10-K 1 v180983_10k.htm Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
x  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Fiscal Year Ended December 31, 2009
 
¨  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Transition Period from                      to
 
Commission File Number 000-50983
 
ECOTALITY, INC.
(Name of small business issuer in its charter)
 
Nevada
 
68-0515422
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number)
     
80 Rio Salado Parkway
   
Tempe, AZ
 
85281
(Address of principal executive offices)
 
(Zip code)
 
Issuer’s telephone number: (480) 219-5005
 
Securities Registered Pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
None
 
None
   
Securities Registered Pursuant to Section 12(g) of the Act:
 
Common Stock, $0.001 par value
(Title of class)
 
(Title of class)
 
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. x  Yes ¨  No
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨  Yes    x   No
 
The issuer’s revenue for its most recent fiscal year was $8,601,674
 
The Company’s common stock is listed on the Over-the-Counter Bulletin Board under the stock ticker symbol “ETLE.”  The aggregate market value of the voting and non-voting common equity held by non-affiliates based upon a price per share of  $4.75 which was the closing price on April 12, 2009, was $42,149,277.

The number of shares outstanding of each of the issuer’s classes of common equity, as of April 12, 2009 was 8,873,532.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
Transitional Small Business Disclosure Format (Check one): Yes ¨ No x
 

 
 
 

 
 
PART I
 
3
ITEM 1    DESCRIPTION OF BUSINESS
 
3
ITEM 1    DESCRIPTION OF PROPERTY
 
21
ITEM 1    LEGAL PROCEEDINGS
 
21
ITEM 2    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
21
PART II
 
22
ITEM 2    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION FOR COMMON STOCK
 
22
ITEM 2    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
35
ITEM 2    CONTROLS AND PROCEDURES
 
F-20
ITEM 2    OTHER INFORMATION
 
F-20
PART III
   
ITEM 4    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
F-21
ITEM 4    EXECUTIVE COMPENSATION
 
F-24
ITEM 4    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
F-26
   
F-27
ITEM 6    EXHIBITS
 
F-28
ITEM 6    PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
F-29
SIGNATURES
 
F-30

 
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FORWARD LOOKING STATEMENTS
 
This Annual Report contains forward-looking statements about our business, financial condition and prospects that reflect our 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 assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, our 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 its customer base, managements’ ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.
 
There may be other risks and circumstances that management may be unable to predict.  When used in this Report, words such as,  “believes,” “expects,” “intends,” “plans,” “anticipates,” “estimates”  and similar expressions are intended to identify and qualify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.
 
PART I
 
Item 1.  Description of Business
 
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 and a wholly-owned subsidiary in Australia, ECOtality Australia Pty Ltd, to market and distribute battery charging equipment to support on-road electric vehicles, industrial equipment, and electric airport ground support equipment.

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.

On August 5, 2009 our wholly owned subsidiary, eTec, was selected by the U.S. Department of Energy for a grant of approximately $99.8 million to undertake the largest deployment of electric vehicles (EVs) and charging infrastructure in U.S. history.  On September 30, 2009 eTec accepted the grant of $99.8 million, of which $13 million was sub-funded to federal research and development centers, which will net eTec $86 million in revenue.   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.

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.

 
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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 positions us well 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.

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.

We acquired eTec 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.  Because 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 as the lead grantee by the U.S. Department of Energy for a grant of approximately $99.8 million to undertake the largest deployment of electric vehicles (EVs) and charging infrastructure in U.S. history. On September 30, eTec accepted the $99.8 million grant, of which approximately $13 million was sub-funded to federal research and development centers, which will net eTec $86.4 million in revenues. 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 including more than 11,000 residential and publicly available charges that will support widespread EV deployment. The Project will install a robust electric vehicle charging infrastructure and will deploy 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.

 
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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 providing 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 electric vehicle market that is quickly expanding is vital as well, 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 a wide 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, manufactures, 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. 
 
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 promise for a variety of future 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 future applications for Hydrality that include stationary applications for remote power, back-up power systems, and large scale industrial and utility use. 

Products

We currently offer the following products:
 
·
Energy engineering services (hydrogen, solar, battery, coal gasification, energy delivery infrastructure)
 
·
eTec’s Minit-Charger fast-charge systems for material handling and airport ground support equipment
 
·
Charging systems (Level 2 & 3) for on-road grid-connected electric vehicles
 
·
Energy engineering services (hydrogen, solar, battery, coal gasification, energy delivery infrastructure, etc…)
 
·
eTec Bridge Power Manager (BPM) systems
 
·
Hydrogen internal combustion engine (HICE) vehicle conversions
 
·
Industrial battery systems
 
·
Solar panel production
 
·
Specialty solar solutions
 
·
Specialty thin-sealed lead battery products
 
·
Various proprietary solar products for consumer, emergency response programs and remote power systems.
 
·
Third-party hydrogen and education related products 
 
·
EV Microclimate Program

 
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Customers

We have a strong base of commercial, industrial, institutional, governmental, and utility customers. As the transition to renewable clean energy continues to advance, we believe that our positioning within the commercial sector gives us an advantage over companies who focus on consumer products or distribution. Our customer base includes many Fortune 500 companies, colleges and universities, international research institutes, major electric utilities, the Department of Energy, the Department of Transportation, major industry research consortiums, regional government organizations, vehicle manufacturers and original equipment manufacturers (OEM). By providing testing and engineering services, as well as being a product provider, we are on the cutting edge of technology and product development for the production, storage and delivery of renewable energy sources, which allows us to develop innovative products and solutions for industry and government needs. Our customers use our products in industrial applications and for OEM applications.

We believe that commercial/industrial entities will be the early users of clean electric and renewable energy technologies and products, precipitated by regulatory, financial, employee, and customer pressures. While we continue to achieve growth in the sale of fast-charge products for material handling and airport applications, we have identified an emerging new market for our fast-charging products for on-road electric vehicles. We are currently targeting large international retailers, property management firms, major utilities, traditional fuel providers and other commercial entities as potential on-road vehicle fast-charge customers.

Manufacturing

We have through our wholly-owned subsidiary Portable Energy De Mexico S.A.De C.V., manufacturing facilities in Tijuana, Mexico operated under a “maquilladora”  program for the production of solar and battery products. The facility is highly labor-intensive. We have a high-value assembly operation in Phoenix, Arizona. Additionally, we have manufacturing agreements with third parties in Canada and China.

If  needed, we have the ability to substantially expand our Mexican operations as well as our high-value manufacturing capability in Phoenix, Arizona. We are planning for new leased facilities in Mexico and Arizona to handle our anticipated growth. Part of our strategic growth plan would include more mechanized production systems, inclusive of International Organization for Standardization (ISO) quality and environmental certifications. Should the market for on-road grid-connected vehicles continue to expand, we anticipate a tremendous increase in market demand for electric vehicle supply equipment (EVSE) by 2012. As the market for EVSE enters a growth phase, the manufacturing capabilities in Mexico and Phoenix may need to be expanded through the lease or purchase of additional adjacent buildings that will allow us to increase manufacturing capacity to meet the appropriate levels of market demands

Research and Development

We devoted a large percentage of our 2007 research and development expenditures to the Hydrality project. This expenditure was with third-party technology and engineering partners including NASA’s Jet Propulsion Laboratories (JPL) and others, we have determined that we will reduce our technology research and development expenditures at levels in-line with traditional operating technology companies based upon a reasonable percentage of revenues.

We have also determined that the vagaries of the hydrogen industry, the advancement of other renewable technologies to the commercial forefront, and the potentially long and expensive road to commercialization and profitability for hydrogen technologies necessitate that we prudently scale back our hydrogen research and development expenditures as indicated above, and proceed only on the basis of joint development projects with third-parties or significantly subsidized development with potential licensees or federal grants.

This shift to joint development projects and the scaling back on our hydrogen research and development expenditures  is clearly reflected in our 2009 operating results. The most significant research and development expenditures for 2008 relate to final payments on Hydrality- related projects initiated in 2007 that were scheduled for completion in the first half of 2008.

Sales and Marketing

We are actively marketing all of our companies and products under the ECOtality brand as well as under their historic brand names. We are striving to build a strong corporate identity as a “leader in clean electric transportation and storage technologies”. This corporate branding of group products is an important part of our strategy to provide individual and integrated electro-centric products and solutions. Product marketing is handled on a divisional and subsidiary level, with cross-marketing efforts to be a key element of the corporate marketing program. Corporate marketing and overall brand management, investor relations and group representation is handled out of our corporate headquarters in Tempe, Arizona.

The majority of our products and services are sold directly on a business-to-business basis. ECOtality Stores conducts sales operations through the internet of hydrogen fuel cell products and educational kits and systems. 

Government Regulation

The energy industry is highly regulated. Several states in the U.S. along with Canada and various countries in Europe and Asia have adopted a variety of government subsidies to allow new renewable sources of energy and technologies to compete with conventional fossil fuel based sources. Government grants for research and development are often the precursors to the acceptance of and government incentives for new clean technologies. We closely track government policy and strategy as it relates to renewable and clean tech energy. Our eTec subsidiary has a large portfolio of DOE contracts and is in regular contact with leaders of U.S energy and technology policies.

 
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The energy industry is highly regulated. Several states in the U.S. along with Canada and various countries in Europe and Asia have adopted a variety of government subsidies to allow new renewable sources of energy and technologies to compete with conventional fossil fuel based sources. Government grants for research and development are often the precursors to the acceptance of and government incentives for new clean technologies. We closely track government policy and strategy as it relates to renewable and clean tech energy. Our eTec subsidiary has a large portfolio of DOE contracts and is in regular contact with leaders of U.S. energy and technology policies.

President Barack Obama and his Administration continue to be strong proponents of grid-connected vehicles and supporting infrastructure. Solid evidence of this commitment can be found in the provisions of the Recovery Act. In a December 2009 report to the President, Vice President Joe Biden wrote, “The energy components of the Recovery Act represent the largest single investment in clean energy in American history… The Recovery Act investments of $80 billion for clean energy will produce as much as $150 billion in additional clean energy projects.” The Vice President also referenced The EV Project when he wrote, “We are also building the infrastructure to support these vehicles including construction of more than 10,000 charging locations in more than twelve cities.
 
We believe that the Obama Administration will continue to help advance the electric transportation technologies and to provide ongoing substantial funding opportunities to establish and advance renewable energy infrastructure, electric grid enhancements, and physical infrastructure to support this new method of transportation.  At the very least, substantial tax incentives and rebates are offered for the purchase and use of reduced emissions vehicles, for which all grid-connected vehicles currently apply, that are designed to support consumer adoption.  With our strong focus on electric transportation infrastructure, grid-connected vehicles, and renewable energy technologies, we believe the focus by the Obama Administration will continue to provide robust funding opportunities for us and our core technologies.

eTec’s portfolio of battery-charging and fast-charging systems may be subject to regulation under the 2002 National Electric Code (“NEC”), which is a model code adopted by the National Fire Protection Association that governs, among other things, the installation of charging systems.  Accordingly, any of our systems installed in a jurisdiction that has adopted the 2002 NEC must be installed in accordance with Article 692. Additionally, standards are being devised by the Society of Automotive Engineers (SAE) for the connection and communications standards between battery charging systems and grid-connected vehicles.  Our eTec subsidiary occupies leadership positions on both the SAE’s Level 2 and Level 3 (fast-charging) committees. We expect all of our electric vehicle supply equipment (EVSE) to comply with the necessary SAE standards and specifications.

The Federal Bayh-Dole Act requires the California Institute of Technology (CalTech- operators of NASA’s JPL) to grant to the Federal government a worldwide, non-exclusive, non-transferable, irrevocable, paid-up license in connection with any invention developed under the Hydrality license agreement.  Therefore, under this provision, the Federal government would have a license to use each subject invention for NASA-related applications and for other applications of the Federal government.

The Federal government also retains “March-in Rights, ” which would allow the Federal government to grant licenses to others if:  (1) we do not “achieve practical application” of a subject invention (i.e. commercialize the technology); (2) such action is necessary to alleviate health or safety needs that are not reasonably satisfied by us; (3) such action is necessary to meet requirements for public use specified by federal regulations and such requirements are not reasonably satisfied by us; or (4) such action is necessary because we and/or our sub licensees are manufacturing patented products outside of the United States.  We believe that the Federal government is not likely to exercise its March-in Rights with regard to any of our patented technology because March-in Rights have rarely, if ever, been invoked by the Federal government since the Bayh-Dole Act was enacted in 1980. However, we cannot assure you that the Federal government will not invoke its March-in Rights against us in the future.
 
General Competition
 
While many of our individual technologies and products do have direct market competition, we are aware of no other entity that has consolidated its products and technology offerings to extend to such diverse renewable energy market segments.
 
As competition in the renewable energy sectors  intensifies, the potential competition for each of the individual products and technologies that we offer  ranges from development stage companies to major domestic and international companies, many of which have financial, technical, marketing, sales, manufacturing, distribution and other resources that are significantly greater than ours.
 
Fast-Charge Competition
 
The eTec SuperCharge and Minit-Charger systems (consolidated under the eTec Minit-Charger brand) are designed for material handling applications, airport ground support equipment and electric vehicles. We believe that the principal competitive factors in the markets for our battery fast charging products and services include product performance, features, acquisition cost, lifetime operating cost, including maintenance and support, ease of use, integration with existing equipment, quality, reliability, customer support, brand and reputation.

 
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The primary direct competitors to the Minit-Charger systems are other fast-charge suppliers, including AeroVironment, Inc., Aker Wade Power Technologies LLC, Power Designers, LLC, and C&D Technologies, Inc. Some of the major industrial battery suppliers have begun to align themselves with fast charge suppliers, creating a potentially more significant source of competition. In addition, the eTec SuperCharge and Minit-Charger systems compete against the traditional method of battery changing. Competitors in this area include suppliers of battery changing equipment and infrastructure, designers of battery changing rooms, battery manufacturers and dealers who may experience reduced sales volume because the Minit-Charger  fast charge system reduces or eliminates the need for extra batteries.

