As filed with the Securities and Exchange Commission on March 25, 2010

Registration No. 333-164915

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Amendment No. 1

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Fallbrook Technologies Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware	3714	20-1027116
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

9444 Waples Street, Suite 410

San Diego, California 92121

(858) 623-9557

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

William G. Klehm III

Chairman and Chief Executive Officer

Fallbrook Technologies Inc.

9444 Waples Street, Suite 410

San Diego, California 92121

(858) 623-9557

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

with copies to:


Craig S. Andrews, Esq.		Kevin Morris, Esq.
Matthew W. Leivo, Esq.		Daniel P. Raglan, Esq.
C. Christopher Shoff, Esq.		Torys LLP
DLA Piper LLP (US)		237 Park Avenue
4365 Executive Drive, Suite 1100		New York, New York 10017
San Diego, California 92121		(212) 880-6000
(858) 677-1400

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

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


Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ	Smaller reporting company o

(Do not check if a smaller reporting company)

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), shall determine.

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

Subject to Completion, dated March 25, 2010

Shares

Fallbrook Technologies Inc.

Common Stock

This is Fallbrook Technologies Inc.’s initial public offering. We are selling shares of our common stock.

We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the under the symbol “ ”.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

Underwriting

Initial Public

Discounts and

Proceeds to Us,

Offering Price

Commissions

Before Expenses

Per Share

Total

We have granted the underwriters a 30-day option to purchase up to a maximum of additional shares of common stock from us at the public offering price, less underwriting discounts and commissions, to cover over-allotment of shares, if any.

Delivery of the shares of common stock will be made on or about , 2010.


CIBC	Mackie Research Capital

Prospectus dated , 2010

[Artwork]

Table of Contents


	Page

Prospectus Summary		1
Risk Factors		9
Special Note Regarding Forward-Looking Statements		24
Use of Proceeds		25
Dividend Policy		26
Conversion of Preferred Stock into Common Stock		27
Indebtedness		27
Capitalization		28
Dilution		30
Selected Consolidated Financial Data		32
Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Business		57
Management		84
Compensation Discussion and Analysis		91
Certain Relationships and Related Party Transactions		102
Principal Stockholders		106
Description of Capital Stock		109
Shares Eligible for Future Sale		113
Material U.S. Federal Tax Considerations for Non-U.S. Holders		115
Underwriting		118
Legal Matters		119
Experts		120
Change in Accountants		120
Where You Can Find More Information		121
Index to Consolidated Financial Statements		F-1
EX-10.11.1
EX-10.13.1
EX-10.19
EX-23.2
EX-23.3

You should rely only on the information contained in this prospectus and any free writing prospectus we provide to you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell securities.

Until , 2010 (the 25th day after the date of this prospectus), all dealers, whether or not participating in this offering, that effect transactions in these securities may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter in this offering and when selling previously unsold allotments or subscriptions.

Prospectus Summary

This summary highlights information contained elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully before making an investment decision, including the information under “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included in this prospectus. Unless the context otherwise requires, the terms “we,” “us,” “our,” “Company,” “Fallbrook” and “Fallbrook Technologies” refer to Fallbrook Technologies Inc. and its wholly-owned subsidiary, Fallbrook Technologies International Co.

Overview

NuVinci Technology

We have developed patented transmission technology, sold under the “NuVinci” brand. It is designed to improve the overall efficiency and performance of mechanical systems that require variation between the speed of a primary drive and the speed required to operate the mechanical system.

Our NuVinci technology is a new type of continuously variable transmission (CVT) that can be used in a wide variety of end market applications. A CVT is a transmission that effectively has an infinite number of gear ratios within its range. Our technology is currently available in the global market for bicycle transmissions, where it has been used to replace the rear wheel gear assembly. We are also currently developing applications for a number of other target end markets that we believe have near term commercial potential. These include alternators, air conditioning compressors and superchargers for the automotive accessory drive market, and primary transmissions for the electric vehicle, small wind turbine and lawn care equipment markets.

Our Strengths

In the end market applications we are focused on, we believe our NuVinci technology provides many advantages over existing transmission technology and addresses the limitations of other currently available CVTs by offering the following:


	•	Improved efficiency and performance;

	•	Adaptable platform technology; and

	•	Simple, durable and cost-effective design.

To date, we have invested significant resources developing applications for a selected set of end market applications that we believe offer the most attractive competitive advantages and potential for economic returns.

Benefits of NuVinci Technology in Our Target Markets

We believe our NuVinci technology provides the following benefits to specific applications in our target end markets:


End Market	Application	Key Benefits

Automotive Accessory Drives	Alternators, air conditioning compressors and superchargers	• Improved accessory performance • Improved fuel economy
Electric Vehicles	Primary transmissions	• Increased operating range • Improved acceleration and top speed • Improved battery life • Reduced manufacturing cost
Bicycles	Primary transmissions (rear wheel hubs)	• Improved ride experience • Unlimited available speeds within its range • Smooth, seamless shifting
Small Wind Turbines (<100kW)	Primary transmissions	• Increased power production • Improved reliability • Lower cost of energy
Lawn Care Equipment	Primary transmissions	• Improved efficiency • Noise reduction • Improved performance

Markets

The applications for our NuVinci technology in each end market are at different stages of development and have different economic prospects. Our technology is already being used in the bicycle market and we anticipate launching products in the small wind turbine market in 2010 and each of the automotive accessory drives, electric vehicles and lawn care equipment markets in 2011.

We believe the addressable market opportunity in each end market to be the product of the number of new units sold in each end market in a given year and the expected selling price of our technology application in that end market for that same year.


End Market Application	Addressable Market Opportunity

Automotive Accessory Drives⁽¹⁾	$	2.4 billion
Electric Vehicle⁽²⁾	$	1.2 billion
Bicycle	$	1.1 billion
Small Wind Turbine (<100kW)⁽²⁾	$	1.0 billion
Lawn Care Equipment	$	65 million


(1)		This includes a one time revenue opportunity of $1.0 billion, which represents potential sales into the existing installed base of vehicles (or pre-owned vehicle market).


(2)		The addressable market opportunity provided is based on projected market size for 2015.

Investment in Technology and Patents

As of December 31, 2009, we had raised approximately $55 million in financing to develop and commercialize our technology. In December 2008, we closed our largest financing round of $25 million from a consortium of private investors and two leading cleantech venture capital firms; NGEN Partners and Dutch investment firm Robeco, a wholly-owned subsidiary of Rabobank Group. This investment followed three previous private investment rounds.

We have developed a patent portfolio that, as of December 31, 2009, consisted of 86 U.S. patents, 61 U.S. pending patent applications, 70 foreign issued patents (including validated countries) and 147 pending foreign patent applications, the oldest of which will run until 2018. Our U.S. patent portfolio was ranked as the #1 patent portfolio in the automotive and transportation industry by The Patent Scorecard^tm as reported in the Wall Street Journal on January 13, 2009, ahead of such companies as Denso Corporation, Toyota Motor Corporation, Honda Motor Company Ltd, General Motors Corporation and Ford Motor Company.

Our NuVinci technology has also won several key industry awards including:


	•	R&D Magazine’s 2007 R&D 100 Award as one of the 100 most technically significant new products of 2007;

	•	Popular Science’s “Best of What’s New, Grand Award 2007”;

	•	The Dutch bicycle industry’s 2007 FietsVak “Innovation of the Year” award honoring the year’s best new bicycle product;

	•	2008 iF Design EUROBIKE Gold Award, one of ten Gold Awards awarded by iF International Forum Design, honoring the best in bicycle design; and

	•	The Guardian/Cleantech Group’s 2009 Global Cleantech 100 Award.

Our Growth Strategy

Our goal is to use our transmission and engineering expertise, strategic commercial relationships and experienced management team to identify and introduce a number of NuVinci applications into specific end markets. We intend to pursue the following strategies to attain this goal:


	•	Expand current markets through continued development and marketing;

	•	Pursue new markets where NuVinci technology has a clear competitive advantage;

	•	Leverage proven commercialization capabilities from the bicycle market into other markets;

	•	Establish strategic relationships with industry leaders to adapt and commercialize our products;

	•	Pursue a flexible approach to manufacturing through the use of contract manufacturers or licensees; and

	•	Continue to invest in our NuVinci technology in order to develop additional applications and proprietary technologies that support a competitive advantage.

Our Management

Our senior management team is comprised of industry veterans. Our chief executive officer has over 20 years of automotive experience with numerous leadership positions in the automotive business. Our chief operating officer has over 30 years of automotive experience in operations, engineering and sales both domestically and internationally. Our chief technology officer previously headed the drivetrain group at the Southwest Research Institute in San Antonio, Texas, and has over 21 years of automotive and engineering experience. Our president of the bicycle division has over 20 years of successful sales, product development and business development experience in the automotive industry.

Risks Related to Our Business

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties summarized below, the risks described under “Risk Factors,” the other information contained in this prospectus and our consolidated financial statements and the related notes before you decide whether to purchase our common stock.


	•	Our patents and other protective measures may not adequately protect our proprietary intellectual property;

	•	It is difficult to evaluate our future prospects, as several of our products are still under development and we have a limited operating history with limited revenue generation to date;

	•	If the applications that we develop for our technology fail to gain market acceptance and adequate market share, our business will be adversely affected;

	•	Since our inception, we have never been profitable and we may be unable to achieve or sustain profitability;

	•	We use single suppliers for several components specifically qualified for use in our CVT products. If any of these suppliers become unable or unwilling to provide their respective components, we would be forced to qualify, over a period of two to three months, a different component from another manufacturer for use in our products, which would adversely impact our or our licensee’s ability to deliver products to customers;

	•	If we do not continue to form and maintain economic arrangements with original equipment manufacturers, or OEMs, to incorporate our technology into their products such that we derive revenue from licensing and royalties on product sales, our profitability will be impaired;

	•	Our ability to sell our products to our direct, OEM and tier one supplier customers depends in part on the quality of our engineering and customization capabilities. If we fail to offer high quality engineering support and services, our sales and operating results will be materially adversely affected; and

	•	The state of the economy affects each of our target end markets and a material downturn in the economy will have a materially adverse effect on these markets.

These risks and other risks described under “Risk Factors” could materially adversely affect our business, financial condition and results of operations.

Company Information

We were originally formed on December 11, 2000 as Motion Systems Technologies, LLC, which was subsequently converted into Fallbrook Technologies Inc., a Delaware corporation, on April 13, 2004.

Immediately prior to the closing of this offering, all of our outstanding shares of preferred stock will be converted into shares of our common stock. See “Conversion of Preferred Stock into Common Stock.” Following this offering, we will have one class of authorized common stock outstanding and no preferred stock outstanding.

Our corporate headquarters are located at 9444 Waples Street, Suite 410, San Diego, California 92121. The telephone number of our corporate headquarters is (858) 623-9557. Our website is www.fallbrooktech.com. The information on, or that may be accessed through, our website is not a part of this prospectus.

Trademarks, Trade Names and Service Marks

“Fallbrook Technologies,” “NuVinci,” “CruiseController” and related trademarks, trade names and service marks of Fallbrook Technologies appearing in this prospectus are the property of Fallbrook Technologies. Solely for convenience, our trademarks referred to in this prospectus may appear without the^® or ^tm symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights to these trademarks.

Industry and Market Data

Market data, industry statistics, forecasts and other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms and other published independent sources. Some data are also based on our good faith estimates, which are derived from our review of internal surveys and data or independent sources listed above. Although we believe these sources are credible, we have not independently verified the information obtained from these sources.

The Offering


Common stock offered by us		shares

Common stock to be outstanding after this offering⁽¹⁾		shares

Over-allotment option		We have granted to the underwriters an option, exercisable upon notice to us, to purchase up to additional shares of common stock at the offering price to cover over-allotments, if any, for a period of 30 days from the date of this prospectus.

Use of proceeds		We intend to use the net proceeds from this offering for general corporate purposes, including the repayment of indebtedness. See “Use of Proceeds” on page 25 of this prospectus for more information.

Risk factors		You should read the information set forth under “Risk Factors” beginning on page 9 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

Dividend policy		We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

Stock exchange symbol		‘‘ ”.


(1)		The number of shares to be outstanding after this offering does not reflect shares of common stock reserved or issuable pursuant to our 2010 Stock Plan, shares of common stock issuable upon exercise of outstanding options under our 2004 Stock Plan, an outstanding warrant held by the Jacobs Family Trust to purchase 3,100,753 shares of our common stock and up to 750,000 shares of common stock issuable pursuant to contingent warrants that may be granted upon achievement of certain performance milestones. After the effective date of the 2010 Stock Plan, we will grant no further stock options or other awards under the 2004 Stock Plan.

Unless otherwise indicated, this prospectus reflects and assumes the following:


	•	the conversion, immediately prior to the closing of this offering, of all of our outstanding shares of preferred stock into 101,106,785 shares of our common stock;


	•	the issuance of shares issuable upon the exercise of warrants to be exercised prior to the closing of the offering;

	•	no exercise by the underwriters of their option to purchase up to additional shares from us; and

	•	an initial public offering price of $ per share, the midpoint of the estimated public offering price range set forth on the cover page of the prospectus.

Summary Consolidated Financial Data

We derived the summary consolidated statement of operations data and consolidated statement of cash flows data for the years ended December 31, 2007 and 2008, as restated (see Note 16 to our audited consolidated financial statements), and December 31, 2009, and the summary consolidated balance sheet data as of December 31, 2008, as restated (see Note 16 to our audited consolidated financial statements), and December 31, 2009, from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated balance sheet data as of December 31, 2007, as restated (see Note 16 to our audited consolidated financial statements), from our audited consolidated financial statements, which are not included in this prospectus.

You should read the summary historical financial data below together with the consolidated financial statements and related notes appearing elsewhere in this prospectus, as well as “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the other financial information included elsewhere in this prospectus.

Consolidated Statement of Operations Data:


	Year Ended December 31,
	2007⁽¹⁾			2008⁽¹⁾			2009
	($ in thousands)

Revenues	$	714		$	2,283		$	1,044
Cost of revenues		1,892			2,048			7,260
Gross (loss) profit		(1,178	)		235			(6,216	)
Operating expenses		5,827			10,321			10,523
Operating loss		(7,005	)		(10,086	)		(16,739	)
Other income (expense)		447			(470	)		(487	)

Net loss	$	(6,558	)	$	(10,556	)	$	(17,226	)

Consolidated Balance Sheet Data:


	As of December 31,
	2007⁽¹⁾		2008⁽²⁾		2009
	($ in thousands)

Cash and cash equivalents	$	8,043	$	14,565	$	9,213
Total assets		10,855		25,314		13,526
Total liabilities		2,158		3,171		3,813
Total equity		8,697		22,143		9,713

Consolidated Statement of Cash Flows Data:


	Year Ended December 31,
	2007⁽¹⁾			2008⁽²⁾			2009
	($ in thousands)

Net cash (used in) provided by:
Operating activities	$	(5,860	)	$	(9,496	)	$	(12,118	)
Investing activities		8,073			(7,271	)		2,954
Financing activities		2,612			23,289			3,812

Net change in cash	$	4,825		$	6,522		$	(5,352	)


(1)		On January 3, 2007, we formed a wholly-owned subsidiary, Viryd Technologies Inc. (Viryd), a Delaware corporation. On December 18, 2008, we completed a spin-off of our ownership of Viryd through a pro rata distribution of shares to our stockholders. The 2007 and 2008 consolidated financial statements include the accounts of Fallbrook Technologies Inc. and Viryd through December 18, 2008. All intercompany transactions through December 18, 2008 have been eliminated.


(2)		On December 18, 2008, we sold an aggregate of 63,607,402 shares of our Series D convertible preferred stock at a purchase price of $0.3992 per share for a total of $25.4 million, of which $20.6 million was in cash and $4.8 million was from the conversion of principal and accrued interest on our then outstanding convertible debt.

Risk Factors

Investing in our common stock involves a high degree of risk. Before making an investment in our common stock, you should carefully consider the risks and uncertainties described below and the other information contained in this prospectus, including our consolidated financial statements and the related notes. These risks could materially adversely affect our business, financial condition and results of operations. As a result, the market price of our common stock could decline, and you may lose part or all of your investment.

Risks Related to Our Business

Our patents and other protective measures may not adequately protect our proprietary intellectual property.

We regard our intellectual property, particularly our proprietary rights in our NuVinci technology, as critical to our success. We have over 350 issued patents or pending applications worldwide for various applications and aspects of our technology or processes. In addition, we generally enter into confidentiality and invention assignment agreements with our employees and consultants as well as our development partners and licensees. Such patents and agreements and various other measures we take to protect our intellectual property from use by others may not be effective for various reasons, including the following:


	•	our pending patent applications may not be granted for various reasons, including the existence of previously available public information or other prior art, conflicting patents or defects in our applications;

	•	the patents we have been granted may be challenged or invalidated because of the pre-existence of prior art;

	•	the patents we have been granted may be circumvented depending upon the strength of the claims granted in each patent;

	•	parties to the confidentiality and invention agreements may have such agreements declared unenforceable or, even if the agreements are enforceable, may breach such agreements;

	•	the costs associated with enforcing patents, confidentiality and invention agreements or other intellectual property rights may limit our enforcement of our rights in them;

	•	even if we enforce our rights, injunctions, fines and other penalties may be insufficient to deter violations of our intellectual property rights; and

	•	other persons may independently develop proprietary information and techniques that are functionally equivalent or superior to our intellectual proprietary information and techniques but do not breach our patented or unpatented proprietary rights.

It is difficult to evaluate our future prospects, as several of our products are still under development and we have a limited operating history with limited revenue generation to date.

Efforts to expand our products beyond our existing bicycle market may never result in new products that achieve market acceptance, create additional revenue or become profitable. Several of our products targeted for use in the automotive industry are still under development, and it is difficult to determine the timing of our release of new products. The successful use of our technology in small wind turbines and lawn care equipment, and the associated licensing revenue, depends on the success of our licensees, Viryd Technologies Inc. and Hydro-Gear, respectively. With our limited operating history and the uncertainty of market dynamics for planned products, it is difficult to evaluate our future prospects.

If the applications that we develop for our technology fail to gain market acceptance and adequate market share, our business will be adversely affected.

The value proposition for the application of our technology to bicycles involves some factors such as ride feel/ride enjoyment, ease of shifting, ability for a rider to find his or her “own gear,” which factors are at least partially subjective. A well-funded competitor may be able to reduce the value of these advantages through

marketing and public relations campaigns or through price cuts and thereby impact our ability to command a premium price or grow our market share, which in turn would impact our ability to achieve our planned revenue and profit levels.

The value proposition for other applications of our technology involves providing increased system efficiency, fuel economy, or cost reductions for manufacturers. If we are unable in a timely fashion, either directly or through licensees, to implement our technology and manufacture products that provide sufficient, demonstrable incremental value, we will be unable to achieve our business objectives.

Since our inception, we have never been profitable and we may be unable to achieve or sustain profitability.

We experienced net losses of $6,558,000 for 2007, $10,556,000 for 2008 and $17,226,000 for 2009. We expect to incur a loss in 2010. We anticipate that we will continue to have negative cash flow in 2010 as we invest resources in developing and commercializing our products for our target end markets. We expect selling, general and administrative expenses to also increase as we commercialize additional NuVinci CVT products, increase our business development and marketing efforts worldwide, and continue to build out the corporate infrastructure needed to support a public company. These additional expenses will likely involve increases to salaries and related expenses, legal and consultant fees, accounting fees, rent and utilities, director fees, increased directors’ and officers’ insurance premiums, and fees for investor relations services. These increased expenditures will make it harder for us to achieve and maintain future profitability. We may incur losses in the future for a number of reasons, including the other risks outlined in this prospectus. Additionally, there may be unanticipated expenses, difficulties, complications, delays and other unknown events that may impact our ability to achieve or maintain profitability.

We use single suppliers for several components specifically qualified for use in our CVT products. If any of these suppliers become unable or unwilling to provide their respective components, we would be forced to qualify, over a period of two to three months, a different component from another manufacturer for use in our products, which would adversely impact our or our licensee’s ability to deliver products to customers.

We use single suppliers for several components in our CVT products. The component parts for our products are qualified for production through a rigorous validation process prior to approval for use. If we were required to utilize another supplier for some key components that are not readily available from other sources, we would need to spend some significant time qualifying the parts from the alternative supplier, which would require both time and substantial expense. Any resulting delays in our ability or the ability of our licensees to deliver products containing such component parts would affect our profitability, could lead to a loss of future business, and would harm our reputation.

If we do not continue to form and maintain economic arrangements with original equipment manufacturers, or OEMs, to incorporate our technology into their products such that we derive revenue from licensing and royalties on product sales, our profitability will be impaired.

Part of our business strategy is to license our NuVinci technology to OEMs for use in various application areas. For example, Viryd Technologies Inc. has licensed our technology for use in wind energy applications and we have an agreement with Hydro-Gear to incorporate our technology into lawn care equipment products. The development process for our customers to incorporate our technology not only requires considerable lead time between the start of design efforts and commercial availability but also typically involves our providing engineering services for a fee prior to the negotiation of licensing and royalty arrangements.

If our customers are unable to successfully implement our technology and develop successful commercial products, we will not obtain licensing and royalty revenue, which would adversely affect our revenue and profitability levels. If we are unable to enter into additional agreements for the use of our technology in various applications, we will not receive revenue from engineering services, from the licensing of our technology for additional application areas, or from royalties on the sales of resulting commercial products. Consequently both our growth and profitability could be adversely affected.

Our ability to sell our products to our direct, OEM and tier one supplier customers depends in part on the quality of our engineering and customization capabilities. If we fail to offer high quality engineering support and services, our sales and operating results will be materially adversely affected.

A high level of support is critical for the successful marketing and sale of our products. The sale or licensing of our technology involves significant co-development and customization work in certain applications. This development process may require substantial lead time between the commencement of design efforts for a transmission or the incorporation of a transmission into an end product and the commencement of volume shipments of products to customers. The cooperation and assistance of our OEMs is also required to determine the requirements for each specific application. Once our products are designed into an OEM or tier one supplier customer’s products or systems, the OEM or tier one supplier customer may depend on us to resolve issues relating to our products. If we do not effectively assist our OEM or tier one supplier customers in customizing, integrating and deploying our products in their own systems or products, or if we do not succeed in helping them quickly resolve post-deployment issues and provide effective support, our ability to sell our products would be adversely affected.

In addition, while we may have supply and co-development agreements with customers located in different regions of the world, we do not have a globally distributed engineering support and services organization. Currently, issue resolution related to our products, system deployment or integration is directed to our engineering and product development group in Cedar Park, Texas from which we deploy engineers and support personnel. As we grow our business with our existing customers and beyond the markets into which we currently sell our products, we may need to increase the size of our engineering support teams and deploy them closer to our customers. Any inability to deliver a consistent level of engineering support and overall service as we expand our operations would have a material adverse effect on our business and operating results. Moreover, our products may contain manufacturing or design defects or exhibit performance problems at any stage of their lifecycle. These problems could result in expensive and time-consuming design modifications and impose additional needs for engineering support and maintenance services as well as significant warranty charges.

The state of the economy affects each of our target end markets and a material downturn in the economy will have a materially adverse effect on these markets.

The state of the economy as a whole affects each of our target end markets and a material downturn or economic problems in any of these industries will have a materially adverse effect on our business. For example, the financial problems of the automobile industry might result in reduced spending on alternative or more efficient energy management systems for automobiles, delays in the introduction of new hybrid and electric vehicles and the elimination of other programs, which in each case would be candidates for the use of our technology. If this happens, our business would be materially adversely affected.

We rely on contract manufacturers and licensees to produce and sell products that generate product sales revenue and royalties for us. If revenue from contract manufacturers and licensees is less than anticipated, we will be unable to achieve our projected revenue and profit goals.

We rely on contract manufacturers and licensees to produce products incorporating our technology. If the demand for our manufacturers’ and licensees’ products declines, they may reduce production and the revenue we receive from our related license agreements with these manufacturers and licensees may also decline. This could cause us to fail to achieve our projected revenue and profit goals. Additionally, our success depends on entering into agreements with new manufacturers and licensees who are able to acquire or manufacture, incorporate, and successfully market products utilizing our technology in a reasonable timeframe. While we assist contract manufacturers and licensees in various ways in their ability to incorporate our technology, there are many factors affecting their success or failure over which we have no control.

Our principal competitors have, and any future competitors may have, greater financial and marketing resources than we do, and they may therefore develop products or other technologies similar or superior to ours or otherwise compete more successfully than we do.

The industries in which we compete and will be competing include major domestic and international companies, most of which have existing relationships in the markets into which we sell as well as name recognition, financial, technical, marketing, sales, manufacturing, growth capacity, distribution and other resources that are substantially greater than ours. Some of our competitors have existing and evolving relationships with our target customers. For example, Shimano has the major share of the market for internal hub bicycle transmissions and has a significant relationship with all of our current and projected future customers in that business.

Potential customers may also choose to do business with our more established competitors because of their perception that our competitors are more stable, are more likely to complete various projects, can grow their operations more quickly, have greater manufacturing capacity and are more likely to continue as a going concern. If we are unable to compete successfully against manufacturers of other products or technologies in any of our targeted applications, our business will suffer, and we could lose or be unable to gain market share.

Our failure to raise additional capital necessary to expand our operations and invest in our products and manufacturing facilities could reduce our ability to compete successfully.

Throughout the global credit and economic crisis, it has been expensive for us to raise private capital. We may require additional capital in the future and we may be unable to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests, and the per share value of our common stock could decline. With respect to debt financing, the credit markets have experienced extreme volatility during the last year, and worldwide credit markets have remained illiquid despite injections of capital by the federal government and foreign governments. Despite these capital injections and government actions, banks and other lenders (including equipment leasing companies) have significantly increased credit requirements and reduced the amounts available to borrowers. For our activities requiring substantial debt capital or other credit instruments, if current credit market conditions do not improve, we may not be able to access debt or leasing markets to finance our growth. Further, even if we are able to engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios. If we need additional capital and cannot raise or otherwise obtain it on acceptable terms, our ability to expand our business will be severely constrained.

Our working capital requirements involve estimates based on demand expectations and may decrease or increase beyond those currently anticipated, which could harm our operating results and financial condition.

It is difficult to accurately predict how much capital our anticipated product launches will require. Inaccurate forecasts as to our working capital requirements could delay or prevent effective rollouts of products and interfere with our ability to market and sell existing products. Additionally, in order to fulfill the future product delivery requirements of our customers, we plan for working capital needs in advance of customer orders. For example, under a manufacturing and supply agreement with Tri Star Group for the manufacture of our next generation bicycle CVT (N360) we are required to purchase certain inventory Tri Star has on hand based on our forecasts of future demand. As long as the agreement is effective, we may be required to use working capital to pay for this inventory. If demand for our products does not increase as quickly as we have estimated or drops off sharply, our inventory and expenses could rise, and our business and operating results could suffer. Alternatively, if we experience sales in excess of our estimates, our working capital needs may be higher than those currently anticipated. Our ability to meet this excess customer demand depends on our ability to arrange for additional financing for any ongoing working capital shortages, since it is likely that cash flow from sales will lag behind these investment requirements.

We may not be able to successfully recruit and retain skilled employees, particularly scientific, technical and management professionals.

Our success will depend, to a significant extent, on the continued services of our senior management team. The loss or unavailability of one or more members of senior management could adversely impact our ability to execute our business plan, maintain important business relationships and complete certain product-development initiatives. Employment agreements with members of our senior management team do not require them to remain with our company. Any one of them could terminate his or her relationship with us on 30 days notice, and we may be unable to enforce any applicable employment or non-compete agreements. Additionally, among our employees are a number of highly skilled traction drive experts. These individuals are not easily replaced and if one or more of these individuals is incapacitated or leaves us, our ability to address problems in existing products or develop new products will be affected beyond the impact of normal attrition.

