10-Q 1 v167071_10q.htm Unassociated Document
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: September 30, 2009
   
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.)
   
6821 E Thomas Road, Scottsdale, Arizona
85251
(Address of principal executive offices)
(Zip Code)

(480) 219-5005

 (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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
 
large accelerated filer o
 
Accelerated filer  o
 
Non-accelerated filer o
 (Do not check 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 o    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 16, 2009
315,077,990

 
 

 

ECOtality, Inc.

Table of Contents
   
PART I - FINANCIAL INFORMATION
3
   
Financial Statements:
 
   
Unaudited Condensed Consolidated 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
39
   
Controls and Procedures
39
   
PART II - OTHER INFORMATION
40
   
Legal Proceedings
40
   
Risk Factors
40
   
Unregistered Sales of Equity Securities
40
   
Defaults Upon Senior Securities
41
   
Submission of Matters to a Vote of Security Holders
41
   
Exhibits and Reports on Form 8-K
42
   
SIGNATURES
43
 
 
2

 

PART1. FINANCIAL INFORMATION

ECOtality, Inc.
Condensed Consolidated Statement of Operations
Unaudited

   
For the 3 Months Ended September 30,
   
For the 9 Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Revenue
  $ 1,900,002     $ 2,900,819     $ 6,117,286     $ 8,654,868  
Cost of goods sold
    1,018,388       1,871,940       3,232,310       5,156,240  
                                 
Gross profit
    881,614       1,028,879       2,884,976       3,498,628  
                                 
Expenses:
                               
Depreciation
    102,224       203,665       352,531       469,669  
General and administrative expenses
    11,291,586       1,534,492       14,177,947       5,431,071  
Research and development
    602       138,143       12,763       285,777  
                                 
Total expenses
    11,394,410       1,876,300       14,543,241       6,186,517  
                                 
Operating loss
    (10,512,798 )     (847,421 )     (11,658,265 )     (2,687,889 )
                                 
Other income:
                               
Interest income
    -       616       -       9,778  
Other Income - Working Capital True Up
    -       375,877       -       375,877  
Total other income
    -       376,493       -       385,655  
                                 
Other expenses:
                               
Interest expense
    5,172,128       1,109,666       8,660,823       2,175,279  
(Gain) / Loss on Disposal of Assets
    (4,424 )     (16,165 )     (14,184 )     (11,271 )
Total other expenses
    5,167,704       1,093,501       8,646,639       2,164,008  
                                 
Loss from operations before income taxes
    (15,680,502 )     (1,564,429 )     (20,304,903 )     (4,466,242 )
                                 
Provision for income taxes
    -       -       -       -  
                                 
Net (loss)
  $ (15,680,502 )   $ (1,564,429 )   $ (20,304,903 )   $ (4,466,242 )
                                 
Weighted average number of common shares outstanding - basic and fully diluted
    210,677,799       124,732,194       174,643,951       124,711,559  
                                 
Net (loss) per share-basic and fully diluted
  $ (0.07 )   $ (0.01 )   $ (0.12 )   $ (0.04 )
 
The accompanying notes are an integral part of these financial statements

 
3

 
ECOtality, Inc.
Condensed Consolidated Balance Sheets

   
September 30, 2009
   
December 31, 2008
 
 
(Unaudited)
   
(Audited)
 
Assets            
             
Current assets:
           
                 
Cash
  $ 903,640     $ 327,332  
Certificates of deposit
    -       28,044  
Receivables, net of allowance for bad debt of  $92,494 and $69,176 as of 09/30/09 and  12/31/08 respectively
    1,089,066       1,963,073  
Inventory, net of allowance for obsolescence of $183,487 and $167,487  as of 09/30/09 and 12/31/08 respectively
    951,053       1,149,881  
Prepaid expenses and other current assets
    397,556       229,931  
Total current assets
    3,341,315       3,698,263  
                 
Fixed assets, net accumulated depreciation of $4,482,786 and   $4,283,866 as of 09/30/09 and 12/31/08 respectively
    1,670,180       1,632,315  
                 
Goodwill
    3,495,878       3,495,878  
                 
Total assets
  $ 8,507,372     $ 8,826,457  
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities:
               
Accounts payable
  $ 751,745     $ 1,510,277  
Accrued liabilities
    10,338,768       848,789  
Accrued Interest
    466,107       1,281,115  
Liability for purchase price
    235,253       2,115,253  
Note Payable - related party
    -       450,000  
Current portion of LT Debt, net of discount of $931,261 and $1,530,101 as of 09/30/09 and 12/31/08 respectively
    6,794,992       3,411,540  
Total current liabilities
    18,586,865       9,616,975  
                 
Total LT Debt, net of discount of $0 and $548,735 as of 09/30/09 and 12/31/08 respectively
    1,145,972       1,971,849  
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value, 200,000,000 shares
               
authorized, no shares issued and outstanding
    -       -  
Common stock, $0.001 par value, 1,300,000,000 shares
               
authorized, 270,396,362  and 129,422,861 shares issued
               
and outstanding as of 09/30/09 and 12/31/08, respectively
    270,397       129,423  
Common stock owed but not issued 1,000,000 shares at 09/30/09 and 75,000 at 12/31/08
    1,000       75  
Additional paid-in capital
    49,805,121       33,485,763  
Unamortized Financing Charges
    (4,605,619 )     -  
Retained deficit
    (56,642,527 )     (36,337,624 )
Accumulated Foreign Currency Translation Adjustments
    (53,837 )     (40,006 )
Total stockholders' equity
    (11,225,465 )     (2,762,368 )
                 
Total liabilities and stockholders' equity
  $ 8,507,372     $ 8,826,457  

The accompanying notes are an integral part of these financial statements

 
4

 
 
Consolidated Statement of Cash Flows
Unaudited
 
   
For the 9 Months Ended September 30,
 
   
2009
   
2008
 
Cash flows from operating activities
           
Net Income (loss)
  $ (20,304,903 )   $ (4,466,242 )
Adjustments to reconcile:
               
Stock and options issued for services and compensation
    499,738       147,601  
Depreciation
    352,531       469,669  
Amortization of stock issued for services
    117,206       217,989  
Amortization of discount on notes payable
    1,147,574       1,207,623  
Amortization of financing costs
    6,908,432       -  
Gain on disposal of assets
    (14,184 )     (11,271 )
Changes in operating assets and liabilities:
               
    Certificate of deposit
    28,044       1,197,784  
Accounts Receivable
    874,007       (164,613 )
Inventory
    198,828       210,729  
Prepaid expenses and other
    (167,625 )     (1,027,672 )
Accounts Payable
    (749,018 )     173,402  
Accrued Liabilities
    9,585,236       1,934,639  
Net cash provided (used) by operating activities
    (1,524,135 )     (110,361 )
                 
Cash flows from investing activities
               
Purchase of fixed assets
    (402,365 )     (250,469 )
Proceeds from sales of fixed assets
    16,639       54,357  
Net cash (used) by investing activities
    (385,726 )     (196,114 )
                 
Cash flows from financing activities
               
Proceeds from notes payable
    -       300,000  
Payments on notes payable
    -       (57,723 )
Borrowings on notes payable
    2,500,000          
Net cash provided (used) by financing activities
    2,500,000       242,275  
                 
Effects of exchange rate changes
    (13,831 )     (32,877 )
                 
Net increase (decrease) in cash
    576,308       (97,078 )
Cash – beginning
    327,332       677,318  
Cash – ending
  $ 903,640     $ 580,239  
                 
Supplemental disclosures:
               
Interest paid
  $ -     $ 124,270  
Income Taxes paid
  $ -     $ -  
Non-cash transactions:
               
Stock and options issued for services
  $ 499,738     $ 70,126  
Shares of stock issued
    3,250,000       250,000  
Number of options issued
    -       -  
Stock issued for acquisition
  $ 1,880,000     $ -  
Shares of stock issued
    31,333,333       -  
                 
Amortization of stock issued for services
  $ 117,206     $ 182,826  
                 
Amortization of discount on notes payable
  $ 1,147,574     $ 825,097  
                 
Note Payable converted for common stock
  $ 1,090,000     $ 100,000  
Shares of stock issued
    18,166,666       333,333  

The accompanying notes are an integral part of these financial statements

 
5

 

ECOTALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
Note 1 – History and organization of the company

The Company was organized April 21, 1999 (Date of Inception) 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 ECOtality Stores, Inc wholly owned subsidiary.  See note 3 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 3 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 eTec).  eTec designs fast-charge systems for material handling and airport ground support applications. eTec 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 eTec 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 the common shareholders of the company authorized an increase to the number of shares of common stock from 300,000,000 to 1,300,000,000 and authorized the Board of Directors to conduct a reverse split of the common shares in the range of 1: 50 to 1:100.

The consolidated financial statements as of December 31, 2008 and September 30, 2009 include the accounts of ECOtality, Innergy Power Corporation, ECOtality Stores, Inc (DBA Fuel Cell Store) eTec, and Minit-Charger.  All significant inter-company balances and transactions have been eliminated.  ECOtality and its subsidiaries will collectively be referred herein as the “Company”.