Electric Vehicle Infrastructure Competition

Electric vehicle infrastructure refers to companies that provide electric vehicle supply equipment (EVSE) and services that support grid-connected vehicles. From a product standpoint, this would primarily include the physical charging system hardware and integrated software requirements. While the market is still in its relative infancy, competing firms that have publically announced intentions to enter this market include Better Place, Coulomb Technologies, AeroVironment, Inc., Aker Wade Power Technologies, LLC, Delta-Q Technologies and Elektromotive (UK). We are unaware of any competitor with comparable actual experience in installing EV infrastructure in North America. Additionally, we are unaware of any competitors that are actively engaged in extensive consulting operations for major automotive OEMS, utilities, governmental organizations, research institutes, or industry and trade groups.

Solar Competition

The market for solar electric power technologies is competitive and continually evolving. Innergy’s solar products compete with a large number of competitors in the solar power market, including BP Solar International Inc., Evergreen Solar, Inc., First Solar Inc., Kyocera Corporation, Mitsubishi Electric Corporation, Motech Industries Inc., Q-Cells AG, Sanyo Corporation, Sharp Corporation, SolarWorld AG and Suntech Power Holdings Co., Ltd. Many of these companies have established strong market positions, greater name recognition, a more established distribution network and a larger installed base of customers. Some competitors also have more available capital and significantly greater access to financial, technical, manufacturing, marketing, sales, distribution, management and other resources than we do. Many of our competitors also have well-established relationships with our current and potential suppliers, resellers and their customers and have extensive knowledge of our target markets. As a result, our competitors may be able to devote greater resources to the research, development, promotion and sale of their products and respond more quickly to evolving industry standards and changing customer requirements than we can.

In addition to intense market competitors, universities, research institutions and other companies have brought to market advanced and alternative technologies such as thin films and concentrators, which may compete with our technology in certain applications. Furthermore, the solar power market in general competes with other sources of renewable energy and conventional power generation.

The principal elements of competition in the solar systems market include technical expertise, experience, delivery capabilities, diversity of product offerings, financing structures, marketing and sales, price, product performance, quality and reliability, and technical service and support. We believe that we compete favorably with respect to each of these factors, although we may be at a disadvantage in comparison to larger companies with broader product lines and greater technical service and support capabilities and financial resources.
 
Hydrality Competition
 
Hydrality is a complex reactor system that is currently in developmental stages and stores and delivers hydrogen on-demand using magnesium compounds and water. As Hydrality provides an alternative method of storage and delivery of hydrogen, it competes with current suppliers of delivered hydrogen and with other manufacturers of on-site hydrogen generators. Competitors in the delivered hydrogen market include Airgas, Inc., Air Liquide, Air Products and Chemicals, Inc., Linde AG, Praxair Technology, Inc., and Distributed Energy Systems Corporation. Hydrality will also compete with older generations of electrolysis-based hydrogen generation equipment sold by Hydrogenics Corporation, Statoil Hydro, Teledyne Energy Systems, Inc., and other companies. We believe that many of these current hydrogen creation, storage and delivery methods are bulky, unreliable, expensive, energy inefficient, contain hazardous materials, or require the assistance of mechanical compressors to produce hydrogen at high pressures.
 
There are a number of companies located in the United States, Canada and abroad that are developing Proton Exchange Membrane (PEM) fuel cell technology. These companies include Ballard Power Systems Inc., General Motors Corporation, Giner, Inc., Honda Motor Company, Toyota Motor Corporation, SANYO Electric Co., Ltd., IdaTech LLC, Hydrogenics Corporation, Nuvera Fuel Cells, Plug Power Inc. and United Technologies Corporation. Although we believe these companies are currently primarily targeting vehicular and residential applications, they could decide to enter the hydrogen generation and backup power markets we address. We may also encounter competition from companies that have developed or are developing fuel cells based on non-PEM technology, as well as other distributed hydrogen generation technologies.

Retail Fuel Cell Competition

Fuel Cell Store has active operations in the United States, Japan, Russia, Italy, and Portugal, and is an online retailer (e-commerce) that develops, manufacturers, and sells a diverse and comprehensive range of fuel cell products. We believe that the principal competitive factors in the retail fuel cell and e-commerce markets include breadth of product offerings, product quality, product availability, distribution capabilities, internet rankings, ease of use of the website, customer service, technical support, brand and reputation.

 
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The primary direct competitors to Fuel Cell Store are fuel cell manufacturers, and other fuel cell e-commerce sites. Fuel cell manufacturers that sell products directly to consumers include Heliocentris Fuel Cells AG, Horizon Fuel Cell Technologies, Ltd., BCS Fuel Cells, Inc., Electrochem, Inc., and Fuel Cell Scientific, LLC. New e-commerce sites that are coming online in the U.S. and abroad and are duplicating the Fuel Cell Store format and sourcing from similar vendors are providing growing competition. These companies include GasHub Technology, JHT Power, H-Tech, Inc., Element-1 Power Systems, and miniHYDROGEN. Other renewable technologies, including solar and wind, as well as advanced batteries and conventional fossil fuel technologies are also competing technologies for fuel cells.

Intellectual Property

Our success depends, in part, on our ability to maintain and protect our proprietary technology and to conduct our business without infringing on the proprietary rights of others. We rely primarily on a combination of patents, trademarks and trade secrets, as well as employee and third party confidentiality agreements, to safeguard our intellectual property. As of December 31, 2008, in the United States we held three patent applications and 16 issued patents, which will expire at various times between 2010 and 2021. We also held two PCT patent applications, two Canadian patent applications, one Japanese patent application, one European patent application, 11 issued Canadian patents, four issued Japanese patents, seven issued European patents, and one issued Australian patent. Our patent applications and any future patent applications, might not result in a patent being issued with the scope of the claims we seek, or at all and any patents we may receive may be challenged, invalidated, or declared unenforceable. We continually assess appropriate occasions for seeking patent protection for those aspects of our technology, designs and methodologies and processes that we believe provide significant competitive advantages. Our patents and patent applications generally relate to our hydrogen, battery charging, and thin-cell battery technologies.

In May 2006, CalTech filed a provisional patent application on the hydrogen technology being developed pursuant to a task plan between ECOtality and Jet Propulsion Laboratory (“JPL”), a Federally Funded Research and Development Center for the National Aeronautics and Space Administration (“NASA”).  The California Institute of Technology (“CalTech”) is the operator of JPL and assignee of its patent and technology rights.  On May 7, 2007, a non-provisional patent application was filed by Stinson Morrison Hecker LLP in the name of California Institute of Technology as assignee and ECOtality, Inc. as exclusive licensee of the technology, for a Method and System for Storing and Generating Hydrogen, claiming priority from a provisional application filed by CalTech on May 8, 2006  The details of the patent application and invention are confidential until publication or issue, which did not occur prior December 31, 2008. The patent application is generally directed towards the hydrogen reactor design that has been under development.

On June 12, 2006, we entered into a License Agreement with California Institute of Technology, which operates 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, as well as a nonexclusive licensed technology rights developed as a result of the Task Plan.  The license agreement with CalTech relates to CalTech’s rights to patents and technology based on inventions that are:  (a) identified in the license agreement, (b) developed under the development agreement with JPL, (c) related to electric power cell technology developed at JPL with the involvement of our personnel, or (d) funded, in whole or in part, by us (the “CalTech Rights”).  As partial consideration paid in connection with the License Agreement, we issued 97,826 shares of our common stock to CalTech with a fair market value of $84 per share, based upon the closing price of our common stock on June 12, 2006, for a total aggregate value of $8,217,391.  Furthermore, we are obligated to pay an annual maintenance fee of $50,000 to CalTech, beginning on June 12, 2009, continuing until the expiration, revocation, invalidation or unenforceability of the last exclusively licensed patent rights or improvement patent rights.  The License Agreement carries a perpetual term, subject to default, infringement, expiration, revocation or unenforceability of the License Agreement and the licenses granted thereby.

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 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.

 
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With respect to, among other things, proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on trade secret protection and confidentiality agreements to safeguard our interests. We believe that many elements of our products and manufacturing process involve proprietary know-how, technology, or data that are not covered by patents or patent applications, including technical processes, equipment designs, algorithms and procedures. We have taken security measures to protect these elements. All of our research and development personnel have entered into confidentiality and proprietary information agreements with us. These agreements address intellectual property protection issues and require our employees to assign to us all of the inventions, designs and technologies they develop during the course of employment with us. We also require our customers and business partners to enter into confidentiality agreements before we disclose any sensitive aspects of our solar cells, technology, or business plans.
 
Status of any announced new product or service
 
In January 8, 2009 ECOtality announced the EV Microclimate Program An integrated turnkey program that provides a blueprint for a comprehensive Electric Vehicle infrastructure system.  As part of this program ECOtality works with all relevant stakeholders to ensure an area is prepared for consumer adoption of electric transportation.  The implementation of an EV Micro-Climate includes physical charge infrasture installations at residential, commercial and public locations, as well as comprehensive regulatory, public awareness and marketing programs to support the various value chains associated with a n EV Micro-Climate.  As part of the process, ECOtality will assist the automotive manufactures with the  installation of home charging systems in car owners’ homes (or in public areas) in advance of vehicle delivery, as well as install fast charging systems in strategic locations (ie fuel stations, grocery stores, shopping areas).
 
On May 28, 2008, eTec announced the launch of the eTec Bridge Power Manager (BPM) that allows for eTec Minit-Charger’s fast-charge systems for electric ground support equipment (eGSE) to share power with existing 480VAC supply circuits at airport terminal gates and jetway bridges. The eTec Bridge Power Manager significantly reduces infrastructure transition and conversion costs by utilizing existing 480VAC gate power supply circuits that are typically used only when a jetway bridge is aligning with a plane. The BPM decreases power to Minit-Charger fast charge systems when a jetway bridge is in use, then returns to full power once the bridge is aligned. Up to four fast charge ports can operate from each existing bridge supply with no impact to the airport operations. By eliminating the need for new supply circuits, the BPM substantially reduces transition costs as it provides a solution for the lengthy time needed to design and construct new power circuits at an airport. As electric ground support equipment has been shown to reduce annual fueling costs by 70 to 80% and total operating costs by 30 to 40% (when compared to internal combustion engine ground support equipment that operates on gasoline or diesel fuel), the BPM additionally increases efficiency by saving time and electricity by allowing electric GSE fleets to recharge at the site of operation.

On July 22, 2008, ECOtality’s eTec announced it has launched a Plug-in Hybrid Electric Vehicles (PHEVs) Grid Interaction Project to demonstrate and evaluate bi-directional fast-charging operations for PHEVs in conjunction with smart grid technologies for facility energy management. Funded by the USDOE through Idaho National Laboratory (INL) and supported by project partner V2Green, the project will demonstrate eTec’s ability to fast-charge a PHEV in 10 minutes and will analyze the benefits and costs of using the energy storage capability of PHEVs to provide energy back to a smart metered electric grid system. Pairing the eTec Minit-Charger fast-charge system with utility smart meter interconnections, the PHEV Grid Interaction Project will demonstrate and evaluate a bi-directional fast-charge system capable of both fast-charging a PHEV in 10 minutes and supplying the stored energy of a PHEV back to a smart grid. The project utilizes V2Green’s smart grid technology to enable charging facilities (home or business) to communicate and adaptively control the flow of energy between the fast-charged PHEVs and the grid. Better energy consumption management results from vehicles recharging during off-peak periods and providing stored energy back to the grid during periods of peak-demand. The project will also evaluate the impact of bi-directional fast-charging on PHEV battery life and performance as PHEVs involved in the project will be subject to strenuous charge-discharge cycles as each vehicle will be operated for a total of 5,440 miles.

On July 29, 2008, eTec announced the launch of the new eTec Minit-Charger SC battery fast-charging system. Approved by Underwriters Laboratories Inc. (UL), the SC Charger utilizes Minit-Charger’s patented advanced algorithm technology to provide a lighter, compact and a more cost-effective fast-charging system that serves a variety of material handling equipment applications. The SC Charger is a high-frequency, single-connector charger designed for medium and heavy duty applications. Providing up to 250 amps of output, the SC Charger can fast-charge battery systems of 36 volts or lower four times faster than convention charger. The SC Charger features a light and compact design that allows for the system to be pole or wall mounted in order to save valuable floor space and allows better cable management. The SC Charger also features advanced data collection capabilities, including the patented Minit-Trak™ fleet and system data management system, which provides the most comprehensive performance evaluation of a battery’s state-of-health and state-of-charge and automatically adjusts its charging rates to increase and maximize battery life.

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

 
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Employees
 
As of December 31, 2009, we had 67 employees, including 13 in manufacturing and the rest in research and development, sales and marketing, and general and administration positions. None of our employees is represented by a labor union or is covered by a collective bargaining agreement other than our employees in our wholly owned subsidiary in Mexico. As we expand domestically and internationally, however, we may encounter employees who desire union representation. We believe that relations with our employees are good.
 
Key Transactions in 2007

November 2007 Acquisition-  eTec Group of Companies

On November 6, 2007 we signed an agreement to acquire all of the outstanding stock of the Clarity Group, Inc. and its affiliate, Electric Transportation Engineering Corporation (eTec), through a stock purchase agreement.  eTec provides technical support and field services for all aspects of electric vehicle infrastructure.  eTec operates as our wholly owned subsidiary.

