Print   



22 January 2009

VECTRIX Corporation

 ('Vectrix' or 'the Company')

Unaudited Preliminary Results for the fiscal year ended 30 September 2008

Vectrix Corporation {AIM: VRX}, the high performance zero emission scooter company today announces its Preliminary Results for the year ended 30 September 2008. Vectrix is the first company to design, develop and mass produce a high performance, zero emission powered two wheel vehicle. The Vectrix VX1 Scooter, the Company's first vehicle to be commercially marketed, has a top speed of 62mph, a range up to 60 miles and acceleration of 0-50 mph in 6.8 seconds.

Principal Events

• Sold 1,167 bikes to dealers ('Sell In') and sold 715 bikes to end customers ('Sell Out').

• Recognized approximately US $6.35 million in revenue from sales of bikes to end customers with approximately $5.52 million in deferred revenue from sales of bikes to dealers, to be recognized upon final sale to end customers.

• Expanded our dealer organization to 160 points of sale from 38 at the end of fiscal 2007.

• During the second half we reorganized our management team within the CEO, finance, sales and marketing functions in order to refocus our strategy away from the original Italian centric plan which proved to be a significant false start for the company. This refocused strategy emphasizes dealer development in both the US and European markets and has proven to be more successful as demonstrated by our Sell In results during the second half of FY2008.

• Streamlined our European operations under a single management umbrella which will be tasked with supporting the existing dealer base in all of Europe as well as expanding distribution through aggressive dealer development programs.

• Throughout the second half the Company reduced operating expenses and monetized aspects of the balance sheet through reductions in accounts receivable, inventory and VAT.

• Transitioned the Company from an R&D development stage company to full commercialization of the Vectrix products and organization.

• Developed for introduction in fiscal 2009 an expanded product family including the refreshed version of the Vx1, the new Vx1e which is a lower priced model which will appeal to a more urban commuter and the new Vx2 which is an all new platform designed from the bottom up as the high end smaller and more compact two wheel electric vehicle.

• Entered into an agreement with GE Financial Services for GE to provide inventory financing for our US dealers.

• In the first quarter of fiscal 2009 we began equity fund raising events to address liquidity concerns brought on by the recent worldwide economic crisis.

Enquiries:

VECTRIX Corporation	www.vectrix.com
Michael Boyle, Chief Executive Officer	401-848-9993
John D. McGuinness, Chief Accounting Officer
HSBC	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 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.

CHIEF EXECUTIVE'S STATEMENT

During FY 2008 we sold (Sell-In) to dealers 1,167 bikes as compared to 468 bikes in FY 2007 for a year over year growth of 149%. This broke down to 204 bikes in the first half of FY2008 and 963 bikes in the second half of FY2008 for a half over half growth rate of 372%.  This growth in second half units Sell-In marked the conversion of Vectrix from an R&D development stage company to full commercialization of the Vectrix products and organization. By market, North American Sell-In was 453 bikes for FY2008 of which 435 were in the second half of FY2008 up from 18 in the first half. This growth is attributed to our strategy to focus on North American dealer development which included our successful negotiation with GE to provide inventory financing to our dealers. In Europe Sell-In was 714 bikes for FY2008 of which 528 were in the second half of FY2008 up from 186 in the first half. 

Revenue is presented as a calculation of units sold (Sold-Out) to end customers.  For FY2008 a total of 715 bikes were Sold-Out generating revenue of approximately $6.4 million as compared to FY2007 revenue of approximately $0.8 million, an increase of 675%. The FY 2008 Sell-Out revenue broke down to $1.9 million in the first half and approximately $4.5 million in the second half for a half over half growth rate of approximately 137%.  

Also during FY2008 we saw significant growth in our distribution business defined as dealer points of sale. In FY2008 we expanded our dealer organization to 160 from 38 at the close of FY2007 an increase of 122 or 321% growth. This growth occurred in both North America and Europe with virtually all the growth occurring in the second half of FY2008. We believe our continued focus and success in building this distribution network is critical to supporting the long term success of the company. For the first time in the company's history we entered FY2009 with a backlog of orders for product. We continued production on the 2008 model until mid November at which time we began production of the 2009 model year.  

