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TMCNet:  BALQON CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 19, 2012]

BALQON CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our financial statements and the related notes to financial statements included elsewhere in this report. This report and our financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might generate and profits we might earn if we are successful in implementing our business strategies. Our actual results could differ materially from those expressed in these forward-looking statements as a result of any number of factors, including those set forth under the "Risk Factors" section and elsewhere in this report. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation: · the projected growth or contraction in the industries within which we operate; · our business strategy for expanding, maintaining or contracting our presence in these markets; · anticipated trends in our financial condition and results of operations; and · our ability to distinguish ourselves from our current and future competitors.



We do not undertake to update, revise or correct any forward-looking statements.

Any of the factors described above or elsewhere in this report, including in the "Risk Factors" section of this report, or referenced from time to time in our filings with the Securities Exchange Commission, or SEC, could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially.

Business Overview We are a developer and manufacturer of electric drive systems, charging systems and lithium battery systems for trucks, tractors, buses, industrial equipment and renewable energy storage devices. We also design and assemble electric powered yard tractors, short haul drayage tractors and inner city trucks utilizing our proprietary drive systems, battery systems and charging systems.

Each of our electric drive systems is comprised of an electric motor, transmission, our proprietary flux vector motor controller (which controls the speed of an electric motor by varying the input frequency and voltage from a vehicle's batteries), power electronic components and proprietary software configured to specific application needs. Our lithium battery systems feature our proprietary battery management system, or BMS, an electronic device connected to each lithium battery cell to monitor and balance the state of charge of the battery, including its temperature, voltage and current during charge and discharge cycles. Our proprietary software allows our BMS to be used on any battery cell chemistry. Our charging systems, introduced in the third quarter of 2011, vary in capacity ranging from 8 kilo Watt, or kW, to 120 kW in power and 200 Volts to 700 Volts in charge voltage.

22 A key element of our marketing strategy is to provide fully integrated propulsion and energy storage systems to vehicle manufacturer's worldwide, allowing original equipment manufacturers, or OEMs, of commercial vehicles, such as trucks, tractors, and buses, to rapidly integrate our proprietary technologies into diversified vehicle platforms to address a growing global demand for commercial electric vehicles. We also market energy storage systems comprised of lithium batteries, battery management and chargers to renewable energy storage system manufacturers that market completed systems to solar and industries. We are also engaged in the research and development of battery systems, charging systems and power inverters (which converts direct current voltage into a alternating current voltage) for use in energy storage devices to reduce peak loads in commercial applications such as in the telecommunications industry and in large commercial and industrial buildings.

We sell our electric drive systems, charging systems and battery systems to global OEMs of commercial vehicles and industrial equipment. A key element of our sales strategy is to develop strategic partnerships with global OEM's to jointly develop commercial electric vehicles incorporating our drive systems, charging systems and battery systems into localized chassis platforms that meet regional customer needs. We believe that this strategy allows us to market our proprietary technologies to global customers while reducing product development and integration time for our OEM partners.

We also develop, design, assemble, market and sell zero-emissions heavy-duty electric yard tractors, heavy-duty short haul drayage tractors, and inner city Class 7 and Class 8 trucks and medium-duty trucks that feature our proprietary electric drive systems, charging systems and lithium battery systems. Our heavy-duty electric tractors are suitable for use in the transportation of containers and heavy loads in off-highway applications at facilities such as marine terminals, rail yards, industrial warehouses, intermodal facilities (facilities where freight is transferred from one mode of transportation to another without actual handling of the freight itself when changing modes), military bases and industrial plants. Our medium-duty electric trucks can be configured by our customers for various uses in inner city on-highway applications. For example our customers can configure our medium-duty electric trucks as box trucks or shuttle busses for use in inner city applications.

As of the date of this report, our electric tractor product portfolio features three products in our Nautilus product line, the Nautilus XE20, a heavy-duty on-road electric tractor, the MX30, a heavy-duty electric short-haul tractor, and the Nautilus XR E20, a longer-range version of the Nautilus XE20. We also offer a heavy-duty Class 7 and Class 8 electric truck, the Mule M100, a medium-duty electric truck. The Mule M100 is designed as zero emissions solutions to transport loads of 4 tons, and, depending on battery selection, can be configured to have a range of up to 150 miles on a single charge under unloaded conditions.

Recent Developments Overview During the year ended December 31, 2011 and through November 15, 2012, a significant portion of our research and development efforts, have been focused on the development of electric drive systems, charging systems, lithium battery storage systems and the next generation of our flux vector motor controllers to address the light and medium-duty vehicle markets. During 2011, we developed our proprietary charging systems, high frequency fast chargers that have a capacity of up to 160 kW that will provide our customers with the capability to charge our vehicles in less than two hours. During 2011, we also completed the development of our next generation flux vector motor controllers, which incorporate the latest transistor technology that is commercially available and provide higher efficiency and more power than our existing flux vector motor controllers. Our next generation flux vector motor controllers are designed to work seamlessly with induction motor or permanent magnet motor designs, allowing us the ability to develop drive systems for light-duty vehicles such as automobiles, pickup trucks and light-duty delivery vehicles. Our efforts during 2011 also led to the development of power inverters, charging systems and battery systems capable of providing up to one Mega Watt, or MW, of power in peak load sharing applications in energy storage devices. During 2011, we also developed and sold battery systems to address applications such as forklifts and pallet jacks in the telecommunication energy storage and material handlingmarkets.

23 A significant portion of our production efforts in 2011 and through November 15, 2012, have been focused on developing the MX30, a heavy duty on-road short-haul electric tractor. MX30 is currently being tested by Port of Los Angeles for use in short-haul applications. Testing of MX30 during the past three months under fully loaded conditions indicate 80 mile range under full load conditions transporting 20 ton containers between a marine terminal and a local rail yard.