Additionally, we believe that our future success will depend in large part on our ability to attract and retain highly skilled technical, managerial and marketing personnel. We plan to continue to expand our work force both domestically and internationally. The demand for such employees, particularly those with experience in traction drives, however, exceeds the number of personnel available, and the competition for attracting and retaining these employees will intensify as the use of and applications for continuously variable transmissions increases. As this competition increases, it could require us to increase compensation for current employees over time. We compete in the market for personnel against numerous companies, including larger, more established firms who have significantly greater financial resources than we do and may be in a better financial position to offer higher compensation packages to attract and retain human capital. We cannot be certain that we will be successful in attracting and retaining the skilled personnel necessary to operate our business effectively in the future. Because of the highly technical nature of our products, the loss of any significant number of our existing engineering and project management personnel could adversely affect our business and operating results.

Declines in product prices or increases in the cost of materials may adversely affect our financial results.

If our NuVinci technology becomes recognized by others as a competitive threat to their sales or anticipated sales, there may be increased price pressure as a competitive response, which could force us to reduce the price of our products. In periods of decreased demand, such as the current economic recession, the pressure for us to reduce prices may be even greater. At the same time, the cost to produce our products may increase, as rapid growth and consumption of raw materials by China may cause their prices to rise. Either a reduction in the price of our products or an increase in the costs of our products, or both, would adversely affect our gross margins and ability to achieve profitability, especially during periods of decreased demand for our products as we would expect to occur during a recession.

Our inability to effectively and quickly transfer, replicate and scale new product manufacturing processes from low volume prototype production to high volume, cost effective manufacturing, could adversely affect our results of operations.

Regardless of whether we use contract manufacturers or licensees, manufacturing processes and systems for new products are initially established and developed for relatively low volume production (primarily prototype quantities) and initial profit margins may be below target levels. As demand increases for a product, various processes and systems must be used to support higher volume manufacturing. If we, our contract manufacturers or our licensees are unable to effectively and quickly scale manufacturing processes and systems, customers’ product quality and quantity requirements may not be met and we may not be able to attain the anticipated cost benefits from higher volume and achieve target gross margins. Consequently, our business and results of operations could be adversely affected.

We currently depend on a sole source contract manufacturer to build bicycle transmissions incorporating our NuVinci technology. If that contract manufacturer or contract manufacturers engaged by us for other products are unable to fulfill orders of finished goods of appropriate quality in a timely fashion, we will be unable to meet our revenue and profit goals.

We currently rely on a single contract manufacturer for bicycle transmissions and we intend to rely on future contract manufacturers for certain of our other products. Our contract manufacturer relies, in turn, on obtaining raw materials, parts and components, manufacturing equipment and other supplies from reliable suppliers in a timely manner. It may be difficult for our contract manufacturer to substitute one supplier for another, increase the number of its suppliers or change one component for another in a timely manner or at all due to the interruption of supply or increased industry demand. This may adversely affect our contract manufacturer’s ability to supply our product. The prices of raw materials, parts and components and manufacturing equipment may increase due to changes in supply and demand. In addition, currency fluctuations may affect both our and our contract manufacturer’s purchasing power. We are dependent on the ability of our contract manufacturers to manufacture products at a reasonable schedule and at acceptable cost and quality levels. Failure to meet our expectations could result in the cost of our product exceeding the purchase price paid to us by our customers. Delays in meeting demand and quality requirements could damage our customer relationships and result in significant lost business opportunities for us.

Our restatement of our consolidated financial statements, and possible future restatements, may have a material adverse effect on us.

We have effected restatements of prior period financial results. Since inception through December 31, 2008, we valued our common stock, options, and warrants by a method that was not in accordance with generally accepted accounting principles in the United States, or GAAP. We had determined fair value based on Internal Revenue Code Section 409A, using a probability-weighted expected return valuation method. With the assistance of an unrelated valuation specialist, we have since reassessed the fair value of our common stock in accordance with GAAP by determining the total enterprise value and then allocating a portion of that total enterprise value to the common stock. This reassessment caused us to restate our consolidated financial statements as of December 31, 2008 and for each of the years ended December 31, 2007 and 2008.

The restatement also evidenced a material weakness in our internal control over financial reporting. A material weakness is a significant deficiency, or combination of significant deficiencies, that result in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected.

If we are required to restate our consolidated financial statements in the future, we may be the subject of negative publicity focusing on financial statement inaccuracies and resulting restatement. In addition, our financial results as restated may be more adverse than originally reported. In the past, certain publicly traded companies that have restated their consolidated financial statements have been subject to shareholder actions. The occurrence of any of the foregoing could harm our business and reputation and cause the price of our common stock to decline after this offering. Further, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate consolidated financial statements may have a material adverse effect on our stock price.

If we fail to maintain proper and effective internal controls, our ability to produce accurate consolidated financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and the trading price of our common stock.

As a public company, our management will be responsible for certifying the design of our internal control over financial reporting. Internal control over financial reporting is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable generally accepted accounting principles. Our efforts to institute effective internal control over financial reporting are likely to result in increased general and administrative expenses and the commitment of significant financial and personnel resources. The restatement of our consolidated financial statements relating to the valuation of our common stock prior to 2009 evidenced a material

weakness in our internal control over financial reporting, which we have remediated by reassessing the fair value of our common stock in accordance with GAAP. Additionally, prior to having quarterly reporting requirements, we recorded an impairment loss on certain manufacturing assets during the fourth quarter of 2009. Subsequent to initiating interim reporting requirements, we recorded an adjustment to recognize a portion of this impairment in the third quarter of 2009, which evidenced a material weakness in our internal control over interim financial reporting. Although we have since instituted internal controls to support interim reporting requirements that would remediate this material weakness, we cannot be sure that we will not have other weaknesses in our internal controls in the future. Any failure to adequately maintain effective internal control over our financial reporting or, consequently, our inability to produce accurate consolidated financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate consolidated financial statements will likely have a negative effect on the trading price of our common stock.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

As a public company, we will incur significant additional legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the Securities and Exchange Commission, or SEC, and other applicable regulators and stock exchanges. The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically in recent years. We expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We are unable to currently estimate these costs with any certainty. We also expect these new rules and regulations will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage previously available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as our executive officers.

Our international operations subject us to a number of risks, including unfavorable political, regulatory, labor and tax conditions.

We have manufacturing operations in China and expect to sell a significant portion of our products to customers located in other countries. Risks inherent to international operations and sales include, but are not limited to, the following:


	•	difficulty in enforcing agreements and intellectual property rights, particularly in China;

	•	fluctuations in exchange rates may affect product demand and our costs;

	•	fluctuations in exchange rates may cause foreign currency losses;

	•	impediments to the flow of foreign exchange capital payments and receipts;

	•	changes in general economic and political conditions;

	•	changes in foreign government regulations and technical standards;

	•	requirements or preferences of foreign nations for domestic products;

	•	compliance with the U.S. Foreign Corrupt Practices Act;

	•	diversion of management attention;

	•	trade barriers such as export requirements, tariffs and taxes;

	•	tax consequences from operating in multiple jurisdictions; and

	•	longer payment cycles typically associated with international sales and potential difficulties in collecting accounts receivable.

Our business in foreign jurisdictions will require us to respond to rapid changes in market conditions in these countries. Our overall success will depend on our ability to succeed in different legal, regulatory, economic, social and political situations and conditions. We may not be able to develop and implement effective policies and strategies in each foreign jurisdiction where we do business. Also, each of the foregoing risks will likely take on increased significance as we implement plans to expand foreign manufacturing operations.

Foreign exchange rate fluctuations may have a material impact on our operating revenue and product costs.

While to date all of our sales and costs are in U.S. dollars, in the future foreign exchange rate fluctuations may have a material impact on our operating and product costs. This is because, while our sales are in U.S. dollars, most of our products will be manufactured in China. Our results of operations will be particularly sensitive to the fluctuation of the Chinese renminbi against the U.S. dollar. For example, if the Chinese renminbi were to appreciate against the U.S. dollar, the cost of our products manufactured in China would increase, which would have a negative impact on our margins, profitability and cash flows. If the U.S. dollar appreciates against the currencies of the other markets in which we sell, such as Europe, it may be harder to sell applications with our NuVinci technology and our product sales revenue may decrease. We do not currently hedge against foreign exchange risks.

Our ongoing manufacturing operations in China are complex and it may be difficult to establish adequate management and financial controls in China.

Currently, most of our manufacturing operations are based in China and are provided by a contract manufacturer. Our contractor requires our assistance in developing the skills, processes and knowledge necessary to manufacture and test our products. Any problems or disruptions requiring significant assistance from our company will require additional time for travel to support those operations in China. This may divert management’s attention, lead to disruptions in operations and delay implementation of our business strategy, all of which could negatively impact our profitability.

China has only recently begun to adopt management and financial reporting concepts and practices like those with which investors in North America are familiar. We may have difficulty in ensuring our manufacturer in China has the experience necessary to implement the kind of management and financial controls that are common for a North American company. If our contract manufacturer cannot establish and implement appropriate controls, we may experience great difficulty collecting relevant data necessary to manage our business effectively.

If our products fail to perform as expected, we could lose existing and future business and our ability to develop, market and sell our products and technology could be harmed.

Our products could have unknown defects or errors, which may give rise to claims against us, diminish the reputation of our brand or divert our resources. Despite testing, our existing products may contain defects and errors. In addition, future products may contain manufacturing or design defects, errors or performance problems when first introduced, when new versions or enhancements are released, or even after these products have been used by our customers for a period of time. These problems could result in expensive and time-consuming design modifications or warranty charges, delays in the introduction of new products or enhancements, significant increases in our service and maintenance costs, exposure to liability for damages, damaged customer relationships and harm to our reputation, any of which may adversely affect our business and our operating results.

Our success depends on our ability or that of our licensees to develop and successfully manufacture and commercialize products that are recognized as adding significant value. Significant value would include, with respect to the automotive industry for example, increased fuel economy, more effective power generation, longer range, or lower production costs compared to alternative products or technologies. In the automotive industry in particular, the design and development of a product or use is complex, expensive, time-consuming and subject to rigorous quality and performance requirements. If we are unable to design, develop and

commercially manufacture products that are accepted for use in all of our target end markets, and in particular the automotive industry, our business and operating results may be adversely affected.

Product liability or other claims could cause us to incur losses.

We may be exposed to product liability claims for the products we manufacture and market as well as for products that our licensees manufacture and market. Although we have product liability insurance for our products, this may be inadequate to cover all potential product liability claims. In addition, while we generally seek to limit our product liability in our contracts, such limits may be unenforceable or may be subject to exceptions. Any lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse affect on our business and financial condition.

We are subject to financial and reputational risks due to product recalls resulting from product quality and liability issues.

Product quality and liability issues present significant risks and may affect not only our own products but also the third-party products that incorporate our technology. Our efforts and the efforts of our contract manufacturers and licensees to maintain product quality may not be successful, and if they are not, we may incur expenses in connection with, for example, product recalls and lawsuits, and our brand image and reputation as a producer of high-quality products may suffer. Any product recall or lawsuit seeking significant monetary damages could have a material adverse effect on our business and financial condition. A product recall could generate substantial negative publicity about our products and business, interfere with our manufacturing plans and product delivery obligations as we seek to replace or repair affected products, and inhibit or prevent commercialization of other future product candidates. We do not have insurance to cover the costs associated with a product recall. In addition, the expenses and negative publicity we would incur in connection with a product recall would adversely affect our business and operating results.

Our facilities or operations could be damaged or adversely affected as a result of disasters or unpredictable events, including widespread public health problems.

Our corporate headquarters is located in San Diego, California. Some management personnel and the majority of our staff are located in Texas. If major disasters such as earthquakes, fires, floods, hurricanes, wars, terrorist attacks, computer viruses, pandemics or other events occur, or our information system or communications network breaks down or operates improperly, our facilities may be seriously damaged, or we may have to stop or delay production and shipment of our products. We may incur expenses relating to such damages. In addition, a widespread health problem, such as the H1N1 flu, in the United States, China, or elsewhere in the world could have a negative effect on our operations.

Our financial results may vary significantly from period-to-period because of the unpredictability of revenues associated with the launch of a new product by an early stage company and the seasonality of our target end markets, which may lead to volatility in our stock price.

Due to unpredictable demand by consumers, technical risks, competitive response and other factors associated with early stage companies, we expect to experience unpredictable sales in connection with the initial launch of our products in each of our target end markets.

In addition, we are exposed to the seasonality of our target end markets. In the bicycle transmission market, 50% of our unit sales are likely to occur in the period from December to March because of the model year timing of bicycle OEMs. Only 15% of unit sales are likely to occur in the period from April to July and the remaining 35% in the period from July to November. Additionally, there may be long and unpredictable sales cycles for some of our other products that we may sell directly or will be sold by our licensees. For instance, the lawn care equipment market is subject to substantial seasonal variation in sales, and also depends heavily on annual precipitation. In addition, since transmissions with our technology are incorporated into our customers’ products for sale into their respective end markets, the seasonality of our customers’ product sales will impact the seasonality of our business.

Because many of our expenses are based on anticipated levels of annual revenue, our business and operating results could also be adversely affected if we do not achieve revenue consistent with our expectations for this seasonal demand. Accordingly, our financial results could vary significantly from period to period and if our operating results do not coincide with the expectations of investors or equity research analysts, the trading price of our common stock could fall.

If our warranty expense estimates differ materially from our actual claims, or if we are unable to estimate future warranty expense for new products, our business and financial results could be harmed.

Our warranty for our bicycle transmission is currently six years. We expect that the warranty for our next generation bicycle transmission, the N360, will be two years, which is comparable to that offered in the bicycle industry for other transmissions. Since the bicycle transmissions using our technology were first sold in the consumer market in 2007, we have a limited product history on which to base our warranty estimates. Other products utilizing our technology are not yet available commercially and there is no warranty history. Because of our limited operating history, our management is required to make assumptions and to apply judgment regarding a number of factors, including anticipated rate of warranty claims, the durability and reliability of our products, and service delivery costs. Our assumptions could prove to be materially different from actual performance, which could cause us to incur substantial expense to repair or replace defective products in the future and may exceed expected levels against which we have reserved. If our estimates prove incorrect, we could be required to accrue additional expenses from the time we realize our estimates are incorrect and also face a significant unplanned cash burden at the time our customers make a warranty claim, which could adversely affect our business and operating results.

In addition, with our new products and products that remain under development, we will be required to base our warranty estimates on historical experience of similar products, testing of our products and performance information learned during our development activities with the customer. If we are unable to estimate future warranty costs for any new product, we may realize a lower gross margin on such products than we have estimated, which might result in our financial results varying significantly from period-to-period.

We are planning rapid sales growth for our products. If we fail to manage our growth effectively, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.

Expanding our sales rapidly will require increases in expenditures both for personnel and marketing programs and working capital. In addition, expanding our organization globally and managing a geographically dispersed workforce will require substantial management effort and significant additional investment in support systems. We will be required to continue to improve our operational, financial and management controls and reporting. We may not be able to do so effectively or as rapidly as desired, which could cause inefficiencies in managing our expenses effectively in the future, negatively impacting our operating results in any particular quarter.

We are currently implementing new software systems to support our business operations. If these implementations are not successful, our business and operations could be disrupted and our operating results could be harmed.

We are currently implementing new software systems to assist us in the management of our business. The implementation of new software systems require significant management time, support and cost. We expect the implementation and enhancements of these platforms to continue across new and existing sites worldwide. In addition, as our business continues to develop, we expect to add or enhance existing systems in the areas of engineering, sales, and customer support and warranty management. We cannot be sure that these systems will be fully or effectively implemented on a timely basis, if at all, and implementation may take more resources than expected, which could cause disruption in our operations and an unanticipated increase in our operating expenses.

Risks Related to Intellectual Property

Parties may bring intellectual property infringement claims against us that would be time-consuming and expensive to defend, and if any of our products or processes are found to be infringing, we will be required to attempt to license the necessary patent or redesign our products or processes, failing which we will be unable to manufacture, use or sell those respective products or processes that were found to be infringing.

Our success depends in part on avoiding the infringement of other parties’ patents and proprietary rights. We may inadvertently infringe existing third-party patents or third-party patents issued on existing patent applications. Around the world, most patent applications are confidential until they are published 18 months after filing. However, currently in the U.S. not all patent applications must be published prior to issuance even after 18 months of filing. With patent applications that have not been published, we would not have had an opportunity to try and perform any diligence, as we would be unaware of such pending applications.

Because of the sheer volume of patents in the U.S. and other jurisdictions and the various terminology used to describe components, we can never be sure we do not infringe third-party patents. Those holding ownership or exclusive rights in any patents could bring claims against us that, in any event, could cause us to incur substantial expenses and, if resolved against us, could also cause us to pay substantial damages. Under certain circumstances in the United States, these damages could be triple the actual damages the patent holder incurs. If we have supplied infringing products to third parties for marketing or licensed third parties to manufacture, use or market infringing products, we may be obligated to indemnify these third parties for any damages they may be required to pay to the patent holder and for any losses the third parties may sustain themselves as the result of lost sales or damages paid to the patent holder. In addition, we may have, and may be required to, make representations as to our right to supply intellectual property, license intellectual property and to our compliance with laws.

If a patent infringement suit were brought against us, we and our customers, development partners and licensees could be forced to stop, delay or modify research, development, manufacture or sales of products based on our technologies in the country or countries covered by the patent or patents we infringe, unless we can obtain a license from the patent holder. Such a license may not be available on acceptable terms, or at all, particularly if the third party is developing or marketing a product competitive with products based on our technologies. Even if we were able to obtain a license, the rights may be nonexclusive, which could give our competitors access to the same intellectual property acquired under such a license.

Any successful infringement action brought against us may also adversely affect marketing of products based on our technologies in other markets not covered by the infringement action. Furthermore, even if we are successful in defending or settling a patent infringement action against, it could be costly to defend, require significant time and attention of our key management and technical personnel, and could harm our reputation and competitive position.

We may be involved in lawsuits to protect or enforce our patents, which would be expensive and time consuming.

Competitors or third parties may infringe our patents. We may be required to file patent infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or that the third party’s technology does not in fact infringe upon our patents. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing.

Litigation may fail and, even if successful, may result in substantial costs and be a distraction to our management. We may not be able to prevent misappropriation of our proprietary rights, particularly in countries outside the U.S. where patent rights may be more difficult to enforce.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public

announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

Our patent applications may not result in issued patents, which may have a material adverse effect on our ability to prevent others from commercially exploiting products similar to ours.

Patent applications in the United States are maintained in secrecy until the patents are published or, in some cases, are issued. We cannot be certain that we are the first creator of inventions covered by pending patent applications or the first to file patent applications on these inventions. We also cannot be certain that our pending patent applications will result in issued patents or that any of our issued patents will afford protection against a competitor. In addition, patent applications filed in foreign countries are subject to laws, rules and procedures that differ from those of the United States, and thus we cannot be certain that foreign patent applications related to issued United States patents will be issued. Furthermore, if these patent applications issue, some foreign countries provide significantly less effective patent enforcement mechanisms than in the United States.

The patent application process involves complex legal and factual questions and it is difficult to definitively determine whether any claimed invention in a patent application will go on to issue. Accordingly, we cannot be certain that the patent applications that we file will result in issued patents, or that our patents and any patents that may be issued to us in the near future will afford protection against competitors with similar technology.

Challenges to our patent rights can result in costly and time-consuming legal proceedings that may prevent or limit development of our products.

Outside of the United States, certain jurisdictions, including in Europe, permit oppositions to be filed against the granting of patents within a certain period of their grant. Because our intent is to commercialize products internationally and specifically in Europe, securing both proprietary protection and freedom to operate outside of the United States is important to our business. While we are not currently involved in any opposition proceedings, it is not uncommon for market incumbents to seek and institute opposition proceedings against emerging market companies to gain competitive advantage. European opposition and appeal proceedings can take several years to reach final decision and are therefore costly and not expedient and can cast doubt on the status of the patent during those proceedings. Patent opposition proceedings are not currently available in the United States patent system, but are likely to be instituted in the near future under proposed legislation.

While opposition proceedings as they exist in Europe do not currently exist in the United States, issued United States patents can be reexamined by the Patent and Trademark Office (PTO), at the request of a third party. While we are currently not involved in any such proceedings, our competitors may decide to request reexamination by the PTO with respect to any or all of our issued United States patents if they are in possession of prior art in relation to an issued patent that represents a substantial new question of its patentability. Patent reexamination proceedings, like opposition proceedings, are long and complex and therefore costly and, as in any legal proceeding, the outcome of patent reexaminations is uncertain. A decision adverse to our interests could result in the loss of valuable patent rights.

Where more than one party seeks United States patent protection for the same technology, the PTO may declare an interference proceeding in order to ascertain the party to which the patent should be issued. Patent interferences are typically complex, highly contested legal proceedings, subject to appeal, that are lengthy and expensive and an adverse decision in interference can result in the loss of important patent rights. As more groups become engaged in scientific research and product development related to our NuVinci CVT technology, the risk of our patents being challenged through patent interferences, oppositions, reexaminations or other means will likely increase, and our pending patent applications, or our issued patents, may be drawn into interference proceedings that may delay or prevent the issuance of patents, or result in the loss of issued patent rights.

Successful challenges to our patents through oppositions, reexamination proceedings or interference proceedings could result in a loss of patent rights in the relevant jurisdiction. If we are unsuccessful in actions we bring against the patents of other parties and it is determined that we infringe the patents of third-parties, we may be subject to litigation, or otherwise prevented from commercializing potential products in the relevant jurisdiction, or may be required to obtain licenses to those patents or develop or obtain alternative technologies, any of which could harm our business. Furthermore, if such challenges to our patent rights are not resolved promptly in our favor, our existing business relationships may be jeopardized and we could be delayed or prevented from entering into new collaborations or from commercializing certain products, which could adversely affect our business and results of operations.

We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.

We rely on trade secrets to protect some aspects of our proprietary technology, especially where we do not believe patent protection is appropriate or obtainable. Confidentiality agreements with our employees, contractors, consultants, development partners and other advisors to protect our trade secrets and other proprietary information may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets or independently develop processes or products that are similar or identical to our trade secrets, and courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Risks Related to this Offering and Ownership of Our Common Stock

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. We expect to use the net proceeds from this offering for general corporate purposes, including the repayment of indebtedness. However, our management might not apply our net proceeds from this offering in ways that increase the value of your investment, and you will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.

Our 5% or greater stockholders and executive officers will continue to have substantial influence and control over us, and they may act to the detriment of other stockholders.

Our 5% or greater stockholders, directors and executive officers, as a group, beneficially own approximately 75.7% of our outstanding common stock as of December 31, 2009 and, following this offering will beneficially own approximately % of our outstanding common stock. As a result, they will, as a group, have substantial influence over our business and affairs, including the ability to influence elections of our directors and any other actions that may require stockholder approval, such as amendments to our charter documents and significant corporate transactions. This concentration of ownership could also have the effect of delaying or preventing a change in control that could be beneficial to the other stockholders.

An active trading market for our common stock may not develop, and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for shares of our common stock and we cannot assure you that one will develop or be sustained after the offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of our common stock at an attractive price or at all. The initial public offering price of our common stock will be determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after the offering. In the absence of an active trading market for our common stock, investors may not be able

to sell their common stock at or above the initial public offering price or at the time that they would like to sell.

Our stock price may be volatile, and the market price of our common stock after this offering may drop below the price you pay.

The market price of our common stock could be subject to significant fluctuations after this offering, and it may decline below the initial public offering price. Market prices for securities of early stage companies have historically been particularly volatile. As a result of this volatility, you may not be able to sell your common stock at or above the initial public offering price. In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management. In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation even if it does not result in liability for us, could result in substantial costs to us and divert management attention and resources.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time after the expiration of the lock-up agreements described in the “Underwriting” section of this prospectus. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Based on shares outstanding as of , upon completion of this offering we will have outstanding shares of common stock, assuming no exercise of the underwriters’ over-allotment option. This includes shares, which may be resold in the public market immediately. Of the remaining shares, shares of common stock will be subject to a 180-day contractual lock-up with the underwriters. These shares will be able to be sold, subject to any applicable volume limitations under applicable securities laws, after the earlier of the expiration of, or release from, the 180-day lock-up period. CIBC World Markets Inc. and Mackie Research Capital Corporation, on behalf of the underwriters, may permit our officers, directors, employees and current stockholders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The assumed initial public offering price of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur immediate dilution of $ in net tangible book value per share from the price you paid. Moreover, we issued options in the past to acquire common stock. As of December 31, 2009, 12,994,466 shares of common stock are issuable upon exercise of outstanding stock options with a weighted average exercise price of $0.24 per share, of which 2,933,065 are vested as of such date. To the extent that these outstanding options are ultimately exercised, you will incur further dilution.

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may

cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover attempt.

Delaware law and our certificate of incorporation and bylaws that will be adopted in connection with the completion of this offering contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our Board of Directors. These provisions include:


	•	authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our common stock;

	•	limiting the liability of, and providing indemnification to, our directors and officers;

	•	prohibiting our stockholders from taking any action by written consent in lieu of a meeting;

	•	prohibiting our stockholders from calling and bringing business before special meetings; and

	•	the filling of vacancies or newly created seats on the board to our Board of Directors then in office.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

Any provision of our amended and restated certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

Special Note Regarding Forward-Looking Statements

This prospectus contains estimates and forward-looking statements, principally in “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” Our estimates and forward-looking statements are mainly based on our current expectations and estimates of future events and trends, which affect or may affect our businesses and operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Many important factors, in addition to the factors described in this prospectus, may adversely affect our results as indicated in forward-looking statements. You should read this prospectus and the documents that we have filed as exhibits to the registration statement of which this prospectus is a part completely and with the understanding that our actual future results may be materially different from what we expect.

Our estimates and forward-looking statements may be influenced by the following factors, among others:


	•	the factors discussed in this prospectus set forth under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

	•	the depth and duration of the current economic downturn;

	•	lack of acceptance of new products or technology;

	•	projected expenditures and other costs;

	•	the ability to obtain financing;

	•	our dependence on our key management personnel and our ability to attract and retain qualified personnel; and

	•	changes in the competitive environment in our industry and the markets where we operate.

The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan” and similar words are intended to identify estimates and forward-looking statements.

Estimates and forward-looking statements speak only as of the date they were made and, except to the extent required by applicable laws, we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. As a result of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this prospectus might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, including, but not limited to, the factors mentioned above. Because of these uncertainties, you should not place undue reliance on these forward-looking statements when making an investment decision.

Use of Proceeds

We estimate that the net proceeds to us from the sale of shares of common stock in this offering will be approximately $ million, assuming an initial public offering price of $ per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering for general corporate purposes, including the repayment of indebtedness. As a result, management will retain broad discretion over the allocation of the net proceeds from this offering. Pending use of the net proceeds from this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment-grade securities.

An increase or decrease of shares from the expected number of shares to be sold by us in the offering, assuming no change in the assumed initial public offering price per share, would increase or decrease our net proceeds from this offering by $ . A $1.00 increase or decrease in the assumed public offering price of $ per share, the midpoint of the range set forth on the front cover of this prospectus, would increase or decrease our expected net proceeds by approximately $ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We expect to use any additional net proceeds from this offering for general corporate purposes.

Dividend Policy

We have never declared or paid cash dividends on our common stock. We currently intend to retain all of our future earnings, if any, generated by our operations for the development and growth of our business. The payment of any dividends in the future will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, earnings, capital requirements, contractual restrictions, outstanding indebtedness, and other factors deemed relevant by our board. As a result, you may need to sell your shares of common stock to realize a return on your investment, and you may not be able to sell your shares at or above the price you paid for them.

Conversion of Preferred Stock into Common Stock

We currently have four series of outstanding preferred stock:


	Number of Shares Outstanding
Preferred Stock	as of December 31, 2009

Series A		3,887,577
Series B		4,786,444
Series C		3,012,765
Series D		73,627,442

Total		85,314,228

Effective immediately prior to this offering, all of our outstanding preferred stock will be converted into 101,106,785 shares of our common stock.

