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Vectrix Corporation

27th June 2008

VECTRIX Corporation

('Vectrix' or 'the Company')

Interim Results for the six months ended 31 March 2008

VECTRIX Corporation (AIM:VRX.L) is the first company to design, develop and mass produce a high performance, zero emission powered two wheel vehicle. The Vectrix Maxi Scooter, the Company's first vehicle to be commercially marketed, has a top speed of 62mph, a range of over 60 miles and acceleration of 0-50 mph in 6.8 seconds.

H1 2008 HIGHLIGHTS:

• Delivered 204 bikes to dealers ('Sell In') in 23 countries and sold 129 bikes to consumers ('Sell Out').

• Recognized US$1.9 million in revenues from sales of bikes to end users (H12007: nil), with US$4.5 million in deferred revenues from sales of bikes to dealers, to be recognized upon final sale to end users 

• Secured advanced technology access and a supply contract for lithium batteries with Gold Peak Batteries.

• Slowed cash outflow by renegotiating and delaying supplier shipments and reducing global headcount by 34% with minimal redundancy costs.

POST PERIOD END HIGHLIGHTS:

• Cumulative Sell In (sales to dealers) since start of H2 FY2008 has been 258 units (H1: 204 units). Sell Out (sales to consumers) has totalled 111 bikes (H1: 129).

• Secured dealer inventory financing (floor planning) with GE Capital for US and Canadian markets which has accelerated, and is expected to continue to accelerate dealer acquisition and inventory Sell In. 

• Appointed experienced restructuring executive, Michael J. Boyle, as Chief Executive Officer, to speed revenue development and further reduce costs.

H1 RESULTS SUMMARY:

	6 months ended 31 March 2008	6 months ended 31 March 2007
Revenues	US$ 1,942,922	US$       -
Operating Expenses	(29,253,873)	(13,360,724)
EBIT	(35,803,484)	(13,360,724)
Net Loss	(26,032,045)	(24,555,937)

Michael Boyle, Chief Executive Officer, commented 'The first half of 2008 marked the Company's gradual transition to a robust focus on operations, dealer acquisition and increased internal efficiencies. We re-centered our dealer development effort from an Italian centric one to Northern Europe and the US focus and we have begun to see the results of this effort.  We also slowed production significantly to align inventory with sales.' 

 

Enquiries:

VECTRIX Corporation                              www.vectrix.com

Michael J. Boyle, Chief Executive Officer      +1 401 848 9993

Redleaf Communications                        +44 020 7822 0209

Emma Kane / Paul Dulieu

HSBC                                                      +44 020 7991 8888

Nic Hellyer / Nick Donald

 

This document contains forward looking statements, including, without limitation, statements containing the words 'believes', 'anticipates', 'expects' and similar expressions. Such forward looking statements involve unknown risks, uncertainties and other factors which may cause the actual results, financial condition, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. New factors may emerge from time to time that could cause the Company's business not to develop as it expects, and it is not possible for the Company to predict all such factors. Given these uncertainties, investors and prospective investors are cautioned not to place any undue reliance on such forward looking statements. Except as required by law or the AIM rules, the Company disclaims any obligation to update any such forward looking statements in this report to reflect future events or developments. 

These materials do not constitute an offer to purchase or subscribe for the Company's securities. The Company's common stock has not been and will not be registered under the United States Securities Act of 1933, as amended (the 'Securities Act'), and may not be offered, sold, pledged or otherwise transferred except if such transfer is effected (1) in a transaction meeting the requirements of Regulation S under the Securities Act, (2) pursuant to an effective registration statement under the Securities Act, or (3) pursuant to an available exemption from the registration requirements of the Securities Act, in each case in accordance with all applicable securities laws, including applicable state securities laws of the United States.

  Vectrix Corporation

CHAIRMAN AND CHIEF EXECUTIVE'S REVIEW

INTRODUCTION    

Although the performance in H1 was disappointing, we saw positive signs that our product is being accepted on a global basis. While it has taken longer to build out a dealer network than the Company originally anticipated, targeted calling efforts by our expanded sales force is leading to significant expansion of our dealer network in both the USA and the EU and we expect to have 175 retail points of sale by the end of FY08.  Our continued focus and success in building this distribution network is critical to our long term success. 

To support this expanded point of sale network with exciting Zero Emission Vehicles (ZEV), we plan to expand our product portfolio with the introduction of the 2009 model year in October. This expanded product offering will include a refreshed Maxi Scooter and a new lower entry point version of the Maxi Scooter. In addition, the introduction of new ZEV models in the equivalent petrol 125cc to 350cc markets will significantly expand the markets for our dealers. These new offerings will be developed within the reduced cost structure of our R&D group, capitalizing on existing product technology and lower cost manufacturing options. With our planned new product offerings we expect the available Scooter/Motorcycle market opportunity will grow from approximately 15% to 40%. This expanded product line creates a Product Family Strategy that provides consumers an entry level, mid-range and top-of-the-line selection. Vectrix is positioned in the market as a high end product offering with exceptional technology, performance and quality. Our strategy of a 'family of products' will build on the current Vectrix brand image, positioning our products in a similar way as automotive companies, like BMW and Daimler, have with their family of vehicles. 