The aggregate purchase price for the outstanding capital stock of eTec was $3,000,000 in cash and 108,333 shares of our common stock.   Of the $3,000,000 in cash to be paid to eTec, $2,500,000 was paid upon closing of the stock purchase agreement and $500,000 was paid in installments, with the final payment being made December 11, 2009.  The 108,333 shares were issued in the following manner: 108,333 were issued upon the close of the stock purchase agreement, 54,166 were released on date of signing, and 54,167 were released by our corporate secretary on the first anniversary of the closing of the stock purchase agreement, subject to any indemnity claims.  The shares bear a restrictive legend and are not subject to piggy back registration rights.
 
November 2007 Financing

On November 6, 2007, we entered into a financing arrangement with a group of accredited investors pursuant to which we sold our Original Issue Discount 8% Secured Convertible Debentures and warrants to purchase our common stock in consideration of an aggregate of $4,117,649.  We received gross proceeds of approximately $3,500,000 from this offering.  In connection with the November 2007 financing, we issued the following securities to the investors:
 
 
·
$4,117,649 in Secured Original Issue Discount Convertible Debentures; and
 
·
Common Stock Purchase Warrants to purchase 114,379 shares of common stock at $19.20 per share for a period of five years.

The warrants were exercisable to purchase one share of common stock at $19.20 per share, and had a term of exercise equal to 5 years.  The warrant holders could not exercise the warrants for a number of shares of common stock in excess of that number of shares which upon giving effect to such exercise would cause the aggregate number of shares beneficially owned by the holder to exceed 9.99% of the outstanding shares of the common stock following such exercise.

The Original Issue Discount Secured Debentures were due on May 6, 2010, were sold at an 8% discount, and were convertible into our common stock, at the investors’ option, at a conversion price equal to $18 per share.  We could not prepay any portion of the principal amount of the November 2007 Debentures without the prior written consent of the holder. Beginning on May 6, 2008, and  continuing on the same date of each successive month thereafter, we agreed to repay 1/24 th  of the original principal amount of the  Debentures plus accrued but unpaid interest, liquidated damages and any other amounts then owing to the holder in respect of the  Debenture.  The holders of the November 2007 Debentures did not have the right to convert the November 2007 Debentures, to the  extent that after giving effect to such conversion, such holder would beneficially own in excess of 9.99% of the shares of our common  stock immediately after giving effect to such conversion.

If we, at any time while the November 2007 Debentures were outstanding, sold or granted any option to purchase or sell or grant any right to re-price, or otherwise dispose of or issue (or announce any sale, grant or any option to purchase or other disposition), any  common stock or common stock equivalents entitling any person to acquire shares of our common stock at an effective price per share  that is lower than the then-existing conversion price, the conversion price would be reduced to equal such effective price per share.   Such an adjustment would be made whenever we issued such common stock or common stock equivalents.

We could, at our option, redeem the November 2007 Debentures if we met certain equity conditions and if we delivered a notice to the  debenture holders of our irrevocable election to redeem some or all of the then outstanding principal amount of the November 2007  Debentures for cash in an amount equal to the sum of (i) 115% of the then outstanding principal amount of the Debentures to be  redeemed, (ii) the accrued but unpaid interest on such Debentures and (iii) all liquidated damages and other amounts due in respect of  the Debentures on the 30 th  Trading Day following such notice.  On that 30 th  trading day, the redemption amount is payable in full to  the debenture holders.
 
We could have redeemed a portion of the November 2007 Debentures each month for cash.  If we satisfied certain equity conditions and gave 10 trading days’ prior written irrevocable notice to the debenture holders, on each such monthly redemption date, we could, at our option, have elected to pay all or part of a monthly redemption amount in shares of our common stock based on a conversion price equal to the lesser of (i) the then conversion price and (ii) 88% of the average of the VWAPs for the 10 consecutive trading days ending on the day that is immediately prior to the applicable monthly redemption date.  The debenture holder could convert any principal amount of the November 2007 Debenture subject to a monthly redemption at any time prior to the date that the monthly redemption amount, plus accrued but unpaid interest, liquidated damages and any other amounts then owing to the holder are due and paid in full.

 
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We could, at our option, have forced the debenture holders to convert all or portion of the then outstanding principal amount of the November 2007 Debentures (plus any accrued but unpaid interest, liquidated damages and other amounts then owing the debenture holders) into shares of our common stock if we satisfied certain equity conditions, the VWAP for 20 out of any 30 consecutive trading days exceeds $45, and, within one trading day, we deliverd a written notice to the debenture holders of such conversion.

We granted the November 2007 Debenture investors a first priority security interest in all of our assets and those of each of our subsidiaries subject only to the December 2007 Debentures, pursuant to the security agreement, dated as of November 6, 2007, between us, our subsidiaries and the secured parties.

In conjunction with the November 2007 Debenture transaction, our subsidiaries entered into a guarantee agreement pursuant to which each of them guaranteed our obligations under the securities purchase agreement and the documents entered into pursuant to the securities purchase agreement, including the November 2007 Debentures.

We granted the November 2007 Debenture investors registration rights with respect to the shares issuable upon conversion of the debentures and the shares of common stock underlying the warrants.  Pursuant to the registration rights agreement by and among us and each of the parties signatory thereto, we filed a registration statement on January 8, 2008. Our registration statement was declared effective by the U.S. Securities and Exchange Commission (the “Commission”) on January 28, 2008. With respect to any additional registration statements which may be required pursuant to which, the number of registerable securities at any time exceeds 100% of the number of shares of common stock then registered in a registration statement during the period of effectiveness, we are required to file the additional registration statements within 90 days from closing.  If we failed to have the registration statement filed or declared effective by the required dates, we were obligated to pay a penalty equal to 2% of the purchase price to each investor upon any such registration failure and for each thirty days that such registration failure continues.  The parties agreed that the maximum aggregate liquidated damages payable to a holder under the registration rights agreement shall be 20% of the aggregate subscription amount paid by such holder pursuant to the securities purchase agreement.
 
December 2007 Acquisition – Edison Minit-Charger and related Corporate Assets

 Edison Minit-Charger
 
In December 2007, we entered into and completed various stock and asset purchase agreements with Electric Transportation Engineering Corporation (“eTec”), Edison Source (“Vendor”), Edison Enterprises (“Edison”) and 0810009 B.C. Unlimited Liability Company (“0810009”) to purchase certain technology and assets related to the manufacture and selling of a “fast charge” battery charging system to be used in commercial and industrial market places.
 
The aggregate purchase price is $1,000,000 in cash and 33,333 shares of our common stock.  If, on the 10th day following the first anniversary date of the agreements December 14, 2008, the average closing price for our common stock during the 30-day period ending on the first anniversary date of the Stock Purchase Agreement (December 4, 2008) was less than $60.00 per share, we, at our option, would either:
 
 
1.
Issue additional shares of common stock to the seller so that the aggregate value of our common stock is equal to the $2,000,000 (“Stock Consideration Amount”);
 
 
 
2.
Pay to the seller an additional amount of cash so that the aggregate value equals difference between the amount of the Purchase Price and the Stock Consideration Amount; or
 
 
 
3.
Purchase or cause the purchase of the common stock issued for an aggregate price equal to the Stock Consideration Amount.

December 2007 Financing
 
On December 6, 2007, we entered into a financing arrangement with a group of accredited investors pursuant to which we sold our Original Issue Discount 8% Secured Convertible Debentures and warrants to purchase our common stock in consideration of an aggregate of $1,764,706.  We received gross proceeds of approximately $1,500,000 from this offering.  In connection with the December 2007 financing, we issued the following securities to the investors:
 
 
·
$1,764,706.50 in Secured Original Issue Discount Convertible Debentures; and
 
·
Common Stock Purchase Warrants to purchase 49,019 shares of common stock at $19.20 per share for a period of five years.

 
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The warrants were originally exercisable to purchase one share of common stock at $18 per share, and had a term of exercise equal to 5 years.  The Warrant holders could not exercise the Warrants for a number of shares of common stock in excess of that number of shares which upon giving effect to such exercise would cause the aggregate number of shares beneficially owned by the holder to exceed 9.99% of the outstanding shares of the Common stock following such exercise.

The Original Issue Discount Secured Debentures were due on June 6, 2010, were sold at an 8% discount, and were convertible into our common stock, at the investors’ option, at a conversion price equal to $19.20 per share. We did not have the right to prepay any portion of the principal amount of the Debentures without the prior written consent of the holder. Beginning on June 4, 2008, and continuing on the same date of each successive month thereafter, we agreed to repay 1/24 th of the original principal amount of the Debenture plus accrued but unpaid interest, liquidated damages, if any, and any other amounts then owing to the holder in respect of the Debenture. The holders of the Debentures did not have the right to convert the Debentures, to the extent that after giving effect to such conversion, such holder would beneficially own in excess of 9.99% of the shares of our common stock immediately after giving effect to such conversion.

If we, at any time while the December 2007 Debenture was outstanding, sold or granted any option to purchase or sell or grant any right to re-price, or otherwise dispose of or issue (or announce any sale, grant or any option to purchase or other disposition), any common stock or common stock equivalents entitling any person to acquire shares of our common stock at an effective price per share that is lower than the then-existing conversion price, the conversion price would be reduced to equal such effective price per share.  Such adjustment would be made whenever we issued such common Stock or common stock equivalents.

We could, at our option, have redeemed the December 2007 Debentures if we met certain equity conditions and if we delivered a notice to the debenture holders of our irrevocable election to redeem some or all of the then outstanding principal amount of the December 2007 Debentures for cash in an amount equal to the sum of (i) 115% of the then outstanding principal amount of the Debentures to be redeemed, (ii) the accrued but unpaid interest on such Debentures and (iii) all liquidated damages and other amounts due in respect of the Debentures on the 30 th  Trading Day following such notice.  On that 30 th  trading day, the redemption amount was payable in full to the debenture holders.

We could redeem a portion of the December 2007 Debentures each month for cash.  If we satisfied certain equity conditions and gave 10 trading days’ prior written irrevocable notice to the debenture holders, on each such monthly redemption date, we could, at our option, have elected to pay all or part of a monthly redemption amount in shares of our common stock based on a conversion price equal to the lesser of (i) the then conversion price and (ii) 88% of the average of the VWAPs for the 10 consecutive trading days ending on the day that is immediately prior to the applicable monthly redemption date.  The debenture holder could convert any principal amount of the December 2007 Debenture subject to a monthly redemption at any time prior to the date that the monthly redemption amount, plus accrued but unpaid interest, liquidated damages and any other amounts then owing to the holder were due and paid in full.

We could, at our option, have forced the debenture holders to convert all or portion of the then outstanding principal amount of the December 2007 Debentures (plus any accrued buy unpaid interest, liquidated damages and other amounts then owing the debenture holders) into shares of our common stock if we satisfied certain equity conditions, the VWAP for 20 out of any 30 consecutive trading days exceeds $45, and, within one trading day, we delivered a written notice to the debenture holders of such conversion

We granted the December 2007 Debenture investors a first priority security interest in all of our assets and each subsidiary subject only to the November 2007 Debentures, pursuant to the Security Agreement, dated as of November 6, 2007 between us, our subsidiaries and the secured parties.

In connection with the December 2007 Debenture transaction, each of our subsidiaries entered into a guarantee agreement pursuant to which it guaranteed the obligations of the Company under the securities purchase agreement and the documents entered into pursuant to the securities purchase agreement, including the December 2007 Debentures.

We granted the investors registration rights with respect to the debentures and the shares of common stock underlying the warrants.  Pursuant to the registration rights agreement by and among us and each of the parties signatory thereto, we filed a registration statement on January 8, 2008.  Our registration Statement was declared effective by the Commission on January 28, 2008. With respect to any additional registration statements which may be required pursuant to which, the number of registerable securities at any time exceeds 100% of the number of shares of common stock then registered in a registration statement during the period of effectiveness, we are required to file the additional registration statements within 90 days from closing.  If we failed to have the registration statement filed or declared effective by the required dates, we would be obligated to pay a penalty equal to 2% of the purchase price to each investor upon any such registration failure and for each thirty days that such registration failure continues.  The parties agreed that the maximum aggregate liquidated damages payable to a holder under the registration rights agreement should be 20% of the aggregate subscription amount paid by such holder pursuant to the securities purchase agreement.

As described above, in November and December of 2007, we received gross proceeds of $5,000,000 in exchange for a note payable of $5,882,356 as part of a private offering of 8% Secured Convertible Debentures (the “Debentures”).  The debentures were convertible into common stock at $18 per share. Debenture principal payments were due beginning in May and June of 2008 (1/24th of the outstanding amount is due each month thereafter). In connection with these debentures, we issued debenture holders warrants (“the Warrants”) to purchase up to 163,398 shares of our common stock with an exercise price of $19.20. The warrants were exercisable immediately upon issue.

 
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2008 Key Transactions

August 29, 2008 Amendment to November and December 2007 Debentures

On August 29, 2008 we signed an Amendment to the Debenture agreements deferring payments on our November and December 2007 debentures . The purpose of the agreement was to provide us time to fund our 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.

The waiver, deferment agreement aligned with our short term working capital plan and provided time to achieve our objectives in this regard.  In exchange for the Amendment to the Debentures, we 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 $10.80 to $5.40.
 
E.
Commencement of  principal payments starting January 1, 2009 with no change to the redemption period (May 2010)
 
F.
Commencement of interest payments @ 8% per year April 1, 2009 (first payment due).
 
G.
Inclusion of make whole provisions to reset common stock warrant conversion prices to the value used to “true-up” both the Innergy Power Company and Minit-Charger (Edison) acquisitions when both “true-ups” are completed. For both of these acquisitions the Sellers were issued shares which the Company guaranteed would be worth $60.00 per share for the thirty days prior to the anniversary date of the purchase.  This guarantee requires the issuance of additional shares or payment in cash for the difference in the share price on the respective anniversary dates.  In the case of Innergy, the number of required “true up” shares is capped at 66,666.
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

2009 Key Transactions

March 5, 2009 Amendment to the November and December 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.

