10-Q 1 v229283_10q.htm QUARTERLY REPORT Unassociated Document
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2011

Or

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

Commission File Number: 000-50983

ECOTALITY, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
68-0515422
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
Four Embarcadero Center, Suite 3720
San Francisco, CA
 
94111
(Address of principal executive offices)
 
(Zip Code)

(415) 992-3000
 
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x    No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x    No ¨

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

Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer ¨
(Do not check of a smaller reporting
company)
 
Smaller reporting
company   þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 Yes ¨   No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  23,666,622 shares as of August 11, 2011

 
 

 

ECOtality, Inc.

Table of Contents

PART I - FINANCIAL INFORMATION
 
 
     
Item 1. Financial Statements:
 
 
     
Condensed Consolidated Balance Sheets
 
3
     
Condensed Consolidated Statements of Operations
 
4
     
Condensed Consolidated Statements of Cash Flows
 
5
     
Notes to Condensed Consolidated Financial Statements
 
6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
18
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
30
     
Item 4. Controls and Procedures
 
30
     
PART II - OTHER INFORMATION
 
32
     
Item 1. Legal Proceedings
 
32
     
Item 1A. Risk Factors
 
32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
32
     
Item 3. Defaults Upon Senior Securities
 
32
     
Item 4. (Removed and reserved)
  32
     
Item 5. Other Information
  32
     
Item 6. Exhibits
 
33
     
SIGNATURES
 
34

 
2

 

PART 1. FINANCIAL INFORMATION

Item 1.  Financial Statements

ECOtality, Inc.
Condensed Consolidated Balance Sheets

   
June 30, 2011
   
December 31, 2010
 
 
 
(Unaudited)
   
(Audited)
 
Assets
           
             
Current assets:
           
Cash and cash equivalents
  $ 20,220,738     $ 3,844,841  
Restricted cash
    586,875       1,174,134  
Receivables, net of allowance for bad debt of  $65,603 and $80,371 as of 06/30/11 and  12/31/10, respectively
    4,471,978       1,901,253  
Inventory
    4,753,054       1,860,355  
Prepaid expenses and other current assets
    3,241,582       953,233  
Total current assets
    33,274,227       9,733,816  
                 
Fixed assets
    7,605,513       3,209,982  
Goodwill
    3,495,878       3,495,878  
Intangibles
    551,860       352,361  
                 
Total assets
  $ 44,927,477     $ 16,792,037  
                 
Liabilities and Stockholders’ Equity
               
                 
Current liabilities:
               
Accounts payable
  $ 6,835,493     $ 1,820,621  
Accrued legal fees
    284,409       612,498  
Accrued payroll
    647,241       430,965  
Unearned revenue, current portion
    2,772,455       679,836  
Warranty reserves
    338,911       262,082  
Accrued liabilities
    4,048,213       1,745,332  
Total current liabilities
    14,926,722       5,551,334  
                 
Long term liabilities:
               
Long term portion of unearned revenue
    923,861       -  
Long term debt
    -       287,500  
Total long term liabilities
    923,861       287,500  
Stockholders’ equity:
               
Series A Convertible Preferred stock, $0.001 par value, 200,000,000 shares authorized, 6,329,650 and 6,379,650 shares issued and outstanding as of  06/30/11 and 12/31/10, respectively
    6,330       6,380  
Common stock, $0.001 par value, 1,300,000,000 shares authorized, 22,224,957  and 11,058,229 shares issued and outstanding as of 06/30/11 and 12/31/10, respectively
    22,223       11,057  
Additional paid-in capital
    123,778,863       93,283,359  
Accumulated deficit
    (94,657,081 )     (82,287,267 )
Accumulated foreign currency translation adjustments
    (73,441 )     (60,326 )
Total stockholders' equity
    29,076,894       10,953,203  
Total liabilities and stockholders' equity
  $ 44,927,477     $ 16,792,037  

The accompanying notes are an integral part of these consolidated financial statements

 
3

 

ECOtality, Inc.
Condensed Consolidated Statements of Operations
Unaudited

   
For the Three Months Ended June 30,
   
For the Six Months Ended June 30,
 
    
2011
   
2010
   
2011
   
2010
 
                         
Revenue
  $ 6,038,432     $ 3,411,589     $ 10,374,814     $ 6,111,674  
Cost of goods sold
    6,885,358       3,061,504       12,212,794       5,453,028  
                                 
Gross profit (loss)
    (846,926 )     350,085       (1,837,980 )     658,646  
                                 
Operating Expenses:
                               
General and administrative
    4,513,234       7,768,923       8,291,473       10,008,477  
Depreciation
    106,702       149,107       200,139       290,711  
Warrant expense
    -       -       1,783,780       -  
Research and development
    131,457       51,493       245,770       64,327  
Total operating expenses
    4,751,391       7,969,520       10,521,160       10,363,513  
                                 
Loss from operations
    (5,598,319 )     (7,619,438 )     (12,359,142 )     (9,704,869 )
                                 
Other income (expense):
                               
Interest income
    2,659       8,734       5,202       23,943  
Interest expense
    (26,806 )     322,751       (42,342 )     (6,043 )
Gain (loss) on disposal of assets
    18,236       (12,201 )     18,236       (12,201 )
Other income, net
    6,444       317,824       8,232       317,825  
Total other income (expense)
    533       637,108       (10,672 )     323,524  
                                 
Net loss
  $ (5,597,786 )   $ (6,982,330 )   $ (12,369,814 )   $ (9,381,345 )
                                 
Net loss per share - basic and diluted
  $ (0.40 )   $ (0.78 )   $ (0.90 )   $ (1.09 )
                                 
Weighted average number of common shares outstanding - basic and diluted
  $ 14,005,179     $ 8,960,550     $ 13,694,687     $ 8,629,023  
 
The accompanying notes are an integral part of these consolidated financial statements

 
4

 

ECOtality, Inc.
Condensed Consolidated Statement of Cash Flows
Unaudited

   
For the Six Months Ended June 30,
 
   
2011
   
2010
 
             
Cash flows from operating activities
           
Net loss
  $ (12,369,814 )   $ (9,381,345 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Stock and options issued for services and compensation
    158,474       5,096,076  
Warrant expense
    1,783,780       -  
Depreciation
    867,109       326,164  
(Gain)/loss on disposal of assets
    (18,236 )     12,201  
Changes in operating assets and liabilities:
               
Accounts receivable
    (2,570,725 )     (39,859 )
Inventory
    (2,892,699 )     (416,877 )
Prepaid expenses and other
    (2,288,348 )     51,416  
Accounts payable
    5,014,872       429,937  
Accrued liabilities
    4,996,876       1,637,026  
Net cash used in operating activities
    (7,318,711 )     (2,285,261 )
                 
Cash flows from investing activities
               
Purchase of property and equipment
    (5,262,651 )     (335,347 )
Proceeds from sale of equipment
    19,000       31,500  
Change in restricted cash
    587,259       (672,868 )
Purchase of intangibles
    (199,499 )     -  
Net cash used in investing activities
    (4,855,891 )     (976,715 )
                 
Cash flows from financing activities
               
Proceeds on sale of common stock, net of expenses
    28,564,365       -  
Proceeds from warrant exercise
    -       11,999  
Proceeds from subscription receivable
    -       5,000,000  
Net cash provided by financing activities
    28,564,365       5,011,999  
                 
Effects of exchange rate changes
    (13,868 )     (9,312 )
                 
Net increase in cash
    16,375,895       1,740,710  
Cash at beginning of period
    3,844,841       11,824,605  
Cash at end of period
  $ 20,220,738     $ 13,565,314  
                 
Supplemental disclosures:
               
Interest paid
  $ 9,703     $ 9,703  

The accompanying notes are an integral part of these consolidated financial statements

 
5

 

ECOTALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
 
Note 1 – History and Organization of the Company
 
The Company was incorporated on April 21, 1999 under the laws of the State of Nevada, as Alchemy Enterprises, Ltd. On November 26, 2006, the Company amended its articles of incorporation to change its name from Alchemy Enterprises, Ltd. to ECOtality, Inc. to better reflect the Company’s renewable energy strategy and its focus on developing an electric power cell technology. 

