The
condensed consolidated financial statements of the Company include the accounts
of the Company and its wholly-owned subsidiary. All significant inter-company
balances and transactions have been eliminated.
Organization
The
accompanying condensed consolidated financial statements presented are those
of
Odyne Corporation (the “Company” or “Odyne”), which was originally formed as a
Subchapter S Corporation in the State of New York on August 3, 2001. The
Company
designs, develops, manufactures and installs Plug-in Hybrid Electric Vehicle
(“PHEV”) propulsion systems for medium and heavy duty trucks and buses using its
proprietary technology.
Merger
of Technology Integration Group , Inc. and Odyne Corporation
Pursuant
to an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”),
Technology Integration Group, Inc. (“TIG”), through a newly-formed acquisition
subsidiary, acquired all of the outstanding common stock of the Company on
October 17, 2006. TIG, in exchange for the Company’s stock, issued 12,000,000
shares of its common stock directly to the Company’s stockholders (the “Share
Exchange Transaction”). Following the Share Exchange Transaction, the existing
stockholders of TIG retained 6,000,000 shares of TIG’s outstanding common stock
and the Company’s stockholders became the majority owners of TIG. TIG was
incorporated in the State of Delaware on February 3, 1999.
Prior
the
Share Exchange Transaction, TIG was a publicly-traded corporation with
nominal operations of its own. TIG, immediately following the Share Exchange
Transaction, changed its name to Odyne Corporation and continued to carry
on the
operations of the Company. The Share Exchange Transaction has been accounted
for
as a reverse merger and recapitalization transaction in which the original
Odyne
is deemed to be the accounting acquirer. Accordingly, the accompanying condensed
consolidated financial statements present the historical financial position,
results of operations and cash flows of Odyne, adjusted to give retroactive
effect to the recapitalization of Odyne into TIG.
NOTE
2 – LIQUIDITY AND CAPITAL RESOURCES
The
Company’s net loss amounted to $2,957,462 for the nine months ended September
30, 2007. The Company’s accumulated deficit amounted to $6,798,539 at September
30, 2007. The Company also used $2,895,791 of cash in its operating activities
during the nine months ended September 30, 2007. As of September 30, 2007
the
Company has $60,412 of working capital available to fund its operations.
On
October 26, 2007, the Company completed a private placement of 10% senior
secured convertible notes and warrants to purchase common stock, and received
gross and net proceeds in the amount of $3.2 million and $2.8 million,
respectively. The net proceeds of the private placement will be used by Odyne
for its working capital and capital expenditure requirements and to repay
a $
250,000 bridge note it received from its Chief Executive Officer.
Odyne’s
notes and warrants were offered and sold in units only to “accredited
investors,” as defined in Regulation D of the Securities Act of 1933. Each unit
consisted of $100,000 principal amount of 10% senior secured convertible
debentures and warrants to purchase shares of common stock at an exercise
price
of $.75 per share, subject to certain anti-dilution provisions.
The
debentures are due on April 24, 2009 and bear interest at 10% per year, payable
in cash or freely-tradable common stock, at Odyne’s option. The warrants are
exercisable at any time and expire three years from issuance. The securities
sold in the private placement have not yet been registered under the Securities
Act of 1933, as amended, and may not be offered or sold in the United States
in
the absence of an effective registration statement or exemption from
registration requirements. As part of the private placement, Odyne agreed
to
file a registration statement with the U.S. Securities and Exchange Commission
within 60 days after the final closing for purposes of registering the resale
of
the shares of common stock issuable upon the conversion of the notes and
exercise of the warrants sold in the private placement.
The
Company believes it may not have sufficient capital resources to sustain
operations through September 30, 2008. The Company must obtain additional
capital and increase revenue in order to ensure it has the capital resources
it
needs to pursue its planned operations. If the Company is unable to obtain
additional capital, it will have to implement cost cutting plan, reduce the
size
of its operating structure, and/ or sell assets to conserve its liquidity.
Although the Company’s completion of its Private Placement substantially
improved its overall liquidity, the Company must still devote substantially
all
of its capital resources to its research and development activities, developing
its manufacturing infrastructure and penetrating possible markets for its
PHEV
propulsion system. The Company needs to raise additional funds to achieve
commercialization of its PHEV system and continue the pursuit of its
business plan. The Company also cannot provide any assurance that it will
ultimately be successful in its efforts to commercialize its PHEV propulsion
system.
In
the
year ended December 31, 2006, the Company received gross proceeds of $5,353,995
(net proceeds of $4,355,319 after the payment of $998,676 in transaction
expenses) in a private placement (the “Private Placement”) of 5,750 Units (the
“Units”). The Company also received $250,000 from its issuance of convertible
debentures (the “Convertible Debentures”) that the holders exchanged for Units
upon the first closing of the Private Placement in October 2006. Upon the
completion of the Share Exchange transaction referred to in Note 1, the Company
also effectuated a recapitalization of certain indebtedness to
officers/stockholders into permanent capital, including (i) $1,766,496 for
the
fair value of common stock subject to mandatory redemption under a stockholders
agreement that was terminated at the time of the Share Exchange Transaction,
(ii) $623,314 of deferred compensation payable to certain officers/stockholders
and (iii) $183,559 of loans payable to officers.
Principles
of Consolidation
The
condensed consolidated financial statements of the Company include the accounts
of the Company and its wholly-owned subsidiary. All significant inter-company
balances and transactions have been eliminated.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
These estimates and assumptions include revenue recognition reserves and
write-downs related to receivables and inventories, the recoverability of
long-term assets, deferred taxes and related valuation allowances and valuation
of equity instruments.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash, cash equivalents and accounts receivable.
The
Company maintains its cash accounts at high quality financial institutions
with
balances, at times, in excess of federally insured limits. As of September
30,
2007, the Company had cash balances in excess of federally insured limits
of
approximately $8,742. Management believes that the financial institutions
that
hold the Company’s deposits are financially sound and pose minimal credit
risk.
Accounts
Receivable
The
Company has a policy of reserving for uncollectible accounts based on its
best
estimate of the amount of probable credit losses on its existing accounts
receivable. Account balances deemed to be uncollectible are charged to the
allowance for doubtful accounts after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company’s
customers include municipal governments, public utilities and not-for-profit
organizations. The Company’s credit losses to date have been minimal.
Accordingly, the Company established a $3,000 allowance for doubtful accounts
at
December 31, 2006, which remains unchanged at September 30, 2007.
Revenue
and Cost Recognition
|
|
·
|
Fixed
Price Production Contracts
|
Revenues
from fixed-price production contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred
to
date to estimated total costs for each contract. The Company considers expended
cost to be the best available measure of progress on these contracts. Revenues
generated from fixed-price contracts amounted to $ 95,936 and $ 12,847, for
the
three months ended September 30, 2007 and 2006, respectively and $417,992
and
$182,071 for the nine months ended September 30, 2007 and 2006, respectively.