In addition the Company has received approval from Department of Energy for a grant to build three more MX30 vehicles for use in Port applications.

During 2012, we have developed lithium battery storage systems for the solar, wind and telecommunications industries. In 2012, we also developed 12-48 volt high energy storage capacity battery packs to address telecommunications energy storage needs. Our battery systems replace current lead acid batteries with no maintenance required and double the cycle life of current equivalent lead acid batteries. In 2012, we developed lithium battery solutions for ground support equipment industry, which includes lithium batteries for airport baggage tractors and aircraft tractors.

In 2012, we received a purchase order from Terberg Benschop, a leading manufacturer of Yard tractors located in Europe to jointly develop an electric yard tractor configuration for their current line of yard tractors. As of the date of this report, we have delivered three drive systems, battery systems and chargers to our customer and currently three units are undergoing testing and demonstration in Europe. We currently have two manufacturers, Terberg and MOL Industries demonstrating electric yard in Europe, we anticipate successful demonstrations will lead to additional orders for our drive systems.

Significant Highlights During 2012, we developed an on-road Class 8 short-haul electric tractor, our MX30, for port applications. In June 2012, we successfully completed dynamometer testing on the MX30 with a maximum load of 30 tons on a 10% grade. In August 2012, we began on-road testing the MX30 for short-haul applications at the Port of Los Angeles. We anticipate that testing on the MX30 will continue for six months to demonstrate the viability of our MX30 as a full electric zero emissions heavy-duty on-road tractor in short haul marine applications.

In June 2012, we launched our website to market our complete line of lithium batteries and energy storage systems. Over 10% of our revenue during second quarter of 2012 was a result of online sales of batteries through our website.

We anticipate increased revenues from online sales during rest of the year.

During 2011 we introduced our charging systems, which vary in capacity, ranging from 8 kW to 120 kW in power and 200 Volts to 700 Volts in charge voltage. Our charging systems feature 8 kW modules that are connected in series to achieve a maximum charge rate of 120 kW, and they are equipped with our proprietary software that conforms to Society of Automotive Engineers J1772 communication and protocol requirements.

In October 2011, we sold five units of our next generation flux vector motor controllers to a customer engaged in the manufacturing of monorail systems. Our new generation of motor controllers are equipped with current transistor technology and are able to work seamlessly with induction or permanent magnet motor designs. We expect to market these flux vector motor controllers to automobile manufacturers worldwide for use in light-duty passenger vehicleand cargo vehicle applications.

In November 2011, we completed the assembly of and delivered a one MW battery storage system, featuring our battery system, charging systems and battery management systems, to a local university for use as a peak load sharing device.

In May 2012, the system was placed in operation and delivers power around the clock to a building at a local university. In December 2011, we completed and delivered two additional drive and battery systems to Ashok Leyland, for use in the development of inner city electric buses. We also received additional orders for the development and shipment of four drive and battery systems for medium duty electric trucks for use in inner city applications.

24 During 2011, one of our electric drive systems was integrated into a heavy-duty tow tractor jointly developed by us and Mol Industries, an OEM located in Europe. As of the date of this report, the completed vehicle has successfully completed testing at a customer site. During the second quarter of 2012, the heavy-duty tow tractors that feature our electric drive systems have been demonstrated to commercial and marine port terminals. We expect the demonstrations of the Mol Industries tractor featuring our electric drive system to result in additional orders for our electric drive systems from OEMs in Europe during the remainder of 2012 and 2013.

During 2011, we sold two Nautilus XR E20 yard tractors, one to a steel manufacturer and one to a military base. We expect these Nautilus XR E20s to be used to transport trailers and containers at these facilities. In addition to our Nautilus XR E20s, we also shipped our new charging systems to these customers, enabling our customers to use the Nautilus XR E20s during threeshift operations.

During 2011, we developed, tested and sold a Mule M100, a heavy-duty truck, configured for use as an electric 32 passenger inner city shuttle bus. During this period, we also delivered and sold one 40 foot passenger electric drive chassis and a charging system to a customer engaged in the development of next generation electric buses and passenger vehicles. The chassis incorporates our drive system and battery system and will be configured by our customer for use as a 40 foot passenger bus. During the second quarter of 2012, our customer completed the 40 passenger bus and has demonstrated the bus to customers in transit and federal government agencies. We expect demonstrations of the electric bus by our customer will result in additional orders during 2012 and 2013.

During 2011, we also sold six battery storage systems to a customer in the telecommunications industry to demonstrate the fuel savings that result from the use of battery power on remote wireless towers. As of the date of this report, the battery storage systems are operational and have demonstrated a significant reduction in fuel costs resulting from use of battery power during off-peak hours of operation of the wireless towers. During 2012 we have provided over 10 additional battery systems to telecommunication customers. Over 80% of the new sales were to customers that had previously purchased and tested our battery systems in telecommunications applications. Our telecommunications battery systems were delivered to global customers in Australia, South Africa, Nigeria, India and Bangladesh. We anticipate successful demonstration of our lithium battery storage systems will result in additional sales during the remainder of 2012 and in 2013.

Significant Customers and Strategic Partnerships In January 2011, we entered into an agreement with WGE, an affiliate of our Chairman of the Board headquartered in Shenzhen China, under which WGE agreed to purchase 300 of our electric drive systems at an aggregate purchase price of approximately $15.9 million. In 2011, we delivered one drive system to be integrate our electric drive system into a localized 16 passenger bus chassis.