Note 2 – Basis of Presentation

Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements include all normal and recurring adjustments that we believe are necessary to fairly state our financial position and the results of our operations and cash flows. Interim-period results are not necessarily indicative of results of operations or cash flows for a full-year. The balance sheet at December 31, 2010 has been derived from audited consolidated financial statements at that date, but does not include all disclosures required by U.S. GAAP for complete financial statements. Because all of the disclosures required by U.S. GAAP for complete financial statements are not included herein, these interim unaudited condensed financial statements and the notes accompanying them should be read in conjunction with our audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on April 15, 2011.

The accompanying consolidated financial statements have been prepared with the accounting principles generally accepted in the U.S. and include the accounts of ECOtality Inc. (corporate), ECOtality Stores (dba Fuel Cell Store), Innergy Power Corporation, Portable Energy de Mexico S.A. de C.V. (a subsidiary of the Company), Electric Transportation Engineering Corporation, d.b.a. ECOtality North America (“ECOtality North America”) and its subsidiary, Electric Transportation Applications, and ECOtality Australia. All significant inter-company balances and transactions have been eliminated.

Use of Estimates

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

Note 3 – Summary of Significant Accounting Policies

 Revenue Recognition

The Company derives revenue from sales of services and products and government grants related to clean energy technologies. The Company recognizes revenue when a formal arrangement exists, the price is fixed or determinable, all obligations have been performed pursuant to the terms of the formal arrangement, and collectability is reasonable assured.

The Company enters into agreements, including grant agreements, with various government entities, under which the Company is obligated to deliver services such as development of the infrastructure for deployment of electric vehicles, including gathering and completing the related data analyses. Under these agreements, the government entity makes payments to the Company based on expenditures incurred in the delivery of the services. The Company recognizes revenue as the related services are performed, based upon the actual efforts incurred relative to the amount of total effort expected to be incurred by the Company. Amounts related to capital expenditures are recognized over the term of the agreement as the capital assets are used in the delivery of the Company’s services. Revenue is recognized provided that the conditions under which the government payments were made have been met, and the Company has only perfunctory obligations outstanding. In certain agreements, the government retains a financial interest in the capital assets, which the Company may either buy out upon termination of the agreement, offer the government to buy out the Company’s interest in the assets, or sell the assets in the market and remit to the government the portion of the selling price equal to its financial interest. In these agreements, the government’s estimated financial interest is included in deferred revenues, and the assets are depreciated to the estimated disposal value at the termination of the agreement.

 
6

 

Revenues from service agreements with other customers, such as consulting services, are recognized as the services are performed. All costs of services are expensed as incurred.  Revenue from sales of products is recognized when products are delivered and the title and risk of loss pass to the customer. If the arrangement requires customer acceptance, revenue is recognized when acceptance occurs.  Our products are sold without a right of return.

In October 2009 the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force  (“ASU 2009-13”).  ASU 2009-13 amends ASC Subtopic 650-25 to eliminate the requirement that all undelivered elements have vendor specific objective evidence (“VSOE”) or third party evidence (“TPE”) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered.  In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements.  The overall guidance will require entities to disclose additional information about their multiple-element revenue arrangements.  The Company adopted the new guidance on January 1, 2011 prospectively for arrangements entered into or materially modified on or after the adoption date. As the Company does not have material multiple element arrangements, the adoption of the new guidance had no significant impact on the Company’s financial position or results of operation.

Note 4 – Net Loss per Common Share – Basic and Diluted

Net loss per common share – basic is computed by dividing reported net loss by the weighted average common shares outstanding. Our preferred stockholders have no obligation to fund the Company’s losses; accordingly, no losses are allocated to shares of preferred stock. In the periods when the Company earns net income, net income per common share – basic will be determined using the two-class method. Under this method, net income per share is calculated for common stock and participating securities such as preferred stock considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period.

Except where the result would be anti-dilutive, net loss per common share – diluted has been computed assuming the conversion of outstanding shares of preferred stock into common stock, and the exercise of stock warrants and stock options. The two-class method will be used to allocate net income between shares of preferred and common stock if the results are more dilutive to common stock than the conversion of preferred stock into common stock. For the six months ended June 30, 2011 and 2010, the assumed conversion of convertible preferred stock and the exercise of stock warrants and stock options are anti-dilutive due to the Company’s net losses and are excluded in determining net loss per common share - diluted. Accordingly, net loss per common share – diluted equals net loss per common share – basic in all periods presented.

Net loss per common share has been computed using the weighted average number of common shares outstanding during the periods presented.

Note 5– Income Taxes
 
ECOtality reported a loss before income taxes in the three and six month periods ended June 30, 2011 and 2010, and ECOtality did not record a tax provision in any period presented.

Note 6 – Fair Value of Financial Instruments

Fair value is defined as the price at which that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or parameters are not available, valuation models are applied.
 
Assets and liabilities recorded at fair value in our financial statements are categorized based upon the hierarchy of levels of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
 
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
 
Level 2 – Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
 
Level 3 – Valuations based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability.

 
7

 

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate their fair values based on their short-term nature. The carrying amount of the Company’s long term debt – current portion approximates its fair value based on interest rates available to the Company for similar debt instruments and the remaining short-term period until maturity of the debt. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2011 and December 31, 2010.
 
Note 7 – Balance Sheet Components

Inventory

Inventory is valued at the lower of cost, determined on a first-in, first-out basis, or market. Inventory includes material, labor, and factory overhead required in the production of our products. The Company writes down inventories for excess and obsolete items after evaluating historical sales, future demand, market conditions and expected product life cycles to reduce inventories to their estimated net realizable value. Such provisions are made in the normal course of business and charged to cost of goods sold in the consolidated statements of operations. Inventories as of June 30, 2011 and December 31, 2010 consisted of the following (in thousands):

   
June 30, 2011
   
December 31, 2010
 
Raw materials
  $ 1,697     $ 926  
Work-in-process
    29       381  
Finished goods
    3,547       915  
Less: excess and obsolete items
    (520 )     (362 )
    $ 4,753     $ 1,860  

Fixed Assets
 
Fixed assets as of June 30, 2011 and December 31, 2010 consisted of the following (in thousands):

   
June 30, 2011
   
December 31, 2010
 
Equipment
  $ 7,406     $ 2,962  
Buildings
    576       576  
Vehicles
    1,146       792  
Furniture and fixtures
    234       135  
Leasehold improvements
    689       600  
Computer software
    1,320       1,072  
 
    11,371       6,136  
Less:  accumulated depreciation
    (3,766 )     (2,926 )
    $ 7,606     $ 3,210  

Note 8 – Recent Accounting Pronouncements
 
In June 2011, the FASB issued ASU 2011-05 Comprehensive Income (Topic 220 - Presentation of Comprehensive Income). Under this amendment, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This Update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We are evaluating the provisions of ASU 2011-05 and do not believe it will have a material impact on the Company’s consolidated financial statements.
 
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs.  The amendments to the FASB Accounting Standards Codification™ (Codification) in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted.  We are evaluating the provisions of ASU 2011-04 and do not believe it will have a material impact on the Company’s consolidated financial statements.
 
In December 2010, the FASB issued ASU No. 2010-28-Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts  (“ASU 2010-28”). The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company adopted ASU 2010-28 as of January 1, 2011. The adoption of ASU 2010-28 did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29-Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations  (“ASU 2010-29”). The amendments in this ASU affect any public entity as defined by Topic 805,  Business Combinations , that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted ASU 2010-29 as of January 1, 2011. The adoption of ASU 2010-29 did not have a material impact on the Company’s consolidated financial statements.