  

For FY2009 we are introducing our expanded Product Family. Our flagship product will be identified as the Vx1 which is a refreshed version of the current Vectrix bike with new paint colours and an exciting new look. A new product and model identified as the Vx1e will be introduced in Q2-FY2009. This model uses the same platform and drive train as the Vx1 with more of an urban commuter driver profile and with slightly less acceleration and top speed. Using SLA (sealed lead acid) battery technology the Vx1e creates an exciting new price point for the urban commuter. We are also introducing an entry level model, identified as the Vx2, which is an all new platform designed from the bottom up as the high end smaller and more compact two wheel electric vehicle. We expect this to be available in Q3-FY2009. The Vx2 is sized as the electric equivalent to a 50cc gas bike and uses both US and European designs. It is our expectation to add additional power profiles to this product reaching the electric equivalent of a gas 150cc bike. Like the Vx1 and Vx1e, the Vx2 has the distinctive Vectrix style and quality consumers have come to associate with our products. This expanded product line creates a 'Product Family Strategy' providing the consumer a Vectrix product equivalent to gas from 50cc to 350cc, the largest all electric two wheel line up in the world. Additionally, we are introducing a line of new accessories from seats and windshields to rear view mirrors. All of these new products and accessories will contribute and support our growth in FY2009. Vectrix is positioned in the market as a high end product offering with exceptional technology, engineering, 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 have, such as BMW and Daimler, with their family of vehicles.  

As part of our strategy to streamline Vectrix operations we have consolidated our operations in Europe under a single management umbrella known as Vectrix Europe which is headquartered in the UK. This organization is tasked with supporting the existing dealer base in all of Europe as well as expanding distribution through aggressive dealer development programs.  In addition, we also made changes within our worldwide finance and domestic sales and marketing functions. These changes along with the streamlining of our European operations will allow the company to be more efficient and less expensive to operate. 

We will continue to build the Vx1 and Vx1e at our plant in Poland although current production levels continue to result in a lower absorption of fixed overheads than desired and we are looking at alternatives to optimize the facility. We have also entered into a supplier agreement for the Vx2 product where final assembly will be completed under our supervision in the Peoples Republic of China.  During the second half the Company made a $494 thousand milestone prepayment to this supplier. The agreement includes milestone payments that will total approximately $2.0 million. 

Much of the acceleration in sales is a result of the previously announced pricing strategy and has also resulted in significant inventory reductions from accelerated sales rates amounting to approximately $8.9 million, while also conditioning the consumer expectation for model price increases for 2008 and the new 2009 model year offerings. 

Mike Boyle CEO of Vectrix commented on company performance: 'The Vectrix turnaround which began in the second half is progressing and our performance in all areas is improving. We believe the overall market interest in the company and our maxi scooter remains high. FY2008 sales increased, distribution is growing and spending decreased during the second half. Our FY2009 plan will set another milestone in validating the viability of our business. We are implementing a product strategy to expand addressable markets by offering a 'Family of Products' thereby increasing the size of our target opportunity by 400%. Quality and style are two critical attributes of the Vectrix brand and embedding these attributes in our new product family was critical to insure our success for many years to come.'

Current Trading Conditions and Financing

The Company's net cash position at the year end (excluding restricted cash) was approximately $11,600,000, and at 31 December 2008 it was approximately $3,300,000 on the same basis. As the Company is still cash flow negative, securing additional financing is critical in the short-term if the Company is to be able to fund its future obligations. As we have explored funding alternatives we have found banks reluctant to offer any form of trade financing or finance alternatives to emerging companies like Vectrix; accordingly, additional equity capital is critical to our refinancing plans. In December we announced that we were evaluating options for an equity fund raising. Discussions are continuing with potential investors and we anticipate a further update before the end of March 2009. If we are unable to complete a fund raising by the end of March it is likely that the Directors would need to seek other financial or strategic alternatives. However, even if financing sufficient to ensure short-term liquidity is secured by that date, it remains possible that our auditors may issue a report indicating there is substantial doubt about our ability to continue as a going concern in connection with the issuance of our financial statements. 