Indebtedness

We have a $3,000,000 revolving line of credit with Wells Fargo Bank, National Association, of which $2,000,000 was outstanding as of March 25, 2010. The line of credit is fully collateralized by assets held on account with the lender by a stockholder and director of our company. The line of credit imposes no restrictive financial covenants on the Company. The outstanding principal balance bears interest at a base rate, which is a fluctuating rate equal to the highest of the prime rate (5.0 percent at December 31, 2009), LIBOR plus 1.5 percent, or the Federal Funds Rate plus 1.5 percent. The line of credit provides for a quarterly unused commitment fee of 0.375 percent per annum on the average daily unused amount. Up to $2,000,000 of the line of credit may be used to finance standby letters of credit, with maximum maturities of one year. The line of credit expires December 31, 2010.

We intend to repay the outstanding balance under this revolving line of credit with the net proceeds of this offering.

Capitalization

The following table sets forth our capitalization as of December 31, 2009:


	•	On an actual basis;


	•	On a pro forma basis, to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 101,106,785 shares of common stock (as of December 31, 2009) upon the closing of this offering, which we refer to as the “Conversion”; and


	•	On an as adjusted basis, giving effect to:


	•	the Conversion;


	•	the issuance of shares upon the exercise of warrants that will be exercised prior to the closing of the offering;


	•	our sale of shares of our common stock in this offering (at an assumed initial public offering price of $ per share, which is the midpoint of the range set forth on the cover page of this prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us); and


	•	our repayment of $2.0 million in short-term debt with the net proceeds from this offering.


	As of December 31, 2009
	Actual			Pro Forma			As Adjusted⁽¹⁾
	($ in thousands)

Cash and cash equivalents	$	9,213		$	9,213

Short-term debt	$	2,000		$	2,000
Equity:
Series A convertible preferred stock: $0.001 par value; 3,887,577 shares authorized, issued and outstanding, actual		479			–
Series B convertible preferred stock: $0.001 par value; 4,786,444 shares authorized, issued and outstanding, actual		8,202			–
Series C convertible preferred stock: $0.001 par value; 3,012,765 shares authorized, issued and outstanding, actual		16,040			–
Series D convertible preferred stock: $0.001 par value; 78,637,462 shares authorized, 73,627,442 shares issued and outstanding, actual		27,735			–
Common stock: $0.001 par value; 140,000,000 shares authorized, 11,660,855 shares issued and outstanding, actual; shares authorized, shares issued and outstanding, as adjusted		12			113
Additional paid-in capital		2,732			55,087
Accumulated deficit		(45,487	)		(45,487	)

Total equity		9,713			9,713

Total capitalization	$	11,713		$	11,713


(1)		A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease cash and cash equivalents by $ million, would increase or decrease additional paid-in capital by $ million, and would increase or decrease total stockholders’ equity and total capitalization by $ million, after deducting the underwriting discount and the estimated offering expenses payable by us. Similarly, any increase or decrease in the number of shares that we sell in the offering will increase or decrease our net proceeds by such increase or decrease, as applicable, multiplied by the offering price per share, less underwriting discounts and commissions and offering expenses.

The table above does not include:


	•	shares of common stock reserved or issuable pursuant to our 2010 Stock Plan;


	•	shares of common stock issuable upon the exercise of outstanding options to purchase common stock under our 2004 Stock Plan;


	•	3,100,753 shares of common stock issuable upon the exercise of a warrant held by the Jacobs Family Trust;


	•	50,000 shares of common stock issuable upon the exercise of a warrant held by Advanced Strategic Leadership Limited (ASL) issued after December 31, 2009; and contingent warrants to purchase up to an additional 750,000 shares of our common stock that may be granted upon achievement of certain performance milestones, which have not been earned as of March 25, 2010; and


	•	the exercise by the underwriters of their option to purchase up to additional shares from us.

You should read this capitalization table together with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Consolidated Financial Data,” and our consolidated financial statements and related notes included elsewhere in this prospectus.

Dilution

Purchasers of the common stock in the offering will suffer an immediate and substantial dilution in net tangible book value per share. Dilution is the amount by which the initial public offering price paid by purchasers of shares of common stock in this initial public offering exceeds the net tangible book value per share of our common stock immediately after completion of the offering. Net tangible book value per share represents the amount of our total tangible assets (calculated as total assets minus intangible assets and deferred costs) reduced by our total liabilities and par value of preferred stock, divided by the number of shares of common stock outstanding.

As of December 31, 2009, our actual net tangible book value was approximately $6,229,000, or $0.53 per share, based on 11,660,855 shares of common stock outstanding.

After giving effect to (a) the automatic conversion of all outstanding shares of our convertible preferred stock into 101,106,785 shares of common stock, (b) the issuance of shares of common stock upon the exercise of warrants to be exercised prior to the closing of the offering, (c) our repayment of $2.0 million in short-term debt with the net proceeds from this offering, and (d) the sale of shares of common stock in this offering at an assumed public offering price of $ per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of December 31, 2009 would have been approximately $ , or $ per share. This represents an immediate increase in as adjusted net tangible book value per share of $ to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution:


Assumed initial public offering price			$

Net tangible book value per share as of December 31, 2009	$	0.53
Increase per share attributable to this offering

As adjusted net tangible book value per share after giving effect to this offering

Dilution per share to new investors in this offering			$

A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease, as applicable, our as adjusted net tangible book value per share of common stock by $ , and increase or decrease, as applicable, the dilution per share of common stock to new investors by $ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, any increase or decrease in the number of shares that we sell in the offering will increase or decrease our net proceeds in proportion to such increase or decrease, as applicable, multiplied by the offering price per share, less underwriting discounts and commissions and offering expenses.

The following table sets forth, as of December 31, 2009, on the as adjusted basis described above, the differences between existing stockholders and new investors with respect to the total number of shares of common stock purchased from us, the total consideration paid, and the average price per share paid before deducting underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $ per share of common stock, which is the midpoint of the range set forth on the cover page of this prospectus:


									Average
	Shares Purchased				Total Consideration				Price per
	Number	Percent			Amount	Percent			Share

Existing stockholders				%	$			%	$
New investors

Total			100.00	%			100.00	%

The foregoing tables and calculations assume no exercise of the underwriters’ option to purchase additional shares and exclude:


	•	shares of common stock issuable upon the exercise of options outstanding as of December 31, 2009 at a weighted average exercise price of $ per share;


	•	shares of common stock reserved for issuance under our 2010 Stock Plan;


	•	up to 750,000 shares of common stock issuable pursuant to contingent warrants that may be granted upon achievement of certain performance milestones; and


	•	3,100,753 shares of our common stock issuable pursuant to the exercise of an outstanding warrant held by the Jacobs Family Trust.

Selected Consolidated Financial Data

We derived the selected consolidated statement of operations data and the selected consolidated statement of cash flows data for the years ended December 31, 2007 and 2008, as restated (see Note 16 to our audited consolidated financial statements), and December 31, 2009, and the selected consolidated balance sheet data as of December 31, 2008, as restated (see Note 16 to our audited consolidated financial statements), and December 31, 2009, from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated statement of operations data and the selected consolidated statement of cash flows data for the years ended December 31, 2005 and 2006 and the selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 from our audited consolidated financial statements, as restated, which are not included in this prospectus and include restatement adjustments for similar items as discussed in Note 16 to our audited consolidated financial statements.

You should read the selected historical financial data together with the consolidated financial statements and related notes appearing elsewhere in this prospectus, as well as “Prospectus Summary — Summary Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the other financial information included elsewhere in this prospectus.

Consolidated Statement of Operations Data:


	Year Ended December 31,
	2005			2006			2007⁽¹⁾			2008⁽¹⁾			2009
	($ in thousands, except per share data)

Revenues	$	40		$	97		$	714		$	2,283		$	1,044
Cost of revenues		12			283			1,892			2,048			7,260
Gross (loss) profit		28			(186	)		(1,178	)		235			(6,216	)
Operating expenses		4,961			6,558			5,827			10,321			10,523
Operating loss		(4,933	)		(6,744	)		(7,005	)		(10,086	)		(16,739	)
Other income (expense)		122			490			447			(470	)		(487	)

Net loss		(4,811	)		(6,254	)		(6,558	)		(10,556	)		(17,226	)

Less: Discount related to beneficial conversion feature on Preferred Stock		–			–			–			(1,376	)		–

Net loss attributable to Fallbrook Technologies Inc. common stockholders	$	(4,811	)	$	(6,254	)	$	(6,558	)	$	(11,932	)	$	(17,226	)

Net loss per share—basic and diluted	$	(0.42	)	$	(0.55	)	$	(0.57	)	$	(1.04	)	$	(1.48	)
Weighted average shares outstanding—basic and diluted		11,422			11,422			11,437			11,462			11,656
Pro forma net loss per share—basic and diluted (unaudited)⁽²⁾													$	(0.17	)
Pro forma weighted average shares outstanding—basic and diluted (unaudited)⁽²⁾														103,978

Consolidated Balance Sheet Data:


	As of December 31,
	2005			2006⁽³⁾			2007⁽¹⁾			2008⁽⁴⁾			2009
	($ in thousands)

Cash and cash equivalents	$	4,195		$	3,218		$	8,043		$	14,565		$	9,213
Total assets		11,153			14,105			10,855			25,314			13,526
Total liabilities		505			1,764			2,158			3,171			3,813
Convertible preferred stock		17,091			24,721			24,721			48,566			52,456
Accumulated deficit		(7,252	)		(13,506	)		(20,064	)		(28,261	)		(45,487	)
Total equity		10,648			12,341			8,697			22,143			9,713

Consolidated Statement of Cash Flows Data:


	Year Ended December 31,
	2005			2006⁽³⁾			2007⁽¹⁾			2008⁽¹⁾⁽⁴⁾			2009
	($ in thousands)

Net cash (used in) provided by:
Operating activities	$	(3,796	)	$	(4,564	)	$	(5,860	)	$	(9,496	)	$	(12,118	)
Investing activities		(6,393	)		(4,034	)		8,073			(7,271	)		2,954
Financing activities		8,351			7,621			2,612			23,289			3,812

Net change in cash	$	(1,838	)	$	(977	)	$	4,825		$	6,522		$	(5,352	)


(1)		On January 3, 2007, we formed a wholly-owned subsidiary, Viryd Technologies Inc. (Viryd), a Delaware corporation. On December 18, 2008, we completed a spin-off of our ownership of Viryd through a pro rata distribution of shares to our stockholders. The 2007 and 2008 consolidated financial statements include the accounts of Fallbrook Technologies Inc. and Viryd through December 18, 2008.


(2)		The pro forma basic and diluted net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding for the period plus the weighted average number of common shares resulting from the assumed conversion of the outstanding shares of convertible preferred stock. The assumed conversion is calculated using the if-converted method, as if such conversion had occurred as of the beginning of the period presented or as of the original issuance date, if later.


(3)		In 2006, we issued 1,429,487 shares of Series C convertible preferred stock for cash in the amount of $7,636,000, recorded net of issuance costs of $6,000.


(4)		On December 18, 2008, we sold an aggregate of 63,607,402 shares of our Series D convertible preferred stock at a purchase price of $0.3992 per share for a total of $25.4 million, of which $20.6 million was in cash and $4.8 million was from the conversion of principal and accrued interest on our then outstanding convertible debt.

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Prospectus Summary—Summary Consolidated Financial Data,” “Selected Consolidated Financial Data” and our consolidated financial statements included elsewhere in this prospectus. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those discussed in the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this prospectus.

Overview

Our NuVinci Technology

Our NuVinci technology is a new type of continuously variable transmission (CVT) that can be used in a wide variety of end market applications. A CVT is a transmission that effectively has an infinite number of gear ratios within its range. Our technology is currently available in the global market for bicycle transmissions, where it has been used to replace the rear wheel gear assembly. We are also currently developing applications for a number of other target end markets. These include alternators, air conditioning compressors and superchargers for the automotive accessory drives market, primary transmissions for the electric vehicles, wind turbines, and lawn care equipment markets.

We were originally formed in 2000, and to date have raised approximately $55 million in financing to develop and commercialize our technology. We have focused on developing applications for a group of target end markets that offer the most attractive competitive advantages and potential for economic returns. As of December 31, 2009, we invested in the development and protection of intellectual property resulting in a worldwide portfolio of 156 patents (including validated countries) and 208 patent applications.

Commercialization

Our first commercial product, a CVT for bicycles, was introduced in January 2007, under a development and manufacturing license agreement with Aftermarket Technologies Corp. (ATC) for the development, manufacturing and sale of our bicycle CVT. Our revenue from that agreement consisted of royalties on ATC’s product sales, license fees, and revenue from engineering services. In February 2008, to gain greater control of manufacturing and sales, we ended our relationship with ATC, and transitioned to a contract manufacturing arrangement with MTD Products Inc. (MTD). The contract manufacturing agreement with MTD was signed in March 2008. At the same time, we assumed direct responsibilities for sales and marketing. As part of the transition to MTD, we purchased the manufacturing line and associated equipment from ATC and moved the manufacturing line to MTD’s facilities. MTD spent approximately six months setting up and testing the manufacturing line and production of the bicycle CVT resumed in September 2008. Before manufacturing resumed at MTD, we sold the bicycle CVTs out of the inventory that had been built up by ATC. After September 2008, we purchased bicycle CVTs from MTD and sold them directly to original equipment manufacturers (OEMs) and distributors. However, the per unit cost of the bicycle CVTs manufactured by MTD was prohibitive because the manufacturing process used a long lead time supply chain. We have determined that it would be most cost effective and would provide for the largest growth opportunity to concentrate the supply base in one off-shore region or location.

In 2009, we began the process of phasing out production of our existing bicycle CVTs to prepare for the launch of the next generation bicycle CVT, called the N360. We terminated our contract manufacturing agreement with MTD in October 2009, after building 2,600 units of inventory for us to continue to deliver

products to customers while our next contract manufacturer prepares for production of the N360. We have engaged a contract manufacturer, Tri Star Group, located in Shanghai, China, to manufacture the N360. The production of prototypes began in December 2009 and we expect to launch production of the N360 in 2010. The N360 will have many improvements over the current bicycle CVT including a weight reduction of at least 35%, a size reduction of at least 10%, improved shift feel and responsiveness, and the CVT will be easier to assemble with over 50% fewer parts. We believe the improved design of the N360 will have a much broader appeal in the marketplace. In addition, as Tri Star is located in China and is near most of the component suppliers, inbound logistics costs will be lower and coordination will be easier. Through the combination of the fixed-priced manufacturing agreement with Tri Star, new component suppliers, and improved design, we expect the N360 will have a per unit cost that is at least 50% less than the per unit cost of the N171 bicycle CVT.

The end markets for our NuVinci technology on which we are currently focusing are automotive accessory drives, electric vehicles, bicycles, small wind turbines and lawn care equipment. We are at different stages of development of the products for each of these end markets.

We expect to manufacture NuVinci CVTs for automotive accessory drives, electric vehicles, bicycles and small wind turbines primarily through a contract manufacturer and to sell these products to distributors, OEMs, or directly to customers. Starting in 2010, we will manufacture and sell the NuVinci CVTs to Viryd Technologies Inc. (Viryd). We have also licensed to Viryd the rights to manufacture and sell the NuVinci CVTs for the small wind turbines market and we will receive royalties from Viryd should they manufacture the CVTs. In the near term, we anticipate this revenue will be primarily from product sales, but over the longer term it may be primarily from royalties. We have licensed the rights to manufacture and sell NuVinci CVTs for lawn care equipment to Hydro-Gear in that end market and will receive royalties from them. We may also opportunistically license the manufacturing of products of other end market applications to certain manufacturers or OEMs that will commercialize products utilizing our NuVinci technology. We will receive revenue through the sale of engineering services, license fees, and royalties on product sales. In all licensing and development arrangements, we own all patentable improvements to our NuVinci CVT. In our view, the use of contract manufacturing to manufacture our NuVinci CVTs and licensing our technology to OEMs has several advantages over in-house manufacturing. These advantages include lower capital requirements, less operational complexity, the need for fewer permanent employees and faster commercialization of new applications.

Production of the N360 and NuVinci CVT for small wind turbine will be launched in 2010. We anticipate that we or our licensee will launch production of our products into the automotive accessory drive, electric vehicle, and lawn care equipment end markets in 2011.

Financial Overview

Revenues

We primarily derive our revenues from product sales, license fees and royalties, engineering services, and related party revenues.

Product sales. These revenues to date consist primarily of sales of our bicycle CVTs. We started to earn product sales revenue when we transitioned from the licensing business model for the bicycle CVTs to a manufacturing model. As part of the transition plan, in February 2008 we purchased finished bicycle CVTs from our licensee manufacturer (ATC) for inventory so that we could continue to fulfill customer orders. In March 2008, we began outsourcing physical manufacturing to a contract manufacturer and started selling the NuVinci CVTs directly to OEMs and distributors. We have been working with a new manufacturer, Tri Star Group (Tri Star), located in Shanghai, China, to design and prepare for production of the N360. We believe the improved design of the N360 bicycle CVT will have a much broader appeal in the marketplace and that product sales will increase accordingly. We expect to launch production of the N360 in 2010.

We expect to launch our product for the automotive accessory drives and electric vehicles end markets in 2011 using one or more contract manufacturers.

License fees and royalties. We receive license fees and royalties from the licensing of our NuVinci technology to manufacturers and OEMs. We receive license fees up front from customers upon or shortly after the signing of our licenses and we recognize license fee revenues when the license term commences and there are no future performance obligations or requirements. When the contract requires us to provide engineering development services during the license term, license fee revenue is deferred and recognized over the term of the contract or the remaining estimated period of continuing involvement. We also receive royalties from product sales by our licensees. Lawn care equipment CVT production is expected to be launched in 2011 by Hydro-Gear, who licensed the rights to manufacturer and sell NuVinci CVTs for that end market.

As we develop and commercialize NuVinci technology, additional manufacturers and OEMs may sign license agreements for those products and we would generate additional license fees and royalty revenue.

Engineering services. These revenues consist primarily of fees for engineering services that we provide to manufacturers and OEMs associated with applying the NuVinci CVT technology to their products. We own all of the intellectual property that results from our engineering work. In some engineering services agreements, we may receive partial payments from manufacturers or OEMs upfront before the project or pre-determined milestones are completed. Such pre-payments are recorded as revenue when we meet pre-determined milestones.

Development under engineering services agreements is intended to lead to commercialization of NuVinci CVTs. For example, the development performed under the engineering services agreements with Viryd in 2008 and 2009 for the small wind turbine end market will result in the launch of the product in 2010. We expect that the engineering services agreements for the automotive accessory drive for superchargers and lawn care equipment CVTs will lead to commercialization and manufacturing of these products in 2011.

Related-party revenues. These revenues are earned from providing administrative, operations and engineering support services to Viryd subsequent to its spin-off on December 18, 2008. We expect administrative support services to Viryd to decline as they hire additional administrative staff. However, we expect to continue to provide operations and engineering support services as they prepare to manufacture and sell their products. The engineering support services that we have provided to Viryd have led to the development of a product we expect Viryd to launch, under the license from us, for the small wind turbine end market in 2010. We expect product sales revenue to increase when we begin to manufacture and sell our NuVinci CVT for the small wind turbine end market in 2010.

Cost of revenues

The cost component for each of our main sources of revenues consists primarily of cost of product sales, license fees and royalties, engineering services and related-party revenues.

Cost of product sales. Since March 2008, when we started the contract manufacturing business model, cost of product sales represent costs of purchasing the NuVinci CVTs from contract manufacturers that we then sell to OEMs and distributors. Prior to March 2008, we employed a licensing model for the production of the bicycle CVTs when we earned royalties from sales of the bicycle CVTs by our licensed manufacturer (ATC). Through the combination of the fixed-priced manufacturing agreement with Tri Star, new component suppliers, and improved design, we expect the N360 will have a per unit cost that is at least 50% less than the per unit cost of the N171 bicycle CVT.

Also included in cost of product sales are depreciation of assembly line equipment that we purchased from ATC as part of the transition to MTD and provisions for estimated future warranty claims expense. Because our cost of product sales has, to date, exceeded our product selling price, our cost of product sales also includes provisions to write down the carrying value of inventories to their net realizable value.

In 2010, we expect our licensee, Viryd, to launch the production of the NuVinci CVTs for the small wind turbine end market. We will be selling NuVinci CVTs manufactured by Tri Star to Viryd. We expect to launch

the manufacturing and sales of automotive accessory drives and CVTs for electric vehicles in 2011. We will be providing these NuVinci products to our customers through one or more contract manufacturers.

Cost of license fees and royalties. These represent the costs of support provided to our licensees. For example, certain of our license agreements require that we provide engineering support to the manufacturer for a period of time as it commences production of our NuVinci bicycle CVTs. If we enter into additional licensing agreements that will require us to provide engineering support to the customers, we expect our costs will increase proportionally with the increases in revenue.

Cost of engineering services. These represent the costs of our development, primarily engineering labor and related expenses, incurred as we perform our obligations under the engineering services agreements between us and the manufacturer or OEMs.

In 2009, we signed an engineering services agreement for an automotive accessory drive for superchargers and another agreement for the lawn care equipment CVT. Engineering services revenue and cost of engineering services will be recorded when we achieve pre-determined milestones.

As we advance the development of the NuVinci CVT technology, we expect other manufacturers and OEMs to sign engineering services agreements to develop the NuVinci CVTs for their specific products. Thus the cost of engineering services will increase along with engineering services revenue.

Cost of related-party revenues. These represent the costs of providing administrative, operations and engineering support services to Viryd. We expect administrative support services to Viryd to decline as they hire additional administrative staff. However, we expect to continue to provide operations and engineering support services as they prepare to manufacture and sell their products.

Operating expenses

Our operating expenses consist primarily of development expenses and selling, general and administrative expenses.

Research and development expenses. These costs include salaries and related expenses for engineering personnel, cost of building and testing product prototypes, rent expense for our facilities in Cedar Park, Texas and depreciation of machinery, furniture, and equipment used by the engineering personnel.

Development expenses will increase as we continue to develop NuVinci technology. We expect our investment in development expenses for existing and future potential applications may lead to future engineering services and license agreements and ultimately commercialization.

Selling, general and administrative expenses. These costs consist primarily of salaries and related expenses for personnel in the business development, administration, intellectual property and finance departments. Other expenses include trade show costs, advertising and marketing, professional fees for legal and accounting, general office expenses, facility rent for our corporate offices in San Diego, California, utilities, various insurance expenses, amortization of capitalized patent costs and intangibles, depreciation of various furniture and equipment, and other general administrative expenses.

We expect selling, general and administrative expenses to increase as we commercialize additional NuVinci CVT products, increase our business development and marketing efforts worldwide and as we begin to operate as a public company and continue to build our corporate infrastructure. These increases will likely include salaries and related expenses, legal and consultant fees, accounting fees, rent and utilities, director fees, increased directors’ and officers’ insurance premiums, and fees for investor relations services.

Interest income (expense)

Interest and dividend income. This consists of interest and dividend income earned on our cash, cash equivalents and short-term investments.

Interest expense. This consists primarily of interest paid on our line of credit, note payable, capital lease, and non-cash interest related to convertible unsecured promissory notes and warrants.

Results of Operations

Comparison of the Years Ended December 31, 2008 and 2009


	Year Ended
	December 31,						Increase			Percentage
	2008			2009			(Decrease)			Change
				($ in thousands)

Revenues:
Product sales	$	320		$	467		$	147			46	%
License fees and royalties		914			12			(902	)		(99	)%
Engineering services		998			53			(945	)		(95	)%
Related party revenues		19			512			493			2,595	%
Other		32			–			(32	)		(100	)%

Total revenues		2,283			1,044			(1,239	)		(54	)%

Cost of revenues:
Cost of product sales		1,158			6,639			5,481			473	%
Cost of license fees and royalties		368			–			(368	)		(100	)%
Cost of engineering services		488			37			(451	)		(92	)%
Cost of related party revenues		11			584			573			5,209	%
Cost of other revenues		23			–			(23	)		(100	)%

Total cost of revenues		2,048			7,260			5,212			254	%

Gross (loss) profit		235			(6,216	)		(6,451	)		(2,745	)%

Operating expenses:
Research and development		5,939			5,426			(513	)		(9	)%
Selling, general and administrative		4,382			5,097			715			16	%

Total operating expenses		10,321			10,523			202			2	%

Operating loss		(10,086	)		(16,739	)		(6,653	)		66	%

Other income (expense):
Interest and dividend income		127			87			(40	)		(31	)%
Interest expense		(597	)		(574	)		23			(4	)%

Total other income (expense)		(470	)		(487	)		(17	)		4	%

Net loss	$	(10,556	)	$	(17,226	)	$	(6,670	)		63	%

Revenues


	Year Ended
	December 31,				Increase			Percentage
	2008		2009		(Decrease)			Change
	($ in thousands)

Product sales	$	320	$	467	$	147			46	%
License fees and royalties		914		12		(902	)		(99	)%
Engineering services		998		53		(945	)		(95	)%
Related party revenues		19		512		493			2,595	%
Other		32		–		(32	)		(100	)%

Total revenues	$	2,283	$	1,044	$	(1,239	)		(54	)%

Total revenues for the year ended December 31, 2009 decreased by $1,239,000, or 54%, compared to the year ended December 31, 2008.

Product sales for 2009 increased by $147,000, or 46%, compared to 2008. In March 2008, we transitioned from a licensing business model for the bicycle CVT to a manufacturing model that outsources physical manufacturing to a contract manufacturer. At that time, we started selling the NuVinci bicycle CVT’s directly to OEMs and distributors. The increase in product sales in 2009 was the result of a full year of selling the bicycle CVT’s via contract manufacturing.

License fees and royalties decreased by $902,000, or 99%, in 2009 compared to 2008. The $914,000 in license fees and royalties revenue that were earned from our licensed manufacturer and OEM customers in 2008 were not replicated in 2009. In February 2008, we terminated our manufacturing license agreement with ATC, who had paid us $50,000 in May 2005 and $950,000 in August 2006, for a total of $1,000,000 in nonrefundable license fees. We were previously recognizing that license fee revenue over a period of five years. When the manufacturing license agreement terminated, $733,000 of unrecognized license fees were immediately recognized. The remaining $181,000 of license fees and royalties that were recognized in 2008 were from Valvoline, our trademark licensee, and royalties from ATC, which did not recur in 2009. In March 2008, we engaged a contract manufacturer for the bicycle CVT. As a result of replacing our licensed manufacturer with a contract manufacturer in 2008, there were no manufacturing license fees from bicycle CVT products in 2009.

Engineering services revenue decreased by $945,000, or 95%, in 2009 compared to 2008. The majority of the $998,000 engineering services revenue earned in 2008, were from agreements signed in 2007 with various manufacturers and OEMs. When we established the contract manufacturing arrangement for the NuVinci CVTs in March 2008, we primarily focused on manufacturing and selling the bicycle CVTs. Because of limited resources, we did not focus on selling additional engineering services to develop NuVinci CVTs for new applications other than those that were committed to customers in 2007. Nearly all of our engineering services agreements signed in 2007 were completed by the end of 2008. In 2009, we signed an engineering services agreement for an automotive accessory drive for superchargers and another agreement for the lawn care equipment CVT. Although we may receive partial payments upfront from these engineering services agreements, we will not recognize engineering services revenue until we meet the pre-determined milestones.

Related-party revenues were recognized for the first time in December 2008 and continued through 2009, because of contractual agreements for us to provide support services and engineering services to Viryd subsequent to the December 18, 2008 spin-off of Viryd.

Cost of revenues


	Year Ended
	December 31,				Increase			Percentage
	2008		2009		(Decrease)			Change
	($ in thousands)

Cost of product sales	$	1,158	$	6,639	$	5,481			473	%
Cost of license fees and royalties		368		–		(368	)		(100	)%
Cost of engineering services		488		37		(451	)		(92	)%
Cost of related party revenues		11		584		573			5,209	%
Cost of other revenues		23		–		(23	)		(100	)%

Total cost of revenues	$	2,048	$	7,260	$	5,212			254	%

Total cost of revenues for the year ended December 31, 2009 increased by $5,212,000, or 254%, compared to the year ended December 31, 2008.