 
8

 

Note 9– Stockholders’ Equity
 
Common Stock

On January 10, 2011, 2,604,167 shares of common stock were issued in return for  $10,000,000 in cash.
 
On February 8, 2011, 12,500 shares were issued to a consultant for professional services in the normal course of business.

On March 30, 2011 50,000 shares of preferred stock were converted in exchange for the issuance of 50,000 shares of common stock.

On June 27, 2011, the Company completed a public offering of 8,500,000 shares of its common stock.  The net proceeds to the Company were $19,200,000, after deducting the underwriting discount and related offering expenses.  The public offering was made pursuant to a prospectus dated June 22, 2011, filed as part of the Company’s registration statement on Form S-1 (Registration No. 333-174088), as amended (the “Registration Statement”).  The Company intends to use the net proceeds received from the Offering primarily for working capital related to its $100.2 million cost reimbursable contract with the U.S. Department of Energy.  The Company intends to use any remaining proceeds from this offering to expand its Blink infrastructure and for general corporate purposes.
 
Preferred Shares 
 
On March 30, 2011, 50,000 shares of preferred stock were converted to 50,000 shares of common stock.

Note 10 – Notes Payable
 
On January 16, 2007, the Company purchased an office building for an aggregate price of $576,000.  $288,000 was paid in cash and the remaining balance of $288,000 was structured as an interest-only loan.  The loan carried an interest rate of 6.75% calculated annually, with monthly interest-only payments due beginning on February 16, 2007.  The entire principal balance is due on or before January 16, 2012 and is included in accrued liabilities at June 30, 2011 and long-term debt at December 31, 2010 in the accompanying condensed consolidated balance sheets.

Note 11– Options and Warrants

STOCK WARRANTS

          
Weighted-
 
          
Average
 
    
Number
   
Exercise
 
    
Of Shares
   
Price
 
Outstanding at December 31, 2009
    3,071,023     $ 9.69  
Granted
    9,999     $ 0.60  
Exercised
    (36,664 )   $ 0.60  
Cancelled
    -       -  
Outstanding at December 31, 2010
    3,044,358     $ 9.76  
Granted
    1,519,444     $ 3.55  
Exercised
    -     $ -  
Cancelled
    -       -  
Outstanding at June 30, 2011
    4,563,802     $ 7.70  

STOCK WARRANTS OUTSTANDING

          
Weighted-
Average
       
          
Remaining
       
    
Number of
   
Contractual
   
Weighted-
 
Range of
 
Shares
   
Life in
   
Average
 
Exercise Prices
 
Outstanding
   
Years
   
Price
 
$74.40 - $85.20
    31,665       0.10     $ 81.66  
$21.00
    2,281       0.33     $ 21.00  
$9.00
    3,010,412       3.36     $ 9.00  
$4.91
    1,041,667       4.71     $ 4.91  
$0.60
    477,777       4.62     $ 0.60  
      4,563,802       3.78     $ 7.70  
 
 
9

 
 
On January 13, 2011, a warrant to purchase 1,041,557 shares of common stock with a strike price of $4.91, expiring in January 2016, was issued to ABB Technology Ventures Ltd. (ABBTV) pursuant to the Securities Purchase Agreement in partial consideration for ABBTV’s investment in the Company of $10,000,000 in cash (see Note 14). The warrant is exercisable upon issuance. The warrant represents an equity instrument and was included in additional paid-in capital, along with the remainder of the proceeds from the investment by ABBTV.
 
On February 17, 2011 a warrant to purchase 477,777 shares of common stock with a strike price of $0.60, expiring in February 2016, was issued to Shenzen Goch Investment Ltd. in accordance with an amendment to our Master Overhead Joint Venture Agreement.  This warrant is exercisable upon issuance and was valued at $1,784,000 using the Black Scholes model (strike price $0.60, stock price $3.85, expected term five years, volatility 151%, risk free interest rate 2.3%). The value of the warrant of $_1,784,0000  was included in general and administrative expense in the statement of operations for the six months ended June 30, 2011, as it represents a release of exclusivity rights previously granted to SGI which was necessitated by the Securities Purchase Agreement with ABBTV. The warrant represents an equity instrument and was included in additional paid-in capital.
 
Options:

   
Number of Stock
Options
Outstanding
   
Weighted-Average
Exercise Price
   
Weighted-Average
Remaining
Contractual Life
(Years)
   
Aggregate Intrinsic
Value (in thousands)
 
                                 
Outstanding — December 31, 2009
    49,164     $ 10.08       9.23          
Additional options authorized
                               
Granted
    1,197,500       5.02                  
Repurchased
                               
Forfeited
    (29,166 )     6.21                  
Exercised
                               
                                 
Outstanding — December 31, 2010
    1,217,498     $ 5.20       9.40          
                                 
Outstanding — June 30, 2011
    1,217,498     $ 5.20       8.90     $ 4.83  
                                 
Vested — June 30, 2011
    992,498     $ 5.58       8.79     $ 4.83  

There were no options awarded, exercised or cancelled during the six months ended June 30, 2011.

 
10

 

Additional information regarding the Company’s stock options outstanding and vested and exercisable as of June 30, 2011 is summarized below:  

       
Options Outstanding
   
Options Vested and 
Exercisable
 
 
Exercise
Prices
   
Number of Stock Options
Outstanding
   
Weighted-Average
Remaining
Contractual Life
(Years)
   
Shares Subject to Stock
Options
 
                       
  $ 16.80       16,666       6.33       16,666  
  $ 11.10       11,666       6.50       11,666  
  $ 6.19       100,000       8.84       100,000  
  $ 5.39       742,000       8.87       742,000  
  $ 4.60       70,500       8.87       70,500  
  $ 4.04       35,000       8.84       35,000  
  $ 3.62       25,000       9.39       -  
  $ 3.53       200,000       9.38       -  
  $ 2.40       16,666       7.33       16,666  
                               
            1,217,498               992,498  

Note 12 – Commitments and Contingencies

Operating Leases
 
The Company leases facilities under leases with third parties classified as operating leases.  The aggregate monthly rental payment on these operating leases is approximately $69,205.  Some leases are month to month, which requires no future obligation; however, all termed leases expire through December 2015.

At June 30, 2011
     
2011 (remaining 6 months)
  $ 376,496  
2012
    680,776  
2013
    337,700  
2014
    220,480  
2015
    204,148  
Thereafter
    -  
Total future minimum lease payments
  $ 1,819,600  

The total rental expense included in the consolidated statements of operations for the six months ended June 30, 2011 and 2010 was $407,213 and $195,863 respectively. As of June 30, 2011, the Company has eighteen leases in effect for operating space.
 
Contingencies
 
On October 28, 2010, we and our ECOtality North America subsidiary, as well as certain individuals, received subpoenas from the SEC, pursuant to a formal Private Order of Investigation, in connection with a fact-finding inquiry as to trading in shares of our common stock from the period between August 1, 2008 and August 31, 2009. The SEC has informed us, and the terms of the subpoenas confirm, that the fact-finding inquiry should not be construed as a determination that violations of law have occurred. At a meeting held on November 1, 2010, our Board of Directors delegated to the Audit Committee the responsibility and authority to respond to the SEC subpoenas. We are cooperating fully with the SEC.
 
On January 31, 2011, SIPCO, LLC filed a patent infringement suit against ECOtality and nine other defendants in the U.S. District Court for the Eastern District of Texas. SIPCO alleged that ECOtality’s EV Project, Blink Network, and EV Charging Stations infringe three SIPCO patents relating to wireless communications networks. SIPCO sought monetary damages and injunctive relief. The suit was dismissed without prejudice on May 31, 2011.
 