Note 2 – Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred a net loss of $15,680,502 for the three months ended September 30, 2009 and $20,304,903 for the nine months ended September 30, 2009.  The Company has working capital of ($15,245,550) as of September 30, 2009 and has accumulated a retained deficit of $56,642,527 since its date of inception.

These conditions give rise to doubt about the Company’s ability to continue as a going concern. These financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to obtain additional financing or sale of its common stock as may be required and ultimately to attain profitability. Progress has been made in this regard as follows:

 
6

 

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 9,270,804  shares of Series A Convertible Preferred Stock.  Also on October 31,2009 the Company 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 Common Stock at a pre-Reverse Split purchase price of $0.12 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.

Terms of the private placement include:
1.  
A minimum aggregate purchase of $15,500,000 of Common Stock by the Investors.

2.  
Each Investor will receive a Warrant to purchase the equivalent number of shares of Common Stock that it purchases under to the Securities Purchase Agreement.  The exercise price of the Warrants will be equal to $0.15 per share (pre-Reverse Split).  The Company may call the Warrants if the closing price of shares of the Common Stock is at least $0.45 per share (pre-Reverse Split) for 20 consecutive trading days, subject to certain conditions, including the existence of an effective registration statement for the shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”) and minimum volume provisions.  The Company may not affect any exercise of the Warrants in an amount that would result in any Investor or  its affiliates beneficially owning more than 9.99% of the outstanding Common Stock upon such an exercise.  The Warrants will have a five-year term during which they can be exercised and shall contain a cashless exercise provision which shall apply if there is not an effective registration statement covering the resale of the shares issuable upon exercise.
   
3.  
The Company shall file a shelf registration statement for the resale of the shares of Common Stock purchased under the Securities Purchase Agreement and the Warrant Shares on Form S-3 or another appropriate form (the “Registration Statement”).  Such Registration Statement shall be filed as soon as practicable, but in any event within 45 days of the closing date of the Securities Purchase Agreement.
 
4.  
The Investors have agree not to exercise “short sales” for a period of 9-months after the date of the Securities Purchase Agreement.

5.  
The Company will initiate the process to effect the Reverse Split prior to the closing, and the Company will submit its application to be listed on The NASDAQ Stock Market as soon as possible thereafter. The Company is obligated to consummate the Reverse Split within 30 days of the date of the Securities Purchase Agreement.

Note 3 – 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.

 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 quarter ended September 30, 2009 and 2008 interest income was $0 and $616 respectively.  For the nine months ended September 30, 2009 and 2008 interest income was $0 and $9,778 respectively.

Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits and accounts receivable. 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 September 30, 2009 and 2008, the Company had approximately $400,000 and $100,000 in excess of FDIC insured limits, respectively.

Accounts Receivable
Accounts receivable are carried on a gross basis, with no discounting, less the allowance for doubtful accounts.   Accounts receivable at September 30, 2009 was $1,089,066  At September 30, 2009 we had two customers that represented in excess of 10% of our receivable balance. The first, Palco Telecom Service Inc., had a balance of $150,740.  The second, The United States Department of Energy had a balance of $120,830. The Company has not experienced material losses in the past from these or any other significant customers and continues to monitor its exposures to minimize potential credit losses.  The allowance for doubtful accounts was $92,494 and $35,028 as of September  30, 2009 and 2008, respectively.

 
7

 

Impairment of long-lived assets and intangible assets
The Company follows the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and SFAS No. 142, “Goodwill and other intangible assets”, which addresses financial accounting and reporting for acquired goodwill and other intangible assets.  Management regularly reviews property, equipment, intangibles and other long-lived assets for possible impairment by performing the necessary testing for recoverability of the asset and measuring its fair value. 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 three months ended September 30, 2009 and 2008 the Company had impairment expense of $0 and $0, respectively.  During the nine months ended September 30, 2009 and 2008 impairment expense was $0 and $0 respectively.

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 under the American Institute of Certified Public Accountants’ Statement of Position 81-1,    Accounting for Performance of Construction-Type and Certain Production-Type Contracts   . 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 on 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 or a product warranty liability.  As of September 30, 2009 and 2008, management has concluded that no reserve is required for product returns.

Warranty Liability
The Company warrants a limited number of Minit-Charger products against defects for periods up to 33 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.  As of September 30, 2009 and 2008 the warranty reserve was $70,853 and $182,093 respectively.   Management has concluded this warranty reserve to be adequate for future expenses relating to the warranty.

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 was $183,487 and $73,000 as of September 30, 2009 and September 2008 respectively.

Advertising costs
The Company expenses all costs of advertising as incurred.  Advertising costs of $4,308 and $4,518 were included in general and administrative expenses for the quarter ended September 30, 2009 and 2008 respectively.  For the nine months ended September 30, 2009 and 2008 advertising costs included in general and administrative expenses were $25,606 and $22,072 respectively.

Research and development costs
Research and development costs are charged to expense when incurred.  For the quarter ended September 30, 2009 and 2008,  research and development costs were $602 and $138,143, respectively. For the nine months ended September 30, 2009 and 2008 research and development was 12,763 and 285,777 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 September 30, 2009 and 2008.  The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values.

 
8

 

Loss per Common Share
Net loss per share is provided in accordance with Statement of Financial Accounting Standards No. 128 (SFAS #128), “Earnings Per Share”. 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 September 30, 2009 and 2008 and for the nine months ended September 30, 2009 and 2008 the assumed conversion of convertible long-term debt and the exercise of stock warrants are anti-dilutive due to the Company’s net loss and were excluded in determining diluted loss per share.

Foreign Currency Translation
In 2008 and 2009, a Company subsidiary, PEP Mexico operated outside the United States and 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 for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of stockholders' equity, within other comprehensive loss, net of tax where applicable.

In 2008, a Company subsidiary, eTec, conducted a portion of their business in Canadian Dollars. Because their functional currency is US dollars, the impact of the translation was taken directly to the income statement and included in General and Administrative expense.

Stock-Based Compensation
The Company records stock-based compensation in accordance with SFAS No. 123R “Share Based Payments”, 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
  
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 SFAS No. 109, “Accounting for Income Taxes" 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 adopted FASB Interpretation Number. 48, Accounting for Uncertainty in Income Taxes, as of January 1, 2007.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the companies’ financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.  As a result, the Company applies a more-likely-than-not recognition threshold for all tax uncertainties.  FIN 48 only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities.  As a result of implementing FIN 48, the Company reviewed its tax positions and determined there were no outstanding, or retroactive tax positions with less than a fifty percent likelihood of being sustained upon examination, therefore the implementation of this standard has not had a material effect on the Company.

The Company does not anticipate any significant changes to its total unrecognized tax benefits within the next twelve months.  As of September 30, 2009 and 2008 respectively, no income tax expense has been incurred.

 
9

 

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
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires 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.  Upon completion of FuelCellStores.com, Innergy Power Corporation, Electric Transportation Engineering Corporation (eTec) and eTec’s Minit-Charger business acquisitions from June through December 2007, the Company identified its segments based on the way management expects to organize the Company to assess performance and make operating decisions regarding the allocation of resources.   In accordance with the criteria in SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” the Company has concluded it has three reportable segments for the quarter ended June 30, 2009; ECOtality Stores segment, Innergy Power segment and eTec segment. 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 eTec segment 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.  eTec holds exclusive patent rights to the eTec 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: Fuel Cell Store, eTec and Innergy.

The accounting policies for the segments are the same as those described in the summary of significant accounting policies in Note 3 of this Form 10-Q. Management continues to assess how it evaluates segment performance, and utilizes income (loss) from operations, excluding share-based compensation (benefits), depreciation and intangibles amortization and income taxes. For the quarter ended September 30, 2009 and September 30, 2008, inter-segment sales were $0 and $0 respectively.  For the nine months ended September 30, 2009 and 2008 inter-segment sales were $28,723 and $0 respectively.  All inter-segment sales have been eliminated during the consolidation process.

Recent Accounting pronouncements
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133”.  SFAS No. 161 is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows.  SFAS No. 161 applies to all derivate instruments within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”.  It also applies to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under SFAS No. 133.  SFAS No. 161 is effective prospectively for financial statements issued for fiscal years beginning after 15 November 2008, with early application encouraged.  The adoption of SFAS No. 161 did not have an impact on the Company’s condensed financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities.  Prior to the issuance of SFAS No. 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”.  SAS No. 69 has been criticized because it is directed to the auditor rather than the entity.  SFAS No. 162 addresses these issues by establishing that the GAAP hierarchy should be directed to entities because it is the entity, not its auditor, which is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.  SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”.  The Company does not expect SFAS No. 162 to have a material effect on its condensed financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60”.  SFAS No. 163 provides enhanced guidance on the recognition and measurement to be used to account for premium revenue and claim liabilities and related disclosures and is limited to financial guarantee insurance (and reinsurance) contracts, issued by enterprises included within the scope of FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”.  SFAS No. 163 also requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation.  SFAS No. 163 is effective for financial statements issued for fiscal years and interim periods beginning after 15 December 2008, with early application not permitted.  The adoption of SFAS No. 163 did not have an impact on the Company’s condensed financial statements.