As of the date of this report, our customer has been unable to successfully integrate and test our drive system, thereby delaying our ability to ship additional drive systems. In order to remedy the delay in product development, we have signed a Memorandum of Understanding with a large Bus manufacturer in China to expedite development of small to mid-size transit buses for the China market.

Under an agreement with the City of Los Angeles, or City of Los Angeles Agreement, we agreed to sell 20 Nautilus E20 heavy-duty electric yard tractors (the predecessor to our Nautilus XE20) and five Nautilus E30 short-haul tractors (the predecessor to our Nautilus XE30) to the City of Los Angeles for use at the Port of Los Angeles. As of the date of this report, we have delivered 14 Nautilus E20s (including four Nautilus XE20s two of which have been retrofitted with extended range lithium batteries and are referred to as our Nautilus XR E20s) and one Nautilus XE30 to the Port of Los Angeles under the terms of the City of Los Angeles Agreement. Initial use of the electric vehicles at the Port of Los Angeles evidenced that the vehicles had a range of between five and six hours. Upon the request of the City of Los Angeles to increase the range of the vehicles to meet two shift operations, we retrofitted two of the vehicles already delivered under the City of Los Angeles Agreement with extended range lithium battery systems, hydraulic systems and idle stop software in order to extend the range of the resultant vehicle, the Nautilus XR E20. The two retrofitted Nautilus XR E20s have completed seven months of testing at a local marine facility. Further, as of the date of this report, two additional E20s are being tested at a local recycling facility under heavy loads exceeding 40 tons.

We believe that the performance of the Nautilus XR E20s are meeting expectations, and the City of Los Angeles has requested that we retrofit two additional vehicles with extended range lithium battery systems for testing at an alternate facility. The City of Los Angeles Agreement terminated on June 26, 2011, and, consequently, we do not have an obligation to sell, and the City of Los Angeles does not have an obligation to buy, the remaining 10 vehicles. We expect to negotiate a new agreement with the City of Los Angeles to upgrade six existing units with extended range batteries to increase the range of the vehicles delivered under the previous agreement. We are also in negotiations with the City of Los Angeles to deliver an on-road Class 8 truck for use in drayage applications that will allow us to deliver the remaining 6 electric yard tractors, 4 short-haul electric tractors. While we are confident that such an agreement with the City of Los Angeles will be reached, no assurance can be given that we will in fact enter into such an agreement.

25 During the year ended December 31, 2010, we delivered electric drive systems and lithium battery systems to Ashok Leyland, a large manufacturer of trucks and buses based in India, to be installed into intercity hybrid buses to be used for demonstration purposes. The intercity hybrid buses incorporating our electric drive systems and lithium battery systems underwent field tests for one year. As a result of the successful demonstration and testing of these intercity hybrid buses, in April 2011 we entered into a Joint Development Agreement with Ashok Leyland under which we will work with Ashok Leyland to jointly develop and test six electric vehicles (comprised of buses and trucks) using Ashok Leyland's glider chassis and our electric drive systems and lithium battery systems. As of the date of this report, we have sold two electric drive systems to Ashok Leyland for integration into prototype inner city buses. In addition we have also delivered two electric drive systems and battery systems for integration into an inner city delivery truck. Subject to the six prototypes being delivered and meeting established performance and cost targets and/or Ashok Leyland obtaining firm requirements from its customers, Ashok Leyland has agreed to purchase a minimum of 14 additional drive systems from us for sale to its customers. As of the date of this report, we have delivered four of the six prototypes.

In January 2012, we received a purchase order from Terberg Benschop, a leading manufacturer of yard tractors and heavy duty trucks with facilities in Netherlands and Malaysia. Under the terms of the purchase order, we jointly developed an electric drive system for the current line of yard tractors manufactured by Terberg. In the third quarter of 2012, we delivered three sets of drive systems and jointly completed the integration of our proprietary drive system and battery system. As of the date of this report, Terberg is demonstrating the electric yard tractor to local customers and showcasing the completed product at local trade shows.

In May 2011, we received a purchase order for an electric drive system and battery system from MOL Industries, a leading manufacturer of yard tractors and heavy duty refuse trucks with facilities in Belgium. In September 2011, MOL began demonstration of the completed electric yard tractors to local warehouse and marine terminals.

Distribution Agreement In December 2010, we entered into a three year distribution agreement, or Distribution Agreement, with Seven One Limited, or SOL, under which we were appointed as the exclusive authorized distributor in the United States for the promotion, marketing and sale of lithium iron phosphate batteries and high voltage charging systems manufactured by Seven One Battery Company. On December 31, 2011, batteries with a value of $1,915,200 were held on consignment. As of September 30, 2012, batteries with a value of $574,900 were held on consignment.

26 Critical Accounting Policies Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our financial statements: 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 revenue and expenses during the reporting period. Material estimates relate to the recognition of contract revenues and estimated costs to complete contracts in process, and recoverability of reported amounts of long-lived assets. Actual results may differ from those estimates.

Revenues Sales of Production Units and Parts. We recognize revenue from the sale of completed production units and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of our product or delivery of the product to the destination specified by the customer.

We determine whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs when we place the products with the buyer's carrier. We regularly review our customers' financial positions to ensure that collectability is reasonably assured. Except for warranties, we have no post-sales obligations.

Contract Revenue and Cost Recognition on Prototype Vehicles. In accounting for contracts, we recognize revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. This method is used because management considers costs to be the best available measure of progress on its contracts. Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion. We also recognize as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated.

27 Contract costs include all direct material and labor costs. The liability "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues earned.

Stock-Based Compensation We periodically issue stock instruments, including shares of our common stock, stock options, and warrants to purchase shares of our common stock to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for stock option awards issued and vesting to employees in accordance with authorization guidance of the Financial Accounting Standards Board, or FASB, where the value of stock-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Options to purchase shares of our common stock vest and expire according to the terms established at the grant date.