Although trading has been affected by the recent volatility in world financial markets, with additional equity financing Vectrix expects to hold its ground in the current market down turn and expects to see strong growth year over year in the first half of fiscal 2009. Our dealers in the US had expressed concern over the contraction of trade financing facilities but now indicate that the concern is easing and levels of optimism are building as we enter into the second quarter. In Europe the markets for our products have been more stable and our dealers have experienced strong year on year growth in FY2008. With continued improvement in the US market and sustained growth in European markets we expect Vectrix worldwide to grow at a significant rate year over year in our first half of fiscal year 2009. Currently we are projecting unit Sales growth ('Sell In') in the first half of more than double the same period last year, although as announced in December this is lower than we had previously expected. This year over year growth is expected without considering the impact of our new products which will not have sales until the second half of fiscal year 2009.

Although we are improving and growing we have not yet achieved the critical mass that supports profitability. Vectrix's directors and management are committed to achieving the bottom line measurement of a profitable company and we are confident the actions we have taken to date will support achieving that endeavour.

While the impact of the worldwide credit crisis has required us to raise additional funding in the short term, FY2008 was a turning point for Vectrix operations. We have established significant world wide distribution, implemented restructuring programs to reduce expenses, increased sales and validated the Vectrix brand and our maxi scooter product as the premiere two wheel electric vehicle in the world. We would like to thank our shareholders, vendors and employees for their faith, confidence and hard work in achieving this early position for all Vectrix electric technologies.

BUSINESS REVIEW

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 FY2008 the Company had wholly-owned subsidiaries in Italy, Ireland, the United Kingdom and Poland.

From inception, the Company has devoted its efforts primarily to research and technology development, securing financing and business planning. The Company now feels principal operations have begun and accordingly no longer considers itself a development stage company. The Company is subject to a number of risks and uncertainties associated with emerging technologies. Principal among these are risks associated with the ability to obtain additional financing, continued commercial acceptance of the Company's products, the build-out of effective distribution channels, the dependence upon key individuals and the achievement of profitability.

On 24 May 2007, the Company's common stock was admitted to the AIM Market of the London Stock Exchange ('the AIM Listing') and the Company raised approximately $66.8 million, net of offering costs.

Revenue

Revenues consist of sales of scooters to end customers. For fiscal 2008 the Company recognized revenue of approximately $6,354,000. This amount was comprised of sales to end customers in North America (24%) and Europe (76%). In fiscal 2007 the Company recognized revenue of $819,000. This amount was comprised of sales to end customers in North America (34%) and Europe (66%).

The Company currently recognizes revenue only on sales of scooters to end customers until such time as the rate of scooter returns from dealers can be reasonably estimated, amongst other criteria. For scooter sales to dealers, the Company records deferred revenue at gross invoice sales price less estimated cash discounts. As of 30 September 2008, the Company recorded deferred revenues of $5,522,000 related to sales of scooters to dealers which have not yet sold out to end customers.

Cost of Goods Sold

Inventory Revaluation

The Company performed a detailed assessment of inventory which included a review of among other factors, demand requirements and market conditions. As a result of this assessment, the Company recorded a $978,000 inventory revaluation charge related to finish goods.

Adverse Purchase Commitment

During fiscal 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 agreement, the Company agreed to pay consideration of $4,208,500 to settle its adverse purchase commitment. Of this amount, $3,979,500 was recorded as an adverse purchase commitment in fiscal 2007 and the remaining $229,000 was recorded as an adverse purchase commitment in fiscal 2008.  This amount was settled through the payment of $3,090,000 for NiMH batteries and a commitment to deliver Vectrix scooters valued at $1,118,500. At 30 September 2008, the Company had a balance of $791,000 in accrued liabilities representing the amount of scooters not yet delivered to the battery manufacturer.