On April 15, 2011, we received a letter from Coulomb Technologies Inc. (“Coulomb”) alleging that we promised to make Coulomb the exclusive supplier for all of our public charging stations and asserting that we infringed Coulomb’s trademarks by including references to Coulomb in one of our websites. On May 3, 2011, we responded to Coulomb by denying its allegations and requesting that it retract these claims. Coulomb has since reasserted its claims and threatened to initiate litigation if the dispute is not resolved. ECOtality believes all of Coulomb’s allegations to be unfounded and intends to defend its position vigorously, if necessary.
 
 
11

 
 
Note 13 – Segment Information

US GAAP 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. We are the parent company of Fuel Cell Store and ECOtality North America. Innergy Power Corporation, a division of ECOtality, 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. ECOtality North America 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. ECOtality North America also holds exclusive patent rights to the 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 report these subsidiaries as three reportable segments: Fuel Cell Store, ECOtality North America and Innergy.

The accounting policies for the segments are the same as those described in the summary of significant accounting policies included in these condensed consolidated financial statements and in the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission on April 15, 2011. Management continues to assess how it evaluates segment performance, and currently utilizes income (loss) from operations. For the six months ended June 30, 2011 and 2010 inter-segment sales were $9,450 and $339,373 respectively. All inter-segment sales have been eliminated during the consolidation process.

Summarized financial information concerning the Company’s reportable segments for the three and six months ended June 30, 2011 and 2010 is as follows:

   
THREE MONTHS ENDED JUNE 30, 2011
 
    
ECOTALITY
NORTH
AMERICA
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total Revenues
  $ 5,544,033     $ 351,736     $ 142,663     $ 6,038,432  
Depreciation and amortization
  $ 92,497     $ 750     $ -     $ 93,247  
Operating income (loss)
  $ (3,976,054 )   $ 60,144     $ 18,686     $ (3,897,224 )
Interest expense
  $ (21,692 )   $ -     $ -     $ (21,692 )
Gain / (Loss) on disposal of assets
  $ 18,236     $ -     $ -     $ 18,236  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (3,979,510 )   $ 60,144     $ 18,686     $ (3,900,680 )
Corporate Overhead Allocation
  $ (1,550,745 )   $ (94,555 )   $ (38,351 )   $ (1,683,651 )
Segment Loss
  $ (5,530,255 )   $ (34,411 )   $ (19,665 )   $ (5,584,331 )
                                 
Not Included in segment loss:
                               
Depreciation on Corporate Assets
                          $ 13,455  
Reported Net income after tax
                          $ (5,597,786 )
Capital Expenditures
  $ 3,959,731     $ -     $ -     $ 3,959,731  
                                 
Total segment assets - excluding intercompany receivables
  $ 24,562,975     $ 450,950     $ 214,580     $ 25,228,505  
Other items Not included in Segment Assets:
                               
                                 
Other Corporate Assets
                          $ 19,698,972  
Total Reported Assets
                          $ 44,927,477  

 
12

 

   
THREE MONTHS ENDED JUNE 30, 2010
 
    
ECOTALITY
NORTH
AMERICA
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total Revenues
  $ 2,925,941     $ 291,654     $ 193,994     $ 3,411,589  
Depreciation and amortization
  $ 109,638     $ 1,012     $ 890     $ 111,540  
Operating income (loss)
  $ (4,178,933 )   $ (108,819 )   $ 53,683     $ (4,234,069 )
Interest expense
  $ (74 )   $ -     $ -     $ (74 )
Gain / (Loss) on disposal of assets
  $ (12,201 )   $ -     $ -     $ (12,201 )
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (4,191,208 )   $ (108,819 )   $ 53,683     $ (4,246,344 )
Corporate Overhead Allocation
  $ (2,314,293 )   $ (230,686 )   $ (153,441 )   $ (2,698,419 )
Segment Loss
  $ (6,505,501 )   $ (339,505 )   $ (99,758 )   $ (6,944,764 )
                                 
Not Included in segment loss:
                               
Depreciation on Corporate Assets
                          $ 37,567  
Reported Net income after tax
                          $ (6,982,330 )
Capital Expenditures
  $ 114,651     $ -     $ -     $ 114,651  
                                 
Total segment assets - excluding intercompany receivables
  $ 8,207,234     $ 367,447     $ 273,535     $ 8,848,216  
Other items Not included in Segment Assets:
                               
                                 
Other Corporate Assets
                          $ 13,562,508  
Total Reported Assets
                          $ 22,410,724  

 
13

 

   
SIX MONTHS ENDED JUNE 30, 2011
 
    
ECOTALITY
NORTH
AMERICA
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total Revenues
  $ 9,239,116     $ 819,344     $ 316,354     $ 10,374,814  
Depreciation and amortization
  $ 173,587     $ 1,500     $ -     $ 175,087  
Operating income (loss)
  $ (7,254,973 )   $ 201,699     $ 59,549     $ (6,993,725 )
Interest expense
  $ (32,375 )   $ -     $ -     $ (32,375 )
Gain / (Loss) on disposal of assets
  $ 18,236     $ -     $ -     $ 18,236  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (7,269,112 )   $ 201,699     $ 59,549     $ (7,007,864 )
Corporate Overhead Allocation
  $ (4,663,720 )   $ (488,498 )   $ (184,680 )   $ (5,336,898 )
Segment Loss
  $ (11,932,832 )   $ (286,799 )   $ (125,131 )   $ (12,344,762 )
                                 
Not Included in segment loss:
                               
Depreciation on Corporate Assets
                          $ 25,052  
Reported Net income after tax
                          $ (12,369,814 )
Capital Expenditures
  $ 5,227,869     $ -     $ -     $ 5,227,869  
                                 
Total segment assets - excluding intercompany receivables
  $ 24,562,975     $ 450,950     $ 214,580     $ 25,228,505  
Other items Not included in Segment Assets:
                               
                                 
Other Corporate Assets
                          $ 19,698,972  
Total Reported Assets
                          $ 44,927,477  

 
14

 

   
SIX MONTHS ENDED JUNE 30, 2010
 
    
ECOTALITY
NORTH
AMERICA
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total Revenues
  $ 5,074,693     $ 639,109     $ 397,873     $ 6,111,674  
Depreciation and amortization
  $ 214,739     $ 1,981     $ 1,779     $ 218,499  
Operating income (loss)
  $ (5,167,729 )   $ (58,387 )   $ 100,617     $ (5,125,500 )
Interest expense
  $ (106 )   $ -     $ -     $ (106 )
Gain / (Loss) on disposal of assets
  $ (12,201 )   $ -     $ -     $ (12,201 )
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (5,180,036 )   $ (58,387 )   $ 100,617     $ (5,137,807 )
Corporate Overhead Allocation
  $ (3,463,568 )   $ (436,203 )   $ (271,555 )   $ (4,171,327 )
Segment Loss
  $ (8,643,605 )   $ (494,590 )   $ (170,939 )   $ (9,309,134 )
                                 
Not Included in segment loss:
                               
Depreciation on Corporate Assets
                          $ 72,212  
Reported Net income after tax
                          $ (9,381,345 )
Capital Expenditures
  $ 335,347     $ -     $ -     $ 335,347  
                                 
Total segment assets - excluding intercompany receivables
  $ 8,207,233     $ 367,447     $ 273,535     $ 8,848,215  
Other items Not included in Segment Assets:
                               
                                 
Other Corporate Assets
                          $ 13,562,508  
Total Reported Assets
                          $ 22,410,724  

NOTE 14 – Agreement with Department of Energy (DOE)
 