We account for stock options and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn the equity instruments is complete.

We estimate the fair value of stock options and warrants using the Black-Scholes Merton option-pricing model, which was developed for use in estimating the fair value of options that have no vesting restrictions and are fully transferable.

This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock and the expected life of stock options.

Projected data related to the expected volatility of stock options is based on the average volatility of the trading prices of comparable companies and the expected life of stock options is based upon the average term and vesting schedules of the options. Changes in these subjective assumptions can materially affect the fair value of the estimate, and therefore the existing valuation models do not provide a precise measure of the fair value of our employee stock options.

We estimate the fair value of shares of common stock issued for services based on the closing price of our common stock on the date shares are granted.

Derivative Financial Instruments We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, we use the Monte Carlo simulation model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Impairment of Long-Lived Assets The FASB, has established guidelines regarding when impairment losses on long-lived assets, which include property and equipment, should be recognized and how impairment losses should be measured. Guidance of the FASB also provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. We periodically review, at least annually, such assets for possible impairment and expected losses. If any losses are determined to exist they are recorded in the period when such impairment is determined. Based upon management's assessment, there were no indicators of impairment of our long lived assets at September 30, 2012 or December 31, 2011.

28 Income Taxes We recognize income taxes for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets are recognized for the future tax consequences of transactions that have been recognized in our financial statements or tax returns. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax assetwill not be realized.

Financial Condition and Results of Operations Our total revenues decreased by $122,619, or 15%, to $712,324 for the three months ended September 30, 2012 as compared to $834,943 for the three months ended September 30, 2011. The decrease in revenues was as a result of lower sales of electric yard tractors when compared to previous period. Gross profits during the nine months ended September 30, 2012 was $64,753, a decrease of $247,426, or 79%, from the same period in 2011. The decrease in gross profit is primarily due to a $350,000 sale of batteries to a wholesale customer at a loss.

Our decision to sell particular configuration of batteries to a wholesale customer was prompted by our desire to reduce inventory and generate cash for operations.

We reported a net loss of $4,191,157 for the three months ended September 30, 2012 as compared to a net loss of $1,012,383 for the three months ended September 30, 2011. Net loss as a percentage of sales during the nine months ended September 30, 2012 was 612%, as compared to net loss as a percentage of sales of 121% during the three months ended September 30, 2011. The increase in losses during the three months ended September 30, 2012, is primarily attributable to the decrease in revenues, a negative gross margin resulting from sales of $350,000 in batteries to wholesale customer, offset by decreases in general and administrative expenses, research and development costs, and depreciation. These are further offset by an increase in interest expense of $96,271 and a $1,345,111 impairment loss. During the three months ended September 30, 2012, a $1,458,609 loss in the fair value of the derivative liability was realized while a $263,199 gain in the fair value of the derivative liability was realized during the three months ended September 30, 2011.

Our product mix during the first nine months of 2012 varied from our product mix during the first nine months of 2011. During the first nine months of 2012, vehicle sales accounted for 34% of our revenues, sales of batteries and battery systems were 42% of revenues, and sales of our electric drive systems accounted for 21% of revenues. During the first nine months of 2011, sales of drive systems represented 55% of total sales, sales battery systems accounted for 7% of our sales, sales of vehicles accounted for 29% of our sales and consulting revenues represented 3% of total sales and revenues.

In December 2010, we raised $5,000,000 in connection with a private placement of common stock and warrants. On May 18, 2012, we raised $340,000 in connection with a private placement of 10% secured subordinated convertible notes and warrants.

Our lack of significant revenues during the first nine months of 2012 is a direct result of a lack of capital, lack of new sales, and the length and complexity of our product development process. Typically, we experience a significant time lag between receiving an order for our electric drive systems or battery systems and recognizing revenue in connection with the order due to the development time required to integrate our technologies into new vehicle platforms specified by our customers. For example, while our electric drive systems and battery systems can be integrated into a multitude of product platforms, often times a substantial amount of time is needed to make design modifications to our product to ensure its integration into each new vehicle platform. In most cases new designs require sourcing of raw materials contributing further to the already lengthy production time. In the case of a new customer or a new product platform, it is customary in our business to complete and deliver a single unit prior to producing the entire order. Once the initial product is delivered, installed and accepted by our customer, we begin production on the remaining order based on production delivery dates agreedupon with our customer.

29 While 34% of our revenues during the first nine months of 2012 were derived as a result of our production efforts that were focused on the upgrade of six trucks previously delivered to the City of Los Angeles for use at the Port of Los Angeles from lead acid batteries to lithium ion batteries, 34% of our revenues during the period were derived from the delivery of battery systems and electric drive systems to our OEM customers in the United States, Asia and Europe. The drive systems were customized for vehicle configurations to be used in both on-road and off-road applications. We anticipate that the delivery of these drive systems will result in additional orders from our OEM partners in the future. In the short term, the Company is focused on continuing to sell battery systems to decrease the consigned inventory of batteries it holds and generate immediate cash.

As of September 30, 2012, we had a working capital deficiency of $9,667,419; an accumulated deficit of $9,452,061 and reported a net loss for the nine months ended September 30, 2012 of $6,690,270. Our plans for correcting these deficiencies include the future sales of our products and the raising of capital, which we expect will help provide us with the liquidity necessary to meet operating expenses. Over the longer-term, we plan to achieve profitability through the sale of our drive systems, electric vehicles, battery systems and other products.