To allow the additional time necessary for us to achieve our working capital targets in the current economic environment, we requested our debenture holders further extend a waiver of debt service requirements.  Therefore, 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 Debentures to $3.60.

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

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

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

 
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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 to have an exercise price of $3.60 (to the extent that such exercise price was previously above $3.60), and the expiration dates shall be extended to May 1, 2014.

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

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

We believe this latest extension is timely and consideration appropriate, given the growing and significant potential opportunities to successfully achieve our capital objectives based on the strength and appeal of our products and technical expertise in the electric vehicle microclimate infrastructure environment.

May 15, 2009 Amendment to the November and December 2007 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:

 
A.
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.
 
 
B.
Commence redemption of principal on January 1, 2010 in 10 equal payments.
 
 
C.
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.
 
 
D.
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.
 
 
E.
Maintain the conversion price of the November 2007 Debentures and December 2007 Debentures at 3.60.
 
 
F.
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.

 
G.
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.
 
 
H.
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.
 
 
I.
All outstanding Warrants (defined in the Securities Purchase Agreements dated November 6, 2007 and December 6, 2007), and all Warrants issued to Holders as consideration for the current or prior Amendments to the November 2007 Debentures and the December 2007 Debentures will be amended to have an exercise price of $0.60 (to the extent that such exercise price was previously above $3.60), and the termination dates for the makeup warrants will be five (5) years from date of issuance.

 
15

 
 
 
J.
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.
 
 
K.
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.
 
June 2009 Amendment to the May Amendment to the Debentures

The debenture holders and the Company signed a First Amendment to Amendment to Debentures and Warrants, Agreement and Waiver dated June 30, 2009.  This amendment modified the May 15, 2009 Amendment by:
 
A.
Increasing approval authority for specified transactions for the November and December 2007 and July 2009 Debenture Holders to 85% from 75% of outstanding principal amount.
 
B.
Clarifying whom has Board of Director member rights
 
 
C.
Clarifying the June 30, 2009 warrant true-up calculation, per the May 15, 2009 Amendment.

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 $3.60 per share of ECOtality common stock.  The July 2009 Debentures:

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

On July 2, 2009  the Company executed a non-binding Letter of Intent (LOI) with Shenzhen Goch Investment Ltd to create joint ventures for the production and distribution of battery charging systems and electric vehicle infrastructure systems in China.  The LOI specifies:

 
A.
Two companies are to be formed:  one for the purpose of manufacturing battery charging and electric vehicle infrastructure systems for global sale and one company for pursuing the marketing and sale of the products within an exclusively designated territory.
 
 
B.
Completion of the Definitive Agreements within 30 days.
 
 
C.
Ecotality  will grant a perpetual, non-assignable no royalty license to both companies with regard to their respective Branded Products within the specified exclusive territory
 
 
D.
Ecotality will own 20% of the manufacturing and 40 % of the distribution companies.
 
 
E.
Ecotality will have a Technology Consulting Agreement with the distribution company.

 
16

 
 
 
F.
The manufacturing company will be funded by Shenzhen Goch Investment Ltd in the amount of $10,000,000 and the distribution company in the amount of $5,000,000.

As of December 31, 2009 we are completing the series of definitive agreements related to the letter of intent.

Securities Exchange Agreement

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

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.  

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 purchase price of $7.20 per share.  The funds from the private placement will be utilized as working capital to support the initial requirements of the contract signed with the Department of Energy on September 30, 2009.

Terms of the private placement include:
 
A.
minimum aggregate purchase of $15,500,000 of Common Stock by the Investors.
 
 
B.
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 $9.00 per share.  The Company may call the Warrants if the closing price of shares of the Common Stock is at least $27 per share 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 effect 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.
 
 
C.
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.
 
The Investors have agreed not to exercise “short sales” for a period of  9 months after the date of the Securities Purchase Agreement.

 
D.
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.

Other Key Transactions in 2009

On August 26, 2009 the shareholders of Ecotality, Inc. (the “Company”) approved a proposal authorizing the Board of Directors effect a reverse stock split of the Company's $.001 par value common stock in the range of one-for-fifty to one-for one-hundred .   On October 26, 2009 the Board of Directors authorized a one-for-sixty reverse stock split.  

 
17

 

On November 23, 2009 Ecotality, Inc. (“Ecotality” or the “Company”) received notice from Financial Industry Regulatory Authority (FINRA) that it had all the necessary documentation to process the Reverse Stock Split of 1:60 for the par value $0.001 common shares of Ecotality, Inc.  This corporate action took effect at the open of business on November 24, 2009. There was also a change to the Company's trading symbol at that time from ETLY to ETLE.

Available Information

We maintain a website at http://www.ecotality.com. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statement and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the SEC. The information contained in or connected to our website is not incorporated by reference into this report.

The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports and other information regarding issuers, such as ECOtality, that file electronically with the SEC. The SEC’s Internet website is located at http://www.sec.gov.

Risks Relating to Our Business:

We have a history of losses which may continue, which may negatively impact our ability to achieve our business objectives.

We incurred net losses of $29,507,750 and $8,067,211 for the years ended December 31, 2009 and 2008, respectively..  We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to continue expansion of our revenue. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us.
 
A large percentage of our revenues will depend on our grant from the Department of Energy, the loss of which would materially adversely affect our operations and revenues.
 
On September 30, 2009 our wholly owned subsidiary, eTec signed a contract with the U.S. Department of Energy for a cost reimbursable contract worth at least $99.8 million, of which approximately $13 million was sub-funded to federal research and development centers. This grant will net $86.4 million in revenue to us, which we expect to account for a substantial portion of our revenues in the immediate future. As a condition of this grant, we are required to meet certain obligations, produce and deliver products on a timely basis to certain required standards, properly account for and bill our products. If we were unable to properly perform these tasks, we could lose the grant, which would have a material adverse effect on our business, financial condition may not be strong enough and results of operations. While we believe we have obtained initial required working capital to meet the requirements of this cost reimbursable contract, there is no guarantee that we will be able to complete this contract without requiring additional working capital given the contract is reimbursable for costs incurred.

There is no assurance that the Hydrality technology is patentable by JPL or, if patented, that others will not develop functionally similar products outside the patent.  Without patent protection, our competitors could develop functionally similar products.
 
We have entered into a license agreement with the California Institute of Technology, or CalTech, under which we have the exclusive license to use and sell the Hydrality technology under any JPL patent and patent application.  There can be no assurance that CalTech will obtain any patents on the Hydrality technology or, if obtained, that others will not develop functionally similar products that do not infringe on the patents.  All license rights granted by CalTech are subject to a reservation of rights by CalTech for non-commercial education and research purposes and U.S. Government rights provided by statute.  Without patent protection, our competitors could develop functionally similar products.

We face competition from large established renewable and alternative energy development companies which are also seeking to develop alternative energy power sources.  Such competition could reduce our revenue or force us to reduce our prices, which would reduce our potential profitability.
 
Literally hundreds of companies, including many of the largest companies in the world, are seeking to develop similar or competitive technologies to that of all of our technologies.  There can be no assurance that we can commercially develop the Hydrality technology or that competitors will not develop substantially equivalent or superior technology.  Such competition could reduce our revenue or force us to reduce our prices, which would reduce or eliminate our potential profitability.
 
We may not be able to protect our patents and intellectual property and we could incur substantial costs defending against claims that our products infringe on the proprietary or other rights of third parties.

Some of our intellectual property may not be covered by any patent or patent application.  Moreover, we do not know whether any of our pending patent applications or those CalTech will file or, in the case of patents issued or to be issued, that the claims allowed are or will be sufficiently broad to protect our technology and processes.  Even if all of our patent applications are issued and are sufficiently broad, our patents may be challenged or invalidated.  We could incur substantial costs in prosecuting or defending patent infringement suits or otherwise protecting our intellectual property rights.  While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so.  Moreover, patent applications filed in foreign countries may be subject to laws, rules and procedures that are substantially different from those of the United States, and any resulting foreign patents may be difficult and expensive to enforce.

 
18

 

Our competitors may independently develop or patent technologies or processes that are substantially equivalent or superior to ours.  If we are found to be infringing on third party patents, we could be required to pay substantial royalties and/or damages, and we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all.  Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of our products, and could necessitate the expenditure of significant resources to develop or acquire non-infringing intellectual property.

Asserting, defending and maintaining our intellectual property rights could be difficult and costly and failure to do so may diminish our ability to compete effectively and may harm our operating results.  We may need to pursue lawsuits or legal action in the future to enforce our intellectual property rights, to protect our trade secrets and domain names and to determine the validity and scope of the proprietary rights of others.  If third parties prepare and file applications for trademarks used or registered by us, we may oppose those applications and be required to participate in proceedings to determine the priority of rights to the trademark.  Similarly, competitors may have filed applications for patents, may have received patents and may obtain additional patents and proprietary rights relating to products or technology that block or compete with ours.  We may have to participate in interference proceedings to determine the priority of invention and the right to a patent for the technology.  Litigation and interference proceedings, even if they are successful, are expensive to pursue and time consuming, and we could use a substantial amount of our financial resources in either case.

Our failure to protect our intellectual property rights may undermine our competitive position and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.

Protection of our proprietary processes, methods and other technology, especially our proprietary vapor transport deposition process and laser scribing process, is critical to our business. Failure to protect and monitor the use of our existing intellectual property rights could result in the loss of valuable technologies. We rely primarily on patents, trademarks, trade secrets, copyrights and other contractual restrictions to protect our intellectual property. We have received patents in the United States and select foreign jurisdictions and we have pending applications in such jurisdictions as well. Our existing patents and future patents could be challenged, invalidated, circumvented, or rendered unenforceable. We have pending patent applications in the United States and in foreign jurisdictions. Our pending patent applications may not result in issued patents, or if patents are issued to us, such patents may not be sufficient to provide meaningful protection against competitors or against competitive technologies.

We also rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, such confidentiality agreements are limited in duration and could be breached and may not provide meaningful protection for our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available in the event of unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge of our trade secrets through independent development or legal means. The failure of our patents or confidentiality agreements to protect our processes, equipment, technology, trade secrets and proprietary manufacturing expertise, methods and compounds could have a material adverse effect on our business. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some foreign countries. In some countries we have not applied for patent, trademark, or copyright protection.

Third parties may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could have a material adverse effect on our business, financial condition and operating results. Policing unauthorized use of proprietary technology can be difficult and expensive. Also, litigation may be necessary to protect our legitimate interests.
 
We cannot assure you that eTec will continue to receive Department of Energy (DOE), or any other government funding, which comprises a large portion of its revenue.

Government funding of projects related to renewable energy, energy, and transportation is subject to cuts or cancellation without notice. A large portion of the consulting and testing revenue of eTec is DOE related activity, and as such the future of such revenue streams is uncertain and out of our control.
 
We cannot assure that the underlying technology of SuperCharge and MinitCharger will remain commercially viable, and this could affect the revenue and potential profit of eTec and MinitCharger.
 
We face competition in the battery recharging and fast charging sector from a number of companies. While we believe that we currently have the best technology in fast charging, conditioning and monitoring batteries for transportation and industrial applications, we cannot assure you that competitors will not develop and bring to market substantially equivalent or superior technology. A loss of our technology advantage could adversely impact or eliminate our revenue and profitability

 
19

 

We cannot assure you that the demand for hydrogen testing, educational and small-scale applications will continue, and this could affect the prospects for the Fuel Cell Store.
 
We face competition in the provision of fuel cell products and educational materials from a number of companies. Additionally, the hydrogen industry is evolving, demand is unpredictable and follows outside forces such as school funding programs and government funding which are out of our control.

An increase in interest rates or a dramatic tightening of corporate credit markets could make it difficult for end-users to finance the cost of a conversion to renewable energy products and systems and could reduce or eliminate the demand for our products.
 
Many of our end-users depend on debt financing to fund the initial capital expenditure required to purchase and install renewable energy products and systems. As a result, an increase in interest rates could make it difficult for our end-users to secure the financing necessary to purchase and install renewable energy products and systems on favorable terms, or at all and thus lower demand for our products and reduce our net sales. In addition, we believe that a significant percentage of our end-users install renewable energy products as an investment, funding the initial capital expenditure through a combination of equity and debt. An increase in interest rates could lower an investor’s return on investment in a renewable energy products and systems and make alternative investments more attractive relative to renewable energy products and, in each case, could cause these end-users to seek alternative investments.

Problems with product quality or performance may cause us to incur warranty expenses, damage our market reputation and prevent us from maintaining or increasing our market share.
 
Our products are sold with various materials and workmanship warranty for technical defects and a 10 year and 25 year warranty against declines of more than 10% and 20% of their initial rated power, respectively. As a result, we bear the risk of extensive warranty claims long after we have sold our products and recognized net sales. As of December 31, 2009, our accrued warranty expense amounted to approximately $211,345.

Because of the limited operating history of our products, we have been required to make assumptions regarding the durability and reliability of our products. Our assumptions could prove to be materially different from the actual performance of our products, causing us to incur substantial expense to repair or replace defective solar modules in the future. Any widespread product failures may damage our market reputation and cause our sales to decline and require us to repair or replace the defective products, which could have a material adverse effect on our financial results
 
We depend on a limited number of third-party suppliers for key raw materials and their failure to perform could cause manufacturing delays and impair our ability to deliver our products to customers in the required quality and quantities and at a price that is profitable to us.
 