On September 30, 2009, the Company’s ECOtality North America subsidiary signed a contract with the DOE for a cost-reimbursable contract worth at least $99.8 million, of which $13.4 million was sub-funded to federal research and development centers. On June 17, 2010, ECOtality North America was awarded a $15.0 million extension to the original cost-reimbursable contract, of which $1.2 million was sub-funded to federal research and development centers (such contract, as extended, the “DOE Contract”).  In connection with the DOE Contract, ECOtality North America will perform services to undertake deployment of electric vehicles and charging infrastructure in certain locations within the United States (“The EV Project”).  ECOtality North America obligations under the agreement include production and installation of charging units, support of electric vehicle deployment, program operation, gathering and analysis of data and preparation of electric vehicle use reports for the DOE, as well as the overall project management. Under the agreement, the DOE will reimburse 45.8% of total EV Project costs to be incurred by ECOtality North America, up to $100.2 million. Costs eligible for reimbursement include both capital expenditures and operating expenses incurred under the EV Project, including costs of charging units, materials, salaries, overhead, outsourced and subcontracted expenses, and other operating expenses. In addition the company will submit as allowable costs certain estimated costs of ownership incurred by the owner of the vehicles in the program, which are not costs to the program. Such allowable costs will result in reimbursement for items that the Company incurs minimal actual related costs. The Company estimates total EV Project costs to be $218.7 million of which approximately $120 million have minimal related costs to the Company as they relate to allowable costs for third party ownership. The Company submits claims for costs reimbursement to the DOE twice per month, and reimbursements are received shortly thereafter. The EV Project commenced in October 2009 and is scheduled to terminate in 2013. Under the federal regulations, upon the completion of the EV Project, there are 3 options for any equipment with a then-current fair value in excess of $5,000. The options are as follows: (1) retain the equipment by paying the DOE the remaining 45.8% of the fair value as determined at the end of the contract, (2) the DOE may buy out from the Company remaining 54.2% of the fair value as determined at the end of the contract, or (3) the asset may be sold, with the Company entitled to 54.2% of the proceeds and the government entitled to 45.8%.

 
15

 

In the early stages of the contract, our costs are primarily driven by labor, research and development of software and hardware. The billable costs and associated revenues generated in the later stages of the contract are driven by and subject to the number of electric vehicles that are deployed at any given time. To the extent that the deployment of vehicles is delayed and or the total number of vehicles is less than our projection, our total realizable revenue and associated billable costs will be less than full contract amount provides for.
 
Disbursement of the DOE funds is subject to customary terms and conditions applicable to federal grants. The Company believes it is in compliance with all applicable terms and conditions.

DOE accounted for 51% of our revenues in the six months ended June 30, 2011, and 33% for the six months ended June 30, 2010. The DOE receivables balance was $929,308 or 20% of our total accounts receivable at June 30, 2011, and $876,301 or 46% of our receivables balance at December 31, 2010. The Company does not believe the accounts receivable from this customer represent a significant credit risk based on its past collection experiences and the general creditworthiness of the customer.
 
Note 15 – Agreements with ABB Technology Ventures Ltd. (ABBTV) and ABB Inc.
 
On January 10, 2011, ECOtality entered into a Securities Purchase Agreement with ABBTV pursuant to which ABBTV agreed to purchase shares of the Company’s common stock for an aggregate purchase price of $10,000,000. The closing of the investment occurred on January 13, 2011. At the closing, the Company issued to ABBTV 2,604,167 shares of common stock at a purchase price of $3.84 per share.  In accordance with the Securities Purchase Agreement, the Company also issued to ABBTV a warrant to purchase 1,041,667 shares of its common stock at an exercise price of $4.91 per share. The warrant expires in January 2016. Under the terms of the warrant, the Company may not effect any exercise of the warrant in an amount that would result in ABBTV or its affiliates beneficially owning more than 19.99% of the outstanding common stock of the Company upon such an exercise. The Company also entered into an investor rights agreement with ABBTV pursuant to which the Company agreed to file a registration statement providing for the resale of common stock purchased by ABBTV. Pursuant to the terms of the investor rights agreement, in January 2011 ABBTV nominated two members to the Company’s Board of Directors, who were subsequently confirmed by the Company. The Company recorded the proceeds from the investment in common stock and additional paid-in capital during the quarter ended March 31, 2011, as both common stock and the warrant represent equity instruments.

On January 10, 2011, the Company entered into a Collaboration and Strategic Supplier Relationship Framework Agreement with ABB Inc., an affiliate of ABBTV. This agreement sets forth the general terms for the collaboration and strategic supplier relationship that ABB Inc. and the Company have agreed to implement between themselves and their affiliated companies. Also on January 10, 2011, the Company and ABB Inc. entered into the Collaboration and Strategic Supplier Relationship for North America Markets Agreement. This agreement sets forth the terms of the supplier relationship between the Company and ABB Inc. with respect to the North American market, providing that ABB Inc. and its affiliates will collaborate with the Company and its affiliates to further the development, expansion, and acceptance of market-leading battery charging solutions that incorporate, use or rely on the Company’s technology and/or that provide the networking functionality that the Company and its affiliates have designed and operate, associated with its “BLINK” trademark. The Company has an obligation to purchase products for battery charging solutions from ABB Inc., subject to ABB Inc. products meeting the Company’s requirements and certain terms and conditions. ABB Inc. also has a right of first refusal to supply current and future products for battery charging solutions to the Company.
 
ABBTV purchased 1,615,000 shares as part of our June 2011 public offering.

 
16

 

Note 16 – Agreement with Shenzhen Goch Investment Ltd. (SGI)

On July 2, 2009, the Company executed a non-binding Letter of Intent (LOI) with SGI. On September 15, 2009, the Company and SGI executed a Master Overhead Joint Venture Agreement and prepared draft business agreements. These arrangements specified creation of two joint ventures for the production and distribution of battery charging systems and electric vehicle infrastructure systems in China, one for the purpose of manufacturing battery charging and electric vehicle infrastructure systems for global sale, and the other for pursuing the marketing and sale of the products within an exclusively designated territory. The Company was to grant a perpetual, non-assignable, no-royalty license to both companies with regard to their respective branded products within the specified exclusive territory. Ecotality was to own 20% of the manufacturing and 40% of the distribution companies, and was to have a Technology Consulting Agreement with the distribution company. The manufacturing company was to be funded by SGI in the amount of $10,000,000, and the distribution company in the amount of $5,000,000. Subsequently, the parties agreed to modify the draft arrangement to form a single joint venture with exclusive sales and distribution rights in China, exclusive supply rights in China subject to certain limitations, and the amount of funding to be provided by SGI limited to $5,000,000.

In connection with signing the Collaboration and Strategic Supplier Relationship Agreements with ABB Inc., which would affect the exclusivity rights granted by the Company to the joint ventures to be formed with SGI, the Company and SGI further re-negotiated the draft business agreement, resulting in signing by both parties, on January 10, 2011, of an Amendment to the Master Overhead Joint Venture Agreement. The amendment aims to accommodate the impact of certain transactions with ABB Inc. on the arrangement with SGI. Under the amendment, SGI released its exclusive rights to supply electric vehicle charging products to the Company in favor of ABB Inc. The Company is obligated to use its best efforts to facilitate a manufacturing joint venture between SGI and ABB Inc. as it relates to certain products. In addition, the Company must offer SGI the first right to bid to replace the products should such products not be supplied by ABB Inc. and give SGI the “most favored nations” treatment with respect to any bids in response to such offers.

The draft business agreements also had provided for SGI to receive certain warrants to purchase the Company’s common stock based on its payment of certain license fees, its capital contributions to the joint venture, and the amount of products purchased by the Company from the joint venture. The parties have agreed that instead, SGI would be entitled to immediately receive warrants with an exercise price of $0.60 to purchase 477,777 shares of common stock. The value of the warrant was included in general and administrative expense in the statement of operations for the six months ended June 30, 2011, as it represents a release of exclusivity rights previously granted to SGI which became necessitated by the Investment and the Securities Purchase Agreement with ABBTV.  SGI will also be entitled to receive upon the final formation and total $5,000,000 funding of the joint venture another warrant to purchase 477,777 shares of the Company’s common stock.