Cost of revenues earned on fixed-price contracts includes direct contract
costs
such as materials, labor, subcontract labor, payroll, payroll taxes, insurance
and other sundry direct costs, and indirect contract costs such as travel,
supplies and depreciation. Provisions for estimated losses on contracts in
progress are made in the period in which such losses are determined. For
the
three months ended September 30, 2007, the Company recorded a reduction of
$
13,130 in its provision for losses on contracts in progress. The provision
for
estimated losses is $1,401 as of September 30, 2007.
|
|
·
|
Completed
- Contract Method
|
Under
the
completed contract method, revenue and cost of individual contracts are included
in operations in the year during which they are completed. Loses expected
to be
incurred on contracts in progress are charged to operations in the period
such
loses are determined. The aggregate of cost of uncompleted contracts in excess
of related billings is included in inventory, and the aggregate of billings
on
uncompleted on uncompleted contracts in excess of related cost is shown as
a
liability. The Company adopted this accounting method effective January 1,
2007
in order to account for its short term fixed price contracts. No revenue
was
recognized using this method during the nine months ended September 30, 2007.
|
|
·
|
Time
and Materials Contracts
|
Revenues
from time and materials contracts are billed, including profits, as incurred
based on a fixed labor rate plus materials. No revenues were generated from
time
and materials contracts for the three months periods ended September 30,
2007
and 2006, respectively. Revenues generated from time and materials contracts
amounted to $-0- and $18,302 for the nine months periods ended September
30,
2007 and 2006, respectively. Cost of revenues from time and materials contracts
includes labor and materials.
Reserve
for Warranty
Product
warranty reserves are established in the same period that revenue from the
sale
of the related products is recognized. The amounts of those reserves are
based
on the Company’s best estimate of the amounts necessary to settle future and
existing claims on products sold as of the balance sheet date.
During
the three months ended September 30, 2007, the Company established a warranty
reserve for delivered systems in the amount of $35,000.
Research
and development expenses include costs incurred for the experimentation,
design
and testing of the Company’s PHEV technology. Such costs are expensed as
incurred. Research and development cost includes direct costs such as materials,
labor, subcontract labor, payroll, payroll taxes, insurance and other sundry
direct costs, and indirect costs such as travel, supplies, repairs and
depreciation.
The
Company has received non-refundable development funding from various
governmental and/or energy related agencies, including Long Island Power
Authority, the Electric Power Research Institute and the Greater Long Island
Clean Cities Coalition. These research projects are funded, in part, by third
parties and expensed as incurred. The Company records non refundable development
funds as a reduction of research and development cost. The Company received
no
non-refundable development funding during the three month periods ended
September 30, 2007 and 2006, respectively. The Company received non-refundable
development funding of -0- and $12,500 during the nine month periods ended
September 30, 2007 and 2006, respectively.
Intangible
Assets - Patents
Costs
incurred to obtain patents are amortized over the remaining legal life of
the
patent or its economic useful life, if shorter. Patent costs are reviewed
for
impairment annually or whenever events or changes in business circumstance
indicate the carrying value of the assets may not be recoverable. Impairment
losses are recognized if future cash flows of the related assets are less
than
their carrying values.
Income
Taxes
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income Taxes. (Note 10)
Prior
to
the Share Exchange Transaction, the Company’s stockholders elected for the
Company to be treated as an “S” corporation under subchapter “S” of the Internal
Revenue Code and as a small business corporation under similar provisions
of the
New York State income tax code applicable to corporations. Accordingly, there
is
no income tax provision for the three and six month periods ended September
30,
2006 as any income earned or losses incurred and any tax credits earned during
these periods were reported by the stockholders in their individual federal
and
state income tax returns.
S
tock-Based
Compensation
The
Company has adopted SFAS No. 123(R) “Share Based Payment”
(“SFAS 123(R)”). This statement is a revision of SFAS Statement
No. 123, and supersedes APB Opinion No. 25, and its related
implementation guidance. SFAS 123(R) addresses all forms of share based
payment (“SBP”) awards including shares issued under employee stock purchase
plans, stock options, restricted stock and stock appreciation rights.
Under
SFAS 123(R), SBP awards are measured at fair value on the awards’
grant date, based on the estimated number of awards that are expected to
vest
and results in a charge to operations.
Non-Employee
Stock Based Compensation
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123(R) and Emerging Issues Task Force
(“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services,” (“EITF 96-18”) which requires that such equity instruments
be recorded at their fair value on the measurement date. The measurement
of
stock-based compensation is subject to periodic adjustment as the underlying
equity instrument vests. Non-employee stock-based compensation charges are
being
amortized over the term of the related service period.
Net
Loss Per Share
Net
loss
per share is presented in accordance with SFAS No. 128 “Earnings Per Share."
(“SFAS 128”) Under SFAS 128, basic net loss per share is computed by dividing
net loss per share available to common stockholders by the weighted average
shares of common stock outstanding for the period and excludes any potentially
dilutive securities. Diluted earnings per share reflects the potential dilution
that would occur upon the exercise or conversion of all dilutive securities
into
common stock. The computation of loss per share for the three and six month
periods ended September 30, 2007 and 2006 excludes potentially dilutive
securities because their inclusion would be anti-dilutive. Loss per share
retroactively includes 12,000,000 shares of common stock issued to the former
stockholders of Odyne in the Share Exchange Transaction, as if these shares
were
outstanding for all periods presented.
Shares
of
common stock issuable upon conversion or exercise of potentially dilutive
securities at September 30, 2007 are as follows:
|
Series
A Convertible Preferred Stock
|
|
|
4,991,320
|
|
|
Warrants
|
|
|
4,319,680
|
|
|
Options
|
|
|
545,000
|
|
|
Total
|
|
|
9,856,000
|
|
Recent
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 150.”
SFAS No. 155 (a) permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, (b) clarifies that certain instruments are not subject to the
requirements of SFAS 133, (c) establishes a requirement to evaluate interests
in
securitized financial assets to identify interests that may contain an embedded
derivative requiring bifurcation, (d) clarifies what may be an embedded
derivative for certain concentrations of credit risk and (e) amends SFAS
140 to
eliminate certain prohibitions related to derivatives on a qualifying
special-purpose entity.
SFAS
155
is applicable to new or modified financial instruments in fiscal years beginning
after September 15, 2006, though the provisions related to fair value accounting
for hybrid financial instruments can also be applied to existing instruments.
Early adoption, as of the beginning of an entity’s fiscal year, is also
permitted, provided interim financial statements have not yet been issued.
The
adoption of SFAS 155 has not had an effect on the Company’s consolidated
financial statements.
In
March
2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
Assets
(SFAS No. 156). SFAS No. 156 amends SFAS No. 140 “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities,” to require
all separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable. SFAS No. 156 also permits
services to subsequently measure each separate class of servicing assets
and
liabilities at fair value rather than at the lower of cost or market. For
those
companies that elect to measure their servicing assets and liabilities at
fair
value, SFAS No. 156 requires the difference between the carrying value and
fair
value at the date of adoption to be recognized as a cumulative effect adjustment
to retained earnings as of the beginning of the fiscal year in which the
election is made. SFAS No. 156 is effective for the first fiscal year beginning
after September 15, 2006. The adoption of this pronouncement did not have
an
effect on the accompanying consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
157"). This Standard defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. The adoption of this pronouncement did not have
an
effect on the accompanying consolidated financial statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB
108 provides guidance on how prior year misstatements should be taken into
consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year’s financial
statements are materially misstated. SAB 108 is effective for the first fiscal
year ending after November 15, 2006. The adoption of SAB 108 did not have
an effect on the accompanying consolidated financial
statements.
In
November 2006, the EITF reached a final consensus in EITF Issue 06-6 “Debtor’s
Accounting for a Modification (or Exchange) of Convertible Debt Instruments”
(“EITF 06-6”). EITF 06-6 addresses the modification of a convertible debt
instrument that changes the fair value of an embedded conversion option and
the
subsequent recognition of interest expense for the associated debt instrument
when the modification does not result in a debt extinguishment pursuant to
EITF
96-19, “Debtor’s Accounting for a Modification or Exchange of Debt
Instruments.” The consensus should be applied to modifications or
exchanges of debt instruments occurring in interim or annual periods beginning
after November 29, 2006. The Company does not expect the adoption of EITF
06-6 to have a material impact on its financial position, results of operations
or cash flows.