This increase was primarily due to the $5,472,000 increase in cost of product sales of the bicycle CVTs. In March 2008, we transitioned from a licensing business model for the bicycle CVT to a manufacturing model that outsources physical manufacturing to a contract manufacturer. We purchased manufacturing line equipment for $3,952,000 and intangible assets for $700,000 from ATC that included trade secrets and manufacturing processes used to manufacture the N171. We delivered the manufacturing line equipment to MTD for the manufacture of bicycle CVTs. However, in 2009, events and changes in circumstances associated with the manufacturing agreement with MTD led management to believe that the carrying amounts of certain tangible and intangible assets associated with the production line used by MTD may not be recoverable. Unresolved negotiations about product cost and unstable production levels between the Company and MTD caused us to terminate the contractual relationship on October 30, 2009. In connection with the early termination of the manufacturing supply agreement, we agreed to transfer the machinery and equipment to MTD. As a result, we recorded an impairment of $1,537,000 and loss on disposal of $1,455,000 on machinery and equipment in 2009. We also determined that the associated trade secrets and manufacturing processes used by MTD would no longer provide future benefit due to the decision to cease production of the N171 to which it was associated before the end of the intangible assets’ previously estimated useful life. Accordingly, in 2009, we recorded a $490,000 impairment loss on the write-off of the intangible assets.

The increase in cost of product sales was also due to a $952,000 lower of cost or market charge on inventory incurred during 2009. This charge was the result of the unit cost of the N171 model of the bicycle CVT being higher than the sales price and, as a result, we recorded a lower of cost or market charge relating to the inventory on hand. Through the combination of the fixed-priced manufacturing agreement with Tri Star, new component suppliers, and improved design, we expect the next generation bicycle CVT, the N360, will have a per unit cost that is at least 50% less than the per unit cost of the N171 bicycle CVT. As the N360 is expected to launch in 2010, we recorded an obsolescence charge of $357,000 during 2009, for the excess inventory of the previous N171 bicycle CVTs on hand. Cost of product sales also increased because of an increase in depreciation of manufacturing equipment by $199,000, or 38%, compared to 2008. The remaining increase in cost of product sales in 2009 was due to a full year of selling the bicycle CVTs via contract manufacturing.

Costs of license fees and royalties in 2009 decreased by $368,000, or 100%, compared to 2008. This was the result of the termination of the manufacturing license agreement with our former bicycle CVT manufacturer, ATC, in February 2008. Under the manufacturing license agreement, we provided engineering support to the manufacturer as it commenced production of our bicycle CVTs.

Cost of engineering services for 2009 decreased by $451,000, or 92%, compared to 2008. The decrease was due to the decline in engineering services provided during 2009, as engineering services agreements signed in 2007 with various manufacturers and OEMs were completed by the end of 2008. In 2009, we signed an engineering services agreement for an automotive accessory drive for superchargers and another agreement for the lawn care equipment CVT. We are currently providing engineering services under those agreements. We

expect to recognize cost of engineering services relating to those agreements in 2010 and 2011 when the predetermined engineering milestones are met and revenues are recognized.

Cost of related-party revenues increased by $573,000, or 5,209%, as they were recognized for the first time starting in December 2008, for contractual agreements to provide support services and engineering services to Viryd subsequent to the December 18, 2008 spin-off of Viryd. The engineering services that we provided to Viryd during 2009 were to design and develop a NuVinci CVT for the small wind turbine end market. The NuVinci CVT that we are designing and developing for Viryd can also be used by other potential customers in industries outside of the wind turbine end market. We can either license or arrange contract manufacturing for the same-size NuVinci CVT for other end markets. We incurred higher development costs for the NuVinci CVT for Viryd than expected resulting in a negative gross margin for the engineering services that we provided to Viryd.

Operating expenses

Research and development


	Year Ended
	December 31,				Increase			Percentage
	2008		2009		(Decrease)			Change
	($ in thousands)

Research and development	$	5,939	$	5,426	$	(513	)		(9	)%

Research and development expense for the year ended December 31, 2009 decreased by $513,000, or 9%, compared to the year ended December 31, 2008.

Prior to the spin-off of Viryd in December 2008, we consolidated Viryd’s research and development expenses. Included in the $5,939,000 of research and development expense incurred during 2008 was $874,000 of research and development expense incurred by Viryd to develop the NuVinci CVTs for the small wind turbine end market. Excluding Viryd’s research and development costs from 2008, our development expense for 2009 increased by $360,000, or 7%. The increase was primarily due to a $191,000 increase in prototype costs incurred as part of our internal continuous development of the next generation of the NuVinci bicycle CVT, as well as supporting the bicycle CVT that is currently being sold in the market. Salaries and payroll-related expenses increased by $91,000, as a result of our engineering team devoting some development efforts to improve and explore opportunities for the core NuVinci technology in the automotive accessory drives end market, which was recognized as research and development expense. In 2008, these labor costs were associated with license fees and engineering services revenue, which were recognized as costs of revenue. Engineering consulting expense for 2009 increased by $112,000, compared to 2008.

Selling, general and administrative


	Year Ended
	December 31,				Increase		Percentage
	2008		2009		(Decrease)		Change
			($ in thousands)

Selling, general and administrative	$	4,382	$	5,097	$	715		16	%

Selling, general and administrative expense for the year ended December 31, 2009 increased by $715,000, or 16%, compared to the year ended December 31, 2008.

Salaries and payroll-related expenses increased by $175,000 due to the addition of three employees in 2009, including the Chief Operating Officer. Share-based compensation expense increased by $196,000, from $160,000 in 2008 to $356,000 in 2009. During 2009, we incurred an additional $258,000 in accounting expenses associated with the restatement of our prior year financial statements. In addition, business and marketing consulting expense increased by $318,000 and travel expenses increased by $67,000 in 2009. These increases were offset by a $329,000 decrease in 2009 because of the spin-off of Viryd in December 2008.

Interest income (expense)

Interest and dividend income


	Year Ended
	December 31,				Increase			Percentage
	2008		2009		(Decrease)			Change
			($ in thousands)

Interest and dividend income	$	127	$	87	$	(40	)		(31	)%

Interest and dividend income for the year ended December 31, 2009, decreased by $40,000, or 31%, compared to the year ended December 31, 2008.

The decrease of $40,000 was attributable to lower interest rates in 2009 as compared to 2008 on certificates of deposit, money market funds, auction rate securities, and checking accounts, as well as the shorter term investments in which we invested. This decrease was offset by an increase in average cash, cash equivalents and short-term investments of $5,584,000 in 2008 to $12,652,000 in 2009 because of $20,594,000 in cash proceeds from the Series D Preferred Stock financing that closed in December 2008 and $4,000,000 in cash proceeds from the Series D Preferred Stock financing that closed in December 2009.

Interest expense


	Year Ended
	December 31,				Increase			Percentage
	2008		2009		(Decrease)			Change
			($ in thousands)

Interest expense	$	597	$	574	$	(23	)		(4	)%

Interest expense for the year ended December 31, 2009 decreased by $23,000, or 4%, compared to the year ended December 31, 2008.

Various financing activities generated the interest expense in 2008. During 2008, we recorded $180,000 of non-cash interest expense and $49,000 for a beneficial conversion charge in connection with the $4,618,000 convertible unsecured promissory note dated August 8, 2008, which was converted into Series D Preferred Stock in December 2008. We also recorded non-cash interest expense of $212,000 during 2008 for the value of the detachable warrants that were associated with the $4,618,000 convertible unsecured promissory note. Also included in interest expense for 2008 was $98,000 of interest expense related to an April 2008 promissory note for $1,952,000. The remaining interest expense recorded in 2008 was related to the $2,000,000 that was drawn down from the line of credit on April 2, 2008. Proceeds from the April 2008 promissory note and draw down on the line of credit were used to purchase the manufacturing assets from our former bicycle CVT manufacturer, ATC. We paid off the promissory note and accrued interest in December 2008.

Interest expense incurred during 2009 was primarily related to $476,000 in non-cash interest expense associated with a warrant issued in connection with a guarantee on our line of credit and interest expense from the $2,000,000 balance that remained outstanding throughout the year on our line of credit.

Comparison of the Years Ended December 31, 2007 and 2008


	Year Ended
	December 31,						Increase			Percentage
	2007			2008			(Decrease)			Change
	($ in thousands)

Revenues:
Product sales	$	–		$	320		$	320			N/A
License fees and royalties		295			914			619			210	%
Engineering services		327			998			671			205	%
Related party revenues		–			19			19			N/A
Other		92			32			(60	)		(65	)%

Total revenues		714			2,283			1,569			220	%

Cost of revenues:
Cost of product sales		–			1,158			1,158			N/A
Cost of license fees and royalties		1,005			368			(637	)		(63	)%
Cost of engineering services		822			488			(334	)		(41	)%
Cost of related party revenues		–			11			11			N/A
Cost of other revenues		65			23			(42	)		(65	)%

Total cost of revenues		1,892			2,048			156			8	%

Gross (loss) profit		(1,178	)		235			1,413			120	%

Operating expenses:
Research and development		2,985			5,939			2,954			99	%
Selling, general and administrative		2,842			4,382			1,540			54	%

Total operating expenses		5,827			10,321			4,494			77	%

Operating loss		(7,005	)		(10,086	)		(3,081	)		(44	)%

Other income (expense):
Interest and dividend income		447			127			(320	)		(72	)%
Interest expense		–			(597	)		(597	)		N/A

Total other income (expense)		447			(470	)		(917	)		(205	)%

Net loss	$	(6,558	)	$	(10,556	)	$	(3,998	)		61	%

Revenues


	Year Ended
	December 31,				Increase			Percentage
	2007		2008		(Decrease)			Change
	($ in thousands)

Product sales	$	–	$	320	$	320			N/A
License fees and royalties		295		914		619			210	%
Engineering services		327		998		671			205	%
Related party revenues		–		19		19			N/A
Other		92		32		(60	)		(65	)%

Total revenues	$	714	$	2,283	$	1,569			220	%

Total revenues for the year ended December 31, 2008 increased by $1,569,000, or 220%, compared to the year ended December 31, 2007.

This increase of $1,569,000 was primarily a result of a $619,000 increase in license fees and royalties and a $671,000 increase in engineering services. The majority of the $998,000 engineering services revenue earned in 2008 was from agreements signed in 2007 with various manufacturers and OEMs. We recognize engineering services revenue when we have completed our services and met certain pre-determined development milestones under the engineering services agreements. In 2007, we recognized revenue for one engineering service project, compared to 2008, when we recognized engineering services revenue from four different projects.

In 2008, we recorded $733,000 of license fee revenue when our manufacturing license agreement with ATC terminated in February 2008. Per our manufacturing license agreement, ATC paid us $50,000 in May 2005 and $950,000 in August 2006, for a total $1,000,000 nonrefundable license fee. We were recognizing that license fee over a period of five years. When the manufacturing license agreement terminated, $733,000 of unrecognized license fee was recognized immediately. In 2008, we also recorded $107,000 fee from Valvoline for a trademark license. The remaining license fees of $12,000 that were recognized in 2008 were from OEMs, and royalties of $59,000 and $3,000 recognized in 2008 were from the sale of NuVinci bicycle CVTs by ATC and for fluid sales by Valvoline, respectively.

We started to earn product sales revenue when we began the contract manufacturing arrangement for the NuVinci bicycle CVT after March 2008. Production of the NuVinci bicycle CVT was launched in January 2007, by ATC under a manufacturing license agreement. We received royalties from ATC for all bicycle CVTs it sold from January 2007 through February 2008. In March 2008, we began outsourcing physical manufacturing to a contract manufacturer, started selling the NuVinci bicycle CVTs directly to OEMs and distributors, and recorded product sales revenue for the first time. Total product sales recorded in 2008 was $320,000.

Other revenue decreased by $60,000, or 65%, in 2008, compared to 2007, because of the termination of the license agreement with ATC in February 2008. The majority of the other revenue in 2007 was from miscellaneous parts and services sold to ATC.

We earned $19,000 of related-party revenues from the support services and engineering services provided to Viryd subsequent to the December 18, 2008 spin-off of Viryd.

Cost of revenues


	Year Ended
	December 31,				Increase			Percentage
	2007		2008		(Decrease)			Change
	($ in thousands)

Cost of product sales	$	–	$	1,158	$	1,158			N/A
Cost of license fees and royalties		1,005		368		(637	)		(63	)%
Cost of engineering services		822		488		(334	)		(41	)%
Cost of related party revenues		–		11		11			N/A
Cost of other revenues		65		23		(42	)		(65	)%

Total cost of revenues	$	1,892	$	2,048	$	156			8	%

Total cost of revenues for the year ended December 31, 2008 increased by $156,000, or 8%, compared to the year ended December 31, 2007.

The increase of $156,000 was primarily due to the $1,158,000 increase in cost of product sales. The increase was offset by the decrease of $637,000 and $334,000 in cost of license fees and royalties and cost of engineering services, respectively. Production of the NuVinci bicycle CVT was launched in January 2007, by ATC under a manufacturing license agreement. We received royalties from ATC for all bicycle CVTs it sold from January 2007 through February 2008, and did not incur any cost of product sales. In March 2008, we transitioned from a licensing business model for the bicycle CVT to a manufacturing model that outsources physical manufacturing to a contract manufacturer. At that time, we started selling the NuVinci bicycle CVTs directly to OEMs and distributors and recorded related cost of product sales. In addition to the cost of the N171 bicycle CVTs we purchased from our contract manufacturer (MTD), included in cost of product sales were $518,000 of depreciation expense of the manufacturing equipment we purchased from ATC and $16,000 of warranty reserve expense. Through the combination of the fixed-priced manufacturing agreement with Tri Star, new component suppliers, and improved design, we expect the N360 will have a per unit cost that is at least 50% less than the per unit cost of the N171 bicycle CVT.

Cost of license fees was from the engineering support we were required to provide to ATC. According to the terms of the manufacturing license agreement, we were to provide engineering support to ATC for a period of time while it commercialized the NuVinci bicycle CVTs. In order for us to successfully launch the first commercial product, we provided as much engineering support as reasonably necessary for that manufacturer to develop and sell the bicycle CVTs. Because of a long lead and unstable component supply base, we provided more engineering support than expected and incurred a negative gross margin from the license fees. We terminated the manufacturing license agreement with ATC in February 2008. In 2008, we recognized $368,000 of cost of license fees associated with the manufacturing license agreement.

The majority of the engineering services revenues earned and expenses incurred in 2007 was from services provided to ATC in support of ATC’s intent to develop the NuVinci technology for a high-powered application, such as automobile primary transmissions. We were willing to provide engineering services for this project at a negative gross margin because it was an opportunity to demonstrate the NuVinci technology in an application beyond bicycle. In 2007, this engineering services project required many more engineering hours than the other engineering projects in 2008. Commercializing the automobile primary transmission would require extensive capital, development and testing over a period of several years. When we terminated the relationship with ATC in February 2008, we considered the costs, barriers to entry and opportunity for this application. Following these deliberations, we chose not to proceed with the project further, choosing instead to focus our resources on the development and commercialization of other near-term revenue opportunities that require significantly less capital, such as products for the automotive accessory drive end market. Notwithstanding this decision, as a result of our development work under the engineering services agreement with ATC, we were able to apply for various patents relating to automobile primary transmissions and we build a fully demonstrable working prototype with performance test results should we choose to pursue the project at a later date. We may license the technology for this application to a manufacturer or OEM in the automotive industry

and sign additional engineering services agreements to further develop and test the automobile primary transmission.

The majority of the other revenue in 2007 was from miscellaneous parts and services sold to ATC. Cost of other revenue decreased in 2008 because of the termination of the relationship with ATC in February 2008.

Operating expenses

Research and development


	Year Ended
	December 31,				Increase		Percentage
	2007		2008		(Decrease)		Change
	($ in thousands)

Research and development	$	2,985	$	5,939	$	2,954		99	%

Research and development expense for the year ended December 31, 2008 increased by $2,954,000, or 99%, compared to the year ended December 31, 2007.

The increase of $2,954,000 was primarily due to an increase in research and development activities by Viryd. Viryd’s research and development was $133,000 and $1,385,000 in 2007 and 2008, respectively. Viryd had one employee (Vice President of Engineering) at the end of July 2007. As of December 31, 2007 and 2008, Viryd increased its headcount (all engineers) to three and five, respectively. Excluding the increase from Viryd’s activities, the increase in our development expense in 2008, was $1,702,000, or 60%, compared to 2007. In 2007, $1,827,000 of development labor costs were incurred as cost of license fees and cost of engineering services revenue. In 2008, $971,000 of those development labor costs were incurred as part of our internal continuous development of the next generation of the NuVinci bicycle CVT, as well as supporting the bicycle CVT that is currently being sold in the market. Our engineering team also devoted some development efforts to improve and explore opportunities for our NuVinci technology in the automotive accessory drive end market. Total engineering salaries and payroll related expenses increased by $612,000 in 2008, compared to 2007. We increased the size of our engineering staff by five in 2007 and an additional five engineers in 2008. Rent, utilities and related expenses for the year ended December 31, 2008 increased by $168,000, compared to 2007 as we leased additional space to accommodate additional test stands and work space.

Selling, general and administrative expense


	Year Ended
	December 31,				Increase		Percentage
	2007		2008		(Decrease)		Change
	($ in thousands)

Selling, general and administrative	$	2,842	$	4,382	$	1,540		54	%

Selling, general and administrative expense for the year ended December 31, 2008, increased by $1,540,000, or 54%, compared to the year ended December 31, 2007.

Included in total selling, general and administrative expense in 2007 and 2008 were Viryd’s activities of $108,000 and $280,000, respectively. Excluding Viryd’s activities, our selling, general and administrative expenses in 2008 increased by $1,368,000, or 50%, compared to 2007. The increase was primarily due to costs incurred as part of becoming a manufacturer in March 2008. Total advertising, marketing, and trade show expenses increased by $387,000, salaries, bonuses and payroll related expenses increased by $335,000, business and marketing consulting expenses increased by $383,000, legal expenses increased by $191,000, and office, insurance, travel related, and other administrative expenses increased by $160,000. We added three employees in selling, general, and administrative in 2007 and two more employees in 2008.

Interest income (expense)

Interest and dividend income


	Year Ended
	December 31,				Increase			Percentage
	2007		2008		(Decrease)			Change
	($ in thousands)

Interest and dividend income	$	447	$	127	$	(320	)		(72	)%

Interest and dividend income for the year ended December 31, 2008 decreased by $320,000, or 72%, compared to the year ended December 31, 2007.

The decrease of $320,000 was attributable to lower average cash, cash equivalents, and short-term investment balances during the year ended December 31, 2008. Prior to the closing of the sale of Series D Preferred Stock on December 18, 2008, our average cash, cash equivalents, and short-term investment balances in 2008 was $6,347,000. During 2007, the average cash, cash equivalents, and short-term investment cash balances was $8,891,000. In addition, due to lower cash balances during the first half of 2008, we primarily invested our cash in money-market and certificate of deposits with shorter terms such as thirty days. In 2007, we invested our excess cash in longer term certificate of deposits and thus earned higher yields.

Interest expense

Year Ended

December 31,

Increase

Percentage

2007

2008

(Decrease)

Change

($ in thousands)

Interest expense

–

597

N/A

We recognized interest expense for the first time in 2008 in the amount of $597,000.

Beginning in March 2008, we received proceeds from bridge loans in the amount of $4,618,000 and effective August 8, 2008 entered into a Convertible Note and Warrant Purchase Agreement and issued Convertible Unsecured Promissory Notes, with interest at an annual rate of 6%, and detachable warrants to purchase a certain number of shares in new securities (Series D Preferred Stock) equal to 20% of the original principal amount of the applicable Notes. We recorded approximately $180,000 of interest expense incurred from these Notes from the effective date to December 18, 2008, when they were converted into Series D Preferred Stock. We also recorded a non-cash interest expense of $261,000 for the value of the detachable warrants and beneficial conversion feature that were associated with the $4,618,000 promissory note.

We recorded $98,000 of interest that was attributable to a note payable by us in April 2008 in the amount of $1,952,000, with an interest rate of 8% per annum, to purchase an assembly line from ATC so that we could become an outsourced manufacturer. We paid the note in full in December 2008. In consideration of prepayment, the interest rate on the note was amended to 7% per annum. The remaining interest expense was incurred from the outstanding $2,000,000 balance of the note drawn from the line of credit in April 2008. As of December 31, 2008, a balance of $2,000,000 remains outstanding.

Liquidity and Capital Resources

Overview

We have incurred losses since our inception on December 11, 2000 and we have accumulated a deficit. We anticipate that we will continue to incur losses until we launch our N360 CVT and commercialize our technology in other end market applications. We expect to begin manufacturing and selling our N360 and our product for the small wind turbine end market in 2010. We expect to begin manufacturing and selling our products for the automotive accessory drives, electric vehicles, and lawn care equipment end markets in 2011.

We expect that as we grow our business, we will need additional capital to fund our growth and to commercialize new products. We may obtain additional capital from:


	•	Internally generated funds;

	•	Equity, debt financings and borrowings on our line of credit; and

	•	Collaborations such as joint development or joint ventures.

We believe that the net proceeds from this offering and our existing cash, cash equivalents and investments, together with interest thereon, will be sufficient to fund our current operations and product development plan until we reach positive cash flow from operations. However, if we choose to develop additional products outside of our current plan or if we choose to make any strategic investments outside of our current plan, we may need additional funds. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. While we intend to pay off our existing line of credit with the proceeds from the offering, we may choose to maintain a line of credit for working capital requirements. If we are unable to raise sufficient additional capital, we may need to substantially curtail our planned operations and revise our new product development plan. In addition, if we are unable to raise capital from this offering, we would raise capital through a private equity round from our existing and new investors, and believe we would be able to raise enough capital to continue operations for at least twelve months.

Since 2000, we have funded our operations primarily through the private placement of approximately $55 million in the aggregate of our equity securities. We have also financed our business through cash generated from our operations and by borrowing cash under our line of credit or other third party sources. To date, we have invested significant resources developing products for a selected set of end markets. We have also invested in the development and protection of intellectual property resulting in a worldwide portfolio of 156 patents (including validated countries) and 208 patent applications as of December 31, 2009. We will continue to invest in developing and commercializing the NuVinci CVTs for the automotive accessory drives, electric vehicles, bicycle, lawn care equipment and small wind turbine end markets.

As of December 31, 2009, we had cash and cash equivalents of approximately $9.2 million and borrowing capacity under a line of credit of $3.0 million, which was subsequently decreased to $1.0 million as a result of amendments to the line of credit in March 2010 that removed its restrictive financial covenants. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in cash, money market accounts, and certificates of deposit.

Recent Transactions Affecting our Liquidity and Capital Resources

Throughout the global credit and economic crisis, it has been expensive for us to raise private capital. In order to purchase the manufacturing tangible and intangible assets from ATC in February 2008, we drew $2.0 million from our $5.0 million line of credit (which was amended in March 2010 to be a $3.0 million line of credit), and issued a promissory note for $2.0 million. Collateral for the line of credit consisted of the personal guarantee of, but now consists of assets held on account with the lender by, a stockholder and

director of our company. In December 2009, we issued a warrant to purchase 3,100,753 shares of common stock at a price of $0.3992 in exchange for the personal guarantee of our line of credit.

Beginning in March 2008, we received proceeds from bridge loans from existing and new private investors in the amount of $4.6 million and effective August 2008, entered into a Convertible Note and Warrant Purchase Agreement and issued Convertible Unsecured Promissory Notes with interest at an annual rate of 6%, and detachable warrants to purchase a certain number of shares in new securities (Series D Preferred Stock) equal to 20% of the original principal amount of the applicable Notes. The bridge loans provided us the capital required to continue operations until we closed the Series D Preferred Stock financing in December 2008.

In December 2008, we were able to close a private placement of new securities and issued 51,589,191 shares of Series D Preferred Stock, at a price of $0.3992 per share in exchange for gross proceeds of approximately $20.6 million. The principal of the Convertible Note and accrued interest of $4.8 million were converted into 12,018,211 shares of Series D Preferred Stock and the detachable warrants were canceled in exchange for 672,050 shares of Viryd Series A Preferred Stock that was held by us. The transaction fees in connection with the Series D Preferred Stock financing include warrants to purchase 2,004,000 shares of common stock at a price of $0.3992.

On December 31, 2008, we paid off the $2.0 million promissory note in full. As of December 31, 2008 and 2009, we continue to have $2.0 million outstanding under the revolving line of credit.

In November 2009, we raised $4.0 million by issuing 10,020,040 shares of Series D Preferred Stock. The transaction fees included warrants to purchase 112,726 shares of common stock at a price of $0.3992 per share.

Sources and Uses of Cash

At December 31, 2009, we had cash and cash equivalents of $9.2 million, compared to $14.6 million at December 31, 2008, and $8.0 million at December 31, 2007.


	Year Ended December 31,
	2007			2008			2009
	($ in thousands)

Net cash (used in) provided by:
Operating activities	$	(5,860	)	$	(9,496	)	$	(12,118	)
Investing activities		8,073			(7,271	)		2,954
Financing activities		2,612			23,289			3,812

Net change in cash	$	4,825		$	6,522		$	(5,352	)

Cash Flows from Operating Activities

In 2009, cash flows used by operating activities totaled $12.1 million, compared to $9.5 million in 2008. The increase in cash used in operations in 2009 was due primarily to an increase in the net loss of $6.6 million offset by a noncash impairment of $1.5 million and loss on disposal of $1.5 million on machinery and equipment, as well as a $0.5 million impairment loss on the write-off of intangible assets from ATC that included trade secrets and manufacturing processes used to manufacture the N171. Additionally, there was a $1.3 million lower of cost or market write-down and obsolescence charge on inventory on hand. This was offset by a $1.7 million increase in cash used to build product inventory for future sales and product replacements, if any, and to further develop the core NuVinci technology for our target end markets.

In 2008, cash flows used by operating activities totaled $9.5 million, compared to $5.9 million in 2007. The increase in cash flows used by operating activities was driven primarily by costs associated with becoming a contract manufacturer and development efforts to improve and further develop the core NuVinci technology for the automotive accessory drive and small wind turbine end markets.

In January 2010, we signed a manufacturing and supply agreement with Tri Star Group, a manufacturer located in Shanghai, China, to manufacture the next generation bicycle CVT. Under that agreement, we are responsible for certain finished goods, work in process, and raw materials inventory relating to our bicycle

CVT that Tri Star has on hand. As long as the manufacturing and supply agreement with Tri Star is effective, we may be required to use working capital to pay for this inventory.

Cash Flows from Investing Activities

In 2009, cash flows provided by investing activities totaled $3.0 million, compared to $7.3 million used in investing activities in 2008. In 2009, cash provided by investing activities primarily consisted of proceeds from sales of investments, while cash used in investing activities in 2008 consisted of purchases of equipment and leasehold improvements, purchases of intangible assets and costs incurred for patents, and purchases of investments.

In 2008, cash flows used in investing activities totaled $7.3 million, compared to $8.1 million that was provided by investing activities in 2007. In 2008, we primarily used cash to purchase manufacturing equipment, intangible assets and to pay for patent costs. In 2007, proceeds from the sale of investments exceeded cash flows used to purchase investments.

Cash Flows from Financing Activities

In 2009, cash flows provided by financing activities totaled $3.8 million, compared to $23.3 million in 2008. Financing activities in 2009 primarily included $4.0 million in proceeds from the issuance of Series D Preferred Stock, as compared to $20.1 million in proceeds from the issuance of Series D Preferred Stock in 2008. In 2008, financing activities also included borrowings of $4.6 million in Convertible Unsecured Promissory Notes and borrowings of $2.0 million on the line of credit, offset by $2.0 million in repayments of notes payable.

In 2008, cash flows provided by financing activities totaled $23.3 million, compared to $2.6 million in 2007. Cash provided by financing activities in 2008 was primarily from the issuance of Series D Preferred Stock in exchange for gross cash proceeds of $20.6 million and borrowings of $4.6 million Convertible Unsecured Promissory Notes and $2.0 million on the line of credit. The cash inflows were reduced by repayments of $2.0 million note payable, Series D Preferred Stock issuance cost of $1.4 million, and spin-off of Viryd of $0.9 million.