As of November 15, 2012, we had a backlog of $1,005,538. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. As of the date of this report, 28% of our backlog consists of a battery system, 26% consists of a drive system and remainder consists of vehicles and accessories. Our backlog does not reflect a $975,000 Department of Energy grant awarded to us, which we are awaiting contract documents. Due to the delay in testing and approval of our drive system, we have removed $15.9 million in drive systems from our backlog until such time we have assurances on production timelines from our customer, WGE, an affiliate of our Chairman of the Board. We believe that the majority of our current backlog will be shipped within the next 12 months. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog.

We anticipate that a majority of future sales of our electric vehicles will be made directly to domestic and international OEMs. We are optimistic that the demonstration of our extended range Nautilus XR E20 and MX30 to existing and potential customers will result in additional sales of our electric vehicles.

The tables presented below, which compare our results of operations from one period to another, present the results for each period, the change in those results from one period to another in both dollars and percentage change, and the results for each period as a percentage of net revenues. The columns present the following: · The first two data columns in each table show the absolute results for each period presented.

· The columns entitled "Dollar Variance" and "Percentage Variance" shows the change in results, both in dollars and percentages. These two columns show favorable changes as a positive and unfavorable changes as negative. For example, when our net revenues increase from one period to the next, that change is shown as a positive number in both columns. Conversely, when expenses increase from one period to the next, that change is shown as a negative in both columns.

· The last two columns in each table show the results for each period as a percentage of net revenues.

30 Third Quarter of 2012 Compared to the Third Quarter of 2011 Results as a Percentage of Net Revenues for the Three Months Ended Dollar Percentage Three Months Ended September 30, Variance Variance September 30, 2012 2011 Favorable Favorable (Unaudited) (Unaudited) (Unfavorable) (Unfavorable) 2012 2011 Net revenues $ 712,324 $ 834,943 $ (122,619 ) $ (15)% 100% 100% Cost of revenues 939,026 729,430 (209,596 ) (29)% 132% 87% Gross profit (226,702 ) 105,513 (332,215 ) (315)% (32)% 13% General and administrative expenses 615,460 709,827 94,367 13% 86% 85% Research and development 46,890 130,820 83,930 64% 7% 16% Depreciation and amortization 8,157 146,490 138,333 94% 1% 18% Change in derivative liability (1,458,609 ) 263,199 (1,721,808 ) (654)% (205)% 32% Impairment loss (1,345,111 ) (1,511,611 ) (100)% (189)% Interest expense (490,229 ) (393,958 ) (96,271 ) (24)% (69)% 47% Net loss $ (4,191,157 ) $ (1,012,383 ) $ (3,178,774 ) $ 873% (588)% (121)% Net Revenues. The decrease in our revenues during the third quarter of 2012 is due to reduced sales of electric yard tractors when compared to same period in 2011. The percentage of our revenues generated from the shipment of battery systems was 74% during the third quarter of 2012 as compared to a 8% during the third quarter of 2011. Our current backlog consists of drive systems and battery systems for energy storage markets. We expect our battery sales to continue to increase at a modest growth levels during the next six months. Due to grant funding from Department of Energy for on-road electric trucks, we anticipate an increase in vehicle sales in the short term.

Gross Profit. During the third quarter of 2012, we generated a negative gross profit as a percentage of net revenues of 32% as compared to a positive gross profit margin of 13% for the third quarter of 2011. This decrease in gross profit margin is due to the sale of $350,000 in batteries at wholesale, at a loss, during the third quarter of 2012.

General and Administrative Expenses. The 13% decrease in general and administrative expenses is comprised of an increase in unapplied overhead of $79,435, a decrease in marketing expenses of $89,030, a decrease in legal, consulting and professional fees of $123,869, a decrease in salaries and wages of $16,209, and a net increase of $55,306 of other general and administrative expenses.

Research and Development Expenses. The 64% decrease in research and development expenses is comprised largely of decreases in salaries and wages of personnel employed in the research and development group. We expect our research and development expenses to remain constant for the remainder of the year as we strive to manage expenses to achieve profitability.

Depreciation and Amortization. The decrease in depreciation and amortization is due largely to the amortization of the battery distribution agreement that occurred during the second quarter of 2011. Since the battery distribution agreement was impaired during the year ended December 31, 2011, no comparable amortization expense was incurred in 2012.

31 Impairment Loss. The increase in impairment loss of $1,345,111 is attributable to impairment charges of $606,111 attributable to inventory and $739,000 attributable to the equipment held for lease under an agreement with T&K Logistics. During the quarterly period ended September 30, 2012, the Company determined these assets to be impaired and recorded the applicable impairment losses.

Change in Fair Value of Derivative Liability. At September 30, 2012, the fair value of our derivatives increased by $1,074,272 resulting in a loss on the change in fair value of the derivative liability. During the quarter ended September 30, 2011, the fair value of our derivatives increased to $2,716,835.

These amounts were determined by management with the use of a probability weighted average Black-Scholes simulation model.