Other Cost of Goods Sold

Other cost of goods sold includes costs related to sales of scooters to end customers, unabsorbed manufacturing costs, warranty costs, freight and other various production costs.

Operating Expenses

Research & Development 

Research & Development consists of wages and benefits, occupancy costs for the R&D facility, technology development expenses and other various expenses. The $2,412,000 (23.7%) decrease from the prior year was primarily the result of a reduction in technology development expenses as the Company moved towards full commercialization.  This reduction was offset by a $503,000 increase in stock based compensation expense as presented in Note-8.

Selling & Marketing

Selling & Marketing consists of wages and benefits, commission expense, travel, marketing and trade shows and other various expenses. The $3,336,000 (29.7%) increase from the prior year was primarily driven by increases in wages, stock based compensation expense and commissions as we build out the sales team.  These increases were partially offset by a reduction in marketing and trade show expenses as the Company restructured and right sized its marketing programs. As presented in Note-8, stock based compensation expense increased approximately $1,868,000 from the prior year as a result of the departure of the former COO at which time his stock based compensation became fully vested and an expense of the Company.

General & Administrative

General & Administrative consists of wages and benefits, travel, professional fees, occupancy costs, insurance and other various expenses. The $9,949,000 (106.0%) increase from the prior year was driven primarily by stock based compensation expense, wages, professional fees and occupancy costs.  As presented in Note-8, stock based compensation expense increased approximately $5,526,000 from the prior year as a result of the departure of the former CEO and CFO at which time their stock based compensation became fully vested and an expense of the Company. The remaining increase in G&A expense was split between wages, professional fees, occupancy costs and other miscellaneous expenses.

Restructuring Charge

During fiscal 2008 the Company restructured its Sales & Marketing function by closing the Company's Italian operations and eliminating redundant positions. As a result of these changes the Company provided $1,561,000 for restructuring expenses such as severance, professional fees and the write down of assets.

Impairment Charge

At the end of the year the Company reviewed its long lived assets and made the determination that certain fixed assets and deposits were impaired and not expected to generate any future economic benefit. Accordingly, the Company recorded $2,457,000 for impairment charges.

Disposal of Assets

During fiscal 2008 the Company performed an extensive review of fixed assets at each of its location. As a result of this review the Company disposed of certain assets which were no longer being used in current operations.  Accordingly, the Company recorded a $1,741,000 charge for the disposal of assets.

Acquired Technology

The Company also executed a strategic agreement to develop lithium battery technology and production capabilities with Gold Peak Batteries. As a result of this agreement the Company recorded $3,584,549 as acquired technology expense during fiscal 2008.

Liquidity and Capital Resources

As of 30 September 2008, the Company had $11,596,000 of operating cash and $5,753,000 of other working capital.  Cash and short term investments decreased $38,802,000 from the prior year primarily as a result of the cash used in operations resulting from the Company's net loss.

Cash Used in Operations

Net cash used in operations was $33,604,000 for the twelve months ended 30 September 2008. The primary use of cash was the $61,479,000 net loss experienced during the year. Adjusted for non-cash charges the net loss was $48,214,000. This adjusted loss along with the Company's successful efforts to monetize certain aspects of the balance sheet such as accounts receivable, inventory and VAT resulted in $33,604,000 cash used in operations.

Cash Provided by Investing Activities

Net cash provided by investing activities was $352,000 for the twelve months ended 30 September 2008. During fiscal 2008 the Company sold $6,066,000 of short term investments, used $2,588,000 for the purchase of furniture and fixtures, automobiles, machinery and equipment and software and used $3,125,000 as restricted cash primarily as security for the new GE dealer inventory financing program. 

Cash Used in Financing Activities

Cash used in financing activities was $905,000 for the twelve months ended 30 September 2008. The primary use of cash was the repayment of a bank overdraft and the payment of capital lease obligations during the year.