Capital Expenditures

Our capital expenditures include machinery and equipment, furniture and fixtures, computer equipment, and leasehold improvements. Under our business model of contract manufacturing and licensing, one of the several advantages over in-house manufacturing is lower capital expenditures. We do not expect to invest significant amounts of capital in facilities and equipment; however, we do expect to share some tooling costs with the contract manufacturer of our products. In 2008, we paid $2.7 million in cash and issued a promissory note in the amount of $2.0 million to ATC in connection with the purchase of ATC’s manufacturing line equipment. In 2009, we spent $0.4 million in cash for machinery and equipment.

Revolving Line of Credit

At December 31, 2008 and 2009, we had $2.0 million of borrowings outstanding under our revolving line of credit. As of December 31, 2008 and 2009, we had $3.0 million available under the revolving line of credit.

In March 2010, we amended the line of credit to remove restrictive financial covenants. The amendment also decreased the available credit from $5.0 million to $3.0 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, except for operating leases for our facilities.

Contractual Obligations

The following table summarizes our contractual obligations and commitments as of December 31, 2009:


	Payments by Year
	Total		2010		2011		2012		Thereafter
	($ in thousands)

Operating leases	$	439	$	308	$	108	$	23	$	–
Debt⁽¹⁾		2,000		2,000		–		–		–

Total	$	2,439	$	2,308	$	108	$	23	$	–


(1)		As of December 31, 2009, debt obligation includes short-term debt of $2.0 million of outstanding balance on the revolving line of credit, but excludes related interest payments on the line of credit. The outstanding principal balance shall bear interest at a rate of 1.0 percent per annum above the base rate, which is a fluctuating rate equal to the highest of the prime rate (5.0 percent at December 31, 2009), LIBOR plus 1.5 percent, or the Federal Funds Rate plus 1.5 percent; but in no case shall the interest rate be less than 5.0 percent. Debt obligation also excludes the quarterly unused commitment fee of 0.375% per annum on the average daily unused line of credit.

We had no long-term debt as of December 31, 2009. Our current debt as of December 31, 2009 was comprised of $2.0 million drawn on a revolving line of credit scheduled to expire on December 31, 2010. Our long-term liabilities include deferred revenue of $0.3 million as of December 31, 2009.

In January 2010, we entered into a two year consulting agreement with Advanced Strategic Leadership Limited (ASL), an unrelated Shanghai company, under which ASL will provide consulting and market development services in exchange for a monthly fee of $10,000 per month, 2% of net sales procured by ASL each calendar quarter during the term of the agreement, and, upon reaching certain performance milestones, warrants to purchase up to 800,000 shares of common stock at an exercise price of $0.3992. Under the consulting agreement, services and deliverables that ASL will provide include a China electric vehicle market analysis and future forecast; support for the establishment of an electric vehicle business; and support for building brand/product introduction.

Effective January 30, 2010, we entered into a manufacturing supply agreement with Tri Star Group (Tri Star) under which Tri Star will manufacture the next generation bicycle transmission, the N360, on a contract basis and will participate with us in the sale of the N360 in China. Tri Star will provide the manufacturing facility and general purpose equipment, Tri Star and the Company will share the cost of tooling, and we will bear the cost of dedicated special purpose equipment needed for assembly of the product. We issued a blanket purchase order in the range of $8.0 million to $12.0 million for forecasted production requirements from May 2010 through August 2011. Regular orders against this blanket purchase order will be provided to Tri Star based on orders received and forecasted demand.

Qualitative and Quantitative Disclosures About Market Risk

Our cash, cash equivalents, and short-term investments as of December 31, 2009, consisted primarily of cash and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of United States interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition or results of operation. We do not have any foreign currency or other derivative financial instruments.

Accounting Restatements

Since inception through December 31, 2008, we elected to value our common stock, options, and warrants by a method not in accordance with GAAP. We had previously determined fair value based on Internal Revenue Code Section 409A, using a probability-weighted expected return valuation method. We have since reassessed

the fair value of our common stock, through the engagement of a third-party valuation specialist, using methodologies in accordance with GAAP based our total enterprise value, which is defined as the market value of equity plus interest bearing debt less cash and cash equivalents.

We have restated the accompanying consolidated financial statements as of December 31, 2008 and for each of the years ended December 31, 2007 and 2008, to correct the recognition of share-based compensation expense, warrants, and debt discounts. The net effects of the restatement on our financial statements are disclosed in Note 16 to the consolidated financial statements.

In connection with the anticipated filing of the registration statement in connection with our initial public offering, certain expenses as originally reported have been reclassified in the consolidated statements of operations to be consistent with the classifications adopted in 2009, with no net impact on the 2007 and 2008 reported net loss, stockholders’ equity, and cash flows. These reclassifications allocated certain research and development and selling, general and administrative expenses to cost of revenues expense categories. Revenues were disaggregated into more detailed revenue lines. Stock-based compensation expense and depreciation and amortization were allocated to cost of revenues, research and development, and selling, general and administrative expenses.

Additionally, certain balance sheet reclassifications within current assets have been made, including consolidating a nominal interest receivable amount into prepaid expenses and other current assets, as well as reclassing certain certificates of deposit out of cash and cash equivalents and into short-term investments based on their original maturity dates. Reclassifications between liability accounts have also been made to properly classify long-term liabilities, such as reclassing deferred rent and deferred revenue to long-term liabilities based on their long-term nature.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 2 to our audited consolidated financial statements included in this prospectus, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of the Board of Directors.

Revenue recognition

Product sales—The Company’s product sales primarily consist of NuVinci CVTs. The Company recognizes revenue upon delivery of the product, provided that (a) persuasive evidence of an arrangement exists; (b) delivery has occurred; (c) the fee is fixed or determinable; and (d) collectability is reasonably assured. The Company’s sales terms provide no right of return. The Company offers a standard six-year warranty on the first generation bicycle CVT.

License fees and royalties—License fee revenue is recognized when the intellectual property is physically delivered, the license term commences, and there are no future performance obligations or requirements. When the Company is obligated to provide development during the license term, license fee revenue is deferred and recognized over the term of the contract or the remaining estimated period of continuing involvement, whichever is longer. Nonrefundable, lump sum license fees are recognized as revenues upon

receipt when there is no future performance obligation and when the earnings process is culminated. The Company recognizes royalty revenues from licensed products when earned in accordance with the terms of the license agreements.

Engineering services—The Company performs third party research and development activities, which are typically provided on a time and materials basis. Revenue for research and development is recorded as performance progresses under the applicable agreement. Revenues for engineering services derived from nonrefundable research and development payments are recognized when the milestone is reached, provided the payment associated with the milestone is commensurate with either the effort required to achieve the milestone or the enhancement of value of the delivered items as a result of achievement of the milestone. Where the milestone payment relates to the remaining deliverables, revenues are deferred to the date milestones are considered to be substantive.

Related party revenues—Related party revenues include support services provided to Viryd, which are recognized monthly as services are provided.

Other revenue—The Company recognizes other revenue upon delivery of miscellaneous parts and raw materials to customers, similar to product sales.

Inventory

All items in inventory are finished goods and are stated at the lower of cost, determined on a first-in-first-out basis, or market. The Company regularly reviews inventory quantities on-hand and adjusts inventory values for excess and obsolete inventory based on overall inventory levels, the current and projected sales levels for such products, the projected markets for such products, and the overall projected demand for products once the next generation of products is scheduled for release. The inventory balance as of December 31, 2008 and 2009 has been adjusted to net realizable value using management’s best estimates of future sales considering the fact that the unit cost of the N171 model of the bicycle CVT was higher than its sales price and the expected launch of, and preliminary marketing effort for, the N360 product. The Company recognized a write-down of inventory from cost to market and for inventory obsolescence in cost of product sales in the consolidated statements of operations of $3,000 and $1,309,000 during 2008 and 2009, respectively.

Evaluation of long-lived assets

The Company assesses its long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Estimated future cash flows are based upon, among other things, assumptions about expected future operating performance and may differ from actual cash flows. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. Management has determined that no impairment of long-lived assets exists for 2008. During 2009, we recognized an impairment loss of $1,537,000 on manufacturing equipment that we acquired from ATC in February 2008 and placed in MTD’s manufacturing facility. In addition, in February 2008, when we terminated our manufacturing license agreement with ATC to become a manufacturer through a contract manufacturing agreement with MTD, we also acquired trade secrets and manufacturing process intangible assets relating to the manufacturing of the bicycle CVT. During 2009, we recognized a $490,000 write-off of such intangible asset.

Intangible Assets

As discussed in the previous policy regarding our evaluation of long-lived assets, we have assessed the recoverability of the patent portfolio based on the associated projected undiscounted future cash flows derived from our projections of the number of units sold and their respective selling prices. The projection of future net cash flows from sales or licenses of products using the Company’s patented technology requires significant management estimates and judgments, including the timing, volume, cost and pricing of future product sales, the expected

rollout date of our next generation products, and expected demand based on discussions with customers. Although we have limited sales history, management believes that this information provides it with a reasonable basis to forecast future cash flows sufficient to support the recoverability of its patent costs. We believe that a 25% reduction in the associated projected undiscounted future cash flows would not affect the recoverability of the patent portfolio. As such, we have determined that no impairment exists for the years ended December 31, 2008 and 2009.

Share-based compensation

We measure all share-based compensation arrangements using a fair value method and to record the expense in our consolidated financial statements over the requisite service period.

Total share-based compensation expense recognized in the statements of operations during the years ended December 31, 2007, 2008, and 2009 is as follows:


	Year Ended December 31,
	2007		2008		2009
	($ in thousands)

Cost of revenues	$	46	$	10	$	39
Research and development		28		152		27
Selling, general and administrative		219		160		356

	$	293	$	322	$	422

The fair value of each employee option granted during the years ended December 31, 2007 and 2009 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions (no options were granted to employees during the year ended December 31, 2008):

Year Ended December 31,

2007

2008

2009

Expected volatility

N/A

56%-63%

Expected dividends

None

N/A

None

Expected term (in years)

5.82

N/A

5.25-6.08

Risk-free interest rate

4.54

N/A

2.02%-2.77%

The fair value of each non-employee option granted during the years ended December 31, 2007 and 2009 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions (no options were granted to non-employees during the year ended December 31, 2008):

Year Ended December 31,

2007

2008

2009

Expected volatility

N/A

59%-63%

Expected dividends

None

N/A

None

Expected term (in years)

5.82

N/A

7.82-10.00

Risk-free interest rate

4.54

N/A

3.07%-3.80%

Expected volatility—The expected volatility rate used to value stock option grants is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on observed comparable companies’ historical common equity volatility for the applicable time periods. For 2009 employee awards, increasing the volatility assumption by 10% to a 62%-69% range or decreasing the volatility assumption by 10% to a 51%-56% would have resulted in an approximately $157,000 ($77,000 increase or $80,000 decrease) or 13% change in fair value. These changes in fair value would have been recognized over the three to four year vesting period of such awards.

Expected term—The Company elected to utilize the “simplified” method to estimate the expected term of stock option grants because the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. Under this approach, the weighted average expected life is presumed to be the average of the vesting term and the contractual term of the option. For

2009 employee awards, increasing the expected term assumption by 10% to 6.05—6.69 years or decreasing the expected term assumption by 10% to 4.95—5.47 years would have resulted in an approximately $92,000 ($44,000 increase or $48,000 decrease) or 7% change in fair value. These changes in fair value would have been recognized over the three to four year vesting period of such awards. It should be noted that a change in the expected term would cause other changes, since the risk-free rate and volatility assumptions are specific to the term; we did not attempt to adjust those assumptions in performing the sensitivity analysis above.

Common stock fair value—For purposes of estimating the fair value of its common stock for stock option grants, the Company reassessed the estimated fair value of its common stock, with the assistance of an unrelated valuation specialist, on selected dates during the years ended December 31, 2007 through 2009. Prior to this reassessment, the Company concluded that stock options granted had exercise prices equal to the then estimated fair value of common stock at the date of grant. Subsequent to reassessment, the Company determined certain stock options granted during 2007 through 2009 had an exercise price different than the estimated fair value of the common stock at the date of grant.

The Company’s reassessment was based on a methodology that first estimated the fair value of the Company as a whole, or enterprise value, and then allocated a portion of the enterprise value to its common stock. This approach is consistent with the methods outlined in the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The valuation methodology utilized in the reassessment of fair value relied primarily on the income approach and the market approach to estimate enterprise value. The market approach gave consideration to the total financing amount received, the implied enterprise value of the Company based on the convertible preferred stock transactions, pricing of comparable publicly traded companies, and market-based private company transactions. Pursuant to the guidance under ASC Topic 820, the inputs used in the market approach over the various valuation dates were primarily Level 2 and Level 3 inputs. The income approach incorporated the expectations of future cash flows of the Company as of the valuation dates and market expectations for an estimated discount rate. The inputs used under the income approach were primarily Level 3 inputs with some Level 2 inputs related primarily to the derivation of the estimated appropriate market participant discount rate. Once the enterprise value was established, the Company used a method consistent with the guidance in AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, to determine the value of the underlying common shares. Specifically, the Company used the Option Pricing Method to determine the fair of the underlying common stock. The Company used these fair value estimates derived from its valuations to determine share-based compensation expense recorded in the consolidated financial statements.

Given the absence of an active market for our common stock, the Company estimated the fair value of our common stock, with assistance from an unrelated valuation specialist, by performing retrospective valuations for the valuation dates prior to 2009 and contemporaneous valuations during 2009. These estimates of the fair value of our common stock were made as of the following dates:


	Fair Value
Common Stock Valuation Date	Per Share

June 30, 2007	$	0.67
December 31, 2007		0.47
December 31, 2008		0.22
August 31, 2009		0.11
December 8, 2009		0.26

The following table sets forth all stock options granted during the 12 months prior to December 31, 2009:


	Number of
	Options		Exercise		Fair Value
Grant Date	Granted		Price		Per Share
	(In thousands)

February 8, 2009		6,927	$	0.22	$	0.22
April 24, 2009		135		0.22		0.22
August 26, 2009		193		0.22		0.22
October 22, 2009		2,449		0.10		0.11
December 3, 2009		102		0.10		0.26
December 5, 2009		105		0.25		0.26

In order to determine the fair value of our common stock on the date of grant for purposes of calculating the fair value of our stock option grants under ASC Topic 718, we utilized the most current valuation, primarily obtained on the last day of the fiscal year. If there was a material change in the business or in the business plan, we obtained an independent valuation prior to granting stock options.

Accounting Standards Updates

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. (FIN) 46(R), (codified in ASC Topic 810), as amended by ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which amends the consolidation guidance that applies to variable interest entities (VIE). The amendments will significantly affect the overall consolidation analysis under FIN 46 (revised December 2003), Consolidation of Variable Interest Entities, or FIN 46(R), to improve financial reporting by enterprises involved with VIE’s and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 carries forward the scope of FIN 46(R), with the addition of entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated in SFAS No. 166, Accounting for Transfers of Financial Assets (ASC Topic 860). The principal objectives of these new disclosures are to provide financial statement users with an understanding of:


	•	The significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement in a VIE;

	•	The nature of restrictions on a consolidated VIE’s assets and on the settlement of its liabilities reported by an enterprise in its statement of financial position, including the carrying amounts of such assets and liabilities;


	•	The nature of, and changes in, the risks associated with an enterprise’s involvement with the VIE; and

	•	How an enterprise’s involvement with the VIE affects the enterprise’s financial position, financial performance, and cash flows.

SFAS No. 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009 (we must adopt the standard as of January 1, 2010). Early adoption is prohibited. Based on our evaluation of ASC Topic 810, Consolidation, we do not believe the adoption of SFAS No. 167 will have a material impact on the consolidated financial statements.

In October 2009, ASU 2009-13, Multiple-Deliverable Revenue Arrangements, codified the consensus in Emerging Issues Task Force (EITF) Issue 08-1, which supersedes EITF Issue 00-21 (codified in ASC Topic 605-25). The ASU was issued in response to practice concerns related to the accounting for revenue arrangements with multiple deliverables under Issue 00-21 and applies to all deliverables in contractual arrangements in all industries in which a vendor will perform multiple revenue-generating activities, except when some or all deliverables in a multiple-deliverable arrangement are within the scope of other, more specific sections of the Codification and other sections of ASC 605 on revenue recognition. Specifically, the ASU addresses the unit of accounting for arrangements involving multiple deliverables. It also addresses how arrangement consideration should be allocated to the separate units of accounting, when applicable. However, guidance on determining when the criteria for revenue recognition are met and on how an entity should recognize revenue for a given unit of accounting are located in other sections of the Codification (e.g., Staff Accounting Bulletin Topic 13). Although the ASU retains the criteria from Issue 00-21 for when delivered items in a multiple-deliverable arrangement should be considered separate units of accounting, it removes the previous separation criterion under Issue 00-21 that objective and reliable evidence of the fair value of any undelivered items must exist for the delivered items to be considered a separate unit or separate units of accounting. The final consensus is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply this ASU (1) prospectively to new or materially modified arrangements after the Issue’s effective date or (2) retrospectively for all periods presented. We do not believe the adoption of ASU 2009-13 will have a material impact on the consolidated financial statements.

Business

Overview

Our NuVinci Technology

Our NuVinci technology is a new type of continuously variable transmission (CVT) that can be used in a wide variety of end market applications. A CVT is a transmission that effectively has an infinite number of gear ratios within its range. Our technology is currently available in the global market for bicycle transmissions, where it has been used to replace the rear wheel gear assembly. We are also currently developing applications for a number of other target end markets that we believe to have near term commercial potential. These include accessory drives for automotive air conditioners, alternators and superchargers and primary transmissions for electric vehicles, lawn care equipment and small wind turbines.

As a result of its simple and compact design and its low manufacturing cost, the NuVinci technology is scalable across multiple applications in various industries, which we feel makes it a “platform technology.” We believe that the NuVinci CVT improves overall efficiency, performance and functionality in many existing mechanical systems and, as discussed below, enables new functions not previously possible.

Benefits of our NuVinci Technology

We believe our NuVinci technology provides the following benefits to specific applications in our target markets:


	•	Automotive Accessory Drives: Enables accessories to maintain an optimal operating speed, even as engine speed increases or decreases. This is important for vehicle engine accessories such as air conditioners and alternators, because it allows them to provide optimal cooling and electric power, respectively, even when the engine is at its lowest speed. For superchargers, this improves engine performance and facilitates the use of smaller engines, or “engine downsizing,” to reduce fuel consumption and emissions without sacrificing performance.

	•	Electric Vehicles: Enhances the commercial potential of electric vehicles by creating mechanical efficiencies that increase vehicle driving range and top speed in typical day to day driving conditions, improved battery life and potentially reducing the need for certain inefficient, high cost power electronics, which would lower manufacturing costs.


	•	Bicycles: Optimizes ride experience by providing an unlimited number of speeds between low and high with smooth, seamless shifting throughout so the rider can select the exact pedaling speed the rider desires for any particular riding condition.


	•	Lawn Care Equipment: Reduces fuel consumption, emissions and noise of lawn care equipment, while providing the same or improved performance.

	•	Small Wind Turbines: Improves the energy capture and improves reliability of small wind turbines, while lowering the cost of the wind turbine and thereby reducing the cost of energy produced.

Our Markets

We believe that, due to its strengths, our NuVinci technology can improve the overall efficiency and performance of mechanical systems that require variation between the speed of a primary drive and the speed required to operate the system, and that our NuVinci technology provides a substantial platform for growth as we seek to commercialize applications in each of our target markets.

To date, we have developed applications for a selected set of end markets that offer the most attractive competitive dynamics and potential for economic returns, namely automotive accessory drives for air conditioners, alternators and superchargers, primary transmissions for electric vehicles and lawn care equipment, drivetrains for the wind power systems markets and rear wheel hubs for bicycles.

To help us adapt our technology to the relevant application and to facilitate market access, we have established commercial relationships with industry leaders in each of our target markets. In the automotive accessory drive market, we are working with a major automotive supplier to develop a supercharger product. In the bicycle market, we have partnered with leading bicycle manufacturers to drive sales of our product. In the electric vehicle market, we have partnered with a strategic automotive industry consultant for market development and consulting services for the Chinese EV market. In the wind and lawn and garden equipment markets we have provided operating licenses to key industry leaders, enabling them to manufacture and distribute our technology, thereby increasing our growth prospects, brand awareness, and short term cash flow.

The applications for our NuVinci technology in each target market are at different stages of development and have different economic prospects. The following table summarizes the competitive advantages of our products, estimated market size, and the stage of development of applications for each of our target end markets:

Table 1: End Markets

Notes:


(1)		Anticipated Product Launch Year refers to the particular year identified that we believe, based on development and planning, a particular product should be launched in the marketplace. We are unable to predict at this stage the particular quarter of any given year in which a product might be launched.

(2)		Not represented is a one time aftermarket opportunity of $1.0 billion.

(3)		Projected addressable annual market opportunity by 2015.

(4)		Launched original version in 2007 and next generation version will be launched in 2010.

(5)		Although this is the currently anticipated product launch date, the precise timing is at the discretion of our licensees.

As we commercialize the end market applications in Table 1, we will address other end market applications that we believe would be well-suited to our NuVinci technology, such as automotive driveline transmission, industrial equipment, and auxiliary power units. We will continue to invest in research and development to develop these applications and to expand into these markets on a commercial basis.

Our Patents and Technology Awards

As of December 31, 2009, we had raised approximately $55 million in financing to develop and commercialize our technology. We have developed a patent portfolio that as of December 31, 2009 consisted of 86 U.S. patents, 61 U.S. pending patent applications, 70 foreign issued patents (including validated countries) and 147 pending foreign patent applications, the oldest of which will run until 2018. Our U.S. patent portfolio was ranked as the #1 patent portfolio in the automotive and transportation industry by The Patent Scorecard^tm as reported in the Wall Street Journal on January 13, 2009, ahead of such companies as Denso Corporation, Toyota Motor Corporation, Honda Motor Company Ltd, General Motors Corporation and Ford Motor Company.

Our NuVinci technology has also won several key industry awards including:


	•	R&D Magazine’s 2007 R&D 100 Award, awarded by an independent panel of experts and by the editors of R&D magazine recognizing the 100 most technically significant new products of 2007 worldwide.

	•	Popular Science’s “Best of What’s New, Grand Award 2007” for the recreational category, honoring innovations that made a positive impact on life.

	•	The Dutch bicycle industry’s 2007 FietsVak “Innovation of the Year” award honoring the year’s best new bicycle product.

	•	2008 iF Design EUROBIKE Gold Award, one of ten Gold Awards awarded by iF International Forum Design, honoring the best in bicycle design, considered one of the industry’s most prestigious design competitions. In 2008, more than 360 entries from 22 countries competed in 19 categories. The NuVinci CVT and CruiseController^tm, the trade name of the shifter for the bicycle hub, were given a Gold Award with judges citing the excellence of the NuVinci product’s engineering, its simplicity, and its ease of use as major factors in their decision.

	•	The Guardian/Cleantech Group’s 2009 Global Cleantech 100 Award. This award reflects the collective opinion of a panel of over 100 cleantech experts and venture capital companies around the world in evaluating companies with the greatest potential to achieve high growth and high market impact.

Our Strengths

Traditional transmission systems are limited to a fixed number of discrete gears and utilize complex shifting mechanisms. CVTs provide a smooth and continuous variation between the speed of the primary drive and the operating speed of the mechanical system or device, from low up through high and any speed in between. In our target end market applications, we believe our NuVinci technology provides many advantages over traditional transmissions and addresses the limitations of other currently available CVTs by offering the following:


	•	Improved efficiency and performance. Improves the overall efficiency and performance of existing mechanical systems, reducing the energy required for operation.

	•	Adaptable platform technology. Its size, design, packaging and economic attributes enable its use in a variety of end market applications ranging in size from bicycle hubs to utility class wind turbine systems. Many of these end markets are currently employing transmission systems that provide lower overall system efficiency, that are more costly to manufacture, or that are limited to single-speeds due to technical, economic or space constraints.


	•	Simple, durable and cost-effective design. Employs a simple design with a small number of components that are relatively simple to produce. This makes the manufacturing of our technology more reliable and less costly than that of other transmissions and results in a more durable product.

	•	Pursue new markets and new applications where NuVinci technology has a clear competitive advantage. We will continue to focus our development efforts on applications in end markets where we believe NuVinci technology has competitive advantages over existing transmission system technology as well as markets that do not currently employ a transmission system.

	•	Continue to invest in research and development. We believe that our NuVinci technology provides us with a competitive advantage over existing CVTs and traditional gear-based transmissions. We intend to continue investing in research and development to improve and further develop the design of applications in our current end markets and continue developing proprietary technologies for other applications where our technology offers a competitive advantage.

We intend to implement these strategies through:


	•	Leverage proven commercialization capabilities from the bicycle market into the development of other markets. We have completed the commercial development of a complete supply chain in the bicycle market. We intend to use this experience to commercialize and apply our NuVinci technology to subsequent end market applications.

	•	Partner with industry leaders to adapt and commercialize our products. In each end market application, we intend to develop strategic relationships with industry leaders as development partners and customers. This approach should provide insights into the performance requirements of each market, increase the likelihood of successful commercialization and reduce development costs.

	•	Flexible approach to manufacturing. In certain target markets, such as bicycle, EV’s and automotive accessory drives, we intend to engage high quality, cost effective contract manufacturers to make our products. In other target markets, such as wind and lawn and garden equipment, we intend to develop licensee relationships with key manufacturers to maximize our growth and cash flow prospects and further our brand awareness, while effectively managing our capital and human resources.

Our Management

Our senior management team is comprised of industry veterans with a wide range of experience in the development and commercialization of technology and products. Our chief executive officer has over 20 years of automotive-related experience with numerous leadership positions in the automotive business, including president of Visteon Climate Control System Ltd— at the time a subsidiary of Ford— with an established track record of leading and growing successful organizations. Our chief operating officer brings over 30 years of automotive experience in operations, engineering and sales both domestically and internationally including key management roles at General Motors and key automotive suppliers. Our chief technology officer, a fellow of the Society of Automotive Engineers, previously headed the drivetrain group at the Southwest Research Institute in San Antonio, Texas. Our president of the bicycle division has over 20 years of successful sales, product development and business development experience in the automotive industry, both domestically and internationally serving in senior global roles with key suppliers such as Visteon, Federal-Mogul and Echlin Inc.

Company History

We were originally formed on December 11, 2000 as Motion Systems Technologies, LLC, which was subsequently converted into Fallbrook Technologies Inc., a Delaware corporation, on April 13, 2004.

In 2002, we retained an independent design and testing laboratory serving automotive OEMs to conduct a series of tests to verify the potential of our NuVinci technology. The tests helped identify further development targets and indicated that our technology had the potential for use in a number of end market applications including variable speed gearboxes and generally within the automotive industry. We also separately confirmed

analytically and then with prototypes our technology’s ability to support the implementation of an infinitely variable transmission (IVT), without additional shafts and gears—a feature we believe to be unique to NuVinci technology among CVTs.

Following these tests, we determined that additional engineering and management expertise was needed to commercialize our technology. In 2004, we hired auto industry veteran Mr. William (Bill) Klehm as President and CEO, converted to a Delaware corporation and changed our name to Fallbrook Technologies Inc. Bill Klehm assembled a team of senior engineers from the transmission field and several managers seasoned in development initiatives. We also accelerated our research and development initiatives resulting in our first manufacturing agreement later in 2004. In 2005, we signed a development agreement and license with Aftermarket Technologies Corp. for the development and manufacturing of our bicycle product.

In 2006, we entered into a number of commercial agreements, including a trademark licensing and development agreement with a transmission fluid manufacturer to design, test and market specialty fluids that improve the performance of the NuVinci CVT, a manufacturing license agreement with Aftermarket Technology Corp. (ATC) for the manufacture of NuVinci CVTs and OEM licensing agreements with Ellsworth International, Inc., Batavus BV, and Currie Technologies to design and market bicycles and electric scooters featuring the NuVinci technology.