In
November 2006, the FASB ratified EITF Issue No. 06-7, “Issuer’s Accounting for a
Previously Bifurcated Conversion Option in a Convertible Debt Instrument
When
the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF
06-7”). At the time of issuance, an embedded conversion option in a convertible
debt instrument may be required to be bifurcated from the debt instrument
and
accounted for separately by the issuer as a derivative under FAS 133, based
on
the application of EITF 00-19. Subsequent to the issuance of the convertible
debt, facts may change and cause the embedded conversion option to no longer
meet the conditions for separate accounting as a derivative instrument, such
as
when the bifurcated instrument meets the conditions of Issue 00-19 to be
classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
option previously accounted for as a derivative under FAS 133 no longer meets
the bifurcation criteria under that standard, an issuer shall disclose a
description of the principal changes causing the embedded conversion option
to
no longer require bifurcation under FAS 133 and the amount of the liability
for
the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
applied to all previously bifurcated conversion options in convertible debt
instruments that no longer meet the bifurcation criteria in FAS 133 in interim
or annual periods beginning after December 15, 2006, regardless of whether
the
debt instrument was entered into prior or subsequent to the effective date
of
EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which
financial statements have not yet been issued. The adoption of this
pronouncement did not have an effect on the accompanying consolidated financial
statements.
In
December 2006, the FASB issued FSP EITF 00-19-2 “Accounting for Registration
Payment Arrangements” (“FSP EITF 00-19-2”). FSP EITF 00-19-2 addresses an
issuer’s accounting for registration payment arrangements. This pronouncement
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether
issued
as a separate agreement or included as a provision of a financial instrument,
should be separately recognized and accounted for as a contingency in accordance
with SFAS 5 “Accounting for Contingencies.” FSP EITF 00-19-2 amending previous
standards relating to rights agreements became effective on December 21,
2006
with respect to arrangements entered into or modified beginning on such date
and
for the first fiscal year beginning after December 15, 2006 with respect
to
those arrangements entered into prior to December 21, 2006. The adoption
of this
pronouncement did not have an effect on the accompanying consolidated financial
statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies
with an option to report selected financial assets and liabilities at fair
value
and establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective for fiscal
years
beginning after November 15, 2007. The Company is in the process of
evaluating the impact of the adoption of this statement on the Company’s results
of operations and financial condition.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date
are
not expected to have a material impact on the financial statements upon
adoption.
NOTE
4 -
Cash
Cash
-
Restricted
The
terms
of the October 2006 Private Placement Agreement require that the Company
use
$250,000 of the proceeds of this transaction during the twelve months following
the closing toward establishing a comprehensive capital markets initiative.
At
September 30, 2007 and for the nine month period then ended, the restricted
cash
account balance was $14,349. Should one or a series of related warrant exercises
result in additional proceeds to the Company of at least $1,500,000, the
Company
would be required to deposit an additional $200,000, to be held in trust
and
used exclusively for additional capital markets initiatives during the twelve
months following the warrant exercise. Through September 30, 2007, the Company
has received no such warrant exercise proceeds.
NOTE
5 -
Development
Funding Subject to Repayment
The
Company entered into a contract in which it received development funding
from
the New York State Energy Research & Development Authority in the amount of
$3,642 during the nine month period ended September 30, 2007. Funding received
under the terms of this agreement is subject to repayment based on a percentage
of sales of the related invention or discovery as defined under the terms
of the
agreement. The obligation terminates upon the earlier of fifteen (15) years
from
the date of the first sale or upon repayment of the amount of funds received
under the agreement. Development funding subject to repayment amounts to
$244,536 at September 30, 2007 and is presented as a liability in the
accompanying balance sheet. This contract was recently amended as described
in
Note 7.
On
February 19, 2007, an officer holding 50 shares of Series A Convertible
Preferred stock exercised the conversion option which resulted in the issuance
of 66,700 shares of the Company’s Common Stock to this individual (See Note
8).
On
June
11, 2007, an officer of the Company purchased 5,000 shares of the Company’s
Common Stock at $.45 per share.
On
July
26, 2007, a director of the Company purchased 27,500 shares of the Company’s
Common Stock at $.27 per share.
In
July
2007, in order to conserve liquidity, the President of the Company began
deferring all of his salary and the Chief Executive Officer began deferring
25%
of his salary. The President’s deferred salary, in the amount of $ 43,046, was
repaid on November 8, 2007. The former Chief Executive Officer’s deferred
salary, in the amount of $ 4,038, was repaid in accordance with the terms
and
conditions of his Separation Agreement on September 13, 2007.
Pursuant
to an agreement between the Company and Roger M. Slotkin, our
former Chief Executive Officer, effective September 8, 2007, Mr. Slotkin
resigned from the Company's board of directors.
Operating
Lease
The
Company conducts its operations from a single facility, under a non-cancelable
operating lease expiring in June 2009 requiring minimum monthly payments
that
increase from $7,210 to $7,708 over the term of the lease.
Future
minimum rental payments under the above non-cancelable operating lease are
as
follows:
|
For
the Twelve Months Ended
September 30,
|
|
Amount
|
|
|
|
|
|
|
|
2008
|
|
|
90,158
|
|
|
2009
|
|
|
69,378
|
|
|
|
|
|
|
|
|
|
|
|
159,536
|
|
Rent
expense amounted to approximately $24,097 and $14,313 for the three months
ended
September 30, 2007 and 2006, respectively and $73,301 and $30,715, for the
nine
months ended September 30, 2007 and 2006, respectively. Rent expense includes
($533) and ($5,179) for the three months ended September 30, 2007 and 2006
respectively and ($173) and $3,448 for the nine months ended September 30,
2007 and 2006, respectively for the effects of recording rent expense on
a
straight line basis over the term of the lease.
Employment
Agreement
On
September 19, 2007, the Company entered into an employment agreement
with
Alan
Tannenbaum as its new Chief Executive Officer and a member of the Board of
Directors.
The
employment agreement has a term expiring one year after the initial closing
of
the Company’s financing transaction which took place on October 25, 2007. The
employment agreement provides for a base salary at the annual rate of $145,000,
starting on January 1, 2008.
Under
the
employment agreement, the Company agreed to grant Mr. Tannenbaum stock options
to purchase an aggregate of 3,000,000 shares of the Company’s common stock. Of
such stock options, options to purchase 300,000 shares were granted on October
23, 2007 at an exercise price of $.395, the closing market price on that
date.
Options to purchase 2,400,000 shares will be granted at $.317 per share,
based
on the average closing market price of the common stock on the 30 consecutive
trading days on and prior to the initial closing date of the private placement
described in Note 12. Options to purchase 300,000 shares will be granted
on
January 2, 2008, based on an exercise price equal to the closing market price
of
the common stock on such date. Each stock option will vest in three equal
installments on the second, third and fourth anniversaries of the grant date
and
expire ten years after it is granted. The Company has agreed to adopt a new
incentive compensation plan or amend its existing plan to increase the number
of
available options that the Company may grant in order to satisfy its obligation
to Mr. Tannenbaum.