 
10

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”. SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date–that is, whether that date represents the date the financial statements were issued or were available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented.  SFAS No. 165 is effective for financial statements issued for fiscal years and interim periods ending after 15 June 2009. The adoption of this statement did not have a material impact on its interim condensed financial statements

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement” (“SFAS 166”).  SFAS No. 166 is intended to establish standards of financial reporting for the transfer of assets and transferred assets to improve the relevance, representational faithfulness, and comparability.  SFAS No. 166 was established to clarify derecognition of assets under FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”.  SFAS No. 166 is effective for financial statements issued for fiscal years and interim periods beginning after 15 November 2009.  The Company has determined that the adoption of SFAS No. 166 will have no impact will have on its condensed financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”.  SFAS No. 167 is intended to establish general standards of financial reporting for companies with variable interest entities.  It requires timely and useful disclosure of information related to the Company’s involvement with variable interest entities.  This disclosure should alert all users to the effects on specific provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities”, related to the changes to the special-purpose entity proposal in FASB Statement No. 166, “Accounting for Transfers of Financial Assets”, and the treatment of specific provisions of Interpretation 46(R).  SFAS No. 167 is effective for financial statements issued for fiscal years and interim periods beginning after 15 November 2009.  The Company has determined that the adoption of SFAS No. 167 will have no impact will have on its condensed financial statements.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principle – a replacement of FASB statement No. 162”.  SFAS  No. 168 replaces the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles as stated with FASB Accounting Standards Codification becoming the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for financial statements issued for fiscal years and interim periods beginning after 15 September 2009.  The Company does not expect this adoption will have a material impact on the Company’s interim condensed financial statements.

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 4 – Acquisitions, Goodwill, and Goodwill Impairment

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 named ECOtality Stores, Inc.  The acquisition has been accounted for under the purchase accounting method pursuant to SFAS 141.  Our consolidated financial statements for the year ended December 31, 2008, the quarter ended and the nine months ended September 30, 2009 and 2008 include the financial results of ECOtality Stores, Inc. subsequent to the date of the acquisition.

The fair value of the transaction was $539,000.  The company paid $350,000 in cash and issued 300,000 shares of common stock, which was valued at $189,000 based on the closing market price on the date of the agreement.

The aggregate purchase price was allocated to the assets acquired on their preliminary estimated fair values at the date of the acquisition.  The preliminary estimate of the excess of purchase price over the fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill.  In accordance with U.S. generally accepted accounting principles, we have up to twelve months from closing of the acquisition to finalize the valuation.  The following table summarizes the preliminary estimate of fair value of assets as part of the acquisition with ECOtality Stores, Inc.:

   
2007
 
Tangible assets acquired, net of liabilities assumed
 
$
212,218
 
Goodwill
   
326,782
 
   
$
539,000
 
 
In accordance with SFAS No. 144, “Accounting for the impairment or disposal of long lived assets”, 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) cash flow losses as well as a determination of fair value less than the carrying value.  As a result of this testing, the full amount of goodwill ($326,782) was impaired during the year ended December 31, 2007.

11

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

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.  The acquisition has been accounted for under the purchase accounting method pursuant to SFAS 141 .  Our consolidated financial statements for the year ended December 31, 2008, the quarter ended and the nine months ended September 30, 2009 and 2008 include the financial results of Innergy Power Corporation and its subsidiary subsequent to the date of the acquisition.

The fair market value of the transaction was $3,000,000. The Company issued 3,000,000 shares of the Company’s common stock for the acquisition.  The Company guaranteed to the sellers that the shares would be worth $1 each ($3,000,000) during the 30-day period commencing 11 months from the closing date. If the shares were not worth $3,000,000, the company would be required to either (a) issue additional shares such that the total shares are worth $3,000,000 at that time or, (b) issue a total of 4,000,000 new shares, or (c) pay cash to the seller such that the aggregate value of the 3,000,000 shares plus the cash given would equal $3,000,000.

The purchase price obligation was settled in full on October 17, 2008 with the issuance of 4,000,000 shares of Ecotality’s $0.001 par value common stock.

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 preliminary estimate of the excess of purchase price over the fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill.  In accordance with U.S. generally accepted accounting principles, we have up to twelve months from closing of the acquisition to finalize the valuation.  The purchase price allocation is preliminary, pending finalization of our valuation of certain liabilities assumed.  The following table summarizes the preliminary estimate of fair value of assets as part of the acquisition of Innergy Power Corporation:

   
2007
 
Tangible assets acquired, net of liabilities assumed
 
$
505,435
 
Goodwill
   
2,494,565
 
   
$
3,000,000
 

In accordance with SFAS No. 144, “Accounting for the impairment or disposal of long lived assets”, 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) cash flow losses as well as a determination of fair value less than the carrying value.  As a result of this testing, the full amount of goodwill ($2,494,565) was impaired during the year ended December 31, 2007.

eTec 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 eTec). eTec designs fast-charge systems for material handling and airport ground support applications. eTec also tests and develops plug-in hybrids, advanced battery systems and hydrogen ICE conversions.  The acquisition has been accounted for under the purchase accounting method pursuant to SFAS 141.   Our consolidated financial statements for the year ended December 31, 2008 and the quarter ended September 30, 2009 include the financial results of eTec subsequent to the date of the acquisition.

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 6,500,000 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 $500,000 was initially payable in monthly installments of $50,000 beginning December of 2007.  Payment of the balance of the note payable remaining at September 30, 2009 was $235,253 and payment of this amount has been deferred by the Sellers until December 31, 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 True-Up Payment of $400,000 from the Buyers to the Sellers was agreed to in full satisfaction of this purchase agreement requirement. The resulting note payable represents an adjustment of the purchase price, and as such has been recorded as an increase to Goodwill of $400,000.
 
The balance of the note payable attributable to the Working Capital True was $400,000 as of September 30, 2009.  This payment has been deferred by the Sellers until December 31, 2009.
 
12

 
ECOTALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 preliminary estimate of the excess of purchase price over the fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill.  In accordance with U.S. generally accepted accounting principles, we have up to twelve months from closing of the acquisition to finalize the valuation.  The purchase price allocation is preliminary, pending finalization of our valuation of certain liabilities assumed.  The following table summarizes the preliminary estimate of fair value of assets as part of the acquisition with eTec:
 
   
2007
 
Tangible assets acquired, net of liabilities assumed
 
$
1,941,315
 
Goodwill
   
3,495,878
 
   
$
5,437,193
 

In accordance with SFAS No. 144, “Accounting for the impairment or disposal of long lived assets”, 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 2007 no impairment was taken in the year ended December 31, 2007.  This testing yielded similar results in both the quarter and the nine months ending September 30, 2009 supporting the carrying value, resulting in $0 impairment for those periods.

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 lift trucks using revolutionary technologies.  The acquisition has been accounted for under the purchase accounting method pursuant to SFAS 141.  Our consolidated financial statements for the year ended December 31, 2008, the quarter ended and the nine months ended September 30, 2009 and 2008 include the financial results of Minit-Charger subsequent to the date of the acquisition.

The fair market value of the transaction was $3,000,000. The company paid $1,000,000 in cash and issued 2,000,000 shares of the company’s common stock for the acquisition.  The company guaranteed to the sellers that the shares would be worth $1 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.

The fair value of the common stock given, based on the closing price of the Company’s common stock on December 31, 2007, was $370,000. A liability for the balance of $1,630,000 based on the December 31 closing price was recorded as a current liability for purchase price on the consolidated balance sheet as of December 31, 2007. The liability was adjusted to reflect the actual obligation due of $1,880,000 on the December 31, 2008 balance sheet. This liability was reflected at $0 for the September 30, 2009 balance sheet as the purchase price obligation was settled in full on January 30, 2009 with the issuance of 31,333,333 shares of Ecotality’s $0.001 par value common stock.

Included in the purchase agreement with Edison 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 to the Sellers in April 2008. Based on this reconciliation and additional documentation and updates from both parties a true up payment of $390,174 was received in December 2008 in full satisfaction of this obligation.  This True Up represents an adjustment of the purchase price. All goodwill associated with the MinitCharger acquisition was impaired and written down to $0 in year ended December 31, 2007.  The remaining book value of the acquired assets was approximately $180K at the time to the true up payment and a full allocation requiring considerable effort would have resulted in an immaterial adjustment to our financials.  For this reason the amount of  $390,174 was  recorded as other income in our eTec business segment for the year ended December 31, 2008.
 