Summary

As of 30 September 2008 the Company had $11,596,000 of cash available for operations. Given the expected increase in sales during fiscal 2009 and the level of working capital which will be required to deliver against those expectations we believe it will be necessary to accelerate our need for fund raising during the first half of fiscal 2009.  As discussed above, if we are unable to complete the fund raising by the end of March our auditors may issue a report indicating there is substantial doubt about our ability to continue as a going concern in connection with the issuance of our financial statements.

John D. McGuinness

Chief Accounting Officer

Vectrix Corporation

Consolidated Statement of Operations

(Unaudited)

 

		Twelve Months Ended
		30 September
		2008				2007
Net Revenues		$	6,354,747			$		818,818
Cost of Goods Sold
Inventory revaluation			977,987					3,173,517
Battery excess charge			-					1,949,500
Adverse purchase commitment			229,000					3,979,500
Other cost of goods sold			24,072,432					4,553,274
Total cost of goods sold			25,279,419					13,655,791
Gross Loss			(18,924,672	)				(12,836,973					)
Operating Expenses
Research and development			7,738,020					10,150,343
Selling and marketing			14,539,515					11,203,818
General and administrative			19,333,579					9,384,967
Start-up cost			-					730,923
Restructuring Charge			1,561,039					-
Impairment charge			2,457,101					3,690,000
Disposal of assets			1,741,137					-
Acquired technology			3,584,549					-
Total operating expenses			50,954,940					35,160,051
Loss from operations			(69,879,612	)				(47,997,024					)
Interest expense			-					(10,957,856					)
Interest income			975,919					881,922
Other (expense) income, net			(1,009	)				21,804
Foreign exchange gain			7,331,562					4,089,162
Loss before income taxes			(61,573,140	)				(53,961,992					)
Benefit (provision) for income taxes			94,391					(191,007					)
Net Loss		$	(61,478,749	)		$		(54,152,999					)
Weighted average shares outstanding: Basic and diluted			260,123,044					151,269,287
Basic and diluted net loss per share		$	(0.24	)		$		(0.36					)

Vectrix Corporation

Consolidated Balance Sheet

(Unaudited)

 

				30 September, 2008										30 September 2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents				$	11,596,053									$	44,332,096
Short term investments					-										6,066,000
Restricted cash					865,859										235,112
Accounts receivable, net					1,997,313										4,457,416
Inventories					10,363,101										19,288,739
Inventory in custody of dealers					5,522,198										3,892,388
VAT					2,750,167										5,932,677
Prepaid expenses and other current assets					1,327,001										776,969
Total Current Assets					34,421,692										84,981,397
Property and equipment, net					6,120,413										10,248,136
Restricted cash					2,500,000										-
Other					597,949										307,507
Total Assets				$	43,640,054									$	95,537,040
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable				$	4,665,648									$	7,195,458
Accrued liabilities					1,875,952										1,250,973
Accrued compensation					1,593,878										756,077
Bank overdraft					-										784,219
Current portion of capital lease obligation					54,770										44,000
Short-term notes payable					-										52,195
Adverse purchase commitment					-										3,979,500
Deferred revenue					5,522,198										4,074,223
Other current liabilities					3,360,391										450,694
Total Current Liabilities					17,072,837										18,587,339
Capital lease obligation, less current portion					173,848										153,388
Other long term liabilities					120,915										74,362
Total Liabilities					17,367,600										18,815,089
SHAREHOLDERS' EQUITY
Common Stock, $.10 Par Value, Authorized 435,000,000 Shares, Issued   283,136,331 and 259,455,215_Shares, respectively					28,313,633										25,945,521
Additional paid-in capital					179,452,424										169,455,857
Accumulated deficit					(179,741,635					)					(118,262,885			)
Accumulated other comprehensive loss					(1,751,968					)					(416,542			)
Total Shareholders' Equity					26,272,454										76,721,951
Total Liabilities and Stockholders' Equity				$	43,640,054									$	95,537,040

Vectrix Corporation

Consolidated Statement of Cash Flows

(Unaudited)