Consulting
and Royalty agreements
In
October 2006, the Company entered into an agreement with one of its outside
engineering labor providers whereby it committed to paying for a minimum
of 100
hours per month through December of 2008. Hourly rates charged under the
contract are $80 per hour in 2007 and $85 per hour in 2008. In May 2005,
the
Company entered into a royalty agreement with the same party that requires
the
Company to pay royalties for sales of systems containing certain proprietary
source code used in the Company's PHEV system. Royalty fees range from
approximately $75 per vehicle to $600 per vehicle depending on cumulative
volume. The Company can purchase these source codes for $65,000 in 2007 and
$181,500 in 2008. For the three months ended September 30, 2007, the Company
recorded $850 of royalty expense under this agreement. Prior to the three
month period ended September 30, 2007 the Company did not incur any royalty
expenses under this agreement.
Research
and Development Arrangements
On
March
30, 2006, the Company signed a Research and Development Contract Amendment
to
its NYSERDA agreement to also develop and install a PHEV system into a refuse
vehicle provided by a third party. The Company’s obligation under this amendment
is to design and install the system and to provide NYSERDA with regular status
reports. NYSERDA will provide up to $161,046 of funding for this effort.
NYSERDA
is entitled to a 1.5 % royalty on future sales of PHEV systems used in vehicles
weighing up to 33,000 pounds that utilize the Company’s PHEV propulsion system.
The maximum royalty obligation that is payable under this agreement is limited
to the amount of funding received, which amount will be recorded as a liability
at the time such funding is received. Total funding received through September
30, 2007 amounted to $ 244,536.
Exclusive
retrofitting and sales arrangements
On
November 21, 2006, the Company entered into a Sales and Marketing Agreement
with
a company that repairs, reconditions and retrofits medium and heavy duty
trucks
and buses (“Retrofit Installer”). Under the terms of the agreement, the Company
granted to the Retrofit Installer an exclusive right to retrofit heavy duty
trucks using its PHEV system in New York, New Jersey and Connecticut. The
exclusivity granted to the Retrofit Installer is subject to certain performance
requirements and other limitations contained in the agreement.
On
March
28, 2007, the Company entered into a Sales and Marketing Agreement with a
company that repairs, reconditions and retrofits medium and heavy duty trucks
and buses in the western United States (“Retrofit Installer”). Under the terms
of the agreement, the Company granted to the Retrofit Installer an exclusive
right to retrofit vehicles (other than buses) using its PHEV system in
California, Nevada and Arizona. The exclusivity granted to the Retrofit
Installer is subject to certain performance requirements and other limitations
contained in the agreement.
Additionally,
subject to certain terms and conditions contained in the agreement, the Company
agreed to pay the Retrofit Installer a sales commission ranging from 2.0%
to
5.0% of sales of its PHEV systems in the territory to original equipment
manufacturers that do not use the Retrofit Installer as the installing company.
On
April
24, 2007, the Company entered into a Memorandum of Understanding with a company
that manufactures and sells vehicles that are used for aerial truck
applications. Under the terms of the agreement, the Company granted the vehicle
distributor an exclusive right to sell vehicles with aerial truck applications
using the PHEV system. The exclusivity granted to the distributor is subject
to
certain performance requirements and other limitations contained in the
agreement. The Company agreed to share the cost of developing a prototype
unit
with the vehicle distributor. The Company does not anticipate that the estimated
cost of developing the prototype will have a material impact on its operations.
On
April
25, 2007, the Company entered into a Strategic Partnership Agreement with
a
company that sells buses in the western United States (“Distributor”). Under the
terms of the agreement, the Company granted to the Distributor an exclusive
right to sell retrofitted buses (excluding school buses) using its PHEV system
in California and Nevada. The exclusivity granted to the Distributor is subject
to certain performance requirements and other limitations contained in the
agreement.
Under
the
terms of the agreement, the Company and the Distributor will build a
demonstration vehicle. The Distributor will supply a vehicle in which the
Company will install its PHEV system and charge the Distributor for its material
cost. Additionally, subject to certain terms and conditions contained in
the
agreement, the Company agreed to pay the Distributor a royalty fee ranging
from
3.5% to 5.0%, based on volume of bus sales, other than school buses, containing
the PHEV system, by other manufacturers and Distributors in its territory.
No
amounts are due under this arrangement as of September 30, 2007.
NOTE
8 -
Stockholders’
Equity
Authorized
Capital
The
Company is authorized to issue up to 95,000,000 shares of common stock and
5,000,000 shares of preferred stock, of which 6,000 shares have been
designated as Series A Convertible Preferred stock.
Description
of Common Stock
Each
share of common stock has the right to one vote. The holders of common stock
are
entitled to dividends when funds are legally available and when declared
by the
Board of Directors.
Description
of Preferred Stock
The
Company is authorized to issue up to 5,000,000 shares of “blank check”
Preferred Stock, par value $.001 per share, of which 6,000 shares have been
designated as Series A Convertible Preferred Stock.
Among
other rights, the holders of the Series A Convertible Preferred stock are
entitled, at any time, to convert their shares of Series A Convertible Preferred
stock into common stock, without any further payment.
Each
share of Series A Convertible Preferred stock is initially convertible into
1,334 shares of common stock. In the event of any subsequent issuances of
common
stock for cash consideration at a price of less than $.75 per share, the
conversion rate will be that number of shares of common stock equal to $1,000
divided by the price per share at which the common stock is issued.
Holders
of Series A Convertible Preferred stock are entitled to vote their shares
on an
as-converted to common stock basis, and shall vote together with the holders
of
the common stock, and not as a separate class.
In
the
event of voluntary or involuntary liquidation, dissolution or winding-up
of the
Company, holders of Series A Convertible Preferred stock will be entitled
to
receive out of the Company’s assets available for distribution to its
stockholders, before any distribution is made to holders of Company common
stock, liquidating distributions in an amount equal to $1,000 per share.
After
payment of the full amount of the liquidating distributions to which the
holders
of the Series A Convertible Preferred stock are entitled, holders of the
Series
A Convertible Preferred stock will receive liquidating distributions pro
rata
with holders of common stock, based on the number of shares of common stock
into
which the Series A Convertible Preferred stock is convertible at the conversion
rate then in effect. The Series A Convertible Preferred stock holders do
not
have redemption rights.
Holders
of the Series A Convertible Preferred stock will not be entitled to receive
dividends except to the extent that dividends are declared on the common
stock.
Holders of the Series A Convertible Preferred stock are entitled to receive
dividends paid on the common stock based on the number of shares of common
stock
into which the Series A Convertible Preferred stock are convertible on the
record date of such dividend.
If
the
closing bid price of the Company’s common stock is above $5.00 per share for a
period of 30 consecutive trading days, then each share of the Series A
Convertible Preferred stock automatically converts into the number of shares
of
common stock at the conversion rate then in effect.
Conversions
of Series A Convertible Preferred Stock
During
the nine months ended September 30, 2007, holders of 2,008.41 shares of Series
A
Convertible Preferred stock elected to convert their preferred shares into
2,679,221 shares of common stock. These exercises included, on February 19,
2007, an officer holding 50 shares of Series A Convertible Preferred stock
exercising the conversion option which resulted in the issuance of 66,700
shares
of the Company’s Common Stock to this individual (Note 6).
In
connection with registration rights granted to the investors in the Private
Placement transaction described in Note 2, the Company filed a registration
statement on Form SB-2 with the Securities and Exchange Commission (the “SEC”)
on April 17, 2007, which became effective on May 11, 2007.