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 preliminary estimate of the excess of purchase price over the fair value of net tangible assets acquired was allocated to identifiable intangible assets and goodwill.  In accordance with U.S. generally accepted accounting principles, we have up to twelve months from closing of the acquisition to finalize the valuation.  The purchase price allocation is preliminary, pending finalization of our valuation of certain liabilities assumed.  The following table summarizes the preliminary estimate of fair value of assets as part of the acquisition with Minit-Charger:
 
13

 
   
2007
 
Tangible assets acquired, net of liabilities assumed
 
$
1,719,934
 
Goodwill
   
1,280,066
 
   
$
3,000,000
 
 
In accordance with SFAS No. 144, “Accounting for the impairment or disposal of long lived assets”, 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) cash flow losses as well as a determination of fair value less than the carrying value.  As a result of this testing, the full amount of goodwill ($1,280,066) was impaired during the year ended December 31, 2007.

Note 5 – Fixed assets

Fixed assets as of September 30, 2009 and December 31, 2008 consisted of the following:
 
   
At September 30
   
At December 31,
 
   
2009
   
2008
 
Equipment
  $ 3,144,201     $ 3,143,273  
Buildings
    609,787       575,615  
Vehicles
    1,808,713       1,600,849  
Furniture and fixtures
    47,410       47,409  
Leasehold improvements
    470,380       470,380  
Computer Software
    72,476       78,655  
      6,152,966       5,916,181  
Less: accumulated depreciation
    (4,482,786 )     (4,283,866 )
      1,670,180       1,632,315  

Depreciation expense totaled $102,224 and $203,665, for the quarters ended September 30, 2009 and 2008 respectively.  For the nine months ended September 30, 2009 and 2008 depreciation expense was $352,531 and 469,669 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. The loan is payable in ten monthly installments of $50,000 each. See note 4 for details. As of September 30, 2009, $ 235,253 was owed and recorded as an accrued liability for purchase price on the consolidated financial statements.

During 2007, the Company acquired a note payable in the acquisition of eTec. The note related to a vehicle that was also acquired in the acquisition. As of September 30, 2008 the vehicle had been sold and the related note payable was paid in full.

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 $0.30 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 9,803,925 shares of the Company’s common stock with an exercise price of $0.32. 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 $0.32, market price of $0.22-$0.32, 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 is being amortized over the loan term of two and one half years.  As of December 31, 2008, a total of $1,797,419 had been amortized and recorded as interest expense and $2,078,836 remained as the unamortized discount. At September 30, 2009 a total of $2,944,995 had been amortized and a balance of $931,261 remains in unamortized discount. See note 8 for additional discussion regarding the issuance of warrants.

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.
 
14


AUGUST 2008 WAIVER PROVISIONS:
The waiver, deferment agreement aligned with the Company’s short term working capital plan and was to provide 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 $0.30 to $0.15.

 
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 $1.00 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 was capped at 4,000,000.
 
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 fiscal year ended December 31, 2008 the impact to the financial statements for the provisions of the waiver noted above were estimated, and the portion attributable to the year ended December 31, 2008 was initially capitalized as prepaid financing charges (see details in #1 through #3 below) and then subsequently expensed over the waiver period ending December 31, 2008.

 
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 9,803,925 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 $0.08 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 $0.32 (old) and $0.08 (new), Stock Price $0.10 (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.
 
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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 (9,803,925 total warrants at original exercise price $0.32), and the new aggregate exercise price of $784,314 following the reset of the exercise price to $0.08. This difference totaled $2,352,942 requiring the issuance of an estimated 29,411,775 warrants (at $0.08) 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 $0.08, Stock Price $0.07 (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 $0.15 to $0.06, as well as to change their debt conversion rate from the previous $0.15 to $0.06.  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 calculations 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 $0.06 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 $0.08 (old) and $0.06 (new), Stock Price $0.10 (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.
     
 
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 $0.08 and the new aggregate exercise price following the reset to $0.06. This change required the issuance of an additional 8,351,491 warrants 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 $0.06, Stock Price $0.04 (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.

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 defers  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 $.06.
  
 
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.
 
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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 $0.06 (to the extent that such exercise price was previously above $0.06), 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.

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 $0.06 at the time of the October 2008 true up.

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.
 
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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 $0.01 (to the extent that such exercise price was previously above $0.06), 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.
     
 
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 is being 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 will be 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 = 52,287,599 + shares available on debenture conversion 122,767,526 = 175,055,125 Total Fully Diluted Debenture Holder Ownership Pre-Waiver.  Total Company Fully Diluted Shares at May 15, 2009 of 860,870,856 was used as the base on which to calculate the 80% ownership target  of  688,696,685 shares.  To determine the warrants to be issued the 80% target figure of 688,696,685 less total Debenture Holder Ownership of 175,055,125 resulted in 513,641,559 (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 161,906,194 multiplied by the closing share price of  $0.11 = $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 (513,641,559) by the total 80% ownership target number of shares for the debenture holders (686,696,685)  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.
 
The portion of the Unamortized Financing Charges that was charged to interest expense through September 30, 2009 was $6,375,725.  The remaining $4,605,619 will be expensed over the remainder of the waiver period (October through December 2009).

JUNE 2009 Amendment to the MAY Amendment to the Debentures
In addition 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.
 
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The current portion of the debentures is recorded, net of a $931,261 discount, is $6,794,992 at September 30, 2009.  The long-term portion of the debentures is $858,472 as of September 30, 2009. 

Included in accrued interest is $466,107 of accrued interest relating to the debentures at September 30, 2009.

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 carried 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 October 1, 2009 by the Lenders.  In consideration of the extension, an interest fee of $50,000 was paid to the Lenders in December 2008.  The fee of $45,000 was expensed in full as of December 31, 2008.  The balance of the note payable in the amount of  $450,000 was paid  at July 7, 2009.

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.

JULY 2009  New Debenture Issuance

To support ECOtality’s expansion and current working capital needs, the Company also received effective July 2, 2009 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 $0.06 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.
 
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.
 (NOTE - on September 30,2009 contracts totaling in excess of  $20 million so this carve out provision is no longer valid).
 
Interest expense totaled $5,172,128 and $1,109,666 for the quarter ended September 30, 2009 and 2008 respectively.  For the nine months ended September 30, 2009 and 2008 interest expense was $8,660,823 and $2,175,279 respectively .

Note 7 – Stockholders’ equity

During the year ended December 31, 2007, the Company issued a total of 790,000 shares of common stock to consultants for services. The stock was valued at the current market price at the date of issue for a total of $400,400.  This amount was recorded as a prepaid expense for services to be amortized over the periods of the related agreements.  During the year ended December 31, 2007, $284,375 has been amortized and $116,025 remains in prepaid expenses.  During the year ended December 31, 2008, $116,025 was amortized and $0 remained in prepaid expenses at December 31, 2008.
 
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During the year ended December 31, 2007, the Company signed an employment agreement with the CEO of the Company.  The Company agreed to issue a total of 1,000,000 options for shares of common stock currently and issue another 1,000,000 options to him one year from the date of the agreement.  The options issued in 2007 have a term of ten years and a strike price of $0.30.  The aggregate fair value of the Warrants equals $281,300 based on the Black-Scholes pricing model using the following assumptions: 3.95% risk free rate, 162.69% volatility, strike price of $0.30, market price of $0.32, no yield, and an expected life of 5 years.  This amount was recorded as unamortized cost of stock issued for services to be amortized over the two-year period of the agreement.  During the year ended December 31, 2007, $23,442 was amortized into expense and $257,858 remained in unamortized cost of stock issued for services.  $140,650 was amortized in 2008, and the remaining $117,208  was expensed in the six months ending June 30, 2009.   The options issued in 2008 were treated as earned equally over the two-year term of the agreement so that 83,334 of these options were earned and expensed as of December 31, 2007.  Those options were valued using the Black-Scholes pricing model using the same assumptions and valued at $14,442. The balance of the options were valued at $55,168 using the Black Scholes pricing model and were expensed as earned in the year ending December 31, 2008.

During the year ended December 31, 2008, a debenture holder, BridgePointe, elected to convert a portion of their principal to shares at the conversion rate in affect at that time of $0.30 per share.  $100,000 of principal was converted to 333,332 shares

During the year ended December 31, 2008 the Company entered into contracts with employees that called for the issuance of 300,000 shares of the Company’s $0.001 common stock.  These shares were valued at $19,750.  This amount was expensed to compensation in the year ended December 31, 2008.

On August 8, 2008 the Company entered into a contract for services with vendor that called for the issuance of 390,000 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 September 30,2009.

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. The fair market value of the transaction was $3,000,000. The Company issued 3,000,000 shares of the Company’s common stock for the acquisition.  The Company guaranteed to the sellers that the shares would be worth $1 each ($3,000,000) during the 30-day period commencing 11 months from the closing date. If the shares were not worth $3,000,000, the company would be required to either (a) issue additional shares such that the total shares are worth $3,000,000 at that time or, (b) issue a total of 4,000,000 new shares, or (c) pay cash to the seller such that the aggregate value of the 3,000,000 shares plus the cash given would equal $3,000,000. On October 17, 2008, 4,000,000 shares were issued to Innergy Power Corporation in full satisfaction of our purchase obligation to them.