We are currently utilizing new price points to accelerate sales in the second half of FY08 and to test the positioning of the current Maxi Scooter to optimize its sales potential prior to the 2009 model announcements. We believe the current pricing strategy will support an accelerated sales rate throughout the remainder of the current financial year while also conditioning the consumer expectation for the new 2009 model year offerings. I am optimistic that the current sales rates and forecasts for H2 will allow for significant inventory reductions and a lower unabsorbed cost from our Polish assembly facility. We are also exploring the use of OEM relationships and alternative manufacturing strategies to reduce time to market and lower product costs.

We expect our cash position to remain stable in the second half of the year with an expectation that it will remain so into the first half of FY2009 when we expect to begin to see results from our expanded product line. We have also taken additional restructuring actions in the manufacturing, R&D and corporate headquarters groups to reduce cash consumption. These latest restructuring actions will further reduce headcount by 15% for a cumulative reduction in personnel costs of 49% since the beginning of the current fiscal year. As we complete the second half of the year, I will keep you updated on this and other matters that might affect our cash position. 

In conclusion, these are exciting times at Vectrix and I am optimistic that the cost reductions we are making, the acceleration we have seen in Sell In as a result of our expanded sales group and the product strategy we are putting in place will stabilize our business in the months ahead.

FINANCIAL REVIEW

In the period, we delivered 204 bikes to dealers ('Sell In') in 20 countries and consumers purchased 111 bikes ('Sell Out'). Cumulative units sold to dealers worldwide since the beginning of production in April 2007 are 666 at the end of the period, and 924 to date. For the six months ended 31 March 2008, we recognized revenues of US$1.9 million from sales of bikes to end users, with an amount of US$4.5 million held on the balance sheet in deferred revenues from sales of bikes to dealers, which will be recognized upon final sale to end users. This is compared to no recognized revenue in the same six month period in 2007 and deferred revenue of US$4.1 million.

 

As a result of initiating production and sales operations in the US and the EU and growing the business, operating expenses for the six months have risen from US$13.4 million to US$29.3 million, which has slightly increased the net loss for the six months ended 31 March 2008 to US$26.0 million (H12007: net loss of US$24.6 million). The increase in operating expenses was primarily the result of the significant expansion in the size of the sales, marketing and manufacturing organizations, increased stock-based compensation costs, and increased expenses associated with the Company's status as a public entity since May 2007. This increase in operating expenses was largely offset by a reduction in financing and other non-operating expenses; from a consolidated expense of US$11.0 million in H1 2007 (principally related to interest expense) to a net gain of US$9.6 million in H1 2008 (principally foreign currency translation gain).

The Company's cash position at 31 March 2008 was US$22.7 million in cash and cash equivalents. The cash used in operating activities during the six months ended 31 March 2008 was US$21.3 million. Cash attributable to investment and financing activities totalled a net inflow of US$0.8 million during the six months ended 31 March 2008 and, with the effects of exchange rates resulting in US$1.2 million, net cash outflow for the six months ended 31 March 2008 was US$21.7 million. While the Company has taken steps to reduce cash expenditures and believes it has adequate funds to meet its current strategic goals, there can be no guarantees and the Company may need additional financing to achieve its plans.

PRODUCTION REVIEW

In the first half of the year we manufactured 244 vehicles. We anticipate commencing 2009 model year build in the latter part of the current financial year. In order to maintain our listing status with National Automobile Dealers Association we are required to show continuous production and product models.  

At period end, we have aligned production with our growing distribution network. Based on our reduced production plan for the balance of FY2008 and our accelerating dealer sales, we expect inventories to reduce significantly by year end.

MARKET AND PRODUCT DEVELOPMENTS

At period end, Vectrix had 79 retail points of sale in 20 countries and as of today we have 103 retail points of sale in 24 countries.

Vectrix continues to receive significant media coverage and high profile celebrity support. We currently have contact with over 500 journalists on a monthly basis and we receive overwhelmingly positive coverage and product reviews from media of record as well as specialist publications. 

We are encouraged by early results in our fleet business. While volumes remain small, we are seeing good uptake in the 'Authority' market dominated by police and campus security groups. To date we have delivered bikes for sale to Los Angeles Port Police, City of Sacramento, Hong Kong Police, Kent Police, Strathclyde Police and deliveries for test to New York City Police Department. We have also entered into an agreement with Leasys, Italy's largest leasing company, to offer leasing of Vectrix vehicles.

We are continuing to support a political advocacy program in the US and UK to capitalize on existing and emerging government mandates, refunds and/or tax credits for individual purchasers and municipal state and national fleets to acquire and operate 'Green' vehicles.

To broaden the appeal of our product, Vectrix is completing the design, testing and homologation of optional features which include a sport windscreen, mirror extensions, narrower seat and center stand. In addition, we are preparing an expanded line up of products for Model Year 2009.

At the end of H1 we entered into a strategic agreement with GP Batteries International Limited (GP Batteries) of Singapore. The agreement provides that GP Batteries will develop and be able to supply by the end of 2008 lithium ion batteries for future Vectrix ZEV models. Vectrix will be the exclusive GP Batteries' customer for the class of lithium ion batteries to be developed for use in two and three-wheel ZEV's. We currently have prototypes of these batteries and early testing is providing positive performance results. In addition to our GP lithium program, Vectrix continues to evaluate, test and develop on board energy systems which will enhance the performance and value of our products to our customers.

It is the Company's intention to use multiple battery technologies to provide our customers with both cost efficiency and performance. Available in the market today we feel we have a breadth in battery chemistry to match the mission and scope of use designed into our family of scooters. In some cases using SLA (sealed lead acid) with new silicone electrolyte that is more environmentally friendly provides a superior price performance option. In other cases technologies including NiMH and Lithium will offer the best price performance. Longer term we see Hybrid battery technology using combinations of battery technology and ultra capacitors to produce lower cost, lower weight and higher performance.  