NOTE
8 -
Stockholders’
Equity, continued
Common
Stock Purchase Warrants
A
summary
of the status of the Company’s outstanding common stock purchase warrants as of
September 30, 2007 and changes during the nine months ended September 30,
2007
are as follows:
|
|
|
Number
of
options
|
|
Weighted
average
exercise
price
|
|
|
Outstanding
at January 1, 2007
|
|
|
4,648,915
|
|
$
|
0.96
|
|
|
Granted
|
|
|
105,000
|
|
$
|
1.72
|
|
|
Exercised
|
|
|
(434,236
|
)
|
$
|
0.75
|
|
|
Outstanding
at September 30, 2007
|
|
|
4,319,679
|
|
$
|
1.00
|
|
Warrants
issued
During
the nine month period ended September 30, 2007, the Company issued 105,000
common stock purchase warrants to non-employees for services with exercise
prices ranging from $1.60 to 1.99 per share for consulting services as
follows:
|
|
|
Number
of
Shares
|
|
Exercise
Price
|
|
Expiration
Date
|
|
Unit
Fair
Value
|
|
Total
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/25/2007
|
|
|
50,000
|
|
$
|
1.60
|
|
|
1/25/2009
|
|
$
|
1.23
|
|
$
|
61,987
|
|
|
2/5/2007
|
|
|
25,000
|
|
$
|
1.99
|
|
|
2/5/2011
|
|
$
|
.78
|
|
$
|
19,524
|
|
|
4/18/07
|
|
|
30,000
|
|
$
|
1.70
|
|
|
4/18/2012
|
|
$
|
1.00
|
|
$
|
30,283
|
|
The
fair
value of these awards was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: fair
value
of common stock $1.06; volatility rate 65.36%; risk free interest rate
4.77%; expected term 2 years; dividend yield 0.
Warrants
exercised
During
the nine month period ended September 30, 2007 placement agents involved
in the
Private Placement exercised the cashless exercise provision with respect
to
400,902 warrants and received 267,268 shares of common stock of the
Company.
During
the nine month period ended September 30, 2007 individuals that received
warrants in connection with the issuance of convertible debentures exercised
the
cashless exercise provision with respect to 33,334 warrants and received
14,389
shares of common stock of the Company.
NOTE
9 -
2006
Equity Incentive Plan
The
2006
Equity Incentive Plan (the “Plan”) was adopted by the Company’s Board of
Directors on October 16, 2006 and approved by the Company’s stockholders on
October 17, 2006. Awards to purchase an aggregate of 3,000,000 shares of
common
stock may be granted under the Plan to employees, consultants and non-employee
directors. Under the Plan, the Company is authorized to issue Incentive Stock
Options intended to qualify under Section 422 of the Code, non-qualified
options, SARS, restricted stock, bonus shares and dividend
equivalents.
On
March
1, 2007, the Company issued 20,000 stock options to a newly hired employee
at an
exercise price of $1.65 per share, The fair value of this award was estimated
to
be $15,800 at the date of grant using the Black-Scholes option pricing model
with the following weighed average assumptions: fair value of common stock
$1.65
volatility rate 65.36 %; risk free interest rate 4.77%; expected term 4
years; dividend yield 0.
On
May 29
2007, the Company issued 20,000 stock options to a newly hired employee at
an
exercise price of $.65 per share, The fair value of this award was estimated
to
be $7,541 at the date of grant using the Black-Scholes option pricing model
with
the following weighed average assumptions: fair value of common stock $.65
volatility rate 73.21 %; risk free interest rate 4.82%; expected term 4
years; dividend yield 0.
As
of
September 30, 2007, an aggregate of 545,000 options were outstanding at a
weighted average exercise price of $.78 per share. These options, which include
445,000 shares granted to employees and directors and 100,000 shares to
non-employees pursuant to the terms of certain consulting agreements, vest
over
four years and feature a contractual term of ten years.
The
volatility rate used through September 30, 2007 was developed based on rates
obtained from a similar company whose shares are publicly traded and have
sufficient trading history upon which to develop a reasonable estimate. The
Company has limited historical data upon which to base an expected term.
Accordingly, the expected term of four years represents management’s best
estimate of the period of time in which grantees would likely hold their
options
until realizing the benefit through their exercise. The Company has estimated
that based upon assumed employee retention, 80% of the options granted entitled
to vest by their terms, will actually vest annually. It believes that this
rate
is reasonable until such time as it develops reliable historical data.
A
summary
of option activity for the nine months ended September 30, 2007 is as
follows:
|
|
|
|
|
|
|
Weighted
-
|
|
|
|
|
|
|
Weighted
-
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
|
Options
|
|
Shares
|
|
Price
|
|
Term
|
|
|
Outstanding
January 1, 2007
|
|
|
505,000
|
|
$
|
0.75
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
40,000
|
|
|
1.15
|
|
|
9.7
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
-
|
|
|
|
|
|
|
|
|
Outstanding
September 30, 2007
|
|
|
545,000
|
|
$
|
0.78
|
|
|
9.2
|
|
|
Exercisable
at September 30, 2007
|
|
|
-
|
|
|
|
|
|
|
|
At
September 30, 2007, there was no aggregate intrinsic value of options
outstanding, based on the September 28, 2007 closing price of the Company’s
common stock ($.29 per share). There were no options exercisable at September
30, 2007. As described above, the Company has estimated that based upon assumed
employee retention, 80% of the options granted entitled to vest by their
terms,
will actually vest annually. The weighted-average grant-date fair value of
all
stock options granted during the nine months ended September 30, 2007 amounted
to $.57 per share. The aggregate fair value of all awards granted during
the
period amounted to $22,756. There have not been any exercises of stock options
to date and no options have vested to date.
As
of
September 30, 2007, there was $135,469 of unrecognized compensation cost
related
to non-vested share-based compensation arrangements. These costs are expected
to
be recognized over a weighted-average period of 3.6
years.
NOTE
10 -
Income
Taxes
As
describe in Note 1, the Company adopted FIN 48 effective January 1, 2007.
FIN 48 requires companies to recognize in their financial statements, the
impact
of a tax position, if that position is more likely than not of being sustained
on audit, based on the technical merits of the position. FIN 48 prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, and disclosure.
The
Company and its subsidiary intend to file consolidated
federal and state income tax returns. The consolidated group for this
purpose includes TIG and the subsidiary it formed to acquire the
stock of Odyne through the Share Exchange Transaction completed on October
17, 2006. TIG, previous to the Share Exchange Transaction, had
nominal operations and a net operating loss of approximately $50,000. The
initial period of tax reporting with respect to the subsidiary is for
the period of October 17, 2006 through December 31,
2006. TIG (previous to the Share Exchange Transaction) filed
Federal and State income tax returns for the years ended December 31, 2003,
2004,and 2005 that have not been examined by the applicable Federal and State
tax authorities.
Management
does not believe that the Company has any material uncertain tax position
requiring recognition or measurement in accordance with the provisions of
FIN
48. Accordingly, the adoption of FIN 48 did not have a material effect on
the
Company financial statements. The Company’s policy is to classify penalties and
interest associated with uncertain tax positions, if required as a component
of
its income tax provision.
The
Company has approximately $213,000 of deferred tax assets, a substantial
portion
of which includes the tax effects of approximately $485,000 of net operating
loss carry forwards generated subsequent to the Share Exchange Transaction
to offset future taxable income through the year ended December
31, 2026. The Company reduced its deferred tax assets and related
reserve by $20,000 upon the adoption of FIN 48 for the effects of TIG's net
operating losses, which became limited at the time of the Share Exchange
Transaction due to the change in ownership provisions under Section 382 of
the
Internal Revenue Code. The utilization of any net operating losses that
the Company has generated may be subject to substantial limitations in
future periods due to the “change in ownership” provisions under
Section 382 of the Internal Revenue Code and similar state provisions.