On January 3, 2007, the Company formed a wholly-owned subsidiary, Viryd Technologies Inc. (Viryd) (formerly known as Fallbrook Wind Technology Inc.), a Delaware corporation, for the further development of applications specifically designed for the wind turbine market. On December 18, 2008, we completed a spin-off of Viryd through a pro rata distribution of shares to our stockholders.

In early 2008, in an effort to gain greater control of the manufacturing process, we agreed with ATC to terminate its license agreement and moved to a contract manufacturing platform by entering a manufacturing supply agreement with MTD Products Inc, a manufacturer of outdoor power equipment.

In December 2008, we closed our largest financing round of approximately $25 million from a consortium of private investors and two leading cleantech venture capital firms; NGEN Partners and Dutch investment firm Robeco, a wholly-owned subsidiary of Rabobank Group. In November 2009 we completed a subsequent closing of this same round for approximately $4 million, which included new and existing investors. This investment round followed three previous private investment rounds that in the aggregate provided approximately $55 million in financing for the development and commercialization of our NuVinci technology.

In 2009, we began the process of phasing out production of our existing bicycle product in order to prepare for the launch of our next generation bicycle product. We terminated our manufacturing supply agreement with MTD Products Inc. in October 2009. On January 30, 2010 we signed a supply agreement with Tri Star Group, a company located in Shanghai, for the manufacture of N360, thereby completing a selection process that began in 2008.

Our Technology

Existing Technologies

Heightened concern for the environment and the desire for reduced dependence on fossil fuels have led to an increased demand for vehicles and equipment that operate more energy efficiently, with lower emissions and that provide the same or superior performance. Vehicle and equipment manufacturers continue to look for technological improvements that meet the increasing environmental standards without sacrificing performance. Increased regulatory standards for efficiency and reduced emissions also drive the pursuit of such improvements. For automobiles and other vehicles, improving the operating efficiency of the engine or motor can have the most significant impact on the overall efficiency of the vehicle.

Manufacturers of automobiles, other vehicles and equipment often focus on the transmission as an area in which to achieve such improvements. Transmissions take the operating speed of a motor or engine and convert it to the speed necessary for the operation of the vehicle or equipment. Since there are few instances where the motor or engine operates optimally at the same speed as the vehicle or equipment, transmissions are needed to

take the speed of the engine or motor and produce an output speed that meets the operating speed requirements of the vehicle or equipment.

As an example, an automobile with a single gear is almost useless, because if geared low enough to start off or climb a hill, the car would have an unacceptably low top speed. If geared high enough to drive on a freeway, a single gear car would not be functional at startup or able to climb a hill. In contrast, the same car equipped with a five-speed transmission can stop and start while pulling a trailer over a mountain and it can cruise at high speeds on a freeway. The transmission makes the car functional. In addition, the multi-speed transmission enables the engine to operate more efficiently. For example, automobile engines typically operate most efficiently at a particular engine speed, or RPM. While the transmission is in each discrete gear, the engine must increase its speed from low to high before the car is travelling fast enough to allow a change to the next higher gear. As the engine’s speed increases within each discrete gear, the engine must rev up from a low RPM to a high RPM, thereby moving into and out of its most efficient operating range. In an automobile equipped with a five speed transmission, unless the automobile drives primarily at a fixed speed, the engine typically spends a large amount of driving time outside its most efficient operating speed and consequently the engine wastes energy and creates unnecessary, harmful emissions. By increasing the number of gears in a transmission, it is possible to increase the energy efficiency of the engine.

Unlike conventional transmissions that have a fixed number of gears or output speeds, a continuously variable transmission, or CVT, is a particular type of transmission that has an unlimited number of speed ratios between its high and low limits. This allows the engine or motor to stay within its peak efficiency or peak power operating speed more than the conventional transmission. For example, when used in an automotive transmission, CVTs improve performance by allowing the engine or motor to continuously deliver peak power and torque to the drivetrain while steadily allowing the speed of the car to increase through acceleration. This improves efficiency by allowing the car’s engine to remain in its most efficient speed as the car speeds up or slows down.

Therefore, because of the unlimited number of gears that allow engines to operate at their most efficient or highest power speed, while the speed of the rest of the mechanical system is allowed to vary, the CVT optimizes the overall system efficiency, reduces fuel consumption and emissions, thereby reducing the adverse effects of such mechanical systems on the environment. Besides automobiles, these benefits of CVTs are similarly achievable in many other mechanical systems that require variation between the speed of a primary drive and the speed required to operate the mechanical system.

How Our NuVinci Technology Works

Our NuVinci technology is a CVT that is based on a set of rotating, tilting balls clamped between two rings. Figure 1 illustrates the basic components of the NuVinci CVT technology. As shown in Figure 1, our NuVinci technology has:


	•	an input disc, or ring, driven by the motor or engine that is in contact with and drives the balls on one side,

	•	a cylindrical support member, or idler, located in the middle of the balls that keeps the balls in their positions around the center of the CVT, and

	•	an output disc, or ring, in contact with and driven by the balls that forms, or is connected to, the output of the CVT.

Figure 1 – NuVinci Technology

Torque from an engine, motor or other input source (illustrated in Figure 1 by the lines with arrows going left to right) is transferred through the input disc to the balls via the contact between the balls and the input disc. The torque is then transmitted through the balls, each of which rotates about its own separate axle, and then to

the output disc via the contact between the ball and the output disc. The input disc and output disc are clamped onto the balls tightly so that the requisite amount of clamping force is provided for the amount of torque being transmitted. A proprietary transmission fluid that provides traction, and prevents metal to metal contact, between the balls and discs and provides lubrication for bearings and other components.

The speed of the input disc compared to the speed of the output disc, or speed ratio, is controlled by the angle of the ball axles relative to the axis of the transmission. Figure 2 illustrates that by tilting the ball axles, the transmission can be shifted from low to high (as shown left to right), or from high to low, or to any ratio in between. The number of balls used depends on several factors including torque and speed requirements, operational requirements and space considerations, among others.

Figure 2 – Shifting NuVinci Technology

Although we initially developed our NuVinci technology as a new type of CVT, we discovered after further development that the same components of the NuVinci technology could be configured as an IVT capable of forward, reverse and a “powered zero” state, where most other CVTs require extra shafts and gearing. In the “powered zero” state for vehicle main driveline transmissions, the NuVinci IVT will hold the wheels stopped on a vehicle even though the engine is running and the transmission is engaged, such as on a hill at a stop.

NuVinci’s Competitive Advantages

We believe our NuVinci technology provides enhanced performance and improved overall system efficiency for mechanical systems that require variation between the speed of a primary drive and the speed required to operate the mechanical system. Considering the pervasive use of mechanical systems, we believe that technologies, such as the NuVinci technology, that deliver improved performance, fuel or energy efficiency or design flexibility combined with reduced emissions should be of interest to consumers and manufacturers in today’s global climate of concern for emissions and efficiency improvement.

Compared to conventional transmissions, our NuVinci CVT offers seamless and continuous transition to any ratio within its range, allowing motors and engines to operate at their most efficient speed thus maximizing overall efficiency, with no jarring or shocks from the shifting process. Consequently, NuVinci technology can improve acceleration and performance while providing system level efficiency improvement over conventional transmissions. Due to its flexible packaging and scalable design, it can enable the commercial use of CVTs in applications not currently using them, such as automotive accessory drives, wind turbines and bicycles.

Although they have a long history, CVTs have varied designs and we believe they have proven difficult or costly to manufacture to date. They have also been too difficult to apply, control or scale to the applications that could benefit from a smooth, quiet and gearless solution. In contrast to most other CVTs, we believe our NuVinci technology is less complex, more compact, provides more stable control, is easier to shift, offers more scalability across product lines, can be assembled and configured to suit a wider range of applications and is

less expensive to manufacture and assemble. We believe that our NuVinci technology can be viewed as the first truly “functional” CVT—one that is simple, versatile, relatively inexpensive and scalable.

Our NuVinci technology uses materials that are commonly available and widely used today in many industries. The primary materials used in our technology include steel and aluminum, both of which are available at commodity prices on mass production scale. Materials available as commodities are inexpensive and have more stable pricing than many special purpose materials that relatively little, if any, mass production history. Unlike many “green” technologies that are dependent on rare raw materials with volatile pricing, we believe that our technologies offer a more sustainable economic proposition.

In summary, NuVinci technology provides flexibility in design and configuration that makes it well suited for applications in many major industries including bicycles, light electric vehicles, agricultural equipment and tractors, automobiles, trucks, accessory drives, and wind turbines of all size classes. For many applications, these advantages should be enabling, meaning that the application simply is not practical without the assembly and configuration flexibility of the NuVinci technology.

Market Opportunities

Overview

We believe the NuVinci CVT provides enhanced performance and improved overall system efficiency for mechanical systems that require variation between the speed of a primary drive and the speed required to operate the mechanical system.

Automotive Accessory Drives

Background—Accessory drives

We believe the opportunity for our NuVinci technology within the transportation segment is substantial. While our technology could be applied as the primary vehicle transmission, our current development and initiatives are focused on improving the performance of automotive accessory drives, a market we believe should have fewer barriers and take less time to enter, as well as having lower capital requirements.

Figure 3 below is an illustration of the front end of a typical engine and various accessories that are driven off the engine’s crankshaft by a belt and a series of pulleys. As illustrated, numerous automotive accessory drives exist in a vehicular system, including an air conditioning compressor, alternator, water pump, power steering pump and, in some cases, a supercharger (not shown).

Figure 3 – Engine Accessories

These automotive accessory drives are powered directly from the engine and because the belt and pulleys that operate the accessories act as a single speed transmission, the operating speeds of the accessories are limited to going up and down as the engine’s speed changes. These accessories are typically sized to provide their required performance even in the worst case scenario—for instance, the AC compressor is sized to cool a car with the engine idling, sitting in traffic conditions, at a very high outside temperature. This means that anytime the engine is not operating in that worst case scenario, the accessories are over-performing and are wasting energy. In other situations, design constraints prevent the use of accessories sized large enough to meet the worst case conditions. In such cases the accessory cannot meet its basic performance requirements.

We are initially focusing on the performance and optimization of the alternator, supercharger and air conditioning compressor and will follow with improvements to the overall system by applying the technology to the crankshaft drive pulley to vary the speed of all the accessories independently of the engine speed. A number of companies have spent significant resources attempting to use multi-speed drives to optimize automotive accessory drives in the quest for greater fuel economy but have, as of yet, failed to deliver any meaningful results because of what we believe to be key technological shortcomings.

We have developed the NuVinci continuously variable accessory drive (CVAD) to address the problems in the automotive accessory drive market. A CVAD is a NuVinci CVT used to drive automobile engine accessories. It can be applied to an engine’s crankshaft such that the operating speed of all the accessories is optimized together at all engine speeds.

Alternatively, our NuVinci CVAD can be mounted on an individual accessory to optimize its performance and efficiency. While we believe that due to its flexible design and configuration, our NuVinci technology improves the overall efficiency and performance of most automotive accessory drives there are many accessories that could benefit from the application of our NuVinci CVAD technology, we are currently focusing our resources on applying our CVAD for the alternator, supercharger, and air conditioner compressor end markets. Our NuVinci technology can be used by original equipment manufacturers, or OEMs, in new vehicles or can easily be applied to most vehicles through the aftermarket as a means to improve overall fuel efficiency and to enhance performance.

NuVinci Opportunity—Alternators

Alternators convert mechanical energy created by the engine into electrical energy to charge the battery and power the vehicle’s electric system when the engine is running. The speed of the alternator, and therefore its ability to generate electricity, is dependent on the speed of the engine because it is coupled directly to the engine crankshaft via a belt and pulleys. Therefore, when engine speed is at its lowest—when the engine is idling—the speed of the alternator is at its lowest and it generates the least amount of electrical power. In some cases, this prevents the alternator from creating sufficient electricity, resulting in excessive battery drain and reduced electric system function, such as when a bus’ lights dim when it stops. Conversely, as the alternator is designed for worst case conditions, that is at low engine speeds and high ambient temperatures, when the vehicle is accelerating and cruising, well above low engine speeds, the alternator operates at levels above that which is needed — resulting in increased fuel consumption and unnecessary emissions.

In heavy-duty vehicles, demands on alternators and batteries are increasing as a result of the addition of numerous electronic controls and devices that place a great deal of stress on the electrical system of the vehicle. In order to provide sufficient electrical power when the engine is idling, or at its lowest speed, the only current solution is to raise the idle speed of the engine to increase the alternator speed and associated electrical output. This is a poor solution due to the resulting increase in fuel consumption and emissions. Accordingly, we believe that there is a significant opportunity to upgrade existing vehicles using our NuVinci technology to improve performance and extend the life of batteries and alternators.

Our CVAD decouples the speed of the alternator from the speed of the engine, enabling the alternator output to meet the vehicle’s electric power needs regardless of driving conditions or engine speed. We demonstrated the potential improvement in alternator performance in a 2007 project conducted on a heavy duty government vehicle. The vehicle’s operators wanted to understand the potential of the NuVinci technology to improve the performance of its existing alternators.

Figure 4 – NuVinci CVAD Performance Improvement

Figure 4 is a graph of the test results from our internal tests showing improved alternator performance with the NuVinci CVAD. The bottom line shows the electrical current the stock alternator delivers at various engine speeds. The top line shows the electrical current delivered at various engine speeds by the same alternator

when its speed is controlled by the NuVinci CVAD. The shaded area shows the increased electrical current that is available at various engine speeds when using the NuVinci CVAD.

Testing of the tactical vehicle over a standardized EPA drive cycle, which simulates real world driving conditions for engine speed over time, showed dramatic improvement with the NuVinci CVAD. This test showed that the NuVinci CVAD delivered over 75% more current at idle than the stock alternator and over 34% more total energy over that same 1,200 second test. When that is extrapolated over an entire 7.5 hour workday the NuVinci CVAD helps deliver over 750% more energy. The 2007 project successfully demonstrated to our satisfaction the packaging, control responsiveness compatibility, proper current at any engine speed and improved total energy output of the CVAD-equipped alternator, even at high ambient temperatures.

NuVinci Opportunity—Superchargers

A supercharger is an air compressor that increases the air flowing into the cylinders of an internal combustion engine. The increased level of oxygen in the cylinder in each combustion cycle results in more power output from each such combustion event than would be available without the supercharger. This increases the overall output power of the engine. Similar to the alternator, the speed at which the supercharger operates, and thus the amount of air it pumps into the engine, is determined by the speed of the engine.

Our NuVinci CVT technology enables the speed of the supercharger to be varied independently of the engine speed and optimized to provide maximum boost and the most efficient performance at all engine speeds. We believe the use of our technology shows great potential for improving vehicle performance and fuel economy when coupled to a supercharger. Specifically, we expect our NuVinci technology to reduce the fuel consumption of engines equipped with superchargers, or enable smaller engines with a supercharger to achieve similar performance to larger, less fuel efficient engines.

We believe current technical literature supports our position regarding the benefits of decoupling superchargers from the crankshaft on existing engine systems. We believe the literature further supports our position that advanced engine designs using CVTs with superchargers are capable of increasing vehicle fuel economy by 30-50% through a 33% reduction in engine size while at the same time maintaining the power, top speed and acceleration of the vehicle.

(FIGURE 7 POTENTIAL SUPERCHARGER ENHANCEMENT)

Figure 5 – Potential Supercharger Enhancement

Figure 5 illustrates the results of a modeling analysis performed for us by an independent automotive industry consulting firm of the improvement that is possible when combining the NuVinci CVAD with a supercharger drive. These results demonstrate the opportunity to reduce the size of car engines to reduce fuel consumption and emissions without sacrificing performance. In the figure, as identified in the legend, the torque available from a standard 2.0 liter 4 cylinder (I4) engine, the torque output available from a 3.6 liter 6-cylinder (V6)

engine, which is notably higher than the standard I4 engine, the higher torque available when a supercharger is added to the I4 engine, and the increased amount of torque available from the I4 engine equipped with a supercharger and a NuVinci CVAD are illustrated by their respective lines. The shaded area shows the increased amount of torque created by utilizing the NuVinci CVAD-driven supercharger. This graph shows that at some engine speeds the I4 engine with the CVAD-enhanced supercharger is actually outperforming the larger V6 engine illustrating the opportunity to downsize the engine without sacrificing performance.

We are currently working with a major automotive supplier under an engineering services agreement for the development of a NuVinci CVAD for automotive superchargers. This supplier has an option to enter into a commercialization agreement with us containing predetermined terms including the exclusive right to purchase NuVinci CVADs for superchargers, pricing and warranty requirements, among other things. The prototype we are currently testing is smaller than that tested for the heavy duty alternator drive, but is configured in a similar fashion and should provide valuable data on the durability of the design as we move to commercialization.

NuVinci Opportunity—Air Conditioner Compressors

Similar to alternators and superchargers, air conditioning compressor output is also determined by the engine speed. The compressor is designed to operate at necessary levels in the worst case operating conditions, which is low engine speeds and high ambient temperatures and cooling demand, meaning that the compressor is sized to provide required cooling during engine idle. However, as the engine speed increases, the compressor is overworked and consumes more fuel than is necessary. Furthermore, the automotive industry is attempting to adjust to increasingly stringent U.S. and European regulations, such as European Regulation (EC) No 842/2006, that phase out the use of certain automobile air conditioning system refrigerants in favor of new, more environmentally friendly system refrigerant formulations. These new refrigerants have thus far demonstrated significantly decreased cooling performance at low compressor speeds. We believe that optimizing the compressor performance with our NuVinci technology should provide automakers and suppliers with an economical solution for implementing the new refrigerant formulations.

Similar to the supercharger application, which is another type of compressor, our NuVinci CVAD enables air conditioning compressor speed to operate and vary independently of the speed of the engine meaning that it can provide optimal cooling at all engine speeds. This allows system designers to optimize the speed of the air conditioning compressor to provide satisfactory cooling performance while maximizing fuel efficiency and reducing emissions.

We are currently working with Hodyon to develop a CVAD specifically designed to allow Hodyon to optimize the performance of their AC compressors. On March 5, 2010, we executed a joint development agreement with Hodyon to develop interface hardware to connect our CVAD to their AC compressor.

Market—Accessory drives

We define the global automotive vehicle market as consisting of two general categories: passenger car and light truck and heavy duty truck (including buses). We believe our NuVinci technology has broad applicability in both categories in both new and used vehicles. Table 2 below provides the unit volumes of the three vehicle categories and identifies annual new unit sales and the current installed base for the U.S.

Table 2—Automotive Vehicles by Segment


	New Sales (2009)				Installed Base (2008)
Vehicle Segment	U.S. (000 units)		Global (000 units)		U.S. (000 units)

Car & Light Truck		10,432		56,000		234,067
Heavy Duty Truck and Bus		228		2,681		6,619

We are targeting the heavy duty truck and bus aftermarket in the near term due to the low barriers to entry, the potential for fleet sales and the need in that market for solutions to the problems identified above make the opportunity attractive. We believe that the addressable number of these vehicles in the aftermarket, when

considering vehicle types, engine compartment configurations and other factors, is about 1.5 million units. While we expect some penetration into the aftermarket for passenger cars and light trucks over the next five years, the projections of any penetration rates would involve significant speculation. Over a longer term, we expect OEM penetration on new sales in passenger car and light truck and in heavy duty trucks and buses. Due to the same factors as the aftermarket, we see the OEM market for passenger cars and light trucks as a 10.5 million annual vehicle market opportunity and for new heavy duty trucks and buses to be about 800 thousand units. While we are assuming the launch of each of our CVAD products, we are initially assuming only one CVAD product per vehicle in the target markets, and therefore we believe combined OEM sales for heavy duty trucks, bus and passenger cars and light trucks presents an addressable annual market of approximately $1.4 billion, while the total aftermarket opportunity for heavy duty trucks is approximately $1.0 billion.

Commercialization Plan— Accessory drives

To date, our efforts in the automotive accessory drive field have focused on developing and optimizing the design and system performance of our technology. In order to gain valuable industry, manufacturing and product insights, to further develop brand awareness and increase market acceptance, we have built and continue to build strategic business relationships with established industry leaders in each of our target markets. For example, in the alternator market we have worked with a North American producer of pumps and complex components, for use in the engine and hydraulics markets, we are working with a leading automotive supplier under an engineering services agreement for the development of a NuVinci CVAD for automotive superchargers and we are in negotiations for a development agreement with an industry manufacturer and distributor of air-conditioning systems.

We expect to use the expertise gained from our contract manufacturing arrangement in the bicycle market to develop commercial scale operations in the CVAD market for the alternator, air conditioner and supercharger applications. The products are at a pre-production design level and we have performed preliminary testing on prototypes. While there should likely be some difference in the mounting hardware, the alternator product and the air conditioner compressor product are very similar and may be manufactured by the same manufacturer. The supercharger product will be a different sized product from the alternator and air conditioner products and therefore we may utilize a different manufacturer for its production.

The prototypes for all of these have been assembled internally from parts delivered primarily from Tri Star Group, our manufacturer for our bicycle CVT product, with some parts made internally. We have spent over a year working with Tri Star Group for the development of our initial CVAD products. Through a series of engineering service programs, we have verified their manufacturing capabilities for the CVAD products. A pre-production prototype of an alternator CVAD has been delivered to an OEM customer and installed in its test vehicle and based on performance reports and the customer’s response we expect an initial order for delivery of preliminary volumes in 2010 for further fleet testing and validation, which would precede an initial production order. We continue to work with developmental partners to validate product durability in multiple applications. These tests and reviews are occurring with other OEM’s, independent global engineering services providers and fleets. We expect to begin negotiations in 2010 with the intent to complete an initial production run in 2011 of the alternator CVAD product and commercial scale production in 2012.

We currently expect to commence sales of our automotive CVADs for alternators and air conditioner compressors in 2011 through aftermarket distributors. This should allow us to demonstrate our capabilities in this market and develop brand awareness, which we will then use to drive distribution through OEMs for these products starting in 2012. We are working under an engineering services agreement for the development of our supercharger products with early prototypes currently being tested. We expect to begin OEM launch of the supercharger product through our customer in 2012.

Electric Vehicles

Background

Electric vehicles, or EVs, are two, three and four-wheeled vehicles powered solely by electric motors or by an electric motor in combination with an internal combustion engine, as in a hybrid vehicle. With increasing fuel costs and more stringent engine emissions requirements, EVs are becoming more popular around the world as consumers are increasingly looking for “green solutions.” However, current EV performance and range is less than that of competitive gasoline-powered vehicles.

The powertrain of a typical EV comprises a power source, usually a battery, an electric drive motor and controller, and power transmission devices such as sprockets, chains or gearing. Many EVs operate in a single speed configuration where the speed of the vehicle is directly linked to the speed of the drive motor, by a fixed gear ratio. Although the motor controller for an EV can direct the motor to operate at high or low speeds or to vary smoothly between them, the motor has a defined operational speed that maximizes its efficiency and similar to the gasoline engine, if the motor can be operated closer to this defined speed, then would be able to more efficiently provide torque and power to drive the vehicle, leading to increased vehicle range and reduced peak current draw among other advantages. As a result of this condition, achieving practical range compared to gas or diesel powered vehicles has challenged EV manufacturers, and their electrical systems have to endure high electrical current draw when climbing hills or starting from stop. These realities have led to significant research and development activities directed toward improved battery technology to support greater storage of energy in the vehicle and on the power electronics of such vehicles to meet the operational requirements of the vehicle.

Furthermore, power electronics, which are increasingly used in today’s vehicles, act as an additional drain on system power and reduce the overall system efficiency in EVs. Power electronics are used in electrical devices for many purposes such as varying voltage or frequency, converting AC to DC or vice versa, as well as changing the operating speed of induction motors. We believe that industry projections indicate that power electronics for hybrids represents 20% of the vehicle’s material costs and is larger for full electric EVs.

Current EVs are increasingly utilizing components made from rare earth materials for their operation and performance. However, our NuVinci technology does not. Instead, the NuVinci technology uses common, readily available materials used in a wide array of industries today, which are available in mass quantities from multiple sources with generally less pricing volatility associated with special purpose materials.

NuVinci Opportunity—Electric Vehicles

EVs suffer in their ability to effectively compete with gasoline powered vehicles as a viable source of reliable daily transportation because they do not generally have the range, top speed, hill climbing ability or the ability to pull significant loads. They therefore generally come up short on expectations placed on them to replace gasoline engines and thereby reduce fuel consumption and emissions. Testing we have conducted has shown that the NuVinci CVT allows EVs to accelerate, climb hills and pull loads at more efficient motor speeds to increase vehicle range and limit peak current levels. Just like in other applications, our NuVinci CVT allows the motor to operate at more efficient or optimal speeds for any vehicle speed to both improve performance of the EV and increase its efficiency. NuVinci CVTs will be integrated into the driveline of an EV as the primary transmission between the motor and the wheels to allow the motor to operate at a more optimal speed during different driving conditions and speeds. We have incorporated our NuVinci CVT into the rear wheel of a standard electric scooter and have demonstrated several improvements through empirical analysis and comparative testing. Specifically, through our demonstration and testing we have demonstrated to our satisfaction increased acceleration, higher top speeds, improved hill climbing, extended real world range and enhanced battery management when the NuVinci CVT is used as the primary transmission on such electric vehicles. While this was performed on a scooter, we believe that the results could be realized in larger vehicles as well. Table 3 provides an illustration of the actual improvements we have observed based on test results reported in our white paper published at the 2007 Ele-Drive Conference.

Table 3—NuVinci CVT Performance Improvements


Operating Metric	Empirical Improvements	⁽¹⁾
Acceleration⁽²⁾	38	%
Steady State Velocity On A Hill⁽³⁾	24	%
Maximum Speed⁽⁴⁾	47	%
Range⁽⁵⁾	20	%


(1)		Results reflect the actual performance improvements in a 2006 model Currie IZIP 1000 scooter in an unmodified (stock) vehicle against a vehicle equipped with a NuVinci CVT.

(2)		Acceleration is measured as the improvement in time to increase in speed from 0—19 KPH.

(3)		Steady state velocity on a hill is measured as the improvement in speed while traveling up a hill.

(4)		Maximum speed is the improvement in the maximum sustained speed.

(5)		Range is measured as total kilometers driven in a city center.

We intend to leverage our existing applications and designs in adapting our NuVinci CVT to provide driveline transmissions for various vehicles in the EV market. We will initially focus on smaller vehicles with lower barriers and shorter time to entry and move towards hybrid automobiles and full electric automobiles. Our focus for the EV market is to provide products that can be easily incorporated in to the design of EVs so that designers can optimize the performance of electric motors and the vehicle resulting in EVs that are better able to compete with gasoline powered vehicles.

To date we have developed the NuVinci CVT and two systems to implement the NuVinci technology in the EV market.


	•	NuVinci CVT. The NuVinci CVT is used as a main driveline transmission connecting the motor to the wheels. The CVT allows the electric motor to be operated at an optimal speed as the driving conditions and speed changes. With production level designs for light electric vehicles and mid size EVs as well as prototype designs for large EVs, we are able to market to a wide range of vehicle OEMs with our performance enhancing products.

	•	Auto-shifting system. Our auto-shifting system includes a controller board with integrated circuit chip containing auto-shifting logic, a shift actuator motor, vehicle speed sensor and wiring harness. This product enables electrical vehicle OEMs to create vehicles that have a CVT that is shifted automatically and seamlessly. The auto-shifting system automatically changes transmission ratio for given vehicle speeds so that the transmission is always in the right ratio to optimize the amount of energy used by the motor therefore directly impacting the performance as well as battery range per charge. We launched a developer kit containing an auto shifting system and a heavy duty version of the N171 bicycle CVT to test the concept. Prototypes of the auto-shifting system built with the developer kit are currently being evaluated by several target customers.

	•	eCVP system. Another product under development for improved motor or generator performance is the eCVP. Our eCVP combines an electric motor, speed reducer/torque multiplier, and CVT in one simple unit housed in an integrated housing creating a unique powertrain package. The eCVP creates packaging and performance advantages. During coasting or braking, the motor can become a generator and recharge the battery, while optimizing the charging capacity through the transmission. We believe that this integration has great promise for EVs and wind turbine applications.