SUBSEQUENT EVENTS

As of this date, cumulative Sell In since the start of H2 FY2008 is 258 and since inception is 924. We added 24 new retail points of sale thus far in the second half of the financial year.

In March, we secured a Dealer Finance Program with GE Capital Solutions' Commercial Distribution Finance to provide inventory floor planning for North American Vectrix dealers. GE's Commercial Distribution Finance, a leader in Powersports financing, now offers selected Vectrix dealers an inventory floor planning program allowing them the capability of having on hand an inventory of Vectrix ZEV's in showrooms for sale to consumers.  This program has accelerated and is expected to continue to accelerate dealer acquisition and inventory Sell In.  

On 23 April 2008 we announced that Andrew MacGowan, the Company's Chairman, President and Chief Executive Officer, had informed the Board that he would not offer himself for re-election as a Director of the Company at the Annual General Meeting ('AGM'), that was to be held on 1 May 2008, and that he would step down from his roles effective upon conclusion of the AGM. The Board of Directors named Michael Boyle as the Company's President and Chief Executive Officer and elected Mr. Robert Bond as Chairman of the Board.

Effective 27 June 2008 the Company accepted the resignation of its Chief Financial Officer and Director Christopher Moe. The Company has named John McGuiness as the newly created Chief Accounting Officer effective 7 July 2008. Mr. McGuiness has extensive experience in the US public market serving as CAO and he is a Certified Public Account.

OUTLOOK

In the last decade, the price for a barrel of oil has risen from $10 to $140, and that trend appears to be accelerating not abating. Emissions from internal combustion engine motorcycles and scooters pollute the atmosphere and continue to be a key contributor to global warming.  Peak oil prices are driving change, creating unprecedented shifts in use and value. Miles driven in the US are declining at an unprecedented rate and dramatic declines in residual values of less fuel efficient vehicles (SUV's) are making alternative technology more acceptable to consumers. In addition, a barrage of regulations supports alternative technology.

The US is requiring a 26% improvement in fuel economy by 2015; 40% by 2020. California and 14 states that mirror California could impose even more aggressive fuel economy standards. Europe is demanding 28% improvement by  2012. France, Austria, Cyprus, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK and Israel are implementing taxes on less fuel efficient vehicles and/or bonuses for more fuel efficient vehicles. Singapore, Stockholm, Velletta, Milan, Santiago, Oslo, London, Durham, Berlin, Rome and Bologna have implemented, or are implementing congestion charges; charges are generally lower (or waived) for high fuel efficiency vehicles. Shanghai and Beijing have banned petrol powered 2-wheelers completely.

We believe that creating an alternative to petrol or petrol-based hybrids for private transportation is imperative. Vectrix remains the only two wheel Zero Emission Vehicle (ZEV) in production, homologated for most of the world's roads and available at dealers. Consumers and fleet owners continue to grow in awareness of the impact the Vectrix ZEV can have in reducing CO2 emissions and as the only low cost substitute for petrol powered vehicles. We believe that the automotive /motorcycle industry is about to experience profound accelerated change. As we continue to build our dealer network worldwide and reduce the internal cost of doing business and position the Vectrix product efficiently in the market, we believe Vectrix will be able to capitalize of this change.

Finally, we would like to take this opportunity to thank all the employees and key stakeholders in Vectrix for their continued dedication and commitment to the Company and its mission of providing low emission, low carbon and high efficiency vehicles. We look forward to your support in building for the future success of the Company.

 

ROBERT W. BOND                 MICHAEL J. BOYLE

Chairman                                Chief Executive Officer

  Vectrix Corporation

Consolidated Balance Sheet (Unaudited)

		31 March	30 September
		2008	2007
Assets
Current assets
Cash and cash equivalents		US$   22,678,692	US$   44,332,096
Short-term investments		-	6,066,000
Accounts receivable		2,410,252	4,457,416
Inventories in custody of dealers		4,410,116	3,892,388
Inventories		17,884,753	19,288,739
VAT receivable		3,874,274	5,932,677
Prepaid expenses		1,040,097	776,969
Other current assets		1,087,373	-
Total current assets		53,385,557	84,746,285
Property and equipment, net		11,025,418	10,248,136
Restricted cash		3,523,107	235,112
Other assets		609,612	307,507
Total assets		US$   68,543,694	US$   95,537,040
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Accounts payable		US$   4,173,996	US$   6,667,017
Accrued liabilities		2,464,153	1,250,973
Due to related parties		285,961	528,441
Accrued compensation		721,323	756,077
Bank overdraft		-	784,219
Current portion of capital lease obligation		51,373	44,000
Short-term notes payable		32,677	52,195
Adverse purchase commitment		-	3,979,500
Deferred revenue		4,468,093	4,074,223
Other current liabilities		201,598	450,694
Total current liabilities		12,399,174	18,587,339
Capital lease obligation, less current portion		185,860	153,388
Other long term liabilities		286,151	74,362
Total liabilities		12,871,185	18,815,089
Stockholders' equity (deficit)
Common stock, US$0.10 par value; 435,000,000 shares authorized; 274,455,217 and 259,455,215 shares issued and outstanding at 31 March 2008 and 30 September 2007, respectively		27,445,522	25,945,521
Additional paid-in capital		174,142,621	169,455,857
Deficit accumulated during development stage		(144,294,930)	(118,262,885)
Accumulated other comprehensive loss		(1,620,704)	(416,542)
Total stockholders' equity (deficit)		55,672,509	76,721,951
Total liabilities and stockholders' equity (deficit)		US$   68,543,694	US$   95,537,040