Interest Expense. The $96,271 increase in interest expense is attributable to interest on convertible notes and the amortization of the related beneficial conversion feature of the convertible notes.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011 Results as a Percentage of Net Revenues for the Nine Months Ended Dollar Percentage Nine Months Ended September 30, Variance Variance September 30, 2012 2011 Favorable Favorable (Unaudited) (Unaudited) (Unfavorable) (Unfavorable) 2012 2011 Net revenues $ 1,860,522 $ 1,450,549 $ 409,973 28% 100% 100% Cost of revenues 1,795,769 1,138,370 657,399 58% 97% 78% Gross profit 64,753 312,179 (247,726 ) (79)% 3% 22% General and administrative expenses 1,966,206 2,886,272 (920,066 ) (32)% 106% 199% Research and development 191,159 424,544 (233,385 ) (55)% 10% 29% Depreciation and amortization 24,471 460,534 (436,063 ) (95)% 1% 32% Change in derivative liability (1,074,272 ) (164,941 ) (1,239,213 ) (751)% (58)% 11% Impairment loss (1,345,111 ) - (1,345,111 ) (100)% (72)% 0% Cost to induce exercise of warrants (671,809 ) - (671,809 ) (100)% (36)% 0% Interest expense (1,481,996 ) (1,390,265 ) (91,731 ) (7)% (80)% 96% Net loss $ (6,690,270 ) $ (4,684,495 ) $ (2,005,775 ) (442)% (360)% (323)% Net Revenues. During the first nine months of 2012, approximately 34% of our revenues were generated as a result of the upgrade of six electric trucks previously delivered to the City of Los Angeles from lead acid batteries to lithium ion batteries while sales of battery systems accounted for approximately 28% of our revenues. During the nine months ended September 30, 2011, 55% of our revenues were generated from the shipment of drive systems for integration into medium sized buses and a heavy-duty tractor, 29% of our sales were comprised of sales of our electric vehicles and related battery charging equipment, 13% of our sales were from batteries and battery systems, and 3% of our revenues were from consulting services.

Gross Profit. During the first nine months of 2012, our low gross profit margin of 3% was mainly attributable to sale of $350,000 of batteries to a wholesale customer, at a loss. During the first nine months of 2011, our gross profit margin of 22% was attributable to the higher margins on the sales of drive systems attributed to improved manufacturing utilization and the lower material costs.

32 General and Administrative Expenses. The decrease in general and administrative expenses is comprised of an decrease in unapplied overhead of $180,449, a decrease in marketing expenses of $434,531 an decrease in legal, consulting and professional fees of $375,589, an increase in salaries and wages of $84,132, and a net decrease of $26,221 of other general and administrative expenses.

Research and Development Expenses. The decrease of 55% in research and development expenses is comprised largely of decreases in salaries and wages of personnel employed in the research and development group.

Depreciation and Amortization. The decrease in depreciation and amortization is due largely to the amortization of the battery distribution agreement that occurred during the quarter ended September 30, 2011. Since the battery distribution agreement was impaired during the year ended December 31, 2011, there is no comparable amortization expense in 2012.

Change in Fair Value of Derivative Liability. At September 30, 2012, the fair value of our derivatives increased by $1,074,272 resulting in a loss on the change in fair value of the derivative liability. During the quarter ended September 30, 2011, the fair value of our derivatives increased to $2,716,835.

These amounts were determined by management with the use of a probability weighted average Black-Scholes simulation model.

Impairment loss. The increase in impairment loss of $1,345,111 is attributable to impairment charges of $606,111 attributable to inventory and $739,000 attributable to the equipment for lease. During the quarterly period ended September 30, 2012, the Company determined these assets to be impaired and recorded the applicable impairment losses.

Cost to Induce Exercise of Warrants. Effective March 31, 2012, the Company's Chairman applied $500,000 of an unsecured loan as the exercise price to exercise a warrant to purchase 1,250,000 shares of our common stock held by Seven One Limited. In consideration of the Chairman's agreement to use the amount loaned to exercise the warrant held by Seven One Limited, we agreed to adjust the exercise price of certain of the warrants held by Seven One Limited from $0.64 per share to $0.40 per share. The total value of the adjustment of the exercise price of these warrants was $671,809.

Interest Expense. The $91,731 increase in interest expense is attributable to interest on convertible notes and the amortization of the related beneficial conversion feature of the convertible notes. During the first nine months of 2012, amortization of the beneficial conversion feature on the convertible notes payable was $1,234,140 while during the nine months ended September 30, 2011, amortization of the beneficial conversion feature on the convertible notes payable was $822,739.

Liquidity and Capital Resources The accompanying condensed financial statements have been prepared under the assumption that we will continue as a going concern. This assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the nine months ended September 30, 2012, we recorded a net loss of $6,690,270. As of September 30, 2012, we had a working capital deficit of $9,667,419 and a shareholders' deficiency of $9,452,061. In addition, we are delinquent in payroll taxes of $253,738 and interest payments on our notes of $242,989. Further, $1,330,000 of our convertible notes came due on September 1, 2012 and unless we can renegotiate these debt obligations, we are unable to pay the obligations and these notes are now in default. Pursuant to the terms of the notes, the non-payment of interest by us constitutes an event of default and, as a result, the holders of the notes may accelerate payment of all amounts outstanding under the notes by giving written notice to us and thereby requiring that we immediately pay up to an aggregate of $3,361,500 in principal plus all accrued and unpaid interest. If the holders of the notes were to declare the notes due and payable, we presently do not have the ability to pay these notes.

33 These factors, among others, raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm, in its report on our 2011 financial statements, has raised substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. We have been, and currently are, working towards identifying and obtaining new sources of financing. No assurances can be given that we will be successful in obtaining additional financing in the future. Any future financing that we may obtain may cause significant dilution to existing stockholders. Any debt financing or other financing of securities senior to common stock that we are able to obtain will likely include financial and other covenants that will restrict the our flexibility. At a minimum, we expect these covenants to include restrictions on its ability to pay dividends on its common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. In addition, our senior secured convertible debentures issued between July and December 2010 contain covenants that include restrictions on our ability to pay dividends on our common stock.

If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations and product and service development efforts or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of its technologies or potential products or other assets. Accordingly, the inability to obtain such financing could result in a significant loss of ownership and/or control of our proprietary technology and other important assets and could also adversely affect its ability to fund our continued operations and its product and service development efforts.