The
Company, as a result of having evaluated all available evidence as required
under SFAS 109, fully reserved for its net deferred tax assets since it is
more
likely than not that the future tax benefits of these deferred tax assets
will
not be realized in future periods.
Effective
April 1, 2007, the Company established the Odyne Corporation 401(k) Profit
Sharing Plan (the “Plan”) pursuant to Internal Revenue Service rules and
regulations,
under
which eligible employees may choose to make salary reduction contributions.
The
Company may make a matching voluntary contribution in the amount determined
by a
uniform percentage of each employee’s contribution that does not exceed a
Company specified percentage of defined total employee’s compensation for the
year or a fixed dollar amount and a discretionary contribution that would
be
allocated equally as a percentage of that year’s 401k plan employee deferrals,
excluding highly compensated employees, as defined.
In
order
to be eligible for the Plan, an employee must be 21 years of age, have 1000
hours of service in the year and be employed on the last day of the calendar
year. An individual employee vests in the employer’s voluntary matching
contribution 25% after one year of service, 50% after two years of service,
75%
after three years of service and 100% after four years of service.
The
Company made no contributions to the Plan for the three and nine month periods
ended September 30, 2007.
NOTE
12 -
Subsequent
Events
a.
On
October 12, 2007, the Company received $250,000 in proceeds from the issuance
of
its Bridge Promissory Note (“Bridge Note”) to Mr. Tannenbaum. The Bridge Note
bears interest at 10% per annum. Principal and interest is due and payable
on
the earlier of the receipt by the Company of at least $250,000 in proceeds
of
its 10% private placement described below or six months from the date of
the
Bridge Note. Such note was repaid on October 31 , 2007
.
b.
On
October 23, 2007, the Company issued 1,025,000 stock options to certain of
its
officers, directors and key employees at an exercise price equal to market
value
of $.395 per share.
c.
On
October 26, 2007, the Company completed a private placement to five accredited
investors (the “Investors”) resulting in gross proceeds of $3,200,000, pursuant
to the terms of a Subscription Agreement (the “Subscription Agreement”). The
securities were offered and sold
in
Units
,
consisting
of $100,000 principal amount of 10%
senior
secured convertible debentures
(“Debentures”) and a warrant to purchase 133,333 shares of
common
stock at an exercise price of $.75 per share
(“Warrants”).
The
Debentures
bear
interest
at
10%
per year, payable quarterly in cash or freely-tradable
common
stock, at the Company’s option, and mature on the earlier of 18 months after the
original issuance date or the completion of one or a series of related debt
or
equity financing transactions for minimum gross proceeds of $5,000,000,
exclusive of any financing transaction by a factor or commercial bank (a
“Subsequent Financing”). The Warrants
are
exercisable at any time and expire three years from issuance
.
The
Debentures are collateralized by a first priority security interest in all
of
the Company’s and its subsidiary’s assets. The outstanding balance of the
Debentures may be converted, at the option of the holder, in whole or in
part,
at the earlier of 12 months after the original issuance date, into shares
of
Company common stock at a conversion price equal to 70% of the then market
price
per share of common stock, or upon the completion of a Subsequent Financing,
into the securities being sold in such Subsequent Financing at an effective
conversion price equal to 80% of the purchase price of those securities.
Notwithstanding the foregoing, the minimum conversion price will be no less
than
$.25 per share. Partial conversions by the Investors are permitted.
The
Warrants are exercisable for three years, contain customary change of control
buy-out provisions and are not redeemable. The Warrants also contain
anti-dilution provisions (including “full-ratchet” price protection from the
future issuance of stock, exclusive of the conversion of the Debentures and
certain other excluded stock issuances, or securities convertible or exercisable
for shares of common stock below $.75 per share), provided that the exercise
price of the Warrants may not be adjusted to less than $.25 per share as
a
result of the full-ratchet price protection.
The
net
proceeds from the private placement will be used by the Company to fund its
working capital and capital expenditure requirements.
Pursuant
to the terms of a related Registration Rights Agreement (the “Registration
Rights Agreement”), the Company agreed to file a registration statement with the
U.S. Securities and Exchange Commission as soon as possible for purposes
of
registering the resale of the shares of Company common stock issuable upon
the
conversion of the Debentures and exercise of the Warrants sold in the private
placement. In the event the registration statement is not filed within 60
calendar days following the closing, the Company is obligated to pay the
Investors 2% in cash or stock, of the face amount of the Debentures for every
30-day period, or portion thereof, that the registration statement is not
filed.
In the event the registration statement is not declared effective within
120
calendar days following the closing, the Company is obligated to pay the
Investors 2% in cash or stock of the face amount of the Debentures for every
30-day period, or portion thereof, that the registration statement is not
declared effective for a maximum of six months, subject to the ability of
the
Investors to sell the underlying shares pursuant to Rule 144. The liquidated
damages can be paid in cash or freely-tradable common stock, at the Company’s
option. The Company also agreed not to file a registration statement for
any
additional shares of common stock until 75 days after the effective date
of the
registration statement.
The
securities sold in the private placement have not been registered under the
Securities Act of 1933, as amended (the “Securities Act”), and were issued and
sold in reliance upon the exemption from registration contained in Section
4(2)
of the Securities Act and Regulation D promulgated there under.
Between
October 1, 2007 and November 5, 2007, 625
shares
of Series A Convertible Preferred stock were converted into 833,750 shares
of
the Company’s Common Stock.
FORWARD
LOOKING STATEMENTS
This
Quarterly Report on Form 10-QSB for the nine months ended September 30, 2007,
contains “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended. Generally, the words “believes”,
“anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,”
“continue,” and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements which include,
but are not limited to, statements concerning the Company’s expectations
regarding its working capital requirements, financing requirements, business
prospects, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. Such statements are subject to certain
risks and uncertainties, including the matters set forth in this Quarterly
Report or other reports or documents the Company files with the SEC from
time to
time, which could cause actual results or outcomes to differ materially from
those projected. Undue reliance should not be placed on these forward-looking
statements which speak only as of the date hereof. The Company undertakes
no
obligation to update these forward-looking statements. In addition, the
forward-looking statements in this Quarterly Report on Form 10-QSB involve
known
and unknown risks, uncertainties and other factors that could cause the actual
results, performance or achievements of the Company to differ materially
from
those expressed in or implied by the forward-looking statements contained
herein.
An
investment in the Company’s Common Stock involves a high degree of risk.
Stockholders and prospective purchasers should carefully consider the risk
factors in the Company’s Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2006, filed with the SEC on April 13 , 2007, and other
pertinent information contained in the Registration Statement on Form SB-2
of
the Company, initially filed with the SEC on April 17, 2007, and which became
effective on May 11, 2007, as well as other information contained in the
Company’s other periodic filings with the SEC. If any of the risks described
therein actually occur, the Company’s business could be materially harmed.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
We
completed a reverse merger transaction on October 17, 2006, in which we caused
PHEV Acquisition Corp., a New York corporation and our newly-created,
wholly-owned subsidiary, to be merged with and into Odyne Corporation, a
New
York corporation (Odyne New York). Until the merger, we engaged in the business
of providing marketing, communications and technical integration advice to
small
and medium-sized businesses, which we discontinued following the merger and
succeeded to the business of Odyne New York. The directors and management
of
Odyne New York thereupon became our directors and management. On October
17,
2006, we changed our corporate name from Technology Integration Group Inc.
to
Odyne Corporation.
Since
our
future business will be that of Odyne New York only, the information in this
report is that of Odyne New York as if Odyne New York had been the registrant
for all the periods presented in this report. Our Discussion and Analysis
or
Plan of Operation presented in this Item 2 and the unaudited condensed
consolidated financial statements presented in Item 1 of this report include
those of Odyne New York prior to the reverse merger, as these provide the
most
relevant information for us on a continuing basis.