 

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

 

Vectrix Corporation

Consolidated Statements of Operations (Unaudited)

				Period from  inception
		Six Months Ended 31 March		(6 March 1996) to 31 March
		2008	2007	2008
Revenue		US$ 1,942,922	US$ -	US$ 2,761,740
Cost of Goods Sold
Inventory revaluation		5,655,703	-	8,829,220
Battery excess charge		-	-	1,949,500
Adverse purchase commitment		229,000	-	4,208,500
Other cost of goods sold		2,607,830	-	3,427,653
Total cost of goods sold		8,492,533	-	18,414,873
Gross loss		(6,549,611)		(15,653,133)
Operating Expenses
Research and development		4,481,449	7,198,710	45,476,194
General and administrative		12,583,389	3,412,354	54,968,645
Selling and marketing		8,326,797	2,749,660	19,110,923
Acquired technology		3,584,549	-	4,541,272
Disposal of asset		277,689	-	277,689
Start up cost		-	-	730,923
Impairment charge		-	-	3,690,000
Loss from operations		(35,803,484)	(13,360,724)	(144,448,779)
Other income (loss), net		114,945	(14,342)	1,164,497
Interest expense		(8,139)	(11,058,401)	(15,314,909)
Interest income		686,919	51,717	1,660,935
Foreign exchange gain		8,816,363	-	12,905,525
Loss before provision for income taxes		(26,193,396)	(24,381,750)	(144,032,731)
Tax benefit (provision)		161,351	(174,187)	(262,199)
Net loss		US$ (26,032,045)	US$ (24,555,937)	US$ (144,294,930)
Basic and diluted net loss per share		US$        (0.10)	US$        (0.37)
Weighted average shares outstanding Basic and diluted		248,509,403	66,438,733

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

  Vectrix Corporation

Consolidated Statements of Operations (Unaudited)

		Period from  inception
Six Months Ended 31 March		(6 March 1996) to 31 March
2008	2007	2008

Other comprehensive income (loss)

Net loss		US$ (26,032,045)	US$ (24,555,937)	US$ (144,294,930)
Unrealized gain on money market and time deposit accounts		99,059	-	230,450
Cumulative foreign currency translation adjustment		(1,303,220)	256,671	(1,851,153)
Comprehensive loss		US$ (27,236,206)	US$ (24,299,266)	US$ (145,915,633)

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

  Vectrix Corporation

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended  31 March 2008	Six Months Ended  31 March 2007	Period from Inception (6 March 1996) to 31 March 2008
Cash flows from operating activities
Net loss	US$      (26,032,045)	US$     (24,555,937)	US$ (144,294,930)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation and amortization	1,262,044	223,602	3,814,028
Gain on foreign exchange translation	(6,755,423)	-	(6,755,423)
Acquired technology in strategic agreement	3,813,549	-	3,813,549
Noncash charges related to issuance of warrants	-	6,033,179	7,973,326
Stock-based compensation and expenses	4,168,465	1,423,807	9,479,722
Impairment of joint venture	-	-	3,690,000
Noncash interest on notes	-	3,778,907	7,131,026
Warrants issued in exchange for cancellation of royalty    agreements	-	-	85,044
Accretion of debt discount		-	16,000
Loss on disposal of fixed assets	251,084	-	251,084
Write-off of acquired in-process research and    development	-	-	956,723
Changes in assets and liabilities
Accounts receivable	2,267,954	-	(1,980,033)
Other receivables	(1,395,297)	(26,076,660)	(1,395,297)
Prepaid expenses and other current assets	(102,550)	(5,962,251)	(956,970)
Inventory	1,949,896	(1,741,514)	(15,939,777)
Debt issuance costs	-	-	(270,938)
Inventory in the custody of distributors	(106,421)	-	(3,742,830)
Input VAT	2,748,310	-	(2,723,457)
Accounts payable and accrued expenses	(3,281,083)	(1,918,195)	4,277,478
Adverse purchase commitment	-	-	3,979,500
Deferred revenue	(89,851)	-	3,759,515
Net cash used in operating activities	(21,301,368)	(48,795,062)	(128,832,660)
Cash flows from investing activities
Redemption of short term investments	6,066,000	-	6,066,000
Purchase of short term investments	-	-	(6,066,000)
Acquisition of business	-	-	(75,000)
Purchase of fixed assets	(1,162,826)	(2,430,046)	(13,080,084)
Restricted cash	(3,260,965)	-	(3,479,908)
Investment in joint venture	-	-	(3,690,000)
Net cash provided by (used in) investing activities	1,642,209	(2,430,046)	(20,324,992)

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

  Vectrix Corporation

Consolidated Statements of Cash Flows (Unaudited)