 

		Twelve Months Ended
		30 September  2008				30 September 2007
Cash Flows from Operating Activities:
Net Loss		$	(61,478,749	)		$		(54,152,999					)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization			2,667,619					1,379,047
Noncash interest on notes			-					4,924,677
Gain on foreign exchange translation			(6,193,622	)				-
Acquired technology in strategic agreement			2,249,049					-
Noncash charges related to issuance of warrants			-					6,033,179
Stock-based compensation and expenses			10,343,831					2,307,685
Loss on disposal of fixed assets			1,741,137					-
Impairment charges			2,457,101					3,690,000
Changes in assets and liabilities
Accounts receivable			2,616,777					(4,247,987					)
Prepaid expenses and other current assets			(1,270,347	)				(278,095					)
Inventory			9,142,420					(16,514,723					)
Inventory in custody of dealers			(1,356,526	)				(3,636,409					)
VAT			3,969,458					(5,471,767					)
Accounts payable			(3,070,418	)				2,733,718
Accrued expenses and other liabilities			3,387,633					(2,613,364					)
Adverse purchase commitment			-					3,979,500
Deferred revenue			1,190,142					3,849,366
Net Cash Used by Operating Activities			(33,604,495	)				(58,018,172					)
Cash Flows from Investing Activities:
Restricted cash			(3,125,230	)				(218,943					)
Sale (purchase) of short term investments			6,066,000					(6,016,000					)
Purchase of property and equipment			(2,588,288	)				(8,990,886					)
Investment in joint venture			-					(3,690,000					)
Net Cash Provided (Used) by Investing Activities			352,482					(18,915,829					)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock, net of issuance costs			800					66,812,485
Proceeds from private issuance of common stock, net of issuance costs			-					25,336,112
Proceeds from issuance of notes payable and warrants to stockholders, net of issuance costs			-					25,050,000
Proceeds from exercise of warrants			-					1,365,498
Bank overdraft			(784,219	)				784,219
Repayment of capital lease obligation			(121,623	)				(84,795					)
Net Cash (Used) Provided by Financing Activities			(905,042	)				119,263,519
Effect of exchange rate changes			1,421,012					(130,067					)
Net (Decrease) increase in Cash and Cash Equivalents			(32,736,043	)				42,199,451
Cash and Cash Equivalents, Beginning of Period			44,332,096					2,132,645
Cash and Cash Equivalents, End of Period		$	11,596,053			$		44,332,096
Supplemental cash flow disclosure
Transfer of marketing bikes (from) to fixed assets to (from) inventory			(926,194	)				1,363,634
Settlement of the 'Lithium Agreement' with the issuance of common stock			2,020,049					-

Notes to Financial Statements

(Unaudited)

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation: The Consolidated financial information is presented in accordance with accounting principles generally accepted in the United States (US GAAP).

Consolidation:  The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Vectrix Europe S.r.l., Vectrix Europe Limited, Vectrix (UK) Limited and Vectrix sp. Z.o.o. All inter-company 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 requires management to make estimates and assumptions that effect 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.

Reclassifications:  Certain prior year balances have been reclassified to conform to the current year's presentation.  In fiscal 2007 approximately $3,600,000 for the Company's Poland operations were classified as research and development and general and administrative expenses. These expenses have been reclassified to cost of goods sold in the current year's presentation.   In addition, in fiscal 2007 all of the Company's $2,307,685 of stock based compensation expense was recorded to selling and marketing expenses. These expenses have also been reclassified to either cost of goods sold, research and development and general and administrative expenses.

Revenue Recognition: The Company recognizes revenue when it is realized or realizable in accordance with the SFAS No. 48 - 'Revenue Recognition When Right of Return Exists'. Revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller's price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. SFAS No. 48 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if (1) the seller's price to the buyer is substantially fixed or determinable at the date of sale; (2) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product: (3) the buyer's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (5) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (6) the amount of future returns can be reasonably estimated.