Our failure to obtain raw materials and components that meet our quality, quantity and cost requirements in a timely manner could interrupt or impair our ability to manufacture our products or increase our manufacturing cost. Most of our key raw materials are either sole-sourced or sourced by a limited number of third-party suppliers. As a result, the failure of any of our suppliers to perform could disrupt our supply chain and impair our operations. In addition, many of our suppliers are small companies that may be unable to supply our increasing demand for raw materials as we implement our planned rapid expansion. We may be unable to identify new suppliers or qualify their products for use on our production lines in a timely manner and on commercially reasonable terms, if at all.
 
Our substantial international operations subject us to a number of risks, including unfavorable political, regulatory, labor and tax conditions in foreign countries.
 
We have significant marketing and distribution operations outside the United States and expect to continue to have significant manufacturing operations outside the United States in the near future.  We have significant manufacturing operations in Mexico. In the future, we may have operations in other European countries, and other Asian countries and, as a result, we will be subject to the legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent to international operations, include, but are not limited to, the following:
 
·
difficulty in enforcing agreements in foreign legal systems;
 
·
foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs, or adopt other restrictions on foreign trade and investment, including currency exchange controls;

·
fluctuations in exchange rates may affect product demand and may adversely affect our profitability in U.S. dollars to the extent the price of our solar modules, cost of raw materials and labor and equipment is denominated in a foreign currency;

·
inability to obtain, maintain, or enforce intellectual property rights;

·
risk of nationalization of private enterprises;

·
changes in general economic and political conditions in the countries in which we operate;

 
20

 
 
 
·
unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to environmental protection, export duties and quotas;

·
difficulty with staffing and managing widespread operations; and

·
trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our solar modules and make us less competitive in some countries.

Our future success depends on our ability to retain our key employees and to successfully integrate them into our management team.

We are dependent on the services of Jonathan Read, our Chief Executive Officer, Barry Baer, our Chief Financial Officer and Don Karner, President of our eTec subsidiary. The loss of Messrs. Read, Baer or Karner could have a material adverse effect on us. There is a risk that we will not be able to retain or replace these key employees. Several of our current key employees, including Messrs. Read, Baer and Karner, are subject to employment conditions or arrangements that contain post-employment non-competition provisions. However, these arrangements permit the employees to terminate their employment with us upon little or no notice.  Failure to maintain our small management team could prove disruptive to our daily operations, require a disproportionate amount of resources and management attention and prove unsuccessful.

We have limited insurance coverage and may incur losses resulting from product liability claims, business interruptions, or natural disasters.

We are exposed to risks associated with product liability claims in the event that the use of our solar modules results in personal injury or property damage. Our recharging systems, batteries, solar modules are electricity-producing devices, and it is possible that users could be injured or killed by our products due to product malfunctions, defects, improper installation, or other causes. Our companies commercial shipment of products began in 1999 and, due to our limited historical experience, we are unable to predict whether product liability claims will be brought against us in the future or the effect of any resulting adverse publicity on our business. Moreover, we may not have adequate resources and insurance to satisfy a judgment in the event of a successful claim against us. The successful assertion of product liability claims against us could result in potentially significant monetary damages and require us to make significant payments. Any business disruption or natural disaster could result in substantial costs and diversion of resources.

Any change in government regulation and/or administrative practices may have a negative impact on our ability to operate and our profitability.

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on our business.

The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably.

Our directors, executive officers and affiliates will continue to exert significant control over our future direction, which could reduce the sale value of our company.

As of February 5, 2010 members of our Board of Directors and our executive officers, together with our affiliates, own approximately 56% of our outstanding common stock.  Accordingly, these stockholders, if they act together, may be able to control all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate transactions.  The concentration of ownership, which could result in a continued concentration of representation on our Board of Directors, may delay, prevent or deter a change in control and could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our assets.

Investors should not anticipate receiving cash dividends on our common stock.

We have never declared or paid any cash dividends or distributions on our common stock and intend to retain future earnings, if any, to support our operations and to finance expansion.  Therefore, we do not anticipate paying any cash dividends on the common stock in the foreseeable future.

There is a reduced probability of a change of control or acquisition of us due to the possible issuance of preferred stock.  This reduced probability could deprive our investors of the opportunity to otherwise sell our stock in an acquisition of us by others.

Our Articles of Incorporation authorize our Board of Directors to issue up to 200,000,000 shares of preferred stock, of which, 8,477,299 shares are outstanding as of April 12, 2010 in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or designation of such series, without further vote or action by stockholders.  As a result of the existence of “blank check” preferred stock, potential acquirers of our company may find it more difficult to, or be discouraged from, attempting to effect an acquisition transaction with, or a change of control of, our company, thereby possibly depriving holders of our securities of certain opportunities to sell or otherwise dispose of such securities at above-market prices pursuant to such transactions.

 
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Risks Relating to Our Outstanding Financing Arrangements:

There are a large number of shares underlying our preferred shares and warrants outstanding that may be available for future sale and the sale of these shares may depress the market price of our common stock.

As of April 12, 2010, we had 8,537,299 shares of common stock issued and outstanding, shares of series A convertible preferred stock outstanding that may be converted into 8,537,299 shares of common stock and warrants outstanding that may be exercised into 3,091,856 shares of common stock. All of the shares issuable upon conversion of the series A convertible preferred stock and exercise of the warrants may be sold without restriction upon the effectiveness  of a registration statement

The issuance of shares upon conversion of the series A convertible preferred stock or exercise of the warrants may cause immediate and substantial dilution to our existing stockholders.

The issuance of shares upon conversion of the series A convertible preferred stock or exercise of the outstanding warrants may result in substantial dilution to the interests of other stockholders. Although holders of the series A convertible preferred stock and warrants may not convert their series A convertible preferred stock or exercise their warrants if such conversion or exercise would cause them to own more than 9.99% of our outstanding common stock, this restriction does not prevent them from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the holders could sell more than their limit while never holding more than this limit. The shares issued upon conversion of the series A convertible preferred stock and/or exercise of the outstanding warrants could have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors in this offering.

Risks Relating to Our Common Stock:

If We Fail to Remain Current in Our Reporting Requirements, We Could be Removed From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to Sell Our Securities and the Ability of Stockholders to Sell Their Securities in the Secondary Market.

Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.

DESCRIPTION OF PROPERTY
 
Our primary property consists of office and manufacturing facilities to support our operations. Our facilities are summarized in the following table:
 
Type
 
Location
 
Ownership
 
Approximate
Square Feet
 
Headquarters
 
Scottsdale, AZ
 
Owned
    1,700  
Manufacturing/Office
 
Phoenix, AZ
 
Leased
    2,350  
Manufacturing/Office
 
Phoenix, AZ
 
Leased
    7,500  
Manufacturing/Office
 
Phoenix, AZ
 
Leased
    3,650  
Manufacturing/Office
 
Phoenix, AZ
 
Leased
    15,000  
Manufacturing/Office
 
San Diego, CA
 
Leased
    5,400  
Manufacturing/Office
 
Tijuana, Mexico
 
Leased
    19,000  

We purchased the office building that serves as our headquarters and which is located in Scottsdale, Arizona, on January 16, 2007 for an aggregate price of $575,615.  A total of $287,959 has been paid as of December 31, 2009 and a tax credit has been recorded in the amount of $156.  The remaining balance of $287,500 is structured as an interest-only loan, bears interest at a rate of 6.75% calculated annually, with monthly payments in the amount of $1,617 due beginning on February 16, 2007.  The entire principal balance of the loan is due on or before January 16, 2012.  The loan is secured by a deed of trust on the office building.

Our lease terms range from month to month through to 2013, with all terminating on or before May 30, 2013.

It is our belief that we are adequately insured regarding our leased and owned properties.
 
 
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LEGAL PROCEEDINGS
 
None of our directors, officers, significant employees, or affiliates has been convicted in a criminal proceeding, exclusive of traffic
violations.

None of our directors, officers, significant employees, or affiliates has been permanently or temporarily enjoined, barred, suspended, or otherwise limited from involvement in any type of business, securities or banking activities.

None of our directors, officers, significant employees, or affiliates of has been convicted of violating a federal or state securities or commodities law.

We are not a party to any pending legal proceedings.

ITEM 2
 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 On August 26, 2009, ECOtality Inc. management met with the shareholders at its annual shareholders' meeting.

Proxies representing more than 86 % of the approximately 2,698,046 shares of the Company’s outstanding common shares eligible to vote as of the record date of July 27, 2009 were received. Accordingly, a quorum was present.

The shareholders voted on the five proposals presented in our proxy statement mailed on July 31, 2009
Proposal 1
At the meeting the shareholders elected the five nominees: Jonathan R. Read, Harold W. Sciotto, Jerry Y. S. Lin, E. Slade Mead and Barry S Baer to hold office until the 2010 Annual Meeting of Stockholders and until their successors have been elected and qualified.

Proposal 2
The Shareholders ratified the selection of Weaver & Martin LLP, Kansas City, Missouri, as our independent auditors for the fiscal year ending December 31, 2009.

Proposal 3
The Shareholders approved the ECOtality Employee Equity Incentive Plan.

Proposal 4
The Shareholders approved an amendment to the Company’s Amended and Restated Articles of Incorporation to increase the number of authorized shares of Common Stock from the 300,000,000 shares, par value $0.001 per share, presently authorized to 1,300,000,000 shares.

Proposal 5
The Shareholders approved discretionary authority for a reverse stock split in the range of one-for-fifty to one-for-one-hundred.

PART II

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION FOR COMMON STOCK

Market information
 Our common stock has been quoted on the NASD’s OTC Bulletin Board under the trading symbol “ACHM” from December 7, 2005 until December 12, 2006 when our symbol was changed to “ETLY.”  In November of 2009 our symbol was changed to "ETLE".  The high and low closing prices of our common stock for the periods indicated are set forth below.  These closing prices do not reflect retail mark-up, markdown or commissions.

 
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High
   
Low
   
*High Adj
   
*Low Adj
 
2009
                       
First Quarter
  $ 0.04     $ 0.02     $ 2.40     $ 1.20  
Second Quarter
  $ 0.17     $ 0.03     $ 10.20     $ 1.80  
Third Quarter
  $ 0.46     $ 0.09     $ 27.60     $ 5.40  
Fourth Quarter
  $ 0.13     $ 8.50     $ 7.80     $ 8.50  
2008
                               
First Quarter
  $ 0.31     $ 0.13     $ 18.60     $ 7.80  
Second Quarter
  $ 0.23     $ 0.05     $ 13.80     $ 3.00  
Third Quarter
  $ 0.07     $ 0.06     $ 4.20     $ 3.60  
Fourth Quarter
  $ 0.09     $ 0.03     $ 5.40     $ 0.03  

* Adjusted for impact of Reverse Split of 1:60 taking place on November 24, 2009.

On December 31, 2009 the closing bid price on the OTC Bulletin Board for our common stock was $5.54 per share.

The shares quoted are not now, but could become subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the Exchange Act”), commonly referred to as the “penny stock” rule. Section 15(g) sets forth certain requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.

The Commission generally defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Rule 3a51-1 provides that any equity security is considered to be a penny stock unless that security is: registered and traded on a national securities exchange meeting specified criteria set by the Commission; authorized for quotation on The NASDAQ Stock Market; issued by a registered investment company; excluded from the definition on the basis of price (at least $5.00 per share) or the registrant’s net tangible assets; or exempted from the definition by the Commission.  Trading in the shares is subject to additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors, generally persons with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse.

For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such securities and must have received the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities. Finally, the monthly statements must be sent disclosing recent price information for the penny stocks held in the account and information on the limited market in penny stocks.  Consequently, these rules may restrict the ability of broker dealers to trade and/or maintain a market in the company’s common stock and may affect the ability of shareholders to sell their shares.

Shares Available Under Rule 144

As of April 12, 2010, we had 8,873,532 shares of common stock outstanding,  In general, under the recently amended Rule 144 which became effective on February 15, 2008 a person, or persons whose shares are aggregated, who owns shares that were purchased from us, or any affiliate, at least six months (subject only to the Rule 144(c) public information requirement until the securities have been held for one year), previously, including a person who may be deemed our affiliate, is entitled to sell within any three month period, a number of shares that does not exceed the greater of:

 
1.
1% of the then outstanding shares of our common stock; or

 
2.
The average weekly trading volume of our common stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission.

Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us.  Any person who is not deemed to have been our affiliate at any time during the 90 days preceding a sale, and who owns shares within the definition of “restricted securities” under Rule 144 under the Securities Act that were purchased from us, or any affiliate, at least one year previously, is entitled to sell such shares under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements.

Future sales of restricted common stock under Rule 144 or otherwise or of the shares could negatively impact the market price of our common stock.  We are unable to estimate the number of shares that may be sold in the future by our existing stockholders or the effect, if any, that sales of shares by such stockholders will have on the market price of our common stock prevailing from time to time.  Sales of substantial amounts of our common stock by existing stockholders could adversely affect prevailing market prices.
 
 
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Holders

As of April 12, 2010,we . had approximately 8,873,525  shares of $0.001 par value common stock issued and outstanding held by 413 registered shareholders.  ECOtality, Inc.’s Transfer Agent is:  Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, CO  80209.  Phone 303-282-4800, Fax 303-282-5800.