		Six Months Ended 31 March	Six Months Ended 31 March	Period from Inception (6 March 1996) to 31 March
		2008	2007	2008
Cash flows from financing activities
Proceeds from issuance of common stock (net of issuance costs)		-	27,541,724	90,648,856
Proceeds from private issuance of common stock (net of issuance costs)		-	-	34,211,112
Proceeds from issuance of notes payable and warrants to stockholders (net of issuance costs)		-	25,050,000	45,110,460
Bank overdraft		(784,219)	-	-
Repayments of notes payable to stockholders		-	-	(451,359)
Proceeds from issuance of redeemable convertible preferred stock (net of issuance costs)		-	-	3,423,730
Collection of stock subscription receivable		-	-	1,869
Proceeds from exercise of warrants		-	-	1,365,498
Repayment of capital lease obligation		(31,957)	(9,935)	(162,143)
Net cash provided by (used in) financing activities		(816,176)	52,581,789	174,148,023
Effect of exchange rate changes		(1,178,069)	(496,250)	(2,311,679)
Net increase (decrease) in cash and cash equivalents		(21,653,404)	860,431	22,678,692
Cash and cash equivalents at beginning of period		44,332,096	2,132,645	-
Cash and cash equivalents at end of period		US$ 22,678,692	US$ 2,993,076	US$ 22,678,692

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

  Vectrix Corporation

Notes to the Condensed Consolidated Financial Statements (Unaudited)

31 March 2008 and 2007

1. Nature of the Business and Organization

Vectrix Corporation (the 'Company') was incorporated in Delaware on 6 March 1996 as Breeze Acquisition Corporation to develop, manufacture and distribute advanced, commercially viable electric vehicle technology. In November 1997, the Company changed its name to Vectrix Corporation. At 31 March 2008, the Company had wholly-owned subsidiaries in Italy, Ireland, United Kingdom and Poland. From inception, the Company has devoted its efforts primarily to research and technology development, securing financing and business planning and is considered to be a development stage enterprise. The Company is subject to a number of risks associated with emerging, technology-oriented development stage companies. Principal among these are risks associated with marketing the Company's products, dependence upon key individuals, competition from larger, more financially independent competitors and the need to obtain adequate financing to fund future operations.  

The consolidated balance sheets and the related consolidated statements of operations, of comprehensive loss and of cash flows (the 'consolidated financial statements') of the Company are unaudited and have been prepared on a basis consistent with the Company's audited financial statements for the fiscal year ended 30 September 2007. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Consequently, these statements do not include all disclosures normally required by generally accepted accounting principles for annual financial statements. These consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the fiscal year ended 30 September 2007. The unaudited consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair statement of the financial position, operations and cash flows presented. The balance sheet at 30 September 2007 has been derived from the audited consolidated financial statements as of that date. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for any other interim period or for the full fiscal year ending 30 September 2008.

The Company's financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred losses and negative cashflows from operations since inception. While the Company has taken steps to reduce cash expenditures and believes it has adequate funds to meet its current strategic goals, there can be no guarantees and the Company may need additional financing to achieve its plans.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial information is presented in accordance with accounting principles generally accepted in the United States of America for interim financial information.

Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, VectrixEurope S.r.l., Vectrix Europe Limited, Vectrix (UK) Limited and Vectrix Sp. z o.o. All intercompany transactions and balances 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 disclosures 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.

Segment Information

Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, ('SFAS No. 131') establishes standards for reporting information regarding operating segments and establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions regarding resource allocation and assessing performance. See note 6 for detailed segment information.

Accounting for Stock-Based Compensation

Effective 1 October 2006, the Company adopted the provisions of SFAS No. 123(R), Share Based Payment ('SFAS No. 123(R)'), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on the estimated fair values of the underlying instruments. Accordingly, stock based compensation cost is measured at grant date, based upon the fair value of the award, and is recognized as expense on a straight line basis over the requisite employee service period.

SFAS No. 123(R) permits companies to select the option pricing model that best fits their particular set of circumstances, provided such valuation model (i) is applied in a manner consistent with the fair value measurement objective required under SFAS No. 123(R), (ii) is based on established principles of financial economic theory, and (iii) reflects all substantive characteristics of the underlying instrument. In recognition of these standards and after consideration of various relevant factors, including option plan design, data availability and cost-benefit analysis, the Company has selected the Black-Scholes option pricing model to value its options.

The weighted average estimated fair value per share of employee stock options granted during the six months ended 31 March 2008 was determined to be US$0.10 using the Black-Scholes model with the following underlying assumptions:

Expected volatility	85%
Weighted average-risk-free interest rate	4.02%
Expected dividend yield	None
Weighted average expected life (in years)	3.5 years

The Company has estimated its expected stock price volatility based on historical volatility calculators for a group of peer comparable companies. The weighted average risk free interest rate reflects the ratios of US government securities appropriate for the term of the Company's stock options at the time of grant. The weighted average expected life of 3.5 years is based on the average of the vesting term and the 7 year contractual lives of all options awarded after 1 October 2007.

Stock based compensation expense recognized in the unaudited consolidated statement of operations for the six months ended 31 March 2008 is based on awards ultimately expected to vest. SFAS No. 123(R) requires forfeitures to be estimated at the time of initial grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical activity, as it believes that this forfeiture rate is indicative of its expected forfeitures rate. No provision for forfeitures has been recorded for the six months ended 31 March 2008 and 31 March 2007.

During the six month period ended 31 March 2008, the Company granted 345,000 options with an estimated total fair market value at grant date of approximately US$34,500.

From time to time, the Company grants restricted stock and units to certain employees, subject to restrictions. During the six months ended 31 March 2008, the Company granted 700,000 shares of US$0.10 par value common stock to employees. No restricted units were offered during the reporting period. As of 31 March 2008, there were 11,727,781 shares of restricted stock and 3,583,011 restricted units outstanding.