There were 129,422,861 shares of common stock issued and outstanding at December 31, 2008.

On December 6, 2007 the Company acquired through eTec 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 2,000,000 shares of the company’s common stock for the acquisition.  The company guaranteed to the sellers that the shares would be worth $1 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 31,333,333 shares of Ecotality’s $0.001 par value common stock.

In March 2009 the Company issued 1,075,000 shares of the Company’s $0.001 common stock in satisfaction of payables owed to two service vendors.

On April 13, 2009 75,000 shares of common stock were issued to an employee in accordance with an employment agreement.

On June 1, 2009, 45,370 shares of common stock were issued to BridgePointe Master Fund Ltd in satisfaction of a cashless exercise of 50,000 warrants.

For the period July 1 through September 30, 2009,  88,178,132 shares of the Company's $0.001 par value common stock  were issued for  the cashless exercise by our debenture holders of  93,976,001 warrants  with an exercise price of $0.01 as follows:  Enable Growth exercised 43,350,000 warrants in exchange for 40,888,329 shares,  Enable Opportunity exercised 5,100,000 warrants in exchange for 4,810,391 shares, Pierce Diversified Master Fund exercised 2,550,000 warrants in exchange for 2,405,196 shares,  BridgePointe Master Fund exercised 40,884,760 warrants in exchange for 38,074,216 shares and Glenwood Capital, LLC (recipient of assigned warrants) exercised 2,091,241 warrants in exchange for 2,000,000 shares.

For the period July 1 through September 30, 2009,  18,166,666 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 $0.06 as follows:  Pierce Diversified Master Fund converted $42,000 in debt for 700,000 shares, Enable Growth converted $714,000 in debt for 11,900,000 shares, Enable Opportunity converted $84,000 in debt for 1,400,000 shares and BridgePointe Master Fund converted $250,000 in debt for 4,166,666 shares.

For the period July 1 through September 30, 1,100,00 shares of the Company's $0.001 par value common stock  were issued to employees per employment agreements .  These shares were valued at their respective grant dates as follows: 1,100,000  shares at $0.11 for a total of $121,000 which was expensed to compensation in the three months ended September 30, 2009.
 
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A one year contract was  signed on August 1, 2009 with a consultant calling for the issuance of 2,000,000 shares of the Company's $0.001 par value common stock in return for services to be provided over the life to the contract.  The rights to the shares vested on the signing date of August 1, 2009 and were issuable in two tranches: 1 million shares within thirty days of the contract signing and the second one million shares after 180 days.  The first tranche of 1,000,000 shares was issued on August 31, 2009.   These shares were valued at the share price on the vesting date of $0.13 for a total of  $260,000 which was recorded in prepaid expense to be amortized over the 1 year contract period.  For the three months ended September 30, 2009,  $43,333 was expensed to consulting and $216,667 remained in prepaid services at September 30, 2009.

A six month contract was signed on September 18, 2009 with a consultant calling for the issuance of 1, 200,000 five year warrants to purchase shares of the Company's $.001 par value common stock at an exercise price of $0.01.  These warrants to be issued (vested) ratably over the contract period and to be issued  in tranches of  200,000 at the end of each 30 day service period (first service period September 15 - November 15, 2009).  The warrants earned  during the period of 09/15/09 - 09/30/09 were valued at $0.1885 using the Black Scholes model with a strike price of  $0.01, Stock Price $0.19 (at September 30, 2009), time 900 days, volatility 256.34% and risk free rate of 2.31%.  The warrants earned and expensed in the three month period ending September 30, 2009 were 100,000 warrants at $0.1885 for total expense of $18,850.

A one year contract was signed on September 28, 2009 with a consultant calling for the issuance of 500,000 five year warrants to purchase shares of the Company's $.001 par value common stock at an exercise price of $0.01.  These warrants are to be issued at the end of the contract period and are to be vested  ratably over the contract period.  The warrants earned  during the period of 09/28/09 - 09/30/09 were valued at $0.1885 using the Black Scholes model with a strike price of  $0.01, Stock Price $0.19 (at September 30, 2009), time 900 days, volatility 256.34% and risk free rate of 2.31%.  The warrants earned and expensed in the three month period ending September 30, 2009 were 25,000 warrants at $0.1885 for total expense of $4,713.

The First Management Incentive Target as defined in our May 15, 2009 Debenture Waiver Agreement was defined as the signing of a contract valued at $20,000 000 or more on or before October 1, 2009.  This target was reached on September 30,2009 with the signing of our contract with the Department of Energy.  Upon reaching this target the Company became obligated issue a number of warrants (“First Management Penny Warrants”) to Jonathan Read, President and Chief Executive Officer of the Company, equal to 5% of the fully diluted number of shares of common stock of the Company as of the applicable Target Date (defined as the signing date or October 1st, whichever occurred earlier), having an exercise price of $0.01, which warrants were to be in the same form as the Warrants of the Existing Holders (as amended).  This obligation was accrued on September 30, 2009 as follows:  The number of warrants to be issued was calculated using the fully diluted number of shares on the target date of September 30, 2009 of  859,948,007 multiplied by 5% to get 42,997,400 as the number of warrants to be issued.  These warrants were valued using the Black Scholes valuation model with the following factors:  Strike Price $0.01, Stock Price (at September 30, 2009) $0.19, time 900 days, volatility 255.63% and risk free rate of 2.31% to yield a value per warrant of $0.1885.  The total award = $0.1885 x 42,997,400 = $8,105,010.  These warrants have been accrued and expensed to compensation in the three months ended September 30, 2009,  but have not been issued as of the date of this filing. This award has been subsequently modified in the Third Amendment to the Amendment to Debentures and Warrants Agreement and Waiver signed on October 31, 2009.  The modifications in the Third amendment call for the replacement of the original award with the issuance of a fixed number (40,410,312 shares or rights to acquire shares) of any of the following or a combination thereof:  common stock,  preferred shares or options to acquire shares at fair market value on the date of grant. In accordance with the guidance in 718-20-35-(3-8) of the FASB Accounting Standards Codification (Compensation - Stock Compensation), we have accrued based on the value of the original award. The modification of the award in October will be treated as an exchange of the original award for a new award. Once the award is firmly defined, any incremental compensation cost for the new award will be recorded.

There were 270,396,362 shares of common stock issued and outstanding at September 30, 2009.

There was no preferred stock issued or outstanding as of September 30, 2009.
 
Note 8 – Options and Warrants

As of December 31, 2007, there were 19,075,462 options and warrants outstanding.

The November and December debenture warrants issued in year ending December 31, 2007 were covered by the 2008 Debenture Waiver documents and as such were subject to the reset provisions outlined in Note 6 (A-I).  In October 2008 these warrants were reset to an exercise price of $0.08 and additional “make whole” warrants were issued to allow the denture holders to true up to the previous aggregate exercise price (original number of warrants extended at previous higher exercise price vs. the lower true up price triggered by the Innergy true up make whole provision.).  This reset led to the issuance of an additional 29,411,775 warrants attributable to the November and December Warrants with an exercise price of $0.08.

The November and December debenture warrants were reset a second time in October 2008 from $0.08 to $0.06 due to the Innergy True Up outlined in Note 6 and an additional 8,351,492 new warrants with an exercise price of $0.06 were issued.

At December 31, 2008, there were 57,838,729 options and 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 4,720,408 warrants attributable to the November and December Warrants with an exercise price of $0.06.

As of March 31, 2009 there were 62,559,137 options and warrants outstanding.

 
21

 

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 $0.06 to $0.01 exercise price and an additional 513,641,559 true up warrants were also issued to provide for an 80% equity position agreed to as part of this amendment.

On June1, 2009 BridgePointe Master Fund exercised 50,000 of their warrants.

As of June  30, 2009 there were 576,150,697 options and warrants outstanding.

In conjunction with the new July 2 debentures discussed more fully in Note 6, the November and December 2007 debenture holders surrendered 43,242,181 warrants in compliance with the June 30th True Up requirement contained in the May 15, 2009 debenture waiver.

For the period July 1 through September 30, 2009,  88,178,132 shares of the Company's $0.001 par value common stock  were issued for  the cashless exercise by our debenture holders of  93,976,001 warrants  with an exercise price of $0.01 as follows:  Enable Growth exercised 43,350,000 warrants in exchange for 40,888,329 shares,  Enable Opportunity exercised 5,100,000 warrants in exchange for 4,810,391 shares, Pierce Diversified Master Fund exercised 2,550,000 warrants in exchange for 2,405,196 shares,  BridgePointe Master Fund exercised 40,884,760 warrants in exchange for 38,074,216 shares and Glenwood Capital, LLC (recipient of assigned warrants) exercised 2,091,241 warrants in exchange for 2,000,000 shares.