Dividends

We have not declared or paid any cash dividends on our common stock.  For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and do not anticipate paying any cash dividends on our 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 our financial condition and the results of operations, capital requirements, contractual restrictions, business prospects, and other factors that the Board of Directors considers relevant.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides the following information as of December 31, 2009, for equity compensation plans previously approved by security holders, as well as those not previously approved by security holders:

 
1.
The number of securities to be issued upon the exercise of outstanding options, warrants and rights;

 
2.
The weighted-average exercise price of the outstanding options, warrants and rights; and

 
3.
Other than securities to be issued upon the exercise of the outstanding options, warrants and rights, the number of securities remaining available for future issuance under the plan.
Plan Category
 
Number of Shares
to be Issued
Upon Exercise of
Outstanding
Options,
Warrants and
Rights
   
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants and
Rights
   
Number of Shares
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Shares Reflected
in the First
Column)
 
                   
Equity compensation plans approved by shareholders
    49,167     $ 10.08       28,000  
Equity compensation plans not approved by shareholders
          $            
                         
Total
    49,167     $ 10.08       28,000  

Recent Sales of Unregistered Securities

On November 6, 2007, we entered into a financing arrangement with a group of accredited investors pursuant to which we sold our Original Issue Discount 8% Secured Convertible Debentures and warrants to purchase our common stock in consideration of an aggregate of $4,117,649.  We received gross proceeds of approximately $3,500,000 from this offering.  In connection with the November 2007 financing, we issued the following securities to the investors:

 
·
$4,117,649 in Secured Original Issue Discount Convertible Debentures; and
 
·
Common Stock Purchase Warrants to purchase 114,379 shares of common stock at $19.20  per share for a period of five years.
 The warrants were originally exercisable to purchase one share of common stock at $19.20 per share, and had a term of exercise equal to 5 years.  The warrant holders could  not exercise the warrants for a number of shares of common stock in excess of that number of shares which upon giving effect to such exercise would cause the aggregate number of shares beneficially owned by the holder to exceed 9.99% of the outstanding shares of the common stock following such exercise.  On October 31, 2009, the remaining unpaid principal and related interest and penalties of $4,194,393 as well as the outstanding warrants (including warrants issued subsequently related to debt payment waivers) to purchase 4,597,145 shares at $0.60, were converted to preferred shares.

On December 6, 2007, we entered into a financing arrangement with a group of accredited investors pursuant to which we sold our Original Issue Discount 8% Secured Convertible Debentures and warrants to purchase our common stock in consideration of an aggregate of $1,764,706.We received gross proceeds of approximately $1,500,000 from this offering.  In connection with the December 2007 financing, we issued the following securities to the investors:

 
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·
$1,764,706.50 in Secured Original Issue Discount Convertible Debentures; and
 
·
Common Stock Purchase Warrants to purchase 49,019 shares of common  stock at $19.20 per share for a period of five years.

The warrants were originally exercisable to purchase one share of common stock at $19.20 per share, and had a term of exercise equal to 5 years.  The Warrant holders could not exercise the Warrants for a number of shares of common stock in excess of that number of shares which upon giving effect to such exercise would cause the aggregate number of shares beneficially owned by the holder to exceed 9.99% of the outstanding shares of the Common stock following such exercise.  On October 30, 2009, the remaining unpaid principal and related interest and penalties of $2,350,895 was converted to preferred shares.

July 2, 2009 issuance of $2,500,000 in 8% Secured Convertible Debentures (July 2009 Debentures) due October 1, 2010. The debentures had an exercise price or $3.60 per share of ECOtality common stock. Shenzhen Goch Investment Ltd was issued $2,000,000 of July 2009 Debentures, Enable Growth Partners (November and December 2007 Debenture holder) was issued $250,000 in July 2009 Debentures, and BridgePointe Master Fund (November and December 2007 Debenture holder) was issued $250,000 in July 2009 Debentures.  New investor Shenzhen Goch was issued 29,149 Common Stock Purchase Warrants to purchase shares of common stock at  $0.60.  The Nov/Dec debenture holders cancelled an equivalent number of previously issued Common Stock purchase warrants of equal value to offset this issuance.  On October 31, 2009, the remaining unpaid principal and related interest of $2,565,881 and the related outstanding warrants to purchase 29,149 shares of common stock at $0.60 were converted to preferred shares.

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

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  purchase price of $7.20 per share.  The funds from the private placement will be utilized as working capital to support the initial requirements of the contract signed with the Department of Energy on September 30, 2009.

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 $9.00 per share.  The Company may call the Warrants if the closing price of shares of the Common Stock is at least $27 per share 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 effect 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 agreed 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 which was accomplished on November 24, 2009.
 
 
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MANAGEMENT’S DISCUSSION AND PLAN OF OPERATIONS.

Forward-Looking Statements

The statements contained in all parts of this document that are not historical facts are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such forward-looking statements include, but are not limited to, those relating to the following: our ability to secure necessary financing; expected growth; future operating expenses; future margins; fluctuations in interest rates; ability to continue to grow and implement growth, and regarding future growth, cash needs, operations, business plans and financial results and any other statements that are not historical facts.

When used in this document, the words “anticipate,” “estimate,” “expect,” “may,” “plans,” “project,” and similar expressions are intended to be among the statements that identify forward-looking statements.  Our results may differ significantly from the results discussed in the forward-looking statements.  Such statements involve risks and uncertainties, including, but not limited to, those relating to costs, delays and difficulties related to our dependence on our ability to attract and retain skilled managers and other personnel; the intense competition within our industry; the uncertainty of our ability to manage and continue its growth and implement its business strategy; its vulnerability to general economic conditions; accuracy of accounting and other estimates; our future financial and operating results, cash needs and demand for services; and our ability to maintain and comply with permits and licenses; as well as other risk factors described in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those projected.

Overview of the Business

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 automotive 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.

 
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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.

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 $99.8 million to undertake the largest deployment of electric vehicles (EVs) and charging infrastructure in U.S. history. On September 30th, eTec accepted the $99.8 million grant, of which approximately $13 million was sub-funded to federal research and development centers, which will net eTec $86.4 million in revenues.   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.

 
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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.

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 common stock to CalTech with a fair market value of $1.40 per share, based upon the closing price of our common stock on June 12, 2006, for a total aggregate value of $8,217,391.  Furthermore, we are obligated to pay an annual maintenance fee of $50,000 to CalTech, beginning on June 12, 2009, continuing until the expiration, revocation, invalidation or unenforceability of the last exclusively licensed patent rights or improvement patent rights.  The License Agreement carries a perpetual term, subject to default, infringement, expiration, revocation or unenforceability of the License Agreement and the licenses granted thereby.

On June 11, 2007, we bought the assets of the Fuel Cell Store (www.FuelCellStore.com), a small web-based seller of educational fuel cell products. The Fuel Cell Store product line includes demonstration kits, educational materials, fuel cell systems and component parts.  It also offers consulting services for establishing educational programs for all levels of educational institutions.  Since Fuel Cell Store was significantly smaller than we are, we were not required to provide audited financial statements for it.  We operate the Fuel Cell Store through our wholly-owned subsidiary, ECOtality Stores, Inc.  While revenue producing activities, facilities and employees has initially remained the same, we have changed the distribution system through inventory control procedures, and expanded the customer base through increased emphasis on marketing.  We sell Fuel Cell Store products through our own ECOtality Store’s website (www.fuelcellstore.com).

On October 1, 2007 we closed on the purchase of certain assets of Innergy Power Corporation and its wholly owned subsidiary, Portable Energy De Mexico, S.A. DE C.V., pursuant to an agreement that we entered into on September, 18, 2007.  Innergy designs and manufactures standard and custom solar-power and integrated solar-battery solutions for government, industrial and consumer applications.  The purchase price for the assets was 50,000 shares of our common stock.  We guaranteed to the sellers that the shares of our common stock issued in the transaction would be worth $3,000,000 during the 30 day period commencing 11 months from the closing date or we would be required to either issue additional shares such that the total shares are worth $3,000,000 at that time or pay the seller the difference in cash.  The shares were issued to the seller and are subject to piggy back registration rights and a lock-up agreement.

On November 6, 2007 we signed an agreement to acquire all of the outstanding stock of the Clarity Group, Inc. and its affiliate, Electric Transportation Engineering Corporation (eTec), through a stock purchase agreement.  eTec provides technical support and field services for all aspects of electric vehicle infrastructure.  eTec operates as our wholly owned subsidiary and there have been no changes to the eTec’s management team.
 
 
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In December 2007, we entered into and completed various stock and asset purchase agreements with Electric Transportation Engineering Corporation (“eTec”), Edison Source (“Vendor”), Edison Enterprises (“Edison”) and 0810009 B.C. Unlimited Liability Company (“0810009”) to purchase certain technology and assets related to the manufacture and selling of a “fast charge” battery charging system to be used in commercial and industrial market places.

Our Hydrality System

We have been developing Hydrality™, a system that stores and delivers hydrogen on-demand using magnesium compounds and water. When used in conjunction with existing fuel cell technology, Hydrality emits only pure water and produces no harmful emissions.

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 promising applications for Hydrality that include stationary application for remote power, back-up power systems, and large-scale industrial and utility use as we have described above in our description of our business.

On May 7, 2007, a non-provisional patent application was filed by Stinson Morrison Hecker LLP in the name of California Institute of Technology as assignee and us as exclusive licensee of the technology, for a Method and System for Storing and Generating Hydrogen, claiming priority from a provisional application filed by CalTech on May 8, 2006.  The details of the patent application and invention are confidential until publication or issue.  The patent application is generally directed towards the hydrogen reactor design currently under development.

The current technology, which is the subject of the pending patent application, is a method for generating hydrogen in an on-board vehicle reaction chamber to fuel a fuel cell or modified engine on demand.  The information and diagrams in the Technology Contribution Agreement and JPL Task Plan involve a metal-air battery design.  Based on the research of JPL into the metal-air battery design, the technology has migrated from a basic metal-air battery concept to a hydrogen reactor.

While we are now are in the process of investigating and analyzing third-generation reactor models, we anticipate this to be a long term project given the minimal amount of funds we are expending on this research and development effort.  Laboratory-scale test reactors are being used to gather data for the purpose of characterizing the reactor and constructing analytical design models.  It is anticipated that patent protection will be sought on one or more aspects or features of the third-generation reactor.  However, it is not our stated intent to manufacture reactors. Rather, it is our intent to use the third-generation reactors to demonstrate the technology, and then license the technology and/or the reactor design to others for commercialization. The specifications of the commercial reactors have not yet been determined, and the designs will vary based on different customer application requirements.

Status of any announced new product or service

Throughout 2008 and 2009, the Company has stressed its focus on being the leading supplier of electric vehicle infrastructure. We have also continued to reiterate that although 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.

Fuel Cell Store

On June 17, 2007 we bought the assets of the Fuel Cell Store for $350,000 in cash and 5,000 shares of our common stock.   Our common stock will be valued at its closing market price on the date of the agreement.  The closing price was $37.80 per share, on that date for a total value of $189,000 and a total price paid cash and stock of $539,000. We concluded this to be an asset purchase rather than a business purchase because we did not acquire their debt and they continue to exist after the purchase is completed.  Of the assets acquired we identified and assigned a value of $179,775 in merchandise inventory, $8,600 in fixed assets, and $23,843 in current accounts receivable. We reviewed the intangible assets that we acquired, including the customer data base and internally developed software, and determined that the intangible assets did not have value to us. Therefore, the difference between the assets noted and the price paid for the assets $326,782 was  allocated to intangible assets and impaired and written-off due to the lack of proven future cash flows generated by the assets acquired.

Innergy Power Corporation

On October 1, 2007, we purchased certain assets of Innergy Power Corporation and its wholly-owned subsidiary, Portable Energy De Mexico, S.A. DE C.V..  The purchase price for the assets was 50,000 shares of our common stock.  We guaranteed to the seller that the shares of our common stock issued to them in the acquisition would be worth $3,000,000 during the 30 day period commencing 11 months from the closing date or we will be required to either issue additional shares such that the total shares are worth $3,000,000 at that time or pay the seller the difference in cash.  The shares that we issued to the seller are subject to piggy back registration rights and a lock up agreement to be executed by the seller’s stockholders.
 
 
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Electric Transportation Engineering Corporation (eTec)

On November 6, 2007, we signed a stock purchase agreement with two non-affiliated individuals whereby we purchased all of the issued and outstanding capital stock of Electric Transportation Engineering Corporation, as well as its affiliated company Clarity Group, Inc. (both of which are collectively referred to as “eTec”).  eTec provides technical support and field services for all aspects of electric vehicle infrastructure.  eTec will operate as our subsidiary and there will be no changes to the company’s management team.

The aggregate purchase price for the outstanding capital stock of eTec is $3,000,000 in cash and 108,333 shares of our common stock of the $3,000,000 in cash to be paid to eTec, $2,500,000 was paid upon closing of the stock purchase agreement and $500,000 was to be paid in 10 equal monthly installments, beginning December 1, 2007.  The 108,333 shares were issued in the following manner: 108,333 were issued upon the close of the stock purchase agreement, 54,166 were released on date of signing, and 54,166 were to be released on the first anniversary of the closing of the stock purchase agreement from the Company corporate secretary barring any indemnity claims.  The shares bear a restrictive legend and are not subject to piggy-back registration rights.

Edison Minit-Charger

In December 2007, we entered into and completed various stock and asset purchase agreements with Electric Transportation Engineering Corporation (“eTec”), Edison Source (“Vendor”), Edison Enterprises (“Edison”) and 0810009 B.C. Unlimited Liability Company (“0810009”) to purchase certain technology and assets related to the manufacture and selling of a “fast charge” battery charging system to be used in commercial and industrial market places.

The aggregate purchase price is $1,000,000 in cash and 33,333 shares of our common stock.  If, on the 10th day following the first anniversary date of the agreements December 14, 2008, the average closing price for our common stock during the 30-day period ending on the first anniversary date of the Stock Purchase Agreement (December 4, 2008) was less than $60.00 per share, we, at our option, shall either:

 
1.
Issue additional shares of common stock to the seller so that the aggregate value of our common stock is equal to the $2,000,000 (“Stock Consideration Amount”);

 
2.
Pay to the seller an additional amount of cash so that the aggregate value equals difference between the amount of the Purchase Price and the Stock Consideration Amount; or

 
3.
Purchase or cause the purchase of the common stock issued for an aggregate price equal to the Stock Consideration Amount.