Compensation expense related to stock-based awards recognized under SFAS No. 123(R) was:

	Six Months Ended 31 March 2008	Six Months Ended 31 March 2007
Research and development	US$         496,487	US$   62,929
Selling and marketing	US$       2,289,093	US$            -
General and administrative	US$       1,382,885	US$ 280,878
	US$       4,168,465	US$ 343,807

We expect compensation expense related to stock-based awards to increase over the next two years due to continued vesting of existing awards. We have not yet recognized compensation expense relating to these unvested awards of approximately $7.9 million in the aggregate, which will be recognized over a weighted-average future period between 0.17 - 2.67 years.

Amounts include compensation expense pertaining to the share-based payment awards granted subsequent to 30 September 2006, based on the grant date fair value estimated in accordance with SFAS No. 123(R).  

Accounting for Uncertainty in Income Taxes

In June 2006, the Financial Accounting Standards Board ('FASB') issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes; an interpretation of FASB Statement No. 109 ('FIN 48').  FIN 48 describes a recognition threshold and a measurement attribute to determine the impact of the tax position reported in the financial statements. FIN 48 also provides guidance as to the subsequent recognition, de-recognition and measurement thereof when the more-likely-than-not determination changes. This Interpretation is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on 1 October 2007. As of the date of adoption, the Company had unrecognized tax benefits of US$ 0 and did not record any cumulative effect adjustment to retained earnings as a result of adopting FIN 48. The Company does not expect to recognize any of its previously unrecognized tax benefits during 2008. The Company has not recorded any accrued interest and penalties for the period under review but will classify these as income taxes if incurred in the future.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides guidance for using fair value to measure assets and liabilities.  SFAS No. 157 references fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.  The Statement applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.  The Statement does not expand the use of fair value in any new circumstances.  It is effective for financial statements issued for fiscal years beginning after 15 November 2007, and interim periods within those fiscal years.

In February 2008, the FASB issued a FASB Statement of Position that amends SFAS No. 157 to delay its effective date for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after 15 November 2008. The adoption of SFAS No. 157 did not have a material impact on our financial and non financial statements or financial assets and liabilities.

3. Net Loss Per Common Share

Basic and diluted net loss per share is presented in conformity with SFAS No. 128, Earnings Per Share, for all periods presented. In accordance with SFAS 128, basic and diluted net loss per share by dividing the weighted average number of shares of common stock outstanding during the period into the net loss attributable to common stockholders.

	Six Months	Six Months
	Ended	Ended
	31 March	31 March
	2008	2007
Net loss	US$ ( 26,032,046)	US$ (24,555,937)
Basic and diluted shares
Weighted average common shares outstanding used in computing basic and diluted net loss	248,509,403	66,438,733
Basic and diluted net loss per share	US$   (0.10)	US$ (0.37)

There were 34,144,116 antidilutive shares at 31 March 2008 related to options, warrants and restricted awards. These shares have not been included in the determination of basic and diluted loss per share since their inclusion would be antidilutive.

4. Common Stock

As of 31 March 2008, pursuant to its amended Certificate of Incorporation filed in April 2007, the Company had authorized 435,000,000 shares of common stock with a US$0.10 par value per share. Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company's stockholders. Common stockholders are entitled to receive dividends, if any, as may be declared by the Board of Directors.

During the six month period ended 31 March 2008, the Company entered into an agreement to settle outstanding purchase commitments and a strategic agreement to develop lithium battery technology and production capability, the 'Lithium Agreement', with a battery manufacturer. Under the settlement agreement, the Company agreed to pay consideration of US$4,208,500 to settle its adverse purchase commitment. Of this amount, US$3,979,500 was recorded as an adverse purchase commitment in the fiscal year ended 30 September 2007 and the US$229,000 was recorded as an adverse purchase commitment in the six months ended 31 March 2008. This amount was settled through the payment of US$3,090,500 for NiMH batteries and delivery of Vectrix Maxi Scooters valued at US$1,118,000. At 31 March 2008, the Company had a balance of US$1,118,000 in Accrued Liabilities representing the amount of the undelivered inventory. Based on the terms of the lithium agreement, the Company issued 15 million new common shares valued at US$ 2,020,049, the price at the date of this transaction, to the battery manufacturer. In addition to the common shares issued, the battery manufacturer was released from its liability related to a prepayment of US$ 1,564,500 made by the company for NiMH batteries. The total amount of the consideration, US$3,584,549 has been recorded as Acquired Technology expense for the six months ended 31 March 2008.  

As of 31 March 2008, the Company had 18,928,324 shares of its common stock reserved for issuance upon the exercise of stock options and warrants and 4,283,011 shares of its common stock reserved for issuance of restricted stock grants approved by the Board and upon vesting of restricted stock units.