During the nine months ended September 30, 2012, we funded our operations from the proceeds from the exercise of a warrant by our Chairman, issuance of convertible debt and proceeds from sales of consigned batteries. In order to fund our operations, we also deferred payment of our accounts payable, payroll taxes, and interest on secured and unsecured convertible notes payable.

As of September 30, 2012, we had a working capital deficiency of $9,667,419 as compared to working capital deficiency of $4,241,177 at December 31, 2011. At September 30, 2012 and December 31, 2011 we had an accumulated deficiency of $29,085,376 and $22,395,105, respectively, and cash and cash equivalents of $5,581 and $32,663, respectively. The decrease in our cash position is a result of a net decrease of $122,066 in cash flow from operations and $245,016 of cash used to pay down the Bridge Bank loan and bank overdraft, offset by $340,000 of proceeds from the issuance of our secured subordinated convertible notes in May of 2012 and conversion of $500,000 in warrants by our Chairman.

During 2009, under the terms of the agreement with the City of Los Angeles, we requested and were issued an advance payment in the amount of $1,159,601 from the City of Los Angeles. Our agreement with the City of Los Angeles terminated prior to delivery of all of the vehicles we were required to deliver under the agreement. To the extent we cannot successfully negotiate an agreement with the City of Los Angeles that gives us additional time to deliver the remaining 10 vehicles and associated equipment to the City of Los Angeles under the same terms as the original agreement, we may have to return up to the entire $1,159,601 to the City of Los Angeles. During June 2012, we billed $630,000 to the City of Los Angeles to upgrade six of the electric trucks previously delivered to from lead acid batteries to lithium ion batteries. This billed amount was applied as a reduction of the advance payment leaving an unpaid balance of $529,601 on this advance. The Company anticipates to sell additional products and services during the next 12 months to reduce the unpaid balance, however the Company presently does not have the funds to pay this advance if payment is requested by the City of Los Angeles.

34 Our available capital resources at September 30, 2012 consisted primarily of approximately $5,581 in cash and cash equivalents. We expect that our future available capital resources will consist primarily of cash on hand, cash generated from our business, if any, and future debt and/or equity financings, if any.

Cash used by operating activities for the first nine months of 2012 was $122,066 as compared to $4,611,384 of cash used in operating activities for first nine months of 2011. During the first nine months of 2012, cash used by operating activities included a net loss of $6,690,270, depreciation and amortization of $24,471, amortization of note discount of $1,234,140, cost to induce conversion of warrants of $671,809, fair value of common shares transferred by a shareholder to settle debt of $33,100, impairment loss of $1,345,111, change in fair value of derivative liability of $1,074,272, and net cash flows from operating assets and liabilities of $2,185,301. Material changes in asset and liabilities at September 30, 2012 as compared to December 31, 2011 that affected these results include: · a decrease in accounts receivable of $675,901; · a decrease in inventory of $112,982; · an increase in prepaid expenses of $437; · an increase in payroll taxes payable of $253,738; · an increase in accounts payable of $1,805,407; and · a decrease in customer advances of $662,290.

Cash used in investing activities totaled none for the first nine months of 2012 as compared to $30,410 of cash used in investing activities for the first nine months of 2011.

Cash provided by financing activities totaled $94,984 for the first nine months of 2012 as compared to $448,606 of cash provided by financing activities for the first nine months of 2011.

Between February 2010 and April 2010, we raised an aggregate of $1,500,000 through the issuance of convertible notes to 11 accredited investors. The convertible notes are convertible into an aggregate of 1,999,993 shares of our common stock. In connection with this offering, we also issued three-year warrants to purchase an aggregate of 1,999,993 shares of common stock at an exercise price of $0.50 per share.

Between July 2010 and December 2010, we raised an aggregate of $850,000 through the issuance of senior secured convertible debentures to 26 accredited investors. The senior secured convertible debentures are secured by a security interest in all of our personal property (subject to customary exceptions) and were initially convertible into shares of our common stock at an initial conversion price of $0.75 per share (subject to adjustment). In connection with this offering, we also issued five-year warrants to purchase an aggregate of 850,000 shares of our common stock at an initial exercise price of $0.75 per share (subject to adjustment). Under the adjustment provisions of the senior secured convertible debentures and warrants, the conversion price of the senior secured convertible debentures and the exercise price of the warrants were reduced to $0.56 in connection with us issuing securities to raise capital during 2010 and 2011. The terms of the senior secured convertible debentures include a restriction on our ability to pay dividends on our common stock.

In December 2010, we raised $5,000,000 through the issuance of 7,812,500 shares of our common stock and a five-year warrant to purchase up to 7,812,500 shares of our common stock at an exercise price of $0.64 per share.

During the year ended December 31, 2011, we raised $148,666 in connection with the issuance of 283,332 shares of our common stock upon the exercise of warrants.

35 Effective March 31, 2012, we converted $500,000 of an unsecured loan from our Chairman into the exercise price for the exercise of 1,250,000 warrants held by Seven One Limited at an exercise price of $0.40 per share.

Effective March 31, 2012, we entered into Amendment and Exchange Agreements with holders of $891,500 of our $916,500 of 10% unsecured notes payable that matured on March 31, 2012. The terms of the Amendment and Exchange Agreements provide that the maturity date of these notes, or the Amended Notes, be extended until March 31, 2013, that the Amended Notes be secured under the terms of a security agreement and that the Amended Notes be convertible into shares of our common stock at an exercise price of $0.40 per share, subject to adjustment for a full ratchet anti-dilution. In connection with the issuance of the Amended Notes, we also issued three-year warrants to purchase up to 975,000 shares of common stock at an exercise price of $0.40. per share, subject to full-ratchet anti-dilution protection.