   
Number
   
Weighted-Average
 
   
Of Shares
   
Exercise Price
 
Outstanding at December 31, 2006
    8,799,982     $ 0.57  
Granted
    11,753,925     $ 0.31  
Exercised
    (1,478,445 )   $ 0.35  
Cancelled
    0     $ 0.00  
Outstanding at December 31,2007
    19,075,462     $ 0.42  
Granted
    38,763,267     $ 0.06  
Exercised
    0     $ 0.00  
Cancelled
    0     $ 0.00  
Outstanding at December 31, 2008
    57,838,729     $ 0.14  
Granted
    518,361,968     $ 0.01  
Exercised
    94,026,001     $ 0.01  
Cancelled
    43,242,181     $ 0.01  
Outstanding at September 30, 2009
    438,932,515     $ 0.02  

   
STOCK WARRANTS OUTSTANDING
 
         
Weighted-
       
         
Average
   
Weighted-
 
   
Number of
   
Remaining
   
Average
 
Range of
 
Shares
   
Contractual
   
Exercise
 
Exercise Prices
 
Outstanding
   
Life in Years
   
Price
 
$0.35
    5,421,537       2.08     $ 0.35  
$1.24 - $1.42
    1,900,000       1.8     $ 1.36  
$0.01
    428,660,976       4.69     $ 0.01  
$0.28
    1,000,000       8.08     $ 0.28  
$0.19
    950,000       8.25     $ 0.19  
$0.04
    1,000,000       9.08     $ 0.04  
      438,932,513       4.67     $ 0.02  
                         

   
STOCK WARRANTS EXERCISABLE
 
   
Number of
   
Weighted-
 
Range of
 
Shares
   
Average
 
Exercise Prices
 
Exercisable
   
Exercise Price
 
$0.35
    5,421,537     $ 0.35  
$1.24 - $1.42
    1,900,000     $ 1.36  
$0.01
    428,660,976     $ 0.01  
$0.28
    1,000,000     $ 0.28  
$0.19
    950,000     $ 0.19  
$0.04
    1,000,000     $ 0.04  
      438,932,513     $ 0.02  

 
22

 

ECOTALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9– Commitments and contingencies

As of September 30, 2009, the Company has five leases in effect for operating space.  Future obligations under these commitments are $76,724 for 2009, $279,208 for 2010, $237,699 for 2011, $242,759 for 2012 and $64,006 for 2013.

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 which has been accrued through the quarter ended September  30, 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.

Note 10 – Segment Reporting

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires 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.  Upon completion of FuelCellStores.com, Innergy Power Corporation, Electric Transportation Engineering Corporation (eTec) and eTec’s Minit-Charger business acquisitions from June through December 2007, the Company identified its segments based on the way management expects to organize the Company to assess performance and make operating decisions regarding the allocation of resources.   In accordance with the criteria in SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” the Company has concluded it has three reportable segments for the quarter and nine months ended September 30 2009; ECOtality Stores segment, Innergy Power segment and eTec segment. 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 eTec segment 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.  eTec holds exclusive patent rights to the eTec 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, eTec and Innergy.

The accounting policies for the segments are the same as those described in the summary of significant accounting policies in Note 3 of this Form 10-Q Management continues to assess how it evaluates segment performance, and currently utilize income (loss) from operations, excluding share-based compensation (benefits), depreciation and intangibles amortization and income taxes.  For the nine months ended September 30, 2009 and 2008 inter-segment sales were $28,723 and $0.  All inter-segment sales have been eliminated in the consolidation process.

23


ECOTALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Summarized financial information concerning the Company’ s reportable segments for the quarter ended September 30, 2009 and September30, 2008    and for the nine months ended September 30, 2009 and 2008 respectively are as follows:

THREE MONTHS ENDED SEPTEMBER 30, 2009

   
ETEC
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total net operating revenues
  $ 1,202,325     $ 448,983     $ 248,693     $ 1,900,002  
Depreciation and amortization
  $ 66,727     $ 1,475     $ 891     $ 69,093  
Operating income (loss)
  $ (1,213,816 )   $ 107,554     $ 49,528     $ (1,056,734 )
Interest Income (expense)
  $ (13 )   $ -     $ -     $ (13 )
Gain / (Loss) on disposal of assets
  $ 4,424     $ -     $ -     $ 4,424  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (1,209,405 )   $ 107,554     $ 49,528     $ (1,052,323 )
Corporate Overhead Allocation
  $ 9,235,780     $ 3,448,908     $ 1,910,360     $ 14,595,048  
Segment Income / (Loss)
  $ (10,445,185 )   $ (3,341,354 )   $ (1,860,832 )   $ (15,647,370 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 33,132  
Reported Net income after tax
                          $ (15,680,502 )
Capital Expenditures
  $ 298,113     $ -     $ -     $ 298,113  
                                 
Total segment assets - excluding intercompany receivables
  $ 2,536,734     $ 502,877     $ 195,933     $ 3,235,544  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 1,775,953  
Total Reported Assets
                          $ 8,507,372  

THREE MONTHS ENDED SEPTEMBER 30, 2008

   
ETEC
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total net operating revenues
  $ 2,131,669     $ 533,317     $ 235,833     $ 2,900,819  
Depreciation and amortization
  $ 168,267     $ 1,097     $ 1,187     $ 170,551  
Operating income (loss)
  $ (36,631 )   $ (75,575 )   $ 56,016     $ (56,190 )
Interest Income (expense)
  $ (843 )   $ 84     $ -     $ (759 )
Gain / (Loss) on disposal of assets
  $ 16,165     $ -     $ -     $ 16,165  
Other Income - Working Capital True Up
  $ 375,877     $ -     $ -     $ 375,877  
Segment Income before Corporate Overhead Allocation
  $ 354,568     $ (75,491 )   $ 56,016     $ 335,093  
Corporate Overhead Allocation
  $ 1,371,531     $ 343,140     $ 151,737     $ 1,866,408  
Segment Income / (Loss)
  $ (1,016,963 )   $ (418,631 )   $ (95,721 )   $ (1,531,315 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 33,114  
Reported Net income after tax
                          $ (1,564,430 )
Capital Expenditures
  $ 76,023     $ 6,193     $ -     $ 82,216  
                                 
Total segment assets - excluding intercompany receivables
  $ 4,324,668     $ 658,435     $ 177,604     $ 5,160,707  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 3,871,570  
Total Reported Assets
                          $ 12,528,155  

 
24

 

NINE MONTHS ENDED SEPTEMBER 30, 2009

   
ETEC
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total net operating revenues
  $ 3,997,884     $ 1,499,805     $ 619,596     $ 6,117,286  
Depreciation and amortization
  $ 246,082     $ 4,401     $ 2,671     $ 253,154  
Operating income (loss)
  $ (1,407,135 )   $ 372,624     $ 110,872     $ (923,639 )
Interest Income (expense)
  $ (13 )   $ -     $ -     $ (13 )
Gain / (Loss) on disposal of assets
  $ 14,184     $ -     $ -     $ 14,184  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (1,392,964 )   $ 372,624     $ 110,872     $ (909,468 )
Corporate Overhead Allocation
  $ 12,134,063     $ 4,836,686     $ 2,325,312     $ 19,296,060  
Segment Income / (Loss)
  $ (13,527,027 )   $ (4,464,062 )   $ (2,214,440 )   $ (20,205,528 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 99,378  
Reported Net income after tax
                          $ (20,304,903 )
Capital Expenditures
  $ 411,995     $ -     $ -     $ 411,995  
                                 
Total segment assets - excluding intercompany receivables
  $ 2,536,734     $ 502,877     $ 195,933     $ 3,235,544  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 1,775,953  
Total Reported Assets
                          $ 8,507,372  
 
NINE MONTHS ENDED SEPTEMBER 30, 2008

   
ETEC
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total net operating revenues
  $ 6,086,676     $ 1,920,162     $ 648,029     $ 8,654,868  
Depreciation and amortization
  $ 359,676     $ 5,196     $ 2,670     $ 367,542  
Operating income (loss)
  $ 46,382     $ 46,538     $ 44,930     $ 137,850  
Interest Income
  $ 2,914     $ 519     $ -     $ 3,433  
Gain / (Loss) on disposal of assets
  $ 18,219     $ -     $ -     $ 18,219  
Other Income - Working Capital True Up
  $ 375,877     $ -     $ -     $ 375,877  
Segment Income before Corporate Overhead Allocation
  $ 443,392     $ 47,057     $ 44,930     $ 535,379  
Corporate Overhead Allocation
  $ 3,456,303     $ 1,074,177     $ 369,014     $ 4,899,494  
Segment Income / (Loss)
  $ (3,012,911 )   $ (1,027,120 )   $ (324,084 )   $ (4,364,115 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 102,127  
Reported Net income after tax
                          $ (4,466,242 )
Capital Expenditures
  $ 242,139     $ 9,025     $ -     $ 251,164  
                                 
Total segment assets - excluding intercompany receivables
  $ 4,324,668     $ 658,435     $ 177,604     $ 5,160,707  
Other items Not included in Segment Assets:
                               
Goodwill
  $ -     $ -     $ -     $ 3,495,878  
Other Corporate Assets
  $ -     $ -     $ -     $ 3,871,570  
Total Reported Assets
                          $ 12,528,155  

NOTE 11 – 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 9 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 9 month period ending September 30, 2008.  The balance of the note payable of $450,000 was paid July 9, 2009.