As part of the amendment, SGI also assigned all its economic interests under this agreement to Green Valley International Energy Investment Company, based in Beijing, China.
 
Note 17 – Subsequent Events

On July 6, 2011 the Company issued 34,500 10-year options with an exercise price of $2.74, the closing market price on the date of issuance, to the Board of Directors as per our board compensation plan put in place in 2010.
 
Pursuant to the Underwriting Agreement entered into on June 22, 2011 between the Company and Roth Capital Partners, LLC, as representative of the several underwriters named therein (the “Underwriters”), the Company granted the Underwriters a 30-day option to purchase up to 1,275,000 shares of common stock to cover over-allotments.  On July 7, 2011, the Underwriters exercised their over-allotment option in full and purchased 1,275,000 shares of common stock from the Company at a purchase price of $2.50 per share.  Gross proceeds to the Company were approximately $3,200,000.
 
On July 15, 2011, we signed a Certificate of Acceptance under a Master Lease Agreement with Cisco Capital for equipment valued at $1.8 million.  This 18 month capital lease of equipment obligates the Company to $2.1 million of lease payments starting August 1, 2011.  The equipment covered by this lease is to be utilized by the company in furthering our deployment of home energy management systems.
 
On July 27, 2011, 166,666 restricted shares and 41,667 stock options with an exercise price of $3.03per share were issued to two of our executive officers in accordance with performance bonuses approved by the Compensation Committee of the Board of Directors.  
 
On August 10, 2011, the DOE announced that our ECOtality North America subsidiary had been selected to receive an award of $26.4 million to continue testing advanced technology vehicles.  We have no further details of the award at this time.  The award will not be finalized and we will not receive any funds until we negotiate and enter into a final contract with the DOE, which we expect to do by October 2011.
 
 
17

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results 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, as amended (the “Exchange Act”).  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 our growth and implement our business strategy; our 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 our Annual Report on Form 10-K and subsequent reports and filings with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those projected.
 
General

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

Overview

We are a leader in advanced electric vehicle (“EV”) charging and storage technologies with 20 years of experience in designing, manufacturing, testing and commercializing these technologies. Leveraging that experience, we are currently building the largest EV smart charging network in the U.S. Our cloud-based smart charging network, branded as the Blink Network, is initially supporting the adoption of EVs in 18 major U.S. metropolitan markets. Through innovation and strategic partnerships, with companies such as ABB and Cisco, we are establishing and monetizing the Blink Network, which is expected to reach 14,000 chargers across the U.S by year-end. Initial commercial customers hosting our chargers include Best Buy, BP/ARCO, Cracker Barrel, Fred Meyer/Kroger, and Macy’s.

We were incorporated in the State of Nevada in 1999 under the name Alchemy Enterprises, Ltd. to market biodegradable products. In November 2006, we changed our name to ECOtality, Inc. to better reflect our renewable energy strategy. Our primary operating segments consist of ECOtality North America, Innergy Power Corporation (“Innergy”) and Fuel Cell Store.  We acquired Fuel Cell Store, Innergy and ECOtality North America in 2007. We have a wholly owned subsidiary in Mexico, Portable Energy de Mexico S.A. de C.V., that provides manufacturing and assembly service.  We also have a wholly owned subsidiary in Australia, ECOtality Australia Pty Ltd., that markets and distributes our Blink   and Minit-Charger equipment in Australia and Southeast Asia. On May 19, 2010, our common stock commenced trading on the Nasdaq Capital Market.

Innergy is based in San Diego, California and 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 ECOtality North America’s Blink™ and Minit-Charger® products. Innergy also provides us the ability to expand our offering of solar products and solutions into current and developing commercial markets, and provides strong manufacturing and assembly operations to assist other aspects of our business.

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, 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. Fuel Cell Store is a 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.

On August 5, 2009, ECOtality North America was selected by the Department of Energy (the “DOE”) for a cost reimbursable contract of approximately $100.2 million to undertake the largest deployment of EVs and charging infrastructure in U.S. history, known as “The EV Project.”  On September 30, 2009, ECOtality North America accepted the original contract of approximately $99.8 million, of which approximately $13.4 million was sub-funded to federally funded research and development centers. On June 17, 2010, ECOtality North America was awarded an additional $15.0 million contract extension from the DOE, of which $1.2 million was sub-funded to federal research and development centers, to expand the market footprint of The EV Project and include the Chevrolet Volt (such contract, as extended, the “DOE Contract”). We believe that leading the world’s largest EV infrastructure project gives us unparalleled and distinct competitive advantages that will support our global business development initiatives.

 
18

 

Through The EV Project, we are developing, installing, and managing up to 14,000 charging stations in eighteen U.S. cities across six states and the District of Columbia in support of the initial launch of over 8,300 grid connected vehicles including the Nissan LEAF BEVs and 2,600 Chevrolet Volt PHEVs. The goal of The EV Project is to develop, implement and study techniques for optimizing the deployment of charging infrastructure to support widespread market acceptance of EVs in the U.S. and internationally, as well as identify commercially viable business models to create a sustainable EV charging industry. Through The EV Project, we have begun to deploy our Blink™ charging stations in the following major metropolitan areas: Phoenix (AZ), Tucson (AZ), Los Angeles (CA), San Diego (CA), San Francisco (CA), Dallas (TX), Fort Worth (TX), Houston (TX), Seattle (WA), Portland (OR), Eugene (OR), Salem (OR), Corvallis (OR), Nashville (TN), Knoxville (TN), Memphis (TN), Chattanooga (TN) and Washington, DC.

On August 31, 2009, ECOtality North America was awarded $8.0 million from the California Energy Commission (the “CEC”) to support the deployment of charge infrastructure and EVs in California as part of the CEC “American Recovery and Reinvestment Act of 2009 Cost Share: Alternative and Renewable Fuel and Vehicle Technology Program.” The related grant agreement was signed in April 2011.

In November 2010, ECOtality Australia was awarded part of the Victorian Electric Vehicle Trial from the Victoria Department of Transportation. This trial will deploy our Blink™ residential, commercial, and DC Fast Chargers in the State of Victoria for testing and data collection. The trial is expected to continue for three years from its inception and will expand the Blink™ product line outside the borders of the U.S.

In January 2011, we entered a strategic partnership with ABB Inc., a global leader in power and automation technologies. In connection with this partnership, ABB Technology Ventures Ltd, an affiliate of ABB Inc., committed $10.0 million of capital, and ABB Inc. entered into a North American collaboration and strategic supplier relationship agreement with us.
 
On February 2, 2011, ECOtality North America was awarded a contract with the Bay Area Air Quality Management District to expand The EV Project into the San Francisco Bay Area. The Company entered into a definitive contract with respect to this award on April 15, 2011.
 
Results of Operations
 
QUARTER ENDED JUNE 30, 2011, COMPARED WITH QUARTER ENDED JUNE 30, 2010
 
The following table sets forth our results of operations for the three months ended June 30, 2011 and 2010 (in thousands, except percentages):
 
   
Three Months Ended June 30,
   
Dollar Increase /
   
Percentage Increase /
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
 
Revenue
  $ 6,038     $ 3,412     $ 2,627       77%  
Cost of revenue
    6,885       3,062       3,824       125  
                                 
Gross profit (loss)
    (847 )     350       (1,197 )     (342)  
Operating expenses:
                               
General and administrative
    4,513       7,769       (3,256 )     (42)  
Research and development
    131       51       80       155  
Depreciation
    107       149       (42 )     (28)  
Total operating expenses
    4,751       7,970       (3,218 )     (40)  
Loss from operations
    (5,598 )     (7,619 )     2,021       (27)  
Other income (expense):
                               
Interest income
    3       9       (6 )     (70)  
Interest expense
    (27 )     323       (296 )     (92)  
Gain (loss) on disposal of assets
    18       (12 )     (6 )     49  
Other income
    6       318       (311 )     100  
Total other income (expense)
    1       637       (619 )     (97)  
Net loss
  $ (5,598 )   $ (6,982 )   $ 1,402       (20)%  
 
Revenue and Cost of Revenue

We recognized revenue of $6.0 million for the three months ended June 30, 2011 compared to $3.4 million for the three months ended June 30, 2010.  The increase in revenue of $2.6 million or 77% in 2011 is primarily related to the revenue earned on work performed under the DOE Contract, which was $3.1 million in the three months ended June 30, 2011 compared to $1.3 million for the same period in 2010. Revenue also increased in 2011 due to the increase in our other lines of business including sales of industrial chargers. We anticipate the majority of our revenue in 2011 will be derived from the DOE Contract based on deliveries of chargers.
 