Stage of Commercialization of the Hydrality Technology

NASA’s Jet Propulsion Laboratory (JPL), under its agreement with us, has completed testing of the Hydrality technology on lab-scale models of the reactor resulting in announced results and improvements. Its research is ongoing on our behalf and will continue throughout the implementation stages of the technology. Additionally, we have entered into an agreement with Arizona State University (ASU) to evaluate potential regeneration technologies and determine cost and energy efficiencies for converting magnesium oxide, the main byproduct of Hydrality, back to its original form of magnesium.

Current transportation industry trends suggest that the commercial viability of hydrogen fuel cell vehicles remains on the distant horizon (about 10 years away) due to cost and efficiency problems with underlying fuel cell technologies. Being reactive and reflexive to these market trends, we have reduced the developmental costs of Hydrality for transportation applications to pursue additional applications with immediate commercial applicability in 2008. With the current shift in the transportation market towards plug-in hybrid vehicles (PHEV) and pure electric vehicles (EV), we will aggressively explore the use of eTec’s fast charging systems in PHEV and EV infrastructure applications.  If and when fuel cell technologies begin to present a practical and economically viable solution for alternative electric propulsion systems, the Company will be prepared to capitalize upon the ongoing research and development efforts of Hydrality to modify the system for use in transportation applications.

As our research and development efforts have identified several new and promising applications for Hydrality that include stationary use, remote power, back-up power systems, and large scale industrial and utility use, we intend to refocus our research and development expenditures upon these areas that we determine to have immediate commercial applicability. While we will target our research and development efforts primarily on stationary and utility power applications, the research and testing for large-scale applications of our Hydrality system will be valuable in further advancing the technology for all applications, including those of transportation.

We believe the Hydrality technology has a promising future, but this future was not as imminent as it was two years ago. There have been dramatic changes in the hydrogen industry and an absence of expected interrelated product advancements (i.e. fuel cells). Thus we have determined that the extreme vagaries of the hydrogen technology industry, the immediate advancement of other renewable technologies to the commercial forefront, and the potentially long and expensive road to commerciality and profitability for any hydrogen technology necessitates us to prudently and significantly scale back all hydrogen expenditures, and proceed only on the basis of joint development projects or significantly subsidized development with potential licensees or DOE grants.
 
 
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Segment Information

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, we identified our segments based on the way we expect to organize our 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,” we have concluded we have three reportable segments for the year ended December 31, 2009; Fuel Cell Store segment, Innergy Power segment and eTec segment. The Fuel Cell Store 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.  We have 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 2 of this Form 10-K. Management continues to assess how it evaluates segment performance, and currently utilizes income (loss) from operations.  There was $28,723 in inter-segment sales during the year ended December 31, 2009.

Summarized financial information concerning our reportable segments for the year ended December 31, 2009 are as follows:

TWELVE MONTHS ENDED DECEMBER 31, 2009
 
   
ETEC
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total net operating revenues
  $ 5,702,323     $ 2,111,198     $ 788,153     $ 8,601,674  
Depreciation and amortization
  $ 320,064     $ 7,078     $ 3,561     $ 330,703  
Operating income (loss)
  $ (2,077,492 )   $ 646,001     $ 147,715     $ (1,283,776 )
Interest Income (expense)
  $ (1,289 )   $ -     $ -     $ (1,289 )
Gain / (Loss) on disposal of assets
  $ 48,523     $ -     $ -     $ 48,523  
Other Income (expense)
  $ 236     $ -     $ -     $ 236  
Segment Income before Corporate Overhead Allocation
  $ (2,030,022 )   $ 646,001     $ 147,715     $ (1,236,306 )
Corporate Overhead Allocation
  $ 18,653,977     $ 6,906,350     $ 2,578,280     $ 28,138,607  
Segment Income / (Loss)
  $ (20,683,999 )   $ (6,260,349 )   $ (2,430,565 )   $ (29,374,913 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 132,840  
Reported Net income after tax
                          $ (29,507,750 )
Capital Expenditures
  $ 771,919     $ -     $ 5,945     $ 777,864  
                                 
Total segment assets - excluding intercompany receivables
  $ 2,876,733     $ 714,433     $ 186,909     $ 3,778,075  
Other items Not included in Segment Assets:
                               
Goodwill
                          $ 3,495,878  
Other Corporate Assets
                          $ 12,352,371  
Total Reported Assets
                          $ 19,626,324  
 
 
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Summarized financial information concerning the Company’s reportable segments for the year ended December 31, 2008 is as follows:

YEAR ENDED DECEMBER 31, 2008
 
   
ETEC
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total net operating revenues
  $ 8,072,664     $ 2,324,170     $ 790,549     $ 11,187,384  
Depreciation and amortization
  $ 470,929     $ 6,229     $ 3,560     $ 480,718  
Operating income (loss)
  $ (528,193 )   $ (40,368 )   $ 49,859     $ (518,702 )
Interest Income
  $ 9,632     $ 519     $ -     $ 10,151  
Gain / (Loss) on disposal of assets
  $ (95 )   $ -     $ -     $ (95 )
Other Income - Working Capital True Up
  $ 364,645     $ -     $ -     $ 364,645  
Segment Income before Corporate Overhead Allocation
  $ (154,011 )   $ (39,849 )   $ 49,859     $ (144,001 )
Corporate Overhead Allocation
  $ 5,721,432     $ 1,534,970     $ 531,566     $ 7,787,968  
Segment Income / (Loss)
  $ (5,875,443 )   $ (1,574,819 )   $ (481,707 )   $ (7,931,969 )
                                 
Not Included in segment income:
                               
Depreciation on Corporate Assets
                          $ 135,241  
Reported Net income after tax
                          $ (8,067,210 )
Capital Expenditures
  $ 251,260     $ 12,025     $ -     $ 263,284  
                                 
Total segment assets - excluding intercompany receivables
  $ 3,637,112     $ 512,532     $ 158,599     $ 4,308,243  
Other items Not included in Segment Assets:
                               
Goodwill
  $ -     $ -     $ -     $ 3,495,878  
Other Corporate Assets
  $ -     $ -     $ -     $ 1,022,336  
Total Reported Assets
                          $ 8,826,457  

Results of Operations

YEAR ENDED DECEMBER 31, 2009 COMPARED WITH YEAR ENDED DECEMBER 31, 2008

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

In the year ended December 31, 2009, we had revenues of $8,601,674 compared to the year ended December 31, 2008 of $11,187,384.  This reduction in revenue is largely related to the effect of the slowing economy on our business particularly our industrial charger sales.  Internally we saw a continued reduction in billable consulting hours due to the redeployment of resources required to prepare for the US Department of Energy Stimulus grant proposals awarded during the third quarter ended September 30, 2009. The cost of goods sold percentage for the year ending December 31, 2009 was 58% leaving us with a gross profit of $3,641.897. Our gross margin of 42% was an improvement over the 2008 gross margin of 36%.

Total operating expenses during the year ended December 31, 2009 were $17,289,242 compared to $7,900,473 for the year ended December 31, 2008.  General and administrative expenses were $16,806,908 or 97% of total operating expenses for the year  ended December 31, 2009 compared with $6,991,804 or 88% for the year ended December 31, 2008.  Details around the changes in these expenses are described below:

Operating Expense
 
Professional fees were $296,231 for the year ended December 31, 2009 compared with $417,767 for year ended December 31, 2008.  This decrease is driven by increased efficiencies.  New media, marketing, advertising and investor and public relations expenses were $253,301 for the year ended December 31, 2009 compared with $179,206 for the year ended December 31, 2008 with the increase primarily attributable to public and investor relations activities in 2009 around our bid for stimulus contracts, and our  capital raise activities.  Legal fees were $840,764 for the year ended December 31, 2009 compared with $448,943 for the year ended December 31, 2008 and accounting fees were $140,322 for the year ended December 31, 2009 compared with $155,981 for the year ended December 31, 2008.  The legal fee increases are a direct result of the activities around our debt restructure and capital raise activities in 2009.  Executive compensation (not including subsidiary executives) was $10,352,828 for the year ended December 31, 2009 compared with $659,300 for the year ended December 31, 2008. This significant increase in executive compensation reflects the bonus payments under the management incentive program as described in the May 15, 2009 debenture waiver agreement incorporated by reference herein. These bonuses were awarded to staff members for their contributions relating to the Company’s success in meeting key milestones in bringing in new business in 2009. These payments involved an award of equity initially valued at $8.1 million, and cash payments of $1 million dollars. In January of 2010 the equity portion of the award was finalized at a reduced value in the form of 673,505 restricted shares valued at $3,704,278 on date of issuance.

Depreciation expense was $463,543 for the year ended December 31, 2009 compared to $615,960 for the year ended December 31, 2008.  All other general and administrative spending totaled $4,997,557 for the year ended December 31, 2009 compared to $5,056,512 for the year ended December 31, 2009.

 
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Expenses for research and development totaled $18,793 for the year ended December 31, 2009 compared to $292,709 for year ended December 31, 2008.  This reduction reflects our focused strategy on applications with short-term commercialization potential supported through joint projects and grants to help defray costs. Since one of our primary objectives continues to be the commercial advancement of clean electric technologies that reduce our dependence upon carbon based fuels, we have retained a strong focus on research and development activities, and expect to continue to incur additional research and development costs, although at a significantly reduced rate, for the foreseeable future

Our operating loss of $13,647,347 for the year ended December 31, 2009 compared with a loss of $3,821,634 for the year ended December 31, 2008.

For the year ended December 31, 2009, we earned interest income in the amount of $6,277 compared with $17,184 for the year ended December 31, 2008.

Interest expense was $15,915,438 for the year ended December 31, 2009 compared to $4,620,364 for the year ended December 31, 2008.  The higher amount for 2009 is attributable to additional fees and financing charges related to our waivers on the convertible debentures we issued in November and December of 2007.  Gain on disposal of assets was $48,523 for the year ended December 31, 2009 compared to a loss of $7,043 for the year ended December 31, 2008.  The gain in 2009 was primarily related to the sale of vehicles previously utilized for testing and evaluation as part of consulting activities.  Other income was $235 for the year ended December 31, 2009 compared to $346,646 for the year ended December 31, 2008. The 2008 figure is attributable to the Net Working Capital True up associated with our Minit-Charger acquisition.
 
Our net loss after other income and expenses compared unfavorably for the year ended December 31, 2009 for a loss of $29,507,750 compared with a $8,067,211 loss for year ended December 31, 2008. The higher loss in for the year ended December 31, 2009 is primarily attributable to costs incurred for waivers on payments related to our debenture obligations, as well as the costs of the final debt restructuring and elimination of our debenture debt. Executive compensation was also a factor (primarily in the form of equity) that was paid for achieving a debt restructure, obtaining critical contracts and securing additional capital to support our existing and future business requirements.

Liquidity and Capital Resources

As of December 31, 2009, we had $11,824,605 of cash on hand compared to year end 2008 balances of $327,332 of cash on hand and $28,044 in certificates of deposit.  This increase in cash is directly attributable to our successful capital raise in 2009 of $20.5 million dollars.

We utilized cash for operating activities in 2009 in the amount of $4,152,163 compared to $1,704,743 for 2008.  In addition, cash used in investing activities was $680,226 for the year ended December 31, 2009 compared to $228,177 for 2008.  The variance of $2.4 million utilized for operating activities was largely driven by significant pay down of accounts payable and accrued liabilities made possible by the inflow of cash related to our capital raise in the fourth quarter of 2009.  The $514,580 variance in investing activities reflects our investment in 2009 in new vehicles required for our consulting activities.  .

Cash generated by financing activities was $16,345,065 in 2009 compared to $1,622,938 in 2008. The cash generated in 2009 is related to receipt of $15.5 million in new investment in 2009.

 It is important to understand our complex financing transactions from  January 1, 2008 through December 31, 2009 as we have endeavored to become a leader in the renewable energy sector during a period characterized by a lack of capital markets in a down economy. These activities are described in detail below:

Given what we believed to be a competitive edge in the fast charger market, as well as having efficient plant operating capacity in Mexico, we were confident our strengths in the alternative energy field would allow us to achieve our planned objectives, and to generate adequate levels of working capital in the second half  of  2008. These assumptions, however, did not adequately capture the magnitude nor the speed of the economic down turn and its subsequent impact in even the alternative energy field. These external forces restricting growth and access to capital simultaneously resulted in our financing options being very limited and expensive.

To bridge this period of restricted capital options required the establishment of a line of credit and relief from debt service requirements as we continued to pursue our objectives of raising working capital through equity or other sources

On August 29, 2008 the Company signed an agreement with its November and December 2007 Debenture Holders to defer principal and interest payments for the period May 1 through December 31, 2008.  This agreement was to provide time to internally fund working capital requirements through organic growth and to obtain both short and long-term funding through equity financing and other capital sources.  The waiver period allotted by this agreement was proven insufficient given the deterioration of the Nation’s economic situation since its signing. The consideration for this waiver/deferment was material to our fiscal operations but necessary to seeking our growth objectives.

These cash management efforts in the year ended December 31, 2008, while adequate for that period, we required additional measures, most notably a successful capital raise and organic growth of our operations to allow us to meet our obligations going forward. To that end, during the year ended December 31, 2009, sought additional capital while working with our debt holders to preclude paying interest and redemption of principal redemption in exchange for additional time to generate needed working capital.  We were successful in this endeavor and in a series of transactions during 2009  obtained additional working capital and converted our debt to equity.