The
following discussion of our financial condition and results of operations
should
be read in conjunction with our condensed consolidated financial statements
and
related notes included under Item 1, Part I of this report.
Results
of Operations – Three months ended September 30, 2007 Compared to Three
months ended September 30, 2006
Revenues
We
engage
in two primary sources of revenue generating activities - revenues from
fixed-price contracts and revenue from and time and material contracts. Total
revenues were $95,936 and $12,847 for the three months ended September 30,
2007
and 2006 respectively, an increase of $83,089 or 647%. For the three months
ended September 30, 2007 we recognized revenue on three projects while for
the
three months ended September 30, 2006 we recognized revenue on one.
Cost
of Revenues
Cost
of
revenues for the three months ended September 30, 2007 and 2006 were $242,760
and $114,579 respectively. The Company had a gross loss on revenues of $146,824
compared to gross loss on revenues of $101,732 for the three months ended
September 30, 2007 and 2006 respectively. Cost of revenues for the three
months
ended September 30, 2007 included direct cost in the amount of $158,996,
other
cost, including allocated general and administrative expenses of $ 48,764
and
the establishment of warranty reserves of $ 35,000. Cost of revenues for
the
three months ended September 30, 2006 included direct costs in the amount
of $
99,757 and other cost including, including allocated general and administrative
cost of $ 14,822.
Research
and Development Expense
Research
and development expenses were $373,141 and $131,429 for the three months
ended
September 30, 2007 and 2006 respectively, an increase of $241,712, or 184%.
This
increased spending, primarily labor and material cost, was incurred to further
develop our PHEV technology that is incorporated into our products.
General
and Administrative Expenses
General
and administrative expenses for the three months ended September 30 2007
and
2006 were $359,434 and $205,472 respectively, an increase of $153,962, or
75%.
This includes the following increases: salaries, $64,398 associated with
the
hiring of additional staff and our Chief Financial Officer, insurance, $28,923
associated with increased general liability and Directors and Officers coverage,
and marketing and sales promotion, $17,433 associated with promoting our
technology at trade shows and other venues.
Other
Income and expense
Interest
income was $ 4,835 and $-0- for the three months ended September 30, 2007
and
2006, respectively. This increase resulted from interest earned on the funds
we
received in connection with our private placement. Interest expense was $394
and
$16,540 for the three months ended September 30, 2007 and 2006, respectively.
The decrease in interest expense resulted from the repayment of credit line
borrowings based upon the availability of funds from our Private Placement
in
October 2006.
Results
of Operations – Nine months ended September 30, 2007 Compared to Nine
months ended September 30, 2006
Revenues
We
engage
in two primary sources of revenue generating activities, revenues from
fixed-price contracts and revenue from and time and material contracts. Total
revenues were $417,992 and $182,071 for the nine months ended September 30,
2007
and 2006, respectively, an increase of $235,921 or 130%. We had an increase
in
our fixed-price contract revenue of $254,223 or 155% and a reduction in revenue
from time and materials contracts of $18,302 because we have shifted our
focus
away from time and materials contracts.
Cost
of Revenues
Cost
of
revenues for the nine months ended September 30, 2007 and 2006 were $827,797
and
$262,700, respectively, an increase of $565,097 or 215%. The company had
a gross
loss on revenues of $409,805 compared to gross loss on revenues of $80,629
for
the nine months ended September 30, 2007 and 2006, respectively. Cost of
revenues for the nine months ended September 30, 2007 included direct cost
in
the amount of $630,656, other cost, including allocated general and
administrative expenses, of $162,141 and the establishment of warranty reserves
of $35,000. Cost of revenues for the nine months ended September 30, 2006
included direct cost in the amount of $243,058 and other cost, including
allocated general and administrative expenses, of $19,642.
Research
and Development Expense
Research
and development expenses were $1,252,752 and $500,532 for the nine months
ended
September 30, 2007 and 2006 respectively, an increase of $752,220, or 150%.
This
increased spending, primarily labor and material cost, was incurred to further
develop our PHEV technology that is incorporated into our products. This
increase represents a planned application of Private Placement funds.
General
and Administrative Expenses
General
and administrative expenses for the nine months ended September 30 2007 and
2006
were $1,341,927 and $355,336 respectively, an increase of $986,591, or 278%.
This includes the following increases: $452,270 - professional fees associated
with becoming a publicly traded company, salaries - $202,144 associated with
the
hiring of additional staff and our Chief Financial Officer, insurance - $76,988
associated with increased general liability and directors and officers coverage,
rent - $42,586 resulting from increased space and marketing, and sales promotion
- $43,054, associated with promoting our technology at trade shows and other
venues.
Other
Income and expense
Interest
income was $48,443 and $-0- for the nine months ended September 30, 2007
and
2006, respectively. This increase resulted from interest earned on the funds
we
received in connection with our private placement. Interest expense was $1,421
and $35,333 for the nine months ended September 30, 2007 and 2006, respectively.
The decrease in interest resulted from the repayment of credit line borrowings
based upon the availability of funds from our Private Placement in October
of
2006.
Liquidity
and Capital Resources
Our
net
loss amounted to $2,957,462 for the nine months ended September 30, 2007.
Our
accumulated deficit amounted to $6,798,539 at September 30, 2007. We also
used
$2,895,791 of cash to fund our operating activities during the nine months
ended
September 30, 2007. At September 30, 2007, we had $60,412 at September 30,
2007
of working capital available to fund our ongoing operations.
As
more
fully described in Note 12c to our unaudited condensed consolidated financial
statements, on October 26, 2007 the Company completed a private placement
of 10%
senior secured convertible debentures and warrants to purchase common stock,
and
received gross proceeds in the amount of $3.2 million. The net proceeds of
the
private placement of $2.8 million will be used by Odyne for its working capital
and capital expenditure requirements and to repay a $250,000 bridge note
we
received from Mr. Tannenbaum. The debentures are due on April 24, 2009 bear
interest at 10% per year, payable in cash or freely-tradable common stock,
at
Odyne’s option.
Although
the completion of the Private Placement substantially improved our overall
liquidity, we believe we may not have sufficient capital resources to sustain
operations through September 30, 2008. We will continue to devote substantial
capital resources to research and development activities, developing our
manufacturing infrastructure and penetrating possible markets for PHEV
propulsion system. We will also need to raise additional funds to achieve
commercialization of our PHEV system and continue the pursuit of our
business plan. There can be no assurance that these funds will be available
to
us, and if available, at acceptable terms. Nor is there any assurance that
we
will ultimately be successful in the commercialization of our PHEV propulsion
system. If we are unable to obtain additional capital, we will have to implement
a cost cutting plan, reduce the size of our operating structure, and/ or
sell
assets to conserve our liquidity. We can also not provide any assurance that
even if we are successful in efforts to raise additional capital, that the
proceeds of any such financing transactions will enable us to develop our
business to a level at which we are actually generating operating profits
and
positive cash flows.
At
September 30, 2007, our current assets exceeded our current liabilities by
$60,412 with a ratio of current assets to current liabilities of approximately
1.09 to 1.0. At September 30, 2007, unrestricted cash on hand was $108,742,
a
decrease of $2,975,200 from December 31, 2006. Restricted cash of $14,349
on
hand at September 30, 2007 can be used to pay for investor relations costs,
all
of which are expected to be used during three months ending December 31,
2007.