Cost of revenue primarily consists of labor, materials, facilities and equipment related to the manufacturing of chargers and development of the Blink Network.  Cost of revenue was $6.9 million for the three months ended June 30, 2011 compared to $3.1 million for the three months ended June 30, 2010.  The increase of $3.8 million, or 125%, was primarily due to the ramp up of activity and associated costs incurred under the DOE Contract in 2011.
 
 
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Gross margin percentage for the three months ended June 30, 2011 was (14%) compared to 10% for the three months ended June 30, 2010. The decrease in the gross margin is reflective of the costs incurred in 2011 under the DOE Contract where we were reimbursed for approximately 46% of our costs. The DOE Contract revenues in the second quarter of 2011 were much higher than for the same period in 2010, and thus the relative impact of the contract in 2010 was limited.

Operating Expenses

Total operating expenses were $4.8 million for the three months ended June 30, 2011 compared to $8.0 million for the three months ended June 30, 2010. The largest component of our operating expenses is general and administrative expenses, which were $4.5 million or 95% of total operating expenses for the three months ended June 30, 2011, compared with $7.8 million or 97% for the three months ended June 30, 2010.

General and administrative expenses primarily consist of payroll, facilities, legal fees, professional fees and marketing costs.  General and administrative expenses decreased by $3.3 million or 42% for the three months ended June 30, 2011 compared to the same period in the prior year.
 
Legal fees net of recoveries were negative $92 thousand for the three months ended June 30, 2011 compared with $0.2 million for the three months ended June 30, 2010. The negative expense in 2011 is due to the recovery of $0.3 million in legal fees through our Directors and Officers insurance carrier in connection with the previously expensed costs associated with the SEC formal Private Order of Investigation. Excluding this adjustment, our legal expenses were flat over the same period in the prior year at $0.2 million.

Professional fees were $0.6 million for the three months ended June 30, 2011 compared with $0.2 million for three months ended June 30, 2010. The $0.4 million increase is attributable to increased expenses to support our outreach to state and local governments in the interest of furthering green energy initiatives as well as increased outsourced recruiting and human resource consulting fees commensurate with our larger employee population.
 
Accounting fees were $0.3 million for the three months ended June 30, 2011 compared with $0.05 million for the three months ended June 30, 2010.  This increase was attributable to higher audit and review fees which we anticipate will stabilize and go down slightly as we move forward.
 
Executive and Director’s compensation was $0.4 million in the three months ended June 30, 2011 compared with $3.0 million for the three months ended June 30, 2010.  All other compensation was $1.5 million in the three months ended June 30, 2011 compared to $3.2 million for the three months ended June 30, 2010.  The decrease in overall compensation expense is attributable to one time compensation paid in 2010 in the form of equity based on recommendations by an outside consulting firm and our Board Compensation Committee who were engaged to ensure our Board compensation and employee incentive plans were on par with similarly situated companies.
 
Our marketing, investor and public relations expenses were $0.2 million for the three months ended June 30, 2011 compared with $0.1 million for the three months ended June 30, 2010. The increased spending in 2011 was primarily related to ongoing branding identification efforts to establish our base brand from which all our on-road (electric vehicle related) products will extend and to promoting our line of electric vehicle products.
 
All other general and administrative expenses totaled $1.6 million for the three months ended June 30, 2011 compared to $0.9 million for the three months ended June 30, 2010.  The increase in all other general and administrative expenses is reflective of the increased costs related to the growth in the business and number of employees year over year.
 
Research and development expenses primarily consist of engineering costs that totaled $0.13 million for the three months ended June 30, 2011 compared to $0.05 million for the three months ended June 30, 2010. The increase of $0.08 million was due to our focus on research and development activities related to our Blink technologies. We expect our research and development expenses to remain at this level as we continue to expand our research and development activities but expect to fund these costs in whole or in part by partnering with government and industry through research and development cost share contracts.
 
Depreciation expense was approximately $0.1 million for the three months ended June 30, 2011 and $0.1 million for the same period in 2010. We expect this expense to increase in 2011 as we purchase more property and equipment in support of the growth of our operations.
 
SIX MONTHS ENDED JUNE 30, 2011, COMPARED WITH SIX MONTHS ENDED JUNE 30, 2010
 
The following table sets forth our results of operations for the six months ended June 30, 2011 and 2010 (in thousands, except percentages):
 
                   
    Six Months Ended June 30,     Dollar Increase /    
Percentage Increase /
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
 
Revenue
  $ 10,375     $ 6,112     $ 4,263       70 %
Cost of revenue
    12,213       5,453       6,760       124  
  
                               
Gross profit (loss)
    (1,838 )     659       (2,497 )     (379 )
Operating expenses:
                               
General and administrative
    8,291       10,008       (1,717     (17
Warrant expense     1,784       -       1,784       -  
Research and development
    246       64       181       282  
Depreciation
    200       291       (91 )     (31 )
Total operating expenses
    10,521       10,364       158       2  
Loss from operations
    (12,359 )     (9,705 )     (2,654 )     27  
Other income (expense):
                               
Interest income
    5       24       (19 )     (78 )
Interest expense
    (42 )     (6 )     48       (801 )
Gain (loss) on disposal of assets
    18       (12 )     30       (249 )
Other income
    8       318       (310 )     100  
Total other income (expense)
    (11 )     324       (250 )     (77 )
Net loss
  $ (12,370 )   $ (9,381 )   $ (2,904 )     31 %
 
 
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Revenue and Cost of Revenue

We recognized revenue of $10.4 million for the six months ended June 30, 2011 compared to $6.1 million for the six months ended June 30, 2010.  The increase in revenue of $4.3 million or 70% in 2011 is primarily related to the revenue earned on work performed under the DOE Contract, which was $5.3 million in the six months ended June 30, 2011 compared to $2 million for the same period in 2010. We anticipate the majority of our revenue in 2011 will be derived from the DOE Contract based on deliveries of chargers.
 
Cost of revenue primarily consists of labor, materials, facilities and equipment related to the manufacturing of chargers and development of the Blink Network.  Cost of revenue was $12.2 million for the six months ended June 30, 2011 compared to $5.5 million for the six months ended June 30, 2010.  The increase of $6.8 million, or 124%, was primarily due to the ramp up of activity and associated costs incurred under the DOE Contract in 2011.
 
Gross margin percentage for the six months ended June 30, 2011 was (18%) compared to 11% for the six months ended June 30, 2010. The decrease in the gross margin is reflective of the costs incurred to date in 2011 under the DOE Contract where we were reimbursed for approximately 46% of our costs. The DOE Contract revenues in the first six months of 2011 were much higher than for the same period in 2010, and thus the relative impact of the contract in 2010 was limited.

Operating Expenses

Total operating expenses were $10.5 million for the six months ended June 30, 2011 compared to $10.4 million for the six months ended June 30, 2010. The largest component of our operating expenses is general and administrative expenses, which were $10.1 million or 96% of total operating expenses for the six months ended June 30, 2011, compared with $10 million or 97% for the six months ended June 30, 2010.