Note 2 - Restricted Cash

The Company has total restricted cash of $3,366,000 of which $2,500,000 is with GE Financial Services to support the new dealer inventory financing program which was introduced in fiscal 2008. Additionally, the Company also has other restricted cash with freight vendors and the Company's credit card vendor.  As of 30 September 2008, GE was owed approximately $1,709,000 from dealers for inventory not sold out. The GE restricted cash is securing these receivables.

Note 3 - Accounts Receivable

The accounts receivable balance of $1,997,000 represents amounts owed to the Company by dealers in countries where bikes are sold. The amounts related to sales in North America total $646,000 and Europe total $1,351,000. The primary drivers causing the reduction in accounts receivable compared to the prior year with increasing unit sales are the reduction in wholesale prices during fiscal 2008 and the GE inventory financing program in North America. These sales are usually paid by GE within twenty one days of the sale.  

Note 4 - Inventory

Inventory is stated at the lower of cost or market and includes materials, direct labor and manufacturing overhead. The Company performs a detailed assessment of excess and obsolete inventory, as well as purchase commitments, at each balance sheet date. This assessment includes a review of, among other factors, demand requirements and market conditions. The decrease from the prior year is the result of the Company's successful efforts to monetize the inventory balance during the year and also the result of write downs during fiscal 2008.

Note 5 - Inventory in Custody of Dealers

The Inventory in Custody of Dealers balance of $5,522,000 is related to bikes sold to dealers which have not been sold to end customers. Although legal title to these bikes has transferred, the associated revenue and cost of goods sold has been deferred until the bikes are sold to the end customer at which time the Company recognizes revenue and the associated cost of goods sold. This accounting treatment is consistent with the 'Sell Out' method of accounting.  At the end of fiscal 2008 the Company wrote off approximately $87,000 of Inventory in Custody of dealers in order to eliminate the embedded deferred loss on deferred revenue to be recognized in future periods.

Note 6 - VAT

The VAT balance of $2,750,000 represents amounts owed to the Company from VAT offices in countries outside of the United States. All amounts are expected to be collected from the VAT offices or offset against future taxes and VAT payables by the end of fiscal 2009. In addition to the $2,750,000 VAT receivable recorded within current assets, the Company also has a $340,000 VAT receivable recorded within other long term assets related to a VAT receivable in Italy which is not expected to be collected during fiscal 2009.

Note 7 - Deferred Revenue

The deferred revenue balance of $5,522,000 is related to bikes sold to dealers which have not been sold out to end customers. Although legal title to these bikes has transferred, the associated revenue and cost of goods sold has been deferred until the bikes are sold to the end customer at which time the Company recognizes revenue and the associated cost of goods sold. This accounting treatment is consistent with the 'Sell Out' method of accounting.

Note 8 - Stock based compensation

Under the provisions of SFAS No. 123(R) 'Share Based Payments', the Company recognized $10,343,831 of stock based compensation expense in fiscal 2008. The following table presents share-based compensation expense included in the Company's consolidated statement of operations:

		30 September
		2008				2007
Cost of goods sold		$	246,359			$		107,484
Research and development			989,960					486,966
Selling and marketing			2,306,533					438,284
General and administrative			6,800,979					1,274,951
Total		$	10,343,831			$		2,307,685

Note 9 - 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, the basic and diluted net loss per share is computed by dividing the weighted average number of shares of common stock outstanding during the period into the net loss attributable to common stockholders.

		30 September
		2008				2007
Net Loss			(61,478,749	)				(54,152,999					)
Weighted average common shares outstanding			260,123,044					151,269,287
Basic and diluted net loss per share		$	(0.24	)		$		(0.36					)

Note 10 - 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 location of the Company's long-lived assets by country:

		30 September
		2008				2007
United States		$	2,482,246			$		2,971,161
Italy			531,143					2,507,974
Poland			3,616,199					4,882,945
United Kingdom			88,774					193,563
Total		$	6,718,362			$		10,555,643

ENDFR PUUGGGUPBGAP