 
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On March 5, 2009, the Company entered in to an agreement (with an effective date of January 1, 2009) to further restructure its equity with the Holders of the November and December 2007 Debentures.  To allow additional time necessary for the Company to achieve its working capital objectives in the current economic environment, the Company  requested the November and December 2007 Debenture Holders to further extend a waiver of debt service requirements.  In exchange for signing the Amendment to Debentures and Warrants, Agreement and Waiver which deferred interest payments due for the first quarter 2009 until May 1, 2009 and payment of monthly principal redemptions until May 1, 2009, the Company agreed to a number of adjustments to the November and December 2007 Debentures.

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

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

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

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

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

Management’s Plan of Operation

Our overall plan of operation calls for sustained organic growth. We believed that the acquisitions we completed during 2007 would provide us with a base to support this objective and this growth was reflected in our budget and business plans for 2008. As described above, growth consistent with our plans did not occur in the third and fourth quarters of 2008, nor during the year ended December 31,  2009.  Sales of consulting services and manufacturing revenues remained at lower than anticipated levels.

However, with the signing of Securities Exchange Agreements with our debenture holders and Securities Purchase Agreements with current and new investors on October 31,2009 ,we  have taken the following actions to significantly strengthen our financial viability:
 
1.
Raise $20.5 million for working capital in equity financing from original investors/debt holders ($15 million) and new investors ($5.5 million).

 
a.
This results in positive shareholder equity on our balance sheet.

 
b.
This private offering also provides a satisfactory level of working capital to support initial requirements of the DOE contract awarded to our subsidiary eTec.

 
2.
Convert $9.08 million of debt on balance sheet to equity (preferred shares).

 
3.
Convert debt holder warrants to equity (preferred shares).

 
a.
Eliminates warrant dilutive “overhang”.

 
b.
Preferred shares have lockup provisions (9 months), and no dividends or redemption rights.
 
 
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4.
Reduce existing dilution “blocker” held by debt holders from 65% to 0%.

 
a.
Diminishes any control issues by any one share holder.

 
b.
Eliminates potential dilution fears with current and future share holders.

 
5.
Conduct reverse split of common shares (1:60).

 
a.
Established reasonable number of shares in the publically traded market place.

 
b.
Prepares us for being listed on a national stock exchange.

Working Capital

Net working capital is an important measure of our ability to finance our operations.  Our net working capital at December 31, 2009 was positive  by $12,446,961.

We do not have any off-balance sheet arrangements.

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

Commitments and Long Term Liabilities

On June 12, 2006, the Company entered into a License Agreement with California Institute of Technology, whereby the Company obtained certain exclusive and non-exclusive intellectual property licenses pertaining to the development of an electronic fuel cell technology, in exchange for 97,826 shares of common stock of the Company with a fair market value of $8,217,391.  The License Agreement carries an annual maintenance fee of $50,000, with the first payment due on or about June 12, 2009.  The License Agreement carries a perpetual term, subject to default, infringement, expiration, revocation or unenforceability of the License Agreement and the licenses granted thereby.

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

As of December 31, 2009, the Company has five leases in effect for operating space.  Future obligations under these commitments are $275,431 for 2010, $234,775 for 2011, $239,777 for 2012 and $63,499 for 2013.

Critical Accounting Policy and Estimates

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, recoverability of intangible assets, and contingencies and litigation.  We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  The most significant accounting estimates inherent in the preparation of our consolidated financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, primarily the valuation of intangible assets.  The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our consolidated financial statements.

Loss per share

Net loss per share is provided in accordance with ASC Subtopic 260-10.  We present basic loss per share (“EPS”) and diluted EPS on the face of statements of operations.  Basic EPS is computed by dividing reported losses by the weighted average shares outstanding.   Except where the result would be anti-dilutive to income from continuing operations, diluted earnings per share has been computed assuming the conversion of the convertible long-term debt and the elimination of the related interest expense, and the exercise of stock warrants. For the year ended December 31, 2008, the assumed conversion of convertible long-term debt and the exercise of stock warrants are anti-dilutive due to our net loss and were excluded in determining diluted loss per share.
 
 
36

 

Fair value of financial instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of December 31, 2009 and 2008.  The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values.  Fair value was assumed to approximate carrying value for cash because it is short term in nature and its carrying amount approximates fair value.

Income Taxes

We follow the provisions of ASC Subtopic 740-10 for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

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

Segment reporting

Generally accepted accounting principles require disclosures related to components of a company for which separate financial information is available that is evaluated regularly by a company’s chief operating decision maker in deciding the allocation of resources and assessing performance.  We are the parent company of Innergy Power Corporation, Fuel Cell Store and Electric Transportation Engineering Corporation. Innergy Power is a leader in the design and manufacture of thin sealed rechargeable lead batteries and high quality flat-panel multi-crystalline solar modules.  Fuel Cell Store is the leading online marketplace for fuel cell-related products and technologies with online distribution sites in the U.S., Japan, Russia, Italy and Portugal.  eTec is a leader in the research, development and testing of advanced transportation and energy systems with a focus on alternative-fuel, hybrid and electric vehicles and infrastructures.  eTec also 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.  We have aggregated these subsidiaries into three reportable segments: Fuel Cell Store, eTec and Innergy.

Dividends

We have not yet adopted any policy regarding payment of dividends. No dividends have been paid or declared since inception.

Recent Accounting Pronouncements
The FASB issued ASC subtopic 855-10 (formerly SFAS 165 “Subsequent Events”), incorporating guidance on subsequent events into authoritative accounting literature and clarifying the time following the balance sheet date which management reviewed for events and transactions that may require disclosure in the financial statements.  The Company has adopted this standard.  The standard increased our disclosure by requiring disclosure reviewing subsequent events.  ASC 855-10 is included in the “Subsequent Events” accounting guidance.

In April 2009, the FASB issued ASC subtopic 820-10 (formerly Staff Position No. FAS 157-4, Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”). ASC 820-10 provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset/liability has significantly decreased. FSP 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. In addition, FSP 157-4 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. The Company determined that adoption of FSP 157-4 did not have a material impact on its results of operations and financial position.

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

 
37

 

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

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

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

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

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following documents (pages F-1 to F-8) form part of the report on the Financial Statements
 
 
PAGE
   
Independent Registered Public Accounting Firm Reports
F-1
Consolidated Balance Sheets
F-2
Consolidated Statements of Operations
F-3
Consolidated Statement of Stockholders’ Equity (Deficit)
F-4
Consolidated Statements of Cash Flows
F-5
Footnotes
F-6
 
 
38

 

ECOtality, Inc.

Consolidated Balance Sheets
as of
December 31, 2009 and 2008

and

Consolidated Statements of Operations,
Stockholders’ Equity, and
Cash Flows
For the years ended
December 31, 2009 and 2008,

 
39

 

TABLE OF CONTENTS
 
 
PAGE
   
Independent Registered Public Accounting Firm Report 2009
F-1
   
Consolidated Balance Sheets
F-2
   
Consolidated Statements of Operations
F-3
   
Consolidated Statement of Changes in Stockholders’ Equity
F-4
   
Consolidated Statements of Cash Flows
F-5
   
Notes to Consolidated Financial Statements
F-6

 
40

 

WEAVER & MARTIN

To the Board of Directors and Stockholders
ECOtality, Inc.
Scottsdale, AZ


We have audited the accompanying consolidated balance sheets of ECOtality, Inc. and Subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended.  ECOtality, Inc.’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. Our audits of the financial statements include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ECOtality, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of its consolidated operations, stockholders’ equity, and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Weaver & Martin, LLC
 
Kansas City, Missouri
 
   
April 15, 2010
 
   
 
Certified Public Accountants & Consultants
 
411 Valentine, Suite 300
 
Kansas City, Missouri 64111
 
Phone: (816) 756-5525
 
Fax: (816) 756-2252
 
 
F-1

 

ECOtality, Inc.
Consolidated Balance Sheets

   
Decenber 31, 2009
   
December 31, 2008
 
    
 
(Audited)
   
(Audited)
 
             
Assets
           
             
Current assets:
           
Cash
  $ 11,824,605     $ 327,332  
Certificates of deposit
    -       28,044  
Receivables, net of allowance for bad debt of  $92,494 and $69,176 as of 12/31/09 and  12/31/08 respectively
    1,296,696       1,963,073  
Inventory, net of allowance for obsolescence of $335,864 and $167,487  as of 12/31/09 and 12/31/08 respectively
    749,492       1,149,881  
Prepaid expenses and other current assets
    387,327       229,931  
Total current assets
    14,258,120       3,698,263  
                 
Fixed assets, net accumulated depreciation of $4,124,431, and   $4,283,866 as of 12/31/09 and 12/31/08 respectively
    1,872,347       1,632,315  
                 
Goodwill
    3,495,878       3,495,878  
                 
Total assets
  $ 19,626,344     $ 8,826,457  
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities:
               
Accounts payable
  $ 372,982     $ 1,510,277  
Accrued liabilities
    1,438,177       848,789  
Accrued Interest
    -       1,281,115  
Liability for purchase price
    -       2,115,253  
Note Payable - related party
    -       450,000  
Current portion of LT Debt, net of discount of $0 and $1,530,101 as of 12/31/09 and 12/31/08 respectively
    -       3,411,540  
Total current liabilities
    1,811,159       9,616,975  
                 
Total LT Debt, net of discount of $0 and $548,735 as of 12/31/09 and 12/31/08 respectively
    287,500       1,971,849  
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value, 200,000,000 shares
               
authorized, 8,597,299 and 0 shares issued and outstanding as of
               
12/31/09 and 12/31/08 respectively
    8,597       -  
Common stock, $0.001 par value, 1,300,000,000 shares
               
authorized, 6,713,285  and 2,157,048 shares issued
               
and outstanding as of 12/31/09 and 12/31/08, respectively
    6,712       129,423  
Common stock owed but not issued;  2,079,061 shares at
               
12/31/09 and 1,250 at 12/31/08
    2,079       75  
Additional paid-in capital
    88,411,074       33,485,763  
Subscription receivable
    (5,000,000 )     -  
Retained deficit
    (65,845,368 )     (36,337,624 )
Accumulated Foreign Currency Translation Adjustments
    (55,409 )     (40,006 )
Total stockholders' equity
    17,527,685       (2,762,368 )
                 
Total liabilities and stockholders' equity
  $ 19,626,344     $ 8,826,457  

The accompanying notes are an integral part of these financial statements

 
F-2

 

ECOtality, Inc.
Consolidated Statement of Operations

   
For the Year Ended December 31,
 
   
2009
   
2008
 
   
(Audited)
   
(Audited)
 
             
Revenue
  $ 8,601,674     $ 11,187,384  
Cost of goods sold
    4,959,777       7,108,545  
                 
Gross profit
    3,641,897       4,078,839  
                 
Expenses:
               
Depreciation
    463,543       615,960  
General and administrative expenses
    16,806,908       6,991,804  
Research and development
    18,793       292,709  
                 
Total expenses
    17,289,244       7,900,473  
                 
Operating loss
    (13,647,347 )     (3,821,634 )
                 
Other income:
               
Interest income
    6,277       17,184  
Other Income
    235       364,646  
Total other income
    6,512       381,830  
                 
Other expenses:
               
Interest expense
    15,915,438       4,620,364  
(Gain) / Loss on Disposal of Assets
    (48,523 )     7,043  
Total other expenses
    15,866,915       4,627,407  
                 
Loss from operations before income taxes
    (29,507,750 )     (8,067,211 )
                 
Provision for income taxes
    -       -  
                 
Net (loss)
  $ (29,507,750 )   $ (8,067,211 )
                 
Weighted average number of
               
common shares outstanding - basic and fully diluted
    3,614,045       2,094,557  
                 
Net (loss) per share-basic and fully diluted
  $ (8.16 )   $ (3.85 )

The accompanying notes are an integral part of these financial statements

 
F-3

 

ECOtality, Inc.
Consolidated Statement of Stockholders’ Equity
 
   
Series A Convertible
               
Common Stock
   
Additional
               
Accum Foreign
   
Total
 
   
Preferred Stock
   
Common Stock
   
owed but
   
Paid-in
   
Subscription
   
Retained
   
Currency Trans
   
Stockholders’
 
   
Shares
   
Amount
   
Shares
   
Amount
   
not issued
   
Capital
   
receivable
   
Deficit
   
Adjustment
   
Equity
 
                                                             
Balance, December 31, 2007
    -     $ -       2,070,409     $ 2,070     $ -     $ 30,903,146     $ -     $ (28,270,409 )   $ -     $ 2,634,808  
                                                                                 
Shares issued for professional services
    -       -       9,417       9       -       81,716       -       -       -       81,725  
                                                                                 
Shares issued for Conversion of Debt
    -       -       5,555       6       -       99,994       -       -       -       100,000  
                                                                                 
Option issued to purchase Ecotality Shares
    -       -       -       -       -       55,168       -       -       -       55,168  
                                                                                 
Option issued for compensation
    -       -       5,000       5       1       24,994       -       -       -       25,000  
                                                                                 
Options Revalued per Purchase Agreements
    -       -       -       -       -       2,195,000       -       -       -       2,195,000  
                                                                                 
Amortization of stock issued for services
    -       -       -       -       -       253,151       -       -       -       253,151  
                                                                                 
Shares issued for 2007 acquisitions
    -       -       66,667       67       -       (67 )     -       -       -       -  
                                                                                 
Accumulated Foreign Currency Translation Adjustments
    -       -       -       -       -       -       -       -       (40,006 )     (40,006 )
                                                                                 
Net loss for the year
    -       -       -       -       -       -       -       (8,067,215 )     -       (8,067,215 )
                                                                                 
Balance, December 31, 2008
    -       -       2,157,048       2,157       1       33,613,103       -       (36,337,624 )     (40,006 )     (2,762,369 )
                                                                                 
                                                                                 
Shares issued for 2007 acquisition
    -       -       522,222       522       -       1,879,478       -       -       -       1,880,000