General and administrative expenses primarily consist of payroll, facilities, legal fees, professional fees and marketing costs.  General and administrative expenses increased by $0.1 million or 1% for the six months ended June 30, 2011 compared to the same period in the prior year.
 
Legal fees were flat at $0.4 million for the six months ended June 30, 2011 and 2010.
 
Professional fees were $0.8 million for the six months ended June 30, 2011 compared with $0.4 million for six months ended June 30, 2010. The $0.4 million increase is attributable to increased expenses to support our outreach to state and local governments in the interest of furthering green energy initiatives as well as increased outsourced recruiting and human resource consulting fees commensurate with our larger employee population.

Accounting fees were $0.5 million for the six months ended June 30, 2011 compared with $0.1 million for the six months ended June 30, 2010.  This increase was attributable to higher audit and review fees.
 
Executive and Director’s compensation was $0.7 million in the six months ended June 30, 2011 compared with $3.4 million for the six months ended June 30, 2010.  All other compensation was $3 million for the six months ended June 30, 2011 compared to $3.9 million for the six months ended June 30, 2010.  The decrease in overall compensation expense is attributable to one time compensation paid in 2010 in the form of equity based on recommendations by an outside consulting firm and our Board Compensation Committee who were engaged to ensure our Board compensation and employee incentive plans were on par with similarly situated companies.
 
Our marketing, investor and public relations expenses were $0.4 million for the six months ended June 30, 2011 compared with $0.3 million for the six months ended June 30, 2010. The increased spending in 2011 was primarily related to ongoing branding identification efforts to establish our base brand from which all our on-road (electric vehicle related) products will extend and to promoting our line of electric vehicle products.
 
All other general and administrative expenses totaled $4.3 million for the six months ended June 30, 2011 compared to $1.6 million for the six months ended June 30, 2010. The increase in all other general and administrative expenses was primarily driven by $1.8 million of non-cash expense for 477,777 warrants issued to Shenzhen Goch in return for a release of supplier non-exclusivity rights to facilitate the $10.0 million investment by ABB Technology Ventures Ltd. in January 2011, as well as increased resources to support the effective execution of our business plan and the fulfillment of our DOE Contract obligations.

Research and development expenses primarily consist of engineering costs that totaled $0.2 million for the six months ended June 30, 2011 compared to $0.1 million for the six months ended June 30, 2010. The increase of $0.1 million was due to our focus on research and development activities related to our Blink technologies. We expect our research and development expenses to remain at this level as we continue to expand our research and development activities but expect to fund these costs in whole or in part by partnering with government and industry through research and development cost share contracts.

Depreciation expense was approximately $0.2 million for the six months ended June 30, 2011 and $0.3 million for the six months ended June 302010. We expect this expense to increase as we purchase more property and equipment in support of the growth of our operations.
 
Segment Information

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 Fuel Cell Store and ECOtality North America. Innergy Power Corporation, a division of ECOtality, 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. ECOtality North America 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. ECOtality North America also holds exclusive patent rights to the   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 report these subsidiaries as three reportable segments: Fuel Cell Store, ECOtality North America and Innergy.
 
While management is currently assessing how it evaluates segment performance, we currently utilize income (loss) from operations, excluding depreciation of corporate assets. For the six months ended June 30, 2011 and 2010 inter-segment sales were $9,450 and $339,373 respectively.  All inter-segment sales have been eliminated during the consolidation process.
 
Summarized financial information concerning the Company’s reportable segments for the three and six months ended June 30, 2011 and 2010 is as follows:
 
   
THREE MONTHS ENDED JUNE 30, 2011
 
   
ECOTALITY
NORTH
AMERICA
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total Revenues
  $ 5,544,033     $ 351,736     $ 142,663     $ 6,038,432  
Depreciation and amortization
  $ 92,497     $ 750     $ -     $ 93,247  
Operating income (loss)
  $ (3,976,054 )   $ 60,144     $ 18,686     $ (3,897,224 )
Interest expense
  $ (21,692 )   $ -     $ -     $ (21,692 )
Gain / (Loss) on disposal of assets
  $ 18,236     $ -     $ -     $ 18,236  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (3,979,510 )   $ 60,144     $ 18,686     $ (3,900,680 )
Corporate Overhead Allocation
  $ (1,550,745 )   $ (94,555 )   $ (38,351 )   $ (1,683,651 )
Segment Loss
  $ (5,530,255 )   $ (34,411 )   $ (19,665 )   $ (5,584,331 )
                                 
Not Included in segment loss:
                               
Depreciation on Corporate Assets
                          $ 13,455  
Reported Net income after tax
                          $ (5,597,786 )
Capital Expenditures
  $ 3,959,731     $ -     $ -     $ 3,959,731  
                                 
Total segment assets - excluding intercompany receivables
  $ 24,562,975     $ 450,950     $ 214,580     $ 25,228,505  
Other items Not included in Segment Assets:
                               
                                 
Other Corporate Assets
                          $ 19,698,972  
Total Reported Assets
                          $ 44,927,477  

 
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THREE MONTHS ENDED JUNE 30, 2010
 
   
ECOTALITY
NORTH
AMERICA
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total Revenues
  $ 2,925,941     $ 291,654     $ 193,994     $ 3,411,589  
Depreciation and amortization
  $ 109,638     $ 1,012     $ 890     $ 111,540  
Operating income (loss)
  $ (4,178,933 )   $ (108,819 )   $ 53,683     $ (4,234,069 )
Interest expense
  $ (74 )   $ -     $ -     $ (74 )
Gain / (Loss) on disposal of assets
  $ (12,201 )   $ -     $ -     $ (12,201 )
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (4,191,208 )   $ (108,819 )   $ 53,683     $ (4,246,344 )
Corporate Overhead Allocation
  $ (2,314,293 )   $ (230,686 )   $ (153,441 )   $ (2,698,419 )
Segment Loss
  $ (6,505,501 )   $ (339,505 )   $ (99,758 )   $ (6,944,764 )
                                 
Not Included in segment loss:
                               
Depreciation on Corporate Assets
                          $ 37,567  
Reported Net income after tax
                          $ (6,982,330 )
Capital Expenditures
  $ 114,651     $ -     $ -     $ 114,651  
                                 
Total segment assets - excluding intercompany receivables
  $ 8,207,234     $ 367,447     $ 273,535     $ 8,848,216  
Other items Not included in Segment Assets:
                               
                                 
Other Corporate Assets
                          $ 13,562,508  
Total Reported Assets
                          $ 22,410,724  

 
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SIX MONTHS ENDED JUNE 30, 2011
 
   
ECOTALITY
NORTH
AMERICA
   
INNERGY
   
FUEL CELL
STORE
   
TOTAL
 
Total Revenues
  $ 9,239,116     $ 819,344     $ 316,354     $ 10,374,814  
Depreciation and amortization
  $ 173,587     $ 1,500     $ -     $ 175,087  
Operating income (loss)
  $ (7,254,973 )   $ 201,699     $ 59,549     $ (6,993,725 )
Interest expense
  $ (32,375 )   $ -     $ -     $ (32,375 )
Gain / (Loss) on disposal of assets
  $ 18,236     $ -     $ -     $ 18,236  
Other Income (expense)
  $ -     $ -     $ -     $ -  
Segment Income before Corporate Overhead Allocation
  $ (7,269,112 )   $ 201,699     $ 59,549     $ (7,007,864 )
Corporate Overhead Allocation
  $ (4,663,720 )   $ (488,498 )   $ (184,680 )   $ (5,336,898 )
Segment Loss
  $ (11,932,832 )   $ (286,799 )   $ (125,131 )   $ (12,344,762 )
                                 
Not Included in segment loss:
                               
Depreciation on Corporate Assets
                          $ 25,052  
Reported Net income after tax
                          $ (12,369,814 )
Capital Expenditures
  $