 
25

 

Note 12 – Subsequent Events

Management has evaluated all events and transactions that have occurred subsequent to the balance sheet date and has determined that all material events which have occurred as of November 19, 2009, that would be deemed significant or require recognition or additional disclosure have been disclosed below:

Brookstreet Broker Warrants

As described in footnote 8, the Company issued warrants to several brokers at Brookstreet Capital  in conjunction with a private offering conducted during the period July-October 2006.  The warrants prepared by independent legal counsel were not well written in terms of anti-dilution provisions and it was believed that no adjustment to the number of warrants or their exercise price was required unless all common stock holders were adjusted accordingly.  However, on October 23, 2009 it was determined that an adjustment should be made for these warrants.

On October 23, 2009 we determined that the Brookstreet warrant holders should be permitted to exercise their warrants at a price of $ .01 per share in a cashless exercise and receive shares of the Company's $.001 par value common stock with the restricted legend removed.  In addition each warrant holder was also eligible to receive one new warrant ($.01 exercise price) for every five (5) of their original warrants exercised.  These new warrants would be subject to the provisions of Rule 144. Substantially all the affected 5,421,537 warrants  have been exercised as of the date of this filing.

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 9,270,804  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 the date of this filing the Series A Convertible Preferred Stock is convertible at a1:60 ratio.  Following the reverse split of common shares (see below) the preferred shares will be convertible at a 1:1 ratio.

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 approved by shareholders at the August 26, 2009 Annual Shareholder Meeting.  In addition, the Board authorized Company management to submit an application to be listed on The NASDAQ Stock Market after affecting the Reverse Split. There can be no assurance that the Company can meet the listing requirements of the NASDAQ Stock Market.

The descriptions of the terms and conditions of the Securities Exchange Agreement and the terms of the Series A Convertible Preferred Stock are qualified in their entirety by the full text of the Securities Exchange Agreement and Certificate of Designation, which are attached as Exhibits hereto and incorporated herein by reference.  The issuance of the securities in the transaction described above will be effected without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on Section 4(2) thereof or Rule 506 of Regulation D thereunder based on the status of each investor as an accredited investor as defined under the Securities Act, and such transaction will be effected without using any form of general advertising or general solicitation as such terms are used in Regulation D.

Securities Purchase Agreement

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 Common Stock at a pre-Reverse Split purchase price of $0.12 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.

Terms of the private placement include:
1. 
A minimum aggregate purchase of $15,500,000 of Common Stock by the Investors.


 
26

 

2. 
Each Investor will receive a Warrant to purchase the equivalent number of shares of Common Stock that it purchases under to the Securities Purchase Agreement.  The exercise price of the Warrants will be equal to $0.15 per share (pre-Reverse Split).  The Company may call the Warrants if the closing price of shares of the Common Stock is at least $0.45 per share (pre-Reverse Split) for 20 consecutive trading days, subject to certain conditions, including the existence of an effective registration statement for the shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”) and minimum volume provisions.  The Company may not affect any exercise of the Warrants in an amount that would result in any Investor or  its affiliates beneficially owning more than 9.99% of the outstanding Common Stock upon such an exercise.  The Warrants will have a five-year term during which they can be exercised and shall contain a cashless exercise provision which shall apply if there is not an effective registration statement covering the resale of the shares issuable upon exercise.
       
3. 
The Company shall file a shelf registration statement for the resale of the shares of Common Stock purchased under the Securities Purchase Agreement and the Warrant Shares on Form S-3 or another appropriate form (the “Registration Statement”).  Such Registration Statement shall be filed as soon as practicable, but in any event within 45 days of the closing date of the Securities Purchase Agreement.
 
4. 
The Investors have agree not to exercise “short sales” for a period of 9-months after the date of the Securities Purchase Agreement.

5. 
The Company will initiate the process to effect the Reverse Split prior to the closing, and the Company will submit its application to be listed on The NASDAQ Stock Market as soon as possible thereafter. The Company is obligated to consummate the Reverse Split within 30 days of the date of the Securities Purchase Agreement.

In the period from October 1, 2009 through November 16th, the following equity issuances were recorded:

38,899,997 shares of the Company's $0.001 par value common stock  were issued for  the cashless exercise by our debenture holders of  41,373,371 warrants  with an exercise price of $0.01 as follows:  Enable Growth exercised 14,871,192 warrants in exchange for 13,939,997 shares,  Enable Opportunity exercised 1,749,552 warrants in exchange for 1,640,000 shares, Pierce Diversified Master Fund exercised 874,776 warrants in exchange for 820,000 shares and  BridgePointe Master Fund exercised 23,877,851 warrants in exchange for 22,500,000 shares.

5,777,969 shares of the Company's $0.001 par value common stock  were issued for  the cashless exercise by various Brookstreet Warrant holders of  6,202,363 warrants  with an exercise price of $0.01.

3,662 shares of the Company's $0.001 par value common stock were issued to an employee in accordance with an employment agreement.

Third Amendment to the Amendment to Debentures and Warrants Agreement and Waiver

Concurrent with, or prior to the closing of the transactions under the Securities Exchange Agreement,  and Securities Purchase Agreement, the Company entered into a Third  Amendment to the Amendment to Debentures and Warrants, Agreement and Waiver dated May 15, 2009 with the debenture holders .  This amendment modified the issuances to be made on the satisfaction of the first, second and third Management Incentive Targets as defined in the May 15, 2009 Waiver Agreement (sections 30 (a-c).)
 
Changes in the Board of Directors

On October 30, 2009, Mr. Harold Sciotto resigned as a member of the Board of Directors of Ecotality. Mr. Sciotto will remain as Secretary/Treasurer of Ecotality per his employment agreement. There were no disagreements with Mr. Sciotto on any matter relating to the Company's operations, policies or practices.

On October 30, 2009, Mr. Jerry Lin resigned as a member of the Board of Directors of Ecotality. Mr. Lin will remain as Chairman of Ecotality's Technology Committee. There were no disagreements with Mr. Lin on any matter relating to the Company's operations, policies or practices.

On October 30, 2009 Mr. Carlton M Johnson was named to fill one of the Company's existing vacant positions as a member of the Board of Directors.

 Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, Alchemy’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.

 
27

 

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

We were incorporated in Nevada in 1999.  We are a leader in clean electric transportation and storage technologies. Through innovation, acquisitions, and strategic partnerships, we accelerate  the market applicability of advanced electric technologies to replace carbon-based fuels. We are a leader in providing electric vehicle infrastructure products and solutions that are used in on-road grid-connected vehicles (including plug-in hybrid electric vehicles (PHEV) and battery electric vehicles (BEV)), material handling and airport electric ground support applications. Through our main operating subsidiary, Electric Transportation Engineering Corporation (eTec), our  primary product offering is the Minit-Charger line of advanced battery fast-charge systems that are designed for various motive applications. In addition to our  electric transportation focus, we are also involved in the development, manufacture, assembly and sale of specialty solar products, advanced battery systems, and hydrogen and fuel cell systems. Our subsidiaries and primary operating segments consist of Electric Transportation Engineering Corporation (eTec), Innergy Power Corporation (Innergy), and ECOtality Stores (dba Fuel Cell Store). In addition we have a wholly owned subsidiary in Mexico providing manufacturing services for us.

We operate with a commercial “electro-centric” strategy, targeting only products and companies involved in the creation, storage, and/or delivery of clean or renewable electric power. This strategy has resulted in the development and acquisition of various operating companies.. While focused on electric transportation infrastructure, we have developed a diversified technology portfolio that is linked through the ability to deliver comprehensive electro-centric energy alternatives and solutions. By establishing a technologically diverse multi-product base we are able to mitigate the uncertainty of clean technology demands and regulatory changes. Our current primary focus is to facilitate and execute the development and implementation of electric vehicle charging infrastructure in anticipation of mass commercialization of plug-in hybrid electric vehicles (PHEV) and battery electric vehicles (BEV) in the 2010 to 2012 timeframe.
 