5. Stock Option Plans

In 1999, the Company adopted the 1999 Employee Stock Option Plan (the '1999 Plan') and the 1999 Non-employee Directors' Stock Option Plan (the 'Director Plan,' and together with the 1999 Plan, the 'Option Plans'). The 1999 Plan as originally adopted authorizes the Company to grant incentive stock options and nonqualified stock options for up to 3,150,000 shares to employees, consultants and directors. The Board of Directors is responsible for administration of the 1999 Plan. The Board of Directors determines the term of each option, the option exercise price, the number of shares for which each option is granted and the rate at which each option is exercisable. Options granted before 2005 vested over three to five years; substantially all options granted in 2005 vested immediately or within one year. Incentive stock options may be granted to any officer or employee at an exercise price per share of not less than the fair value per common share on the date of the grant (not less than 110% of fair value in the case of holders of more than ten percent of the Company's voting stock) and with a term not to exceed ten years from the date of the grant (five years for incentive stock options granted to holders of more than 10% of the Company's voting stock). In December 2000, the number of shares reserved for issuance under the 1999 Option Plan was increased to 4,150,000. In January 2005, stockholders approved an amendment to the 1999 Plan, increasing the total number of shares authorized for issuance pursuant to grants under the 1999 Plan to the greater of 14,000,000 or 20% of the common stock outstanding from time to time.

The Director Plan authorized the Company to issue nonemployee director options for up to 350,000 shares of common stock. Each nonemployee director who was a director on 3 November 1999 and had been a director since 30 June 1998 received an option for 60,000 shares and each newly elected director prior to the termination of the Director Plan in 2005, received an option for 5,000 shares. Nonemployee directors received an annual option grant in January of each year for the number of common shares equal to 1,000 multiplied by the number of Board and Committee meetings attended during the prior calendar year up to a maximum of 5,000 shares per year. Options were granted at an exercise price equal to the market value of the common stock on date of grant and vest immediately. Options expire on the earlier of ten years from the date of grant or 24 months following termination of Board service.  During April 2005, the Director Plan was terminated. All of the previously issued options remain exercisable in accordance with the terms of the Director Plan.  As of 31 March 2008 there remain 123,000 options outstanding related to the Director Plan.

In April 2007 the Board of Directors amended and restated the 1999 Plan, renamed the Equity Incentive Plan, to cap the maximum number of shares issuable pursuant to awards granted under the Plan to the lesser of 40,000,000 or 20% of the number of shares outstanding on the date of grant. The amendment also allowed for the grant of restricted stock and restricted unit awards.

 Activity under the Option Plans for the six months ended 31 March 2008 was as follows:

	Six Months Ended 31 March
		2008
		Average
	Number	Exercise
	of Shares	Price
Outstanding at beginning of period	14,706,768	US$ 0.67
Granted	345,000	US$ 1.03
Exercised	-
Cancelled	(440,000)	(US$ 0.77)
Outstanding at end of the period	14,611,768	US$ 0.67
Options exercisable at end of period	13,811,768
Weighted average fair value of options granted during the period		US$ 0.10
Options available for future grant	9,769,208

Information regarding stock options outstanding at 31 March 2008 is as follows:

	Options Outstanding		Options Exercisable
		Weighted
		Average
		Remaining		Weighted
		Contractual		Average
Exercise	Shares	Life	Number	Exercise
Price	Outstanding	(In Years)	Exercisable	Price
US$0.46 - US$0.50	4,817,038	5.88	4,767,038	US$ 0.49
US$0.69 - US$0.70	8,376,764	6.66	8,046,764	US$ 0.70
US$0.90 - US$1.03	883,833	5.68	463,833	US$ 0.93
US$1.38 - US$1.50	534,133	2.33	534,133	US$ 1.43
	14,611,768		13,811,768	US$ 0.66

 

6. Segments

The Company manages the business as one segment and conducts operations in the United States, Italy, United Kingdom and Poland.

The following table summarizes the Company's long-lived assets, by country:

	31 March	30 September
	2008	2007
Long-lived assets
United States	US$  3,689,149	US$       2,724,958
Italy	712,655	2,454,758
Poland	6,336,277	4,874,858
United Kingdom	287,337	193,562
Total long-lived assets	US$  11,025,418	US$  10,248,136

 

7. Subsequent Events

On 1 May 2008, the Company's CEO, Mr. Andrew McGowan resigned from the organization and was replaced by Mr. Michael Boyle. As part of his Severance Agreement, Mr. MacGowan was allowed to exchange his 3,146,461 common stock options for 1 million of common shares, to be restricted from sale for one year from the date of issuance in addition to other cash compensation allowed under his employment contract. Mr. Michael Boyle was awarded 1.5 million incentive stock options and 4 million shares of restricted stock, vesting over a three year period.

On 1 May, 2008 at the Annual General Meeting of Shareholders ('AGM'), the shareholders approved an amendment, authorizing a 10-1 reverse stock split of the Company's common stock to be implemented at the discretion of the Board of Directors at any time prior to next AGM.

  Vectrix Corporation

Management's Discussion and Analysis of Financial Condition and Results of Operations for the six months ended 31 March 2008

Revenues

Total revenues for the six months ended 31 March 2008 were US$1.9 million as compared to no revenue for the same six month period in 2007. Revenues are still based on recognizing revenue only once the product has sold through to the end consumer, with sales to the Company's dealers held in deferred revenue on the Balance Sheet.

Cost of Goods Sold

Total cost of goods sold for the six months ended 31 March 2008 were US$8.3 million. This included a charge related to the write down of the 2007 finished goods by US$ 5.7 million to reflect a fair value related to the discounting of the goods. 

Operating Expenses

 

1. Research and Development

Research and development expenses consist of costs associated with the product research, product development and various, non-recurring engineering projects, conducted mostly from the Company's New Bedford, Mass (U.S.A.) location. Research and Development costs were US$ 4.5 million for the six months ended 31 March 2008 as compared to US$ 7.2 million for the same six month period in 2007. An additional cost of US$ 3.6 million which is stated separately is related to the development of new lithium batteries and the supply thereof by GP Batteries. This was primarily a non cash agreement utilizing common stock issued and a release of prepaid amounts for batteries.