On May 18, 2012, we raised an aggregate of $340,000 through the issuance of 10% secured subordinated convertible notes and warrants to 3 accredited investors.

The secured subordinated convertible notes are secured by a security interest in all of our personal property (subject to customary exceptions and subordinated to certain senior indebtedness) and are convertible into shares of our common stock at an initial conversion price of $0.40 per share (subject to full ratchet anti dilution adjustment). In connection with this offering, we also issued five-year warrants to purchase an aggregate of 340,000 shares of our common stock at an initial exercise price of $0.40 per share (subject to full ratchet anti dilution adjustment).

Effective February 18, 2009, we entered into a Business Financing Agreement with Bridge Bank, National Association, or Bridge Bank Agreement. The Bridge Bank Agreement, as amended to date, provides us with an accounts receivable based credit facility in the aggregate amount of up to $2,000,000.The credit facility is formula-based and generally provides that the outstanding borrowings under the credit facility may not exceed an aggregate of 80% of eligible accounts receivable. We must immediately pay any advance made under the credit facility within 90 days of the earlier of (i) the invoice date of the receivable that substantiated the advance and (ii) the date on which the advance was made.

Interest on the credit facility is payable monthly. As of September 30, 2012, there was no outstanding balance under the credit agreement and 80% of eligible accounts receivable was available. The interest rate is variable and is adjusted monthly based on the per annum prime rate as published by Bridge Bank plus two percentage points, subject to a minimum rate of 6.0% per annum. In the event of a default and continuation of a default, Bridge Bank may accelerate the payment of the principal balance requiring us to pay the entire indebtedness outstanding on that date. Upon the occurrence and during the continuation of an event of default, the interest rate applicable to the outstanding balance borrowed under the credit facility will be increased by five percentage points above the per annum interest rate that would otherwise be applicable. The credit facility is secured by a continuing first priority security interest in all of our personal property (subject to customary exceptions). The credit facility may be terminated at any time by either party.

During 2012, we expect to incur approximately $200,000 in research and development expenses. We believe that we presently have sufficient plant and production equipment to meet our current operational plan and we do not intend to dispose of any plant and equipment We presently have 18 employees and expect to hire additional personnel to meet production demands of increased product sales. Our present staff is sufficient to meet our current operational plan for the remainder of 2012.

We believe that we will need additional liquidity and capital resources through debt and/or equity financing to complete our entire existing and anticipated future product backlog. As discussed in this report and in notes to our financial statements included in this report, we have suffered recurring losses from operations and at September 30, 2012, we had an accumulated deficit of $9,452,061, and a working capital deficiency of $9,667,419.

36 During the three months ended March 31, 2012, we negotiated Amendment and Exchange Agreements with holders of $891,500 of our 10% unsecured convertible notes that matured on March 31, 2012. In connection with these Amendment and Exchange Agreements, we issued new warrants that enable the warrant holders to purchase up to 975,000 shares of our common stock at an exercise price per share of $0.40. These warrants will have a contractual life of three years and expire on March 31, 2015.

As of September 30, 2012, we are delinquent on $253,738 of payroll taxes which may cause the Internal Revenue Service and California State employment tax agencies to assess penalties or institute collection actions against us. We are also in default on secured and unsecured convertible notes which have an aggregate outstanding principal amount of $3,361,500 as a result of our inability to pay $242,988 of accrued interest on these notes. As a result, the holders of the convertible notes have the right to accelerate up to $3,529,350 of the outstanding principal and accrued and unpaid interest on these notes. We are also in default on a unsecured convertible note in the principal amount of $25,000 that matured on March 31, 2012. In addition, we have an aggregate of $1,330,000 of 10% unsecured convertible notes payable that matured on September 1, 2012 and are in default. While we are attempting to renegotiate these debt obligations we cannot assure you that we will be successful at renegotiating some or all of these obligations. We are presently unable to pay our outstanding obligations due to our limited cash resources and cannot assure you that will have sufficient cash resources to pay our past due obligations.

Backlog As of November 15, 2012, we had a backlog of $1,005,538. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. As of the date of this report 28% of our backlog consists of a battery system, 26% consists of a drive system and the remainder consists of vehicles and accessories. Our backlog does not reflect a $975,000 Department of Energy grant awarded to us, which we are awaiting contract documents. Due to the delay in testing and approval of our drive system, we have removed $15.9 million in drive systems from our backlog, until such time we have assurances on production timelines from our customer, WGE, an affiliate of our Chairman of the Board. We believe that the majority of our current backlog will be shipped within the next 12 months. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog.

37 Effects of Inflation The impact of inflation and changing prices has not been significant on the financial condition or results of operations of our company.

Impacts of New Accounting Pronouncements In May 2011, the FASB issued Accounting Standards Update, or ASU, No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". ASU No. 2011-4 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. We adopted ASU No.

2011-04 effective January 1, 2012. The updated guidance affects our fair value disclosures, but will not affect our results of operations, financial condition or liquidity.

In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income". The ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. We adopted ASU 2011-05 effective January 1, 2012 and it did not affect our results of operations, financial condition or liquidity.

In September 2011, the FASB issued ASU 2011-08, "Testing Goodwill for Impairment", an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted ASU 2011-08 effective January 1, 2012. The adoption of this new accounting guidance will not have a significant effect on our goodwill impairment assessments in the future.

In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." This ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for annual and interim reporting periods beginning on or after January 1, 2013. We do not expect adoption of this standard to have a material impact on results of operations, financial condition, or liquidity.

We do not believe that the adoption of the above recent pronouncements will have a material effect on our results of operations, financial position or cash flow.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on our present or future financial statements.

38

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