Electric Transportation Engineering Corporation (eTec)

Electric Transportation Engineering Corporation (eTec) was incorporated in Arizona in 1996 to support the development and installation of battery charging infrastructures for electric vehicles. As  our  primary operating  subsidiary, eTec is a recognized leader in the research, development and testing of advanced transportation and energy systems, and is the exclusive provider of the Minit-Charger line of battery fast-charge systems and technologies.  Specializing in alternative-fuel, hybrid and electric vehicles and infrastructures, eTec offers consulting, technical support and field services and is committed to developing and commercially advancing clean electric technologies with clear market advantages.
 
eTec’s primary product line consists of the Minit-Charger line of battery fast-charge systems. The Minit-Charger brand is the result of a consolidation of the two leading fast-charging technologies:   eTec SuperCharge™    and   Edison Minit-Charger   . Prior to rebranding all eTec fast-charge systems under the Minit-Charger brand, eTec held exclusive patent rights to the flagship product line,   eTec SuperCharge™    - battery fast-charge systems that allow for rapid charging while generating less heat and promoting longer battery life than conventional chargers. The   eTec SuperCharge   technology was licensed to eTec from Norvic Traction in 1999. The   eTec SuperCharge   system was specifically designed for airport ground support equipment, neighborhood and on-road electric vehicle, and marine and transit system operations. Since the acquisition of the technology, eTec has made considerable engineering and product advancements and is currently a leader in providing these clean electric fast-charging technologies to airports throughout North America.

In 2007, we acquired the Minit-Charger business of Edison Source, a division of Edison International . The core Minit-Charger   technology allows for material handling equipment to convert to electric power systems that can be charged quickly, conveniently and efficiently, thereby eliminating the need for propane or diesel-powered equipment or for backup batteries and costly change-out operations required with traditional straight-line charging..   eTec’s Minit-Charger   line of battery fast charge systems has a large customer base that consists of Fortune 500 companies and other corporate entities throughout North America.

In March of 2008, all eTec fast-charging products, including the eTec SuperCharge product line, were consolidated under the   eTec Minit-Charger   brand. By unifying the underlying fast-charging technologies under a single engineering, manufacturing and sales entity (   eTec Minit-Charger   ), we are better able to streamline our operations and sales and marketing efforts. The complete portfolio of   eTec Minit-Charger   products provides eTec with a leadership position in current fast charging markets and well positions us to capitalize on the rapidly growing clean technology sector for electric vehicle infrastructure technologies. We believe Minit-Charger is the most superior fast-charge technology on the market as it is a smart charging system that can charge batteries (of almost all chemistries) as fast as possible, while best controlling the battery temperature and avoiding the devastating effects of overcharging.

 
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eTec has a comparatively long history in clean and renewable technologies and has various standing contractual relationships as a test contractor and/or primary and consulting engineer for projects with the United States Department of Energy (DoE), several national research laboratories, national energy storage consortiums, and large electric utilities where they provide services in energy storage, monitoring, systems design and fabrication, product and vehicle testing, and product development. Their work has been in the areas of electric vehicle systems, recharging stations, energy demand management systems, utility communication systems, advanced battery technologies, fast charging technologies, hydrogen creation, storage and dispensing systems, and coal gasification programs. Currently, eTec is holds the exclusive contract for the DoE’s Advanced Vehicle Testing Activity (AVTA) program  and has conducted more than 6 million miles of vehicle testing on more than 200 advanced fuel vehicles.

eTec was acquired as an expansion platform for its core expertise in battery technologies, fast charging systems, energy distribution infrastructure, and advanced vehicle technologies and testing, which includes electric vehicle (EV), hybrid electric vehicle (HEV), plug-in hybrid electric vehicle (PHEV) and hydrogen vehicle technologies. We believe that eTec will expand its core technologies through new product development, joint ventures, acquisitions and organic growth. As eTec has unparalleled experience with electric vehicle infrastructure, we believe our experience with electric vehicles infrastructure, our knowledge of the vehicle and battery systems, as well as our industry leading fast-charging technology provides us with a distinct competitive advantage to be leading provider of electric vehicle infrastructure services and installation.

eTec has been involved in every North American EV initiative to date and is a leading provider of solutions for electric vehicles and its supporting infrastructure. Currently, eTec has installed more than 5,100 charging stations for motive applications, and has installed more chargers for on-road applications than any other company in North America

           On August 5, 2009 eTec  was selected by the U.S. Department of Energy for a grant of approximately $95 million to undertake the largest deployment of electric vehicles (EVs) and charging infrastructure in U.S. history.   eTec, as the lead applicant for the proposal, partnered with Nissan North America to deploy EVs and the charging infrastructure to support them. The Project takes advantage of the early availability of the Nissan LEAF, a zero-emission electric vehicle, to develop, implement and study techniques for optimizing the effectiveness of charging infrastructure that will support widespread EV deployment. The Project will install electric vehicle charging infrastructure and deploy up to a total of 4,700 Nissan battery electric vehicles in strategic markets in five states: Arizona, California, Oregon, Tennessee, and Washington.

           The Project will collect and analyze data to characterize vehicle use in diverse topographic and climatic conditions, evaluate the effectiveness of charge infrastructure, and conduct trials of various revenue systems for commercial and public charge infrastructure. With the goal of developing mature charging environments, the Project proposes to deploy charging infrastructure in major population areas that include Phoenix (AZ), Tucson (AZ), San Diego (CA), Portland (OR), Eugene (OR), Salem (OR), Corvallis (OR), Seattle (WA), Nashville (TN), Knoxville (TN) and Chattanooga (TN). To support the Nissan EV, the Project will install approximately 11,000  Level 2 (220V) charging systems and 250 Level 3 (fast-charge) systems.

Innergy Power Systems

Founded in 1989, Innergy Power Systems is based in San Diego, California with a manufacturing facility in Tijuana, Mexico . Innergy is the only North American manufacturer of both renewable energy solar modules and thin-sealed rechargeable batteries, as its solar photovoltaic (PV) product line addresses the burgeoning worldwide demand for solar energy products and off-grid power. Innergy’s fiberglass reinforced panel (FRP) solar modules are designed to meet a broad   range of applications for emergency preparedness and recreation, where quality, durability, rugged construction and light weight are important in the outdoor environment. Applications include logistics tracking, asset management systems, off-grid lighting, mobile communications, mobile computing, recreational vehicles, signaling devices and surveillance cameras.

Innergy and our wholly owned subsidiary  providing manufacturing services, Portable Energy De Mexico, S.A. DE C.V., provides us the ability to further expand our production, manufacturing and assembly capabilities for Innergy’s solar products and energy storage devices, as well as products of our other subsidiaries, including eTec’s Minit-Charger products.  Innergy  provides us the ability to expand our offering of solar products and solutions into current and developing commercial markets, as well as provides strong manufacturing and assembly operations to assist other aspects of our business. While we expect solar to become a major future energy source, Innergy’s battery systems that support the growing electric vehicle market is quickly expanding and we expect the combination of solar solutions and new battery sales to contribute to our long and short-term earnings and revenue growth. Innergy is actively pursuing growth opportunities through product line expansion, joint ventures, acquisitions, and manufacturing contracts.

ECOtality Stores (dba Fuel Cell Store)

ECOtality Stores (dba Fuel Cell Store) is our wholly owned subsidiary and operates as our online retail division. Fuel Cell Store (www.fuelcellstore.com) is an e-commerce marketplace that offers consumers the widest array of fuel cell products from around the globe. Based in San Diego, California and with active international operations in Japan, Russia, Italy, and Portugal , Fuel Cell Store develops, manufacturers, and sells a diverse and comprehensive range of fuel cell products that includes fuel cell stacks, systems, component parts and educational materials. In addition to primary retail operations, Fuel Cell Store also offers consulting services for high schools, colleges, and leading research institutes and is available to host workshops, conferences and corporate events. Fuel Cell Store is the leading market place for fuel cell stack, component, and hydrogen storage manufacturers to unite with consumers and is an attractive source for hydrogen and fuel cell industry activity and direction. 

 
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Hydrality™

Hydrality™ is a complex reactor system that stores and delivers hydrogen on-demand using magnesium compounds and water. The EPC/Hydrality technology, which was initially developed in conjunction with NASA’s Jet Propulsion Laboratory (JPL) and subsequently advanced by Arizona State University , Green Mountain Engineering and Airboss Aerospace, Inc. continues to have strong promise for a variety of commercial applications. While we initially sought to design and license a cost efficient Hydrality system for use in motorized vehicles and industrial equipment, we have identified several additional and promising applications for Hydrality that include stationary applications for remote power, back-up power systems, and large scale industrial and utility use. 
 
Organizational History
 
We were incorporated in Nevada in 1999 under the name Alchemy Enterprises, Ltd. to market biodegradable products.  On November 14, 2006, we changed our name to “ECOtality, Inc.” to better reflect our renewable energy strategy.

On June 12, 2006, we entered into a License Agreement with California Institute of Technology (CalTech), which operates Jet Propulsion Laboratory (JPL), whereby we acquired certain exclusive licensed patent and/or patent applications rights and improvement patent rights related to research performed under the JPL Task Plan No. 82-10777, entitled “Mechanically-Fed Metal-Air Fuel Cell As A High Energy Power Source” (“Task Plan”), as well as a nonexclusive licensed technology rights developed as a result of the Task Plan.  As partial consideration paid in connection with the License Agreement, we issued 5,869,565 shares of our