Net
Cash Used in operating Activities
:
Net
cash used in operating activities totaled $2,895,791 for the nine months
ended
September 30, 2007 as compared to cash flow used in operating activities
of
$295,273 for the nine months ended September 30, 2006. This increase resulted
primarily from our net loss from operations of $2,957,462, as discussed above,
and was funded by the proceeds of our October 2006 Private Placement.
Additionally, as part of our increased level of operating activities to continue
our plan for the development and distribution of our PHEV propulsion system,
other significant components of our change in working capital included: the
use
of cash to increase our inventory by $168,212 and to increase our accounts
receivable by $225,457.
On
March
29, 2007, the Company signed a Research and Development Contract Extension
with
NYSERDA to develop and install a PHEV system into a refuse vehicle provided
by a
third party. The Company’s obligation under this agreement is to design and
install the system and to provide NYSERDA with regular status reports. NYSERDA
will provide funding up to an additional $161,046 for this effort. As of
September 30, 2007, the Company had not obtained a refuse vehicle from a
third
party.
On
April
25, 2007, the Company entered into a Strategic Partnership Agreement with
a
company that sells buses on the west coast (“distributor”). Under the terms of
the agreement, the distributor will supply a demonstration vehicle for which
the
Company will supply its PHEV system to the distributor at a price equal to
material cost. We have incurred no obligation under this arrangement as of
September 30, 2007.
On
April
24, 2007, the Company entered into a Memorandum of Understanding with a company
that manufactures and sells vehicles that are used for aerial truck applications
(“distributor”). As part of the Memorandum of Understanding we agreed to share
the cost of developing a prototype unit with the distributor. We do not
anticipate that our net cost incurred for the development of the prototype
will
have a material impact on our operations.
We
have
no commitments to invest in capital improvements.
We
expect
to be able to pass inflationary increases for raw materials and other costs
on
to our customers through price increases, as required, and do not expect
inflation to be a significant factor in our business.
Seasonality
Although
our operating history is limited, we do not believe our products are
seasonal.
Off-Balance
Sheet Arrangements
There
are
no off-balance sheet arrangements between us and any other entity that have,
or
are reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results
of
operations, liquidity, capital expenditures or capital resources that is
material to stockholders.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to exercise its judgment. We exercise considerable judgment
with respect to establishing sound accounting polices and in making estimates
and assumptions that affect the reported amounts of our assets and liabilities,
our recognition of revenues and expenses, and disclosures of commitments
and
contingencies at the date of the financial statements.
On
an
ongoing basis, we evaluate our estimates and judgments. Areas in which we
exercise significant judgment include, but are not necessarily limited to,
recording revenue and cost and cost of sales under production contracts using
the percentage of completion method, establishing loss reserves of contracts
in
progress when necessary, equity transactions (compensatory and financing),
and
allocating costs among different cost centers and departments within our
Company. We have adopted certain polices with respect to our recognition
of
revenue that we believe are consistent with the guidance provided under
Securities and Exchange Commission Staff Accounting Bulletin No.
104.
We
base
our estimates and judgments on a variety factors including our historical
experience, knowledge of our business and industry, current and expected
economic conditions, the composition of our products and the regulatory
environment. We periodically re-evaluate our estimates and assumptions with
respect to these judgments and modify our approach when circumstances indicate
that modifications are necessary.
While
we
believe that the factors we evaluate provide us with a meaningful basis for
establishing and applying sound accounting policies, we cannot guarantee
that
the results will always be accurate. Since the determination of these estimates
requires the exercise of judgment, actual results could differ from such
estimates.
A
description of significant accounting polices that require us to make estimates
and assumptions in the preparation of our consolidated financial statements
are
as follows:
Revenue
Recognition:
We
derive a significant portion of our revenues from production contracts that
we
account for using the percentage of completion method. Accordingly, we make
estimates of costs to complete these contracts that we us a basis for recording
revenue.
We
apply
the revenue recognition principles set forth under AICPA Statement of Position
("SOP") 81-2 “Accounting for Production Type Contracts” and Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") 104 "Revenue Recognition"
with respect to our revenue.
Income
Taxes.
We are
required to determine the aggregate amount of income tax expense or loss
based
upon tax statutes in jurisdictions in which we conduct business. In making
these
estimates, we adjust our results determined in accordance with generally
accepted accounting principles for items that are treated differently by
the
applicable taxing authorities. Deferred tax assets and liabilities, as a
result
of these differences, are reflected on our balance sheet for temporary
differences, loss and credit carry forwards that will reverse in subsequent
years. We also establish a valuation allowance against deferred tax assets
when
it is more likely than not that some or all of the deferred tax assets will
not
be realized. Valuation allowances are based, in part, on predictions that
management must make as to the Company’s results in future periods. The outcome
of events could differ over time which would require us to make changes in
our
valuation allowance.
We
are
also required to apply complex accounting principles with respect to accounting
for financing transactions that we have consummated in order to finance the
growth of our business. These transactions, which generally consist of
convertible debt and equity instruments, require us to use significant judgment
in order to assess the fair values of these instruments at their dates of
issuance, which is critical to making a reasonable presentation of our financing
costs and how we finance our business.
ITEM 3.
CONTROLS AND PROCEDURES
DISCLOSURE
CONTROLS AND INTERNAL CONTROLS
Disclosure
controls are also designed with the objective of ensuring that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Internal controls are procedures which are
designed with the objective of providing reasonable assurance that our
transactions are properly authorized, recorded and reported and our assets
are
safeguarded against unauthorized or improper use, to permit the preparation
of
our financial statements in conformity with generally accepted accounting
principles.
As
of
December 31, 2006, we had identified certain matters that constituted a material
weaknesses (as defined under the Public Company Accounting Oversight Board
Auditing Standard No. 2) in our internal controls over financial reporting,
The material weakness that was identified related to the fact that that our
overall financial reporting structure, internal accounting information systems,
and current staffing levels are not sufficient to support the complexity
of our
financial reporting requirements. In the nine month period ended September
30,
2007 we instituted additional control procedures which included the retention
of
an outside consulting firm with specific expertise in this area to assist
our
management team.
We
believe that our internal controls risks are partially mitigated by the fact
that our Chief Executive Officer and Chief Financial Officer review and approve
substantially all of our major transactions and we have hired outside experts
to
assist us with implementing complex accounting principles. We believe that
our
weaknesses in internal control over financial reporting and our disclosure
controls relate to the fact that we have limited capital resources and the
incremental benefits of increasing our staff to segregate duties and address
our
deficiencies in our internal controls do not justify the cost. We are in
the
process of evaluating what cost effective alternatives might be available
for us
to improve our internal controls including increasing the size of our staff
if
sufficient capital resources become available.
No
legal
proceedings of claims are currently pending or threatened against us or involve
us.
During
the nine month period ended September 30, 2007 placement agents involved
in the
Private Placement exercised the cashless exercise provision with respect
to
400,902 warrants and received 267,268 shares of common stock of the
Company.
During
the nine month period ended September 30, 2007 individuals that received
warrants in connection with the issuance of convertible debentures exercised
the
cashless exercise provision with respect to 33,334 warrants and received
14,389
shares of common stock of the Company
None
None
ITEM 5.
OTHER INFORMATION.
None
ITEM 6.
EXHIBITS
None
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant has
caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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Odyne
Corporation
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November
14, 2007
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By:
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/s/
Alan Tannebaum
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Alan
Tannenbaum
Chairman
and Chief Executive Officer
(Principal
Executive Officer)
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November
14, 2007
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By:
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/s/
Daniel Bartley
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Daniel
Bartley
Chief
Financial Offer
(Principal
Financial and Accounting Officer)
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