 

2. Sales and Marketing

Sales and marketing expenses were related to initial costs of launching business development and sales activities in various markets, including costs of sales personnel, various fees and charges related to trade shows and other marketing activities, sales commissions paid and other branding and promotional activities undertaken in selected markets. Sales and marketing costs were US$ 8.3 million for the six months ended 31 March 2008 compared to US$ 2.7 million in the same period in 2007 as a result of this increased activity. Included in 2008 is a stock based award expense of US$2.3 million.

 

3. General and Administrative 

General and Administrative expenses consist of costs incurred in connection with finance and administrative activities in various locations, including personnel costs, various consulting and professional services fees, facilities and general corporate expenses. General and Administrative expenses were US$ 12.6 million for the six months ended 31 March 2008, as compared to US$ 3.4 million for the same six month period in 2007. This increase resulted primarily from:

• an increase in headcount in various locations, as required to grow business activities of the Company in different functions;

• an increase in related employment costs, travel and entertainment and office costs;

• costs of growing the US operations;

• increased legal and other administrative costs; 

• costs related to audit, tax and other consulting engagements; and

• stock based award expense of US$1.4 million.

4. Liquidity and Capital Resources

As of 31 March 2008, the Company had US$22.7 million of cash and cash equivalents and US$ 18.3 million in net working capital (excluding cash and cash equivalents, restricted cash as well as short term investments). Cash and cash equivalents decreased by US$ 21.7 million relative to corresponding amounts as of 31 March 2007, primarily as result of increased operations and the commercialization of the product. The majority of working capital is tied up in inventories of finished product and components that are expected to reduce going forward as the company's rate of sales increases. While the Company has taken steps to reduce cash expenditures and believes it has adequate funds to meet its current strategic goals, there can be no guarantees and the Company may need additional financing to achieve its plans.

 

5. Cash Used in Operations

Net cash used in operating activities was US$ 21.3 million for the six months ended 31 March 2008, attributable primarily to a net loss of US$26.0 million, adjusted for non-cash charges related to depreciation and amortization expenses of US$ 1.3 million, non-cash stock compensation of US$4.2 million, intercompany gain on foreign exchange translations of US$6.8 million, the net effect of the strategic supply contract for lithium batteries of $3.8 million.

Also affecting net cash used in operations in 2008 were:

• a decrease in inventory of US$ 1.9 million

• a decrease in VAT receivable of US$ 2.7 million;

• a decrease in receivables of US$ 0.9 million; and

• a decrease in accounts payable and accrued expenses of US$ 3.3 million.

Net cash used in operating activities was US$ 48.8 million for the six months ended 31 March 2007, attributable primarily to a net loss of US$ 24.6 million, adjusted for non-cash charges related to $ 26.1 million in subscription receivable for private placement of common shares (in escrow account as of 31 March 2007), depreciation and amortization expenses (including debt issuance costs) of US$ 0.2 million, non-cash interest expense on notes of US$ 3.8 million, non-cash interest expense on issued warrants of US$ 6.0 million, non-cash stock compensation of US$1.1 million and stock option expense of US$ 0.3 million.

 

6. Cash Provided by Investing Activities

Net cash provided by investing activities was US$ 1.6 million for the six months ended 31 March 2008 and primarily reflects the purchases of fixed assets related to the improvement of Research & Development facilities of US$ 1.2 million, the requirement of restricted cash of US$ 3.3 million related to GE financing, and offset by the maturity of prior money market investments of US$ 6.1 million. 

Net cash used in investing activities was US$ 2.4 million for the six months ended 31 March 2007 and primarily reflects the purchase of fixed assets in Poland, related to the launch of commercial production of scooters in Poland.

 

7. Cash Used in Financing Activities

Net cash used in financing activities was US$0.8 million for the six months ended 31 March 2008 and related to the settlement of a bank overdraft facility.

Net cash provided by financing activities was US$ 52.6 million for the six months ended 31 March 2007 and resulted primarily from:

• the Company's issuance of common stock (net of issuance costs) of US$ 27.5 million, 

• proceeds from sale of notes payable to current shareholders of the Company at the time of sale (net of issuance costs) of US$ 6.6 million; and

• proceeds from notes payable from other parties (net of issuance costs) of US$ 18.5 million.

8. Outlook

Moving into second half of fiscal year 2008, the Company expects to continue its build out of the dealer network in North America and Europe, as well as continuing the development of the fleet business. Further actions were taken to right size the organization, including further reductions in headcount, slower pace of spending in Southern Europe and selective investment in new R&D.

Management took further actions to improve the product and quality of offered bikes, and major actions were undertaken in marketing and sales to accelerate the sales of the bikes to dealers to improve asset turnover and cash flow management. The Company has experienced an increased level of interest from new North American dealers that wanted to purchase bikes under a GE Capital inventory financing option, which was combined with new lower price offered to all dealers on 2007 model bikes.

Management believes that the Company's cash, cash equivalents and short-term investments at 27 June 2008, coupled with improved operating performance, will be sufficient to meet its anticipated cash requirements for operating and working capital purposes. While the Company has taken steps to reduce cash expenditures, there can be no guarantees and the Company may need additional financing to achieve its plans. 

ENDIR ILFEVRAIAFIT