We believe the improved operating performance that can be achieved using our technology in EVs should increase their attractiveness as a practical option to gasoline powered vehicles and boost demand for our products. By allowing the motor to operate at optimal speeds as the vehicle’s driving conditions change, as multispeed transmissions do in other cars, EVs can realize the same benefit that gasoline powered cars do from implementing the NuVinci CVT. Furthermore, we believe that using a NuVinci CVT to optimize the speed of the motor while allowing for the vehicle’s varying driving conditions and speeds provides greater control flexibility and can be used to simplify the motor controller in either EVs or hybrid vehicles potentially

reducing or eliminating the reliance on complex, relatively inefficient and expensive power electronics, therefore creating system level cost savings.

Market—Electric Vehicles

EVs include categories ranging from full size utility or industrial vehicles, such as fork lifts, to passenger cars and all the way down in size to light electric vehicles (LEVs), such as scooters. They also range from full EVs to hybrid electric vehicles, to plug in hybrid vehicles. We believe the benefits realized during our testing on scooters applies equally to larger vehicles such as electric automobiles and electric industrial vehicles. A growing number of passenger car sized electric vehicles are being developed for production by existing automobile OEMs such as GM and Nissan, as well as new entrants solely focused on electric vehicles, such as Tesla and ZAP. Estimation of the growth in sales of EVs is still speculative at this point. Publicly available reports have estimated that globally, more than 17 million cars will be hybrid or electric in 2015. We believe the addressable market for electric cars and hybrid electric cars alone, not including LEVs, to be at least 4 million units annually by 2015 representing an addressable annual opportunity of $1.2 billion.

Commercialization Plan—Electric Vehicles

We developed the auto-shifting system for bicycles and scooters, and demonstrated prototypes of this product for LEV OEMs. We have launched limited sales of the prototype through direct sales to targeted vehicle developers and vehicle manufacturers in order increase market awareness of, and demand for, our NuVinci technology. We expect to partner with vehicle manufacturers to adapt our existing CVT products to their EV. In addition, under a development agreement with a development partner we have applied the NuVinci technology to a medium sized EV application. Under this program our development partner is currently demonstrating the prototype vehicle to potential vehicle OEMs.

We expect to apply the automatic shifting controller system for the development of the eCVP for a target vehicle and we currently plan to develop pre-production prototype designs in 2011 with an expected production launch in 2012.

We have entered a consulting agreement with Advanced Strategic Leadership Limited (ASL), a Shanghai company, under which ASL will provide consulting and market development services for the Chinese EV market. ASL will provide market data and support sales and development of our NuVinci technology for EVs in China. We expect to manufacture our products for the EV market through a contract manufacturing relationship. We will select the appropriate contract manufacturer for the product when a target customer and vehicle is identified.

Lawn Care Equipment

Background

The lawn and garden equipment market encompasses a wide offering of products including lawnmowers, turf and grounds equipment, trimmers and edgers, among others. Powered ride-on mowers or lawn and garden tractors represent the largest market segment and include front engine lawn tractors and rear engine mounted zero turn radius (ZTR) products, which are further segregated into consumer and commercial use categories. In recent years, ZTRs have generated significant market share gains due to their low profile design and independent wheel controls that allow users to turn the mower a full 360-degrees in place. Furthermore, ZTRs, which include two IVTs per tractor, demonstrate superior performance. According to Hustler Turf, studies indicate that ZTRs can mow about 20-25% faster than regular lawn tractors on a U.S. football field size area.

By having an IVT dedicated to each rear wheel of the lawn tractor, each rear wheel can rotate forward or reverse independently of the other. This allows the driver to turn the vehicle in a circle that is the same size as the width of the vehicle by rotating one wheel forward and the other in reverse. This provides for the “zero turn radius” name these lawn tractors are given. The IVT technology presently used in lawn care equipment is the hydrostatic transmission. Hydrostatic transmissions use a hydraulic pump and motor to vary the speed ratio of the transmission. These transmission types can generally transmit more torque than inexpensive rubber belt

transmissions, but can be sensitive to contamination. With efficiencies—that is the percentage of power provided by the engine to the transmission that is actually delivered out of the transmission to the drive shaft and wheels—ranging as low as 50%, the purely hydrostatic transmission is limited to low-end applications like lawn tractors, where its greater durability and absence of startup slip enables its use over more delicate rubber belt types. It is also used in some off-road construction equipment requiring the function of an IVT despite the fuel economy penalty. In addition to low efficiency and its high noise level, this transmission type also suffers from considerable heat generation and substantial fluid cleanliness requirements.

Technology innovation in the lawn and garden equipment market has historically focused on general performance improvements and ergonomic enhancements. However, due to increasing public and regulatory pressure, many companies are now looking for innovation to help reduce emissions and noise, to improve the utility of electric powered products, and to add user-friendliness features, like simple controls and improved handling.

NuVinci Opportunity—Lawn Care Equipment

Under an engineering services agreement with a leading manufacturer of lawn and garden transmission equipment, we have developed an IVT that can be used in ZTRs. Preliminary testing indicates significant improvement in efficiency over existing hydrostatic transmissions.

Through testing and analysis, we have found the relative difference in efficiency between our NuVinci IVT and a hydrostatic transmission to be substantial. The lower efficiency of the hydrostatic transmission results in increased fuel consumption and increased vehicle emissions. As the Environmental Protection Agency has passed regulations in September 2008 limiting exhaust emissions from lawn and garden equipment, OEMs need to find ways to limit exhaust emissions while providing consumers with the same performance. Additionally, the mechanical connection between engine and drive wheels available using the NuVinci IVT, versus the fluid connection in hydrostatic transmissions, provides improved control and secure feel as well as improved performance for the rider. We have adapted our NuVinci IVT to enable the lawnmower to run forward, reverse and in a “powered-zero” state, that is the transmission maintains a zero output speed while engaged and with the engine running, with no additional shafts or gearing. We believe this feature is unique to NuVinci technology among mechanical IVTs and enables the transmission to be built with fewer components, thereby reducing overall packaging space and manufacturing costs. The powered-zero state is advantageous as it will hold the mower steady on the side of the hill when the rider lets up off the control, whether a brake is engaged or not. Other IVTs will not hold the mower’s position and brakes must be engaged to prevent the mower from rolling. Finally, the advantaged packaging of our NuVinci IVT provides vehicle designers more options for vehicle powertrain layout to further enhance rider position on the vehicle and vehicle setup.

Market—Lawn Care Equipment

According to the Freedonia Group, the global lawn care equipment market in 2008 was estimated at approximately $16 billion, with an annual growth rate of approximately 2.8% and with about $9.7 billion of that market in the U.S. (Industry Study 2542, World Power Lawn & Garden Equipment, Freedonia Group, Aug 2009). The units sold were estimated to exceed 7.7 million units per year with the ride on lawn and garden vehicle market estimated to exceed 1.65 million units annually. Of this market, vehicles with automatic transmissions (including ZTRs) make up approximately 50%, and of that 50% hydrostatics have dominant market share. We have entered an exclusive manufacturing license arrangement for this end market application under which we should collect royalties from that licensee’s sales. We believe the royalties available from our licensee in this market, considering the unit sales opportunities available, represents an addressable annual opportunity of $65 million.

Commercialization Plan—Lawn Care Equipment

In August 2009, we entered into a manufacturing license agreement and a development agreement with Hydro-Gear Limited Partnership , which holds the leading market share for ride on automatic mowers with hydrostatic transmissions. Under the agreements, we plan to develop and commercialize NuVinci products within the lawn care equipment field and through this relationship we expect to receive a development fee upon reaching certain milestones and a royalty from future sales. Under our development agreement with

Hydro-Gear and their current projections for product development, we expect to demonstrate the fully functional pre-production prototype to key customers in 2011, beginning preparing for production shortly thereafter with production launch currently projected for later in 2011. The precise date of any launch however is at Hydro-Gear’s discretion.

Wind Power

Background

Over the last 20 years there have been many innovations in the wind turbine industry designed to increase power output capacity and lower the production and operating costs of wind farms. Variable speed turbines and power electronics represent a significant portion of the technology that wind turbines today utilize to control or increase their power output. However, power electronics are costly, representing a large portion of the cost for smaller turbines. For small wind turbines power electronics consist primarily of an inverter, which amounts to approximately 15% of the cost of an 8 kW system. According to the National Renewable Energy Laboratory (NREL), good inverters average about 86% efficiency, meaning the inverter is an expensive component that also reduces power output by at least 14%.

Another technical challenge for small wind turbines is how to handle high winds. Most small wind turbines employ passive furling, which turns the rotor out of the wind during periods of high wind speeds, a time when energy available from the wind is at its highest. Passive furl is a crude and very noisy method of regulating rotor speed, and results in suboptimal power generation at high wind speeds. Once a wind turbine has employed passive furling, power output will decrease, sometimes significantly. Maintaining peak power in high winds, a time when wind energy is abundant, is a technical challenge that small wind turbine manufacturers are striving to overcome.

Most class wind turbines use a drivetrain that is a rigid system and prone to torque spikes from wind gusts. Many early wind turbines failed because engineers underestimated the effect of torque spikes damaging the drivetrain. Drivetrain components tend to be heavy, expensive, and now typically overbuilt.

NuVinci Opportunity—Wind Power

We, along with Viryd, our wind turbine licensee, believe that our NuVinci technology can reduce the complexity and cost of wind turbines by maintaining an optimal speed into the generator as wind speed changes. By doing so, the NuVinci CVT-enabled wind turbine does not require the power electronics inverter needed to provide power acceptable to deliver to the grid. Furthermore, the constant speed into the generator allows the use of simpler more cost-effective generators as well. Other CVT technologies generally lack the torque density (that is torque capacity for a given transmission package size), scalability, assembly and configuration flexibility, cost effectiveness and efficiency, or some combination of these factors, required to be feasible for use in wind turbines, whether utility class or small wind. Furthermore, the NuVinci CVT can be used to control the speed of the turbine blades during high speed winds instead of employing passive furl, thereby generating power during the highest powered winds. This allows designers to use larger more optimized turbine blades to maximize wind capture.

Our NuVinci technology’s ability to mechanically change speed of the turbine rotor to produce a stable input speed to the generator has been shown through testing in the field to expand maximum power production by allowing a turbine to operate at a higher rotor speed in high speed winds for a given maximum generator speed. Further, the NuVinci CVT can shift quickly enough to capture energy dense gusts and absorb torque spikes. Viryd, our licensee, has developed a prototype NuVinci CVT for an 8kW wind turbine drivetrain, which it has tested in Texas. Viryd’s current test data to date indicates a 34% improvement in energy generation. Furthermore, Viryd has also earned a U.S. Department of Energy grant for its wind turbine to be tested by the department’s National Renewable Energy Laboratory in Colorado under a DOE grant.

Figure 6 – Enhanced Wind Performance

Figure 6 is a graph provided to us by Viryd illustrating the improved performance available from wind turbines utilizing a NuVinci CVT drivetrain compared to traditional wind turbines, as determined from Viryd’s test data gathered from actual field testing. The bottom line with triangles illustrates the power available from a standard wind turbine at various wind speeds, and the middle line with circles illustrates the increased power available from the same turbine utilizing a NuVinci CVT. The light or top line with squares illustrates the improved performance available from the NuVinci-enabled wind turbine when also optimizing the turbine blades, as the CVT allows. Our technology provides numerous advantages over existing designs of variable speed motors, electronics and transmissions for wind turbines that attempt to deliver the level of performance and system efficiencies required of current turbine technologies. By providing a solution that promises such improvements, our NuVinci technology is providing for power to be transferred in more efficient manner.

In summary, we believe the NuVinci technology offers the following benefits when used in a wind turbine:


	•	Enables variable rotor speed without an inverter, increasing energy production. NREL tests show that inverter efficiency averages about 86% when inverters on/off cycling at cut-in, cut-out, and standby time are included.

	•	Captures gusts and lulls. Much of the power in a wind gust is lost due to the fact that the rotor is not spinning at its optimal rate, and strong gusts can put the rotor into stall. Our NuVinci CVT can quickly increase rotor speed to capture gusts, and brake the rotor during lulls to extract the stored energy from the rotor, increasing energy production approximately 15%. Studies show that turbulent winds can reduce power output 20 to 40%.


	•	Controls power production above peak power without blade pitching or passive furl. Rotor speed can be reduced precisely as wind speed increases, and peak power can be maintained until the wind turbine is shut down and thus avoiding noisy systems and passive furl.

	•	Use of a larger diameter rotor. NuVinci technology’s ability to slow the rotor above its peak power allows it to use a larger rotor. The larger rotor significantly increases annual energy production.

	•	Absorbs torque spikes, which can damage wind turbine drivetrains. Due to its multiple contact points and durable structure, NuVinci technology can provide mechanical buffer to allow for and absorb torque spikes by spreading their resulting force out over time.

	•	Reduces drivetrain cost to less than half of a typical small wind turbine drivetrain that uses a permanent magnet (PM) generator and an inverter. Our NuVinci technology eliminates the expensive PM generator typically used with small wind turbines and can be used with an inexpensive induction generator. It also eliminates the need for the very expensive inverter.

Market—Wind Power

Overall, U.S. wind-based electricity generation is expected to grow to 20% of total U.S. electricity generating capacity by 2030. Although the entire wind industry may be segmented into several smaller categories, traditionally, the industry has only defined two primary segments, small wind from 0 to 100 kW and large or utility class wind for turbines over 100 kW. We are currently scheduled to launch our product for the small wind turbine end market in 2010, which we currently believe to be an addressable annual opportunity of $40 million. However, as reported in the April 13, 2009 American Wind Energy Association Annual Wind Report, the small wind segment grew 96% in 2008, and the industry projects 30-fold growth in the small wind segment within as little as five years, despite the recent global recession. Given the projected growth in the segment over the next 5 years, we believe this represents an addressable annual opportunity for our NuVinci CVT of about $1 billion by 2015.

Commercialization Plan—Wind Power

We have established a licensing agreement with Viryd, based in Austin, Texas. Viryd is a former subsidiary of ours and was formed as a separate company with a sole focus on the development and distribution of wind turbines and technologies for generating clean renewable energy. Our NuVinci technology is an essential component in Viryd’s value proposition for this market segment.

We expect to begin delivering CVTs for commercial sales to Viryd in 2010; however, the precise date of any launch is at Viryd’s discretion. We have been working with Tri Star Group through a number of engineering service programs to develop the manufacturing capability of these products since 2008 and should sign an agreement for its manufacture of these products in 2010 for sales to Viryd starting in 2010.

Viryd intends to both sell a complete product on its own and also to partner with other OEM’s to provide them wind turbine drivetrains that are not otherwise available in the market. While Viryd is currently scheduled to launch its 8 kW turbine in 2010, it is planning to develop a product for a larger wind turbine in the near future as well. We currently intend to sell Viryd the NuVinci CVTs it requires for its sales. We believe our current addressable opportunity for the small wind turbine market to be $40M. However, given the projected growth by the industry over the next 5 years, we believe this represents an addressable annual opportunity for our NuVinci CVT of about $1 billion a year by 2015.

Current Commercial Application—Bicycles

Background

There are approximately one billion bicycles in operation worldwide today—twice as many as automobiles. Global economic conditions and the need to reduce dependence on fossil fuels favor the continued growth of bicycles for transportation. A person riding a bike once a week instead of driving can reduce his transportation carbon footprint by 20%—about the same amount as replacing a traditional vehicle with a hybrid, only less expensive.

Today the bicycle riding experience is heavily impacted by the process of shifting gears as the rider moves through traffic, stops and starts and adapts to changing terrain. The benefit of using different gears is optimizing performance of the human system, that is, the heart, lungs and legs, by varying or maintaining pedaling speed. Existing gear systems are seen by a large group of the population as being complex.

Figure 7 – N171 Bicycle
CVP & Cruise Controller

NuVinci Advantage

Our bicycle CVT transmission, shown in Figure 7, replaces the derailleur and multiple sprocket geared systems presently used in bicycles and is much smoother and easier to operate. Simply by rotating a handle grip, which we refer to as the Cruise Controller^tm, the rider may seamlessly shift the transmission until the desired gear ratio is attained. There is no temporary loss of power as experienced by the rider with geared systems that force the chain to jump from one sprocket to another. Our bicycle CVT transmission also decreases the effects of mistakes in shifting, which can lead a rider to slip off the pedals or stall going up a hill, creating less than satisfactory ride experience and potentially causing injury. Development of our bicycle CVT has occurred in phased steps over the past ten years with improvements in weight, configuration and performance.

Global Market—Bicycle

We estimate the global annual bicycle market to exceed 100 million units based on information from Bike Europe, Cycle Press, Japan Bicycle Promotion Institute and World Watch Society, COLIBI—European COmité de LIaison des Fabricants Européens de BIcyclettes, 2008 Bicycle Report, Danske Cykelhandlere estimate. However, due to the relatively low cost of bicycles sold in the China and India markets, we consider the realistic global market to be approximately 50 million units per year. Because our product is currently considered targeted to high end bicycles, we have reduced the target market size to include only those bicycles distributed through dealers. This yields a market potential of 14.6 million units. Finally, we further reduce the size of our addressable market by eliminating bicycles that fit into categories that are inappropriate, such as children’s bicycles, high end road bikes and triathlon bikes. Therefore, we estimate that the global bicycle market that is addressable by our NuVinci bicycle products to be approximately 8 million units per year. We believe that with the mix of products we are considering over the next few years that this market represents a total annual opportunity of $1.1 billion.

When considering which key geographic bicycle markets to launch our NuVinci technology in, we focused on countries and regions of the world where bicycle ownership per capita, percentage of trips made on bicycles, bicycle transportation infrastructure, and local bicycle industry advocacy is strong. As a result, we initially launched in The Netherlands, followed by Germany, Switzerland and Denmark, and have continued to leverage knowledge gained from this initial effort to expand into other key European countries as well as into North America and Asia, as increasing fuel prices drive up the interest in commuting bicycles.

Europe: The Netherlands is considered to be the most bicycle-centric country in the world, with annual bicycle sales exceeding 1.5 million units, primarily (80+%) sold by bicycle dealers. With the highest per capita bicycle ownership in the world, bicycles represent 34% of all modes of transportation for all trips. Dutch consumers ride an average 950 kilometers per year (#1 in world). The average value of bicycles sold by independent bike dealers in the Netherlands alone was €709. Germany is the EU country with the largest production of bicycles. We believe the 2008 total bicycle sales in Germany were 4.32 million per year at an average price of €386 with over 65% of bicycles sold through bicycle dealers. The German bicycle industry is planning a state-run program to promote inner-city cycling with a focus on reducing congestion and exhaust emissions environmental in city centers.

North America: The North American market is dominated in unit sales by mass merchants. However, in terms of dollar value, mass merchants only have a 35% market share. Sporting goods retail chains had a 6% share in 2008 units sold and 9% in dollar value while Independent Bicycle Dealers (IBDs) had a 17% share in units and 50% of dollar value with an average per unit price of $422. The Canadian bicycle market of over 1.3 million units sold per year is dominated by the mass retailers with over 75% of unit sales through retailers as Canadian Tire Corp, Wal-Mart, Zellers, and a variety of sporting goods chains. Over 2000 IBDs represent the balance of units sold in Canada.

Products—Bicycle

Our Bicycle Products Division markets NuVinci CVTs into the global bicycle and e-bicycle industry that currently use derailleur and internally geared hubs. The product includes a CVT transmission, a shifter, and a CVT interface that connects the cables between the controller and the CVT for a mechanical shift signal. We sell our bicycle products directly to original equipment manufacturers, or OEMs, that assemble or manufacture bicycles and e-bicycles, to wholesale distributors that sell bicycle components to independent bicycle retailers, or IBDs, to fleets that use bicycle for tourism and trade, and to national retail chains that source and sell private branded bicycles.

Figure 8 – NuVinci CVT improvement

Figure 8 illustrates the development progress we have made with the NuVinci bicycle CVT. On the left, is the B15 Prototype, which represents the first commercially viable bicycle CVT. We currently market our commercial bicycle NuVinci CVT transmission, model N171, the successor to the initial product model N170, along with a developer kit. Our developer kit is an automatic shifting hub system that includes electronics and the N171 CVT. The N171 CVT is sold into the bicycle industry via OEMs and aftermarket dealers whereas the developer kit is sold directly to inventors and developers of light vehicles and equipment interested in implementing our NuVinci CVT technology in future vehicles or equipment.

We are currently preparing to launch the N360, which is a next generation CVT for bicycles and e-bicycles. We intend to begin production of the N360 in 2010. The N360 will have many improvements over the current bicycle CVT including a weight reduction of over 35%, a size reduction of over 10%, improved shift feel and responsiveness, and the CVT will be easier to assemble with over 50% fewer parts. We believe the improved design of N360 bicycle CVT will have a much broader appeal in the marketplace. To date, over 40 bicycle

manufacturers have tested pre-production prototypes of the N360 and have expressed interest in the product. The N360 has also been received favorably at key industry tradeshows.

In addition, as Tri Star is located in China and is near most of the component suppliers, inbound logistics costs will be lower and coordination will be easier. Because of improved logistics, design and a fixed contracted unit price from Tri Star, we expect the cost per unit for the N360 should be at least 50% less than the first generation bicycle CVT. Furthermore, we have leveraged management’s experience in the automotive industry for the manufacturing of this product by implementing processes for quality and supply base management characteristic of the automotive industry. So far, more than 100 prototype versions of the N360 have been built for internal testing and customer demonstration. We continue to develop additional manufacturing sources for our components in order to ensure reliable supply of components and pursue cost reduction opportunities.

Customers—Bicycle

The demand for bicycles in Europe and North America is seasonal in nature with over 50% of the OEM demand ordered between November and March to prepare for bicycle assembly and shipment to the retail market in the spring season. The bicycle markets in China and Asia have less seasonal fluctuations, however, we anticipate that these markets should represent a relatively small (<10%) portion of our bicycle sales in the next three years.

All of our customer orders are placed with purchase order contracts that require shipment per order with no long term contracts that would require renegotiation. The TriStar production line has a rated production capacity of over 300,000 units per year, to allow flexibility in planning and managing the growth of our sales.

Going forward, we plan to leverage strategic partnerships to expand distribution in China, Japan and Korea. For China and Japan, these partners have been identified. We are in the early stages of reviewing Asian OEM and distribution partners.

Marketing

We believe that our award winning NuVinci technology represents the smoothest transmission available for bicycles today. To the bicycle rider, our technology represents a dramatic improvement in ride experience.

Our marketing strategy for bicycles is based on getting prospects to “Experience NuVinci.” Nothing communicates the seamlessly smooth, easy shifting, and superior riding qualities of a NuVinci CVT better than a test ride. Consequently, targeted customer events and key industry trade shows where large numbers of bicycle OEMs, retailers and riders are present are central to NuVinci bicycle marketing. We exhibit and provide test rides at the leading trade shows in Europe, the United States and Taiwan where there is a large global show for OEMs and assemblers.

With our initial product best suited for “city, commuter, and comfort” bicycles, we have focused our marketing program heavily on supporting our OEM customers in The Netherlands and Germany, the two largest European bicycle markets with the largest population of city style bikes. To support our largest Dutch and German OEM bike customers, we offer co-marketing programs at the dealer and consumer level. In the U.S., we support our largest bike customers with co-op advertising and merchandising support. In the U.S. and Canada, our marketing also includes distributor and retailer programs to promote a NuVinci aftermarket conversion kit. This kit can be used to upgrade either a consumer’s existing bike or a new bike.

The popularity of electric/pedal assist bikes has added yet another aspect to our marketing program. We promote an automatic shifting NuVinci system at key LEV conferences, offer test rides at bicycle trade shows, use selected web banner and other advertising to inform developers about our NuVinci Developer Kit, and pursue targeted press and other promotion opportunities.

Manufacturing

History

The original commercial version of our NuVinci bicycle product, the N170S, was produced and sold by Aftermarket Technology Corp (ATC), our original manufacturing licensee, beginning in 2006. Bicycle CVTs were assembled in ATC’s facility in Oklahoma City, Oklahoma. We later acquired the manufacturing line from ATC in early 2008 and established a contract manufacturing arrangement with MTD Products Inc, a major manufacturer of lawn and garden equipment, and production was moved to their facility in Leitchfield, Kentucky. Both of these manufacturers utilized a long lead time component supply chain made up of numerous suppliers around the world. About 8,000 units were built between mid-2008 and August 2009, at which time our N171 model was phased out of production in preparation for the launch of our N360 product in 2010. Through our experience with our initial launch of our N171 bicycle product, we have determined that it will be most cost effective and provide for the largest growth opportunity to concentrate the supply base in one off-shore region or location. We expect that managing suppliers in a concentrated area reduces risks associated with managing global suppliers.

Manufacturing Plans—N360 and New Commercial Products

Therefore, we have selected an off-shore manufacturer, Tri Star Group, headquartered in Shanghai, China, that has a local component supply base capable of supplying the parts for our N360 product. We believe establishing a local component supply base should reduce many of the manufacturing risks associated with producing a high quality, durable product in sufficient quantity and on time. Tri Star has been recognized by Forbes Asia Magazine as one of the top “200 Best Companies Under $1 Billion USD” in September 2008.

As Tri Star’s manufacturing facility is located two hours north of Shangai in Nantong, a manufacturing region that supplies many industries in a wide array of technologies, we believe that the necessary infrastructure and support services are available to support large scale manufacturing. Furthermore, because the component supply base is local to Tri Star, that is nearly all suppliers are located within roughly 250 miles of Tri Star’s facilities, if problems arise with parts from suppliers, Tri Star would be able to address them in a shorter time period than would be possible if parts were supplied via air or sea. In our experience, this has the potential to provide significant cost advantages when considering the launch of a new product. We expect to achieve attractive cost targets with Tri Star, while achieving high standards of quality and responsiveness.

We have also endeavored to limit the risk associated with working with an off-shore manufacturer by fostering a relationship built on an understanding of the long term goals and interests of both parties to align our collective interests. To that end, we have been working with Tri Star since the third quarter of 2008 under engineering service agreements (i) to verify its capabilities of manufacturing the type of parts that are needed, (ii) to support and work with our operations staff, and (iii) to develop a relationship based on long term goals for growth and future product opportunities. We have worked closely with them through engineering service agreements on advanced prototypes for our NuVinci product offerings and we believe that they are capable of manufacturing the parts, assemblies and prototypes we request to our approval. Each part for the N360 will be qualified through a production part approval process (PPAP) discipline to assure that component quality will meet our standards. Moreover, Tri Star’s assembly process will be validated in a similar manner concluding with PPAP of the assembled unit. Following PPAP, production will be ramped up in a controlled manner to assure that volume production can be achieved with sustainable quality. Due to the barriers to entering the China bicycle market, and in the interest of addressing that market, our contract for the N360 bicycle hub includes a provision for working with Tri Star on domestic sales and allows for the equal sharing of profits from the sale of those bicycle products sold in the domestic Chinese market.

In this fashion, we have endeavored to work together in a manner that benefits both us and them, which is more likely to meet our needs both during a period of aggressive growth and over the long term. We have worked with our wind partner Viryd to develop prototypes for testing prior to commercialization, and Tri Star has supplied us with the parts and some assemblies under service agreements as part of a process to validate Tri Star as a manufacturer for those transmissions as well. The supply of transmissions to Viryd allows us to

provide additional incentives for Tri Star by demonstrating the long term potential to supply products that aligns its interests with ours, thereby reducing our risk.

Manufacturing Strategy—Future Commercial Products

Different manufacturing models will be utilized for various applications as the market for each particular application dictates. We plan to establish contract manufacturing or joint ventures to manufacture products for each of our target markets. Where market conditions exist that dictate that we partner with an incumbent market leader capable of manufacturing our product in order to introduce our product to such market, we may enter a manufacturing license where that partner would manufacture the product and we would thereby earn royalties on its sales and fees for the development of commercial products under development agreements. In every case, we intend to continue to enter into agreements under which we maintain ownership of all intellectual property and developments of our technology.

While products involving our NuVinci technology utilize well known and common manufacturing techniques and processes, the manufacture of any advanced mechanical device presents challenges to achieve quality, durability and reliability goals while still meeting the cost demands of an increasingly competitive marketplace. Therefore, in order to address the anticipated challenges of managing the manufacture of our products as we scale to high volume production, we plan to bolster in-house capabilities in purchasing, manufacturing and quality functions.

Specifically, as budgets permit, we plan to establish a fully capable purchasing, manufacturing and quality control function to do the following:


	•	Establish and maintain manufacturing strategies, including consideration of detailed process engineering assessment of critical NuVinci parts, and process qualification for adoption in manufacturing NuVinci products;

	•	Manage make/buy decisions;

	•	Embed manufacturing process engineering expertise in project development teams and consider development of processes unique to NuVinci technology needs;

	•	Provide robust cost estimating for proposals and program development;

	•	Track and manage N360 production program timing;

	•	Manage volumes documentation and handle production programming; and

	•	Provide improved supplier support including technical, quality processes, commercial liaison and training.

Looking ahead, in addition to having tailored manufacturing strategies from a technical viewpoint, we expect to also bring geographic considerations into our planning process. Over time, we anticipate that the placement of our manufacturing facilities should be defined by our customer needs.

Customers

In 2009, revenues from three customers were $115,000, $108,000, and $102,000, or 11%, 10%, and 10%, respectively, of total revenues, while related party revenues were $512,000, or 49%, of total revenues. With the launch of the N360 expected in 2010, we do not expect to have any similar levels of customer concentration.

Competition

Suppliers of drive train components in the bicycle industry currently include two dominant companies, Shimano Corporation (Japan) and SRAM Corporation (Chicago, IL USA). Commonly cited problems in the industry include limited flexibility, long lead time supply and long term purchase commitments. These two primary competitors produce bicycle drive train products in derailleur and internal geared hub form. Of these two companies, Shimano has the largest market share, which is currently estimated to be above 60% of the world’s drivetrain requirements, and competes on quality and price. These Shimano geared systems are well known products that consumers use in everyday riding.

As described above, the NuVinci technology should be addressing several applications that currently do not utilize CVTs. However, our plans include the sale of products into the automotive market, which has a mature competitive base. While we will not directly compete with automakers or automotive suppliers on similar products, we may be competing with the incumbent product manufacturers of alternators and other accessories that may see our products as a threat to their higher margin products.

In the lawn and garden equipment end market, we will be replacing existing hydrostatic transmissions with our own products. While our licensee, Hydro-Gear, is a significant manufacturer of hydrostatic transmissions, there are other manufacturers of hydrostatic transmissions that produce products against which our products will compete.

For automotive driveline transmissions, JATCO, a subsidiary of Nissan, is recognized as the CVT market leader. Many of our current or potential competitors have greater market presence, longer operating histories, stronger name recognition, larger customer bases and significantly greater financial, technical, sales and marketing, manufacturing and other resources than we have. Moreover, if one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our customer relationships and competitive position or otherwise affect our ability to compete effectively.

Intellectual property

Our intellectual property strategy is comprehensive and substantial and comprises a combination of patents, trademarks, trade dress, copyrights, know-how and trade secrets. For patents, our policy is to seek to protect our competitive position by filing patent applications for our developments in the United States and in several foreign jurisdictions that are important to the manufacturing, shipping, development, sales and otherwise for the conduct of our business. We also rely on trademarks, trade secrets, trade dress, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

As of December 31, 2009, our patent portfolio consists of 86 United States patents, 61 United States pending patent applications, 70 foreign issued patents (including validated countries), and 147 pending foreign patent applications. Our U.S. patent portfolio was ranked as the #1 patent portfolio in the automotive and transportation industry by The Patent Scorecard^tm as reported in the Wall Street Journal on January 13, 2009. While this ranking was developed independently by a third party with whom we do not have nor have ever had any relationship, such rankings are inherently subjective and therefore do not guarantee or provide any indication of success in protecting our products in the various marketplaces around the world in which we sell our products.

We use trademarks on our products and marketing materials and believe that having distinctive marks is an important factor in marketing our products, as the products are visible to or selected by the customer. We have registered our NuVinci mark and associated logos in the United States and in over twenty foreign countries and our Fallbrook Technologies’ mark in the United States. In our printed and market facing materials we have developed a consistent look and feel for our brand and products in order to develop an association in the public’s mind of that look and feel with the brand to create a “trade dress” for our technology. We believe there is value in such trade dress and we will continue to develop such trade dress.

There are risks associated with enforcing our intellectual property and with our freedom to operate without affecting the rights of others that could greatly impact our business. For a description of the risks associated with our intellectual property, please see “Risk Factors—Risks Related to Intellectual Property.”

Employees

As of December 31, 2009, we had 47 full-time employees, with 24 in research and product development, 5 in operations, 4 in sales and marketing, 10 in finance, human resources and legal and 4 in senior executive management, and we had 5 independent contractors and 3 part-time consultants. All of our employees, contractors and consultants are under agreements that include provisions relating to confidentiality and assignment of inventions among other terms.

Of the 47 employees as of December 31, 2009, all were located in the United States including 38 in Texas, 8 in California, and 1 in Michigan. We also have a full time contract agent who travels to represent our interests

in China and two full time contract agents who provide sales and customer service in Europe. We consider our current relationship with our permanent employees and our contract agents to be good.

None of our employees are represented by labor unions or have collective bargaining agreements.

Government Regulation

Our business is reliant to a significant degree on the regulation of patents by the U.S. Department of Commerce and by other such agencies around the world. Changes in the laws or regulations pertaining to patents could have a materially adverse effect on our ability to protect our technology from competitors. In the U.S., bills have been introduced in both houses of congress that would, if made into law, adversely affect the ways damages are determined in infringement cases, that will make it more difficult to receive enhanced damages for egregious infringement and copying and that would make it possible for competitors to subject our patents to costly post-grant opposition proceedings, among other changes.

Our operations are subject to a variety of federal, provincial, state, international and local laws and regulations relating to environmental protection and hazardous substances. Such laws and regulations relate to, among other things, the discharge of contaminants into water and air and onto land, the disposal of waste, and the handling, storage and transportation of hazardous materials and recycling requirements. We believe that we have conducted and are conducting our business in compliance with all applicable environmental laws in all material respects.

Property

Our executive offices are currently located in San Diego, California, where we lease approximately 3,000 square feet of office space. The lease will continue until March 31, 2012.

We also maintain research, development, fabrication and testing facilities in Cedar Park, Texas—near Austin—in two different facilities, our Cypress Creek facility and our Whitestone facility. At our Cypress Creek facility, in which we conduct research and development, light fabrication, operations and some administration, we lease approximately 22,000 square feet of space. This lease expires on January 31, 2011. At our Whitestone facility, which is dedicated primarily to testing, we lease approximately 4,300 square feet of space. This lease expires December 31, 2010, but may be terminated with ninety days’ prior notice.

Legal proceedings

We believe that we are not a party to any current litigation in any jurisdiction. We are not aware of any claims that any third party may have against us. We do not believe we infringe any third party’s patent or trademark rights and have never received any notice of such infringement or any threat of such litigation.

Management

Executive officers and directors

Our executive officers and directors and their ages and positions as of December 31, 2009 are set forth below:


Name	Age		Position	Place of Residence

William G. Klehm III		47	Chairman and Chief Executive Officer	Carlsbad, California
Gary E. Jacobs⁽¹⁾⁽²⁾		52	Director	San Diego, California
Steven E. Parry⁽¹⁾⁽²⁾		54	Director	Goleta, California
Keimpe Keuning⁽¹⁾		35	Director	Feldmeilen, Switzerland
Allan R. Kammerer		59	Director	Bloomfield Hills, Michigan
Edward L. Mercaldo		68	Director	Del Mar, California
Vincenza Sera⁽¹⁾		52	Director	Toronto, Ontario, Canada
Jeremiah B. Robins⁽²⁾		50	Director	San Diego, California

Nicole T. Nicks		37	Chief Financial Officer, Treasurer and Assistant Secretary	San Diego, California
Paul A. DeHart		52	Chief Operating Officer	Austin, Texas
Alan M. Nordin		47	President, Bicycle Products Division	Carlsbad, California

Robert A. Smithson		46	Chief Technology Officer and Vice President, Business Development	Cedar Park, Texas
Jeffrey A. Birchak		42	Vice President, Intellectual Property and Secretary	San Diego, California
George L. Lowe		66	Vice President, Operations	Austin, Texas
David W. Markley		45	Vice President, Product Development	Austin, Texas


(1)		Member of audit committee

(2)		Member of compensation committee

William G. Klehm III, Chairman and Chief Executive Officer. Mr. Klehm joined us as Chief Executive Officer in April 2004. He brings over 20 years of automotive-related experience to Fallbrook Technologies. With numerous leadership positions in the automotive business, including finance, marketing, sales, product development, and manufacturing operations, he has a proven track record of leading and growing successful organizations. Prior to joining us, Mr. Klehm served as the president and general manager of Newgen Results Corporation, an automotive customer relationship management firm. Prior to joining Newgen, Mr. Klehm served as president and SBU director for Visteon Climate Control Systems Ltd. He was instrumental in developing and launching Visteon’s Aftermarket Division. Mr. Klehm started his career with Ford Motor Company in 1985 and held a variety of posts within the Ford Customer Service Division where he was responsible for developing and executing the marketing/growth strategy for its customer service parts business. Mr. Klehm holds a B.A. in Management and Marketing from Northwood University and also participated in the Harvard Business School Executive Education Programs. Mr. Klehm was selected to serve on our Board of Directors because of his knowledge of our company and technology, the Board’s belief that the Company is best served by its Chief Executive Officer serving as a director, his many years of experience in a variety of positions, and his experience in the automotive industry.

Gary E. Jacobs, Director. Mr. Jacobs is an investor and philanthropist and has been a member of our Board of Directors since March 31, 2004. He is the Managing Director of Jacobs Investment Company LLC, which participates in real estate development and other investment activities throughout the United States and abroad. He also owns and operates a professional minor league baseball team, the Lake Elsinore Storm, affiliated with the San Diego Padres. Mr. Jacobs serves as chairman of the Board of Trustees High Tech High, a public charter high school and is a board member of the San Diego Symphony and the UCSD Board of Overseers. Mr. Jacob’s other philanthropic work includes being a past president of the United Jewish Federation of San Diego County. Additionally, Mr. Jacobs and his wife created and funded the Mr. Jacob and Jerri-Ann Jacobs International Teen Leadership Institute which promotes Muslim / Jewish understanding. Prior to his

current investment and philanthropic activities, Mr. Jacobs worked as a Software Engineer and Senior Education Specialist at QUALCOMM, Inc. and as a Software Programmer at Linkabit Incorporated. Mr. Jacobs left QUALCOMM in 2000. Mr. Jacobs holds a B.A. in Management Science from the University of California at San Diego. Mr. Jacobs was selected to serve on our Board of Directors because of his experience as a member of many boards, his background in engineering, and his vast network of business contacts.

Steven E. Parry, Director. Mr. Parry has been a member of our Board of Directors since December 18, 2008. Since 2001, he has been a managing director of NGEN Partners, an investment firm specializing in the cleantech sector. He began his career as a professional geologist and worked in the minerals industry for more than 25 years. Prior to NGEN, at Billiton plc and BHP Billiton, Mr. Parry held the position of vice president business development and general manager, innovation for the company’s exploration subsidiary. As a principal in BHP Billiton’s venture capital group, he was responsible for creating its first technology venture fund in 2001. Mr. Parry is also a member of the board of directors of EnviroTower, eps corp, Powerspan, Rayne Corporation, SolFocus and Tioga Energy. Mr. Parry holds a BSc degree from Queen’s University, Canada, and an MSc degree from the University of Western Ontario. He has been awarded the Canada 125 Medal for his activist role in support of sustainability in northern Canadian resource communities. Mr. Parry was selected to serve on our Board of Directors because of his experience in the financing and operations of private companies in the cleantech sector and his experience on the boards of many technology companies.

Keimpe Keuning, Director. Mr. Keuning has been a member of our Board of Directors since December 18, 2008 and is a senior investment manager at SAM Private Equity AG, which provides investment advisory services to Robeco Group N.V., a Dutch-headquartered asset management firm wholly owned by Rabobank. Robeco was established in Rotterdam in 1929 and has offices located world-wide. Robeco offers a wide range of investment products and services to institutional and private investors. Mr. Keuning joined Robeco in 2006 and subsequently joined SAM in July 2009, and his focus is on Clean Technology investments. He is also on the board of directors of Enerpulse Inc., the Albuquerque based maker of the Pulstar ^tm pulse plug, AWS Eco Plastics Ltd., the UK based plastic bottle recycling company and SPG Solar, Inc., the solar integrator based in Novato, California. Prior to Robeco, Mr. Keuning worked from 2001 to 2006 at Fortis Bank as Associate Director where he advised a broad range of clients on numerous transactions. He began his working career at Ernst & Young as a tax advisor. Mr. Keuning studied U.S. and International tax law at the University of Florida and received a master’s degree in tax law from the University of Leiden. He has also participated in executive education at the Amsterdam Institute of Finance and INSEAD. Mr. Keuning was selected to serve on our Board of Directors because of his international experience in business, investment banking and finance as well as his technical experience in finance and accounting principles.

Allan R. Kammerer, Director. Mr. Kammerer has been a member of our Board of Directors since February 10, 2009. He is a seasoned automotive industry veteran who spent 34 years with Ford Motor Company before retiring in 2008 as product development director for Jaguar Land Rover. Prior to this assignment, he served as executive director for SUV and body-on-frame vehicles in North America, where he led product development activities for Ford, Lincoln and Mercury vehicles with these platforms. In his previous work with Ford, he also served as vehicle line director for the group that developed the critically-acclaimed Ford Focus. Mr. Kammerer holds a B.S. in mechanical engineering from California State University at San Luis Obispo, and an M.S. in mechanical engineering from Stanford University. Mr. Kammerer was selected to serve on our Board of Directors because of his experience in the automotive industry and engineering background.

Edward L. Mercaldo, Director. Mr. Mercaldo has been a member of our Board of Directors since November 25, 2009. He has been involved in the financing of natural resource exploration and development companies for almost thirty years. He has been a director of Norwood Resources, a TSX Venture company engaged in oil and gas exploration, since August 2001. As Executive Vice President, CFO and Director of Diamond Fields Resources Inc., he negotiated its acquisition in August 1996 by Inco Ltd. Following that transaction, he served on the Inco Ltd. board until September 2000 where he served as a member of its audit committee. He has provided financial and strategic business advice to numerous natural resource companies and has also served on the boards of several U.S. and Canadian companies. He enjoyed a career of more than

25 years as an International Commercial and Investment Banker with several leading financial institutions including Wachovia, Bank of Montreal, Bankers Trust Company of New York, Gordon Capital and First Marathon Securities. Mr. Mercaldo is a graduate of the School of Foreign Service at Georgetown University and has completed the Advanced Management Program of the Harvard Business School. Mr. Mercaldo was selected to serve on our Board of Directors because of his U.S. and international experience with public and private companies, both at start-up and mature stages, as well as his finance and banking background.

Vincenza Sera, Director. Ms. Sera has been a member of our Board of Directors since December 5, 2009. With more than 25 years of investment banking experience, Ms. Sera is an advisor to senior executives and boards of directors. She is currently chair of the Ontario Pension Board, which she joined in 2004. From 1992 to 2004, Ms. Sera served as Managing Director of Financial Institutions Group, Investment Banking for National Bank Financial. During 2003 and 2004, she was co-head of the Canadian Financial Institutions Group (FIG) practice of Putnam Lovell NBF, which specializes in investment banking activity for global FIG clients. Ms. Sera has an MBA (finance) degree from the University of Toronto and an honors bachelor business administration (accounting) degree from the University of Windsor. Ms. Sera was selected to serve on our Board of Directors because of her investment banking experience and experience with both U.S. and Canadian companies.

Jeremiah B. Robins, Director. Mr. Robins has been a member of our Board of Directors since February 10, 2009. He is the chairman and CEO of Great Pond Management Company (GPMC), a private equity firm he formed in 1979. Over the past three decades, Mr. Robins has participated in the development of companies in a wide range of industries, including Iron and Steel, Specialty Chemicals, HVAC, and Semiconductor Packaging. Mr. Robins also currently serves as chairman and CEO of Thermal Dynamics Corporation (TDX), a manufacturer of specialty heat exchangers for the North American OE Automotive and Industrial markets, and chairman of Rotation Dynamics Corporation (Rotadyne) a multinational manufacturer of consumables for the commercial printing industry with facilities in North, Central and South America, Eastern and Western Europe, and the People’s Republic of China. Mr. Robins maintains residences both in San Diego, California and Shanghai, PRC and divides his time between the U.S. and China. Mr. Robins was selected to serve on our Board of Directors because of his executive and operational experience with a diverse range of companies.

Nicole T. Nicks, Chief Financial Officer, Treasurer and Assistant Secretary. Ms. Nicks joined us in June 2004 and has over 12 years of accounting, financial reporting and SEC filing experience. She has worked in various industries such as database management and customer retention, real estate investment trust, home building and land developing, healthcare, public sector-enterprise fund, manufacturing, and not-for-profit. Immediately prior to joining Fallbrook Technologies, Ms. Nicks worked as an independent consultant specializing in Sarbanes-Oxley compliance. Previously, she served as controller for Newgen Results Corporation. Ms. Nicks also served as Senior Audit Accountant for the San Diego office of Deloitte & Touche LLP. Ms. Nicks holds a Business Administration/Accounting degree magna cum laude from San Diego State University’s Honors Business Program. She is a California Certified Public Accountant (inactive).

Paul A. DeHart, Chief Operating Officer. Mr. DeHart joined us in October 2009 and has more than 25 years experience in manufacturing management, program development and strategic planning. He oversees our engineering and manufacturing operations, which are based at the Company’s facility in Austin, Texas. Prior to joining Fallbrook Technologies, Mr. DeHart served from 2006 to 2009 as president of Alex Dean Consulting, a manufacturing-focused interim management and consulting firm based in Ortonville, Michigan. From 2005 to 2006, he served as chief operating officer of Springfield Wire Corporation located in Springfield, Massachusetts. From 1997 to 2005, Mr. DeHart was the general manager and director of international development at L&L Products of Romeo, Michigan. Mr. DeHart holds a BSEE from the University of Rochester and an MBA from the Harvard Business School.

Alan M. Nordin, President, Bicycle Products Division. Mr. Nordin joined us in November 2004 and has 20 years of sales, product development, and business development experience in the automotive component industry, both in the U.S. and international markets. Most recently, he served as our vice president of sales and business development. Prior to joining Fallbrook Technologies, Mr. Nordin was the vice president of sales for Newgen Results Corporation, an automotive customer relationship management firm. Mr. Nordin’s previous

experience also includes service as divisional manager of Global Aftermarket Operations for Visteon Corporation and global sales/marketing roles at Federal-Mogul and Echlin Inc. Mr. Nordin holds a B.A. in Business Administration from Western Michigan University.

Robert A. Smithson, FSAE, Chief Technology Officer and Vice President, Business Development. Mr. Smithson joined us in March 2004 and is an author of several publications in the area of motor vehicle transmissions with over 21 years of engineering and management experience in the automotive, aerospace, and robotics fields. He previously served as our vice president of product development and was instrumental in our early focus on intellectual property. Prior to joining Fallbrook Technologies, Mr. Smithson served as group leader of the Drivetrain Design & NVH Group for Southwest Research Institute (SwRI) in San Antonio, Texas and as an advisor to several early stage companies in the clean tech sector. Mr. Smithson’s career includes serving as a product development engineer for Ford Motor Company in Dearborn, Michigan. He also was vice president of robot design and a co-founder of ARM Automation, Inc., and worked as a spaceflight hardware engineer for the McDonnell-Douglas Astronautics Company. Mr. Smithson holds a B.S. in Mechanical Engineering from Auburn University and an M.S. in Mechanical Engineering from the University of Texas at Austin. Additionally, he holds an Executive M.S. in Science & Technology Commercialization (named Kozmetzsky Scholar and Outstanding Graduate) from the IC2 Institute at the University of Texas at Austin. In 2009, Mr. Smithson was named a Fellow of the Society of Automotive Engineers (SAE).

Jeffrey A. Birchak, Vice President, Intellectual Property and Secretary. Mr. Birchak joined us in November 2003 and is an intellectual property (IP) attorney specializing in IP portfolio management and strategy as well as patent defense and enforcement strategies for mechanical devices. Prior to joining Fallbrook Technologies, Mr. Birchak was an associate at Knobbe, Martens, Olson & Bear LLP, a California-based IP law firm. Previously, Mr. Birchak served as a nuclear engineering instructor in the U.S. Navy submarine force, and worked as a program engineer for AlliedSignal Corporation. Mr. Birchak holds a B.S.E. cum laude in Mechanical Engineering from Arizona State University and a J.D. cum laude from California Western School of Law where he was the managing editor of the California Western Law Review and the California Western International Law Journal. He is a member of the State Bar of California and is admitted or registered to practice before the Supreme Court of the United States, the U.S. Patent and Trademark Office and the U.S. District Court for the Southern District of California.

George L. Lowe, Vice President, Operations. Mr. Lowe joined us in January 2009 and has an extensive background in the automotive industry, which includes over 30 years with Ford Motor Company. At Ford, he held a variety of positions involving leadership roles in Quality, Service, Sales, Marketing, and Product Development, both in the U.S. and globally. In June 2000, after leaving Ford, he founded his own consulting business—Lowe & Associates, LLC, providing a wide range of tailored consulting, communications, and organizational development services to the automotive industry and other businesses. Mr. Lowe served in the U.S. Army Corp of Engineers from 1969-1971. He holds a Bachelor’s Degree in Automotive Engineering Technology from Western Michigan University (Cum Laude) and a MBA from Michigan State University.

David W. Markley, Vice President, Product Development. Mr. Markley joined us in May 2004 and, prior to his current position, served as our director of engineering. Prior to joining Fallbrook Technologies, Mr. Markley worked for BAE Systems where he led the Low Cost Precision Kill laser-guided missile development project. As a rotating machinery consultant with Radian International and Mechanical & Materials Engineering, he was the program manager for Datalert^tm, which provided engineering and maintenance services to 120 plants in the utility, chemical, and petrochemical industries. While working for General Dynamics Fighter Aircraft Division, Mr. Markley provided analytical and test support for the F-16, YF-22, and other military aircraft. Mr. Markley holds B.S. and M.S. degrees in Mechanical Engineering from Auburn University and is a registered Professional Engineer (PE) and Project Management Professional (PMP).

Board of Directors

Effective upon the closing of this offering, our board will consist of 8 directors. A majority of the directors will be “independent” as defined under and required by applicable securities laws. At each annual meeting, our stockholders will elect our full Board of Directors and our directors will serve until their successors are elected or appointed, unless their office is vacated earlier. Directors may be removed at any time for cause by the affirmative vote of the holders of a majority of the voting power then entitled to vote.

Committees of the Board of Directors

Our Board of Directors directs the management of our business and affairs, as provided by Delaware law, and conducts its business through meetings of the Board of Directors. In October 2009, our Board of Directors formed an audit committee and a compensation committee. Effective upon the closing of this offering, our Board of Directors will amend the charter and function of the compensation committee to make it a compensation, nominating and corporate governance committee. The current compensation committee and the compensation, nominating and corporate governance committee are referred to in this prospectus as the “compensation committee.” In addition, from time to time, special committees may be established under the direction of the Board of Directors when necessary to address specific issues. The composition of the board committees will comply, when required, with applicable securities laws. Our Board of Directors will adopt a written charter for each of the standing committees. These charters will be available on our website following the completion of the offering.

Audit Committee. Upon the closing of this offering, our audit committee will consist of at least 3 members, each of whom will be an “independent” director as defined under and required by applicable securities laws. Our audit committee will be directly responsible for, among other things, the appointment, compensation, retention, and oversight of our independent registered public accounting firm. The oversight includes reviewing the plans and results of the audit engagement with the firm, approving any additional professional services provided by the firm and reviewing the independence of the firm. Commencing with our first report on internal controls over financial reporting, the committee will be responsible for discussing the effectiveness of the internal controls over financial reporting with the firm and relevant financial management.

Compensation, Nominating and Corporate Governance Committee. Upon the closing of this offering, our compensation committee will consist solely of directors who are “non-employee directors” under Section 16 of the Exchange Act, and “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code and each such director will be “independent” as defined under and required by applicable securities laws. The compensation committee will be responsible for, among other things, supervising and reviewing our affairs as they relate to the compensation and benefits of our executive officers. In carrying out these responsibilities, the compensation committee reviews all components of executive compensation for consistency with our compensation philosophy and with the interests of our stockholders. The committee will also be tasked with identifying individuals qualified to become board members; selecting, or recommending to the board, director nominees for each election of directors; developing and recommending to the board criteria for selecting qualified director candidates; considering committee member qualifications, appointment and removal; recommending corporate governance principles, codes of conduct and compliance mechanisms; and providing oversight in the evaluation of the board and each committee.

Compensation Committee Interlocks and Insider Participation

We do not anticipate any interlocking relationships between any member of our compensation committee and any of our executive officers.

Board Leadership

Our Board of Directors has adopted a Charter of the Lead Independent Director, providing that in circumstances where the Chairman of the Board of Directors is not independent, our Board considers it to be

useful and appropriate to designate a Lead Independent Director to coordinate the activities of the other independent directors and to perform such other duties and responsibilities as our Board may determine from time to time. Because William G. Klehm III is our Chief Executive Officer, as well as Chairman of the Board, we have designated a Lead Independent Director. Steven Parry currently serves as the Lead Independent Director.

The Lead Independent Director (if so designated) is responsible for coordinating the activities of the independent directors. The designation of a Lead Independent Director is intended to facilitate communication between the independent directors and the Chairman/Chief Executive Officer and not to diminish the ability of any other independent director to communicate directly with the Chairman/Chief Executive Officer at any time. Our Board of Directors believes that this leadership structure is best for the Company at the current time, as it appropriately balances the need for the Chief Executive Officer to run the Company on a day-to-day basis with significant involvement and authority vested in an outside independent director member—the Lead Independent Director. The role of our Lead Independent Director is fundamental to our decision to combine the Chief Executive Officer and Chairman of the Board positions. Our Lead Independent Director assumes many functions traditionally within the purview of a Chairman of the Board. Under our Charter of the Lead Independent Director, our Lead Independent Director must be independent. The specific responsibilities of the Lead Independent Director include the following:


	•	In consultation with the other independent directors, consult with the Chairman as to an appropriate schedule of Board meetings, seeking to ensure that the independent directors can perform their duties responsibly without interfering with ongoing Company operations;


	•	Consult with the Chairman regarding the information and agendas of the meetings of the Board of Directors and its committees;


	•	Advise the Chairman as to the quality, quantity, and timeliness of information submitted by management that is necessary or appropriate for the independent directors to effectively and responsibly perform their duties;


	•	Serve on the compensation committee;


	•	Call meetings and prepare agendas for the independent directors, as appropriate;


	•	Serve as the Chairman of and prepare the agenda for the executive sessions of the independent directors and its non-employee directors;


	•	Serve as the principal liaison between the independent directors and the Chairman and senior management;


	•	Chair the meetings of the Board of Directors when the Chairman is not present; and


	•	Respond directly to stockholder and other stakeholder questions and comments that are directed to the Lead Independent Director or to the independent directors as a group, with such consultation with the Chairman and the other directors as the Lead Independent Director may deem appropriate.

Director Qualifications

Each of our directors brings to our Board extensive management and leadership experience gained through their service in senior positions of diverse businesses. In these roles, they have taken hands-on, day-to-day responsibility for strategy and operations, including management of capital, risk and business cycles. In addition, many directors bring significant experience on other boards or long service on our Board of Directors, broadening their knowledge of board of director policies and processes, rules and regulations, issues and solutions. In the biographies of each of the directors provided above, we describe specific individual qualifications and skills of our directors that contribute to the overall effectiveness of our Board of Directors and its committees.

In addition to the information presented above regarding each nominee’s specific experience, qualifications, attributes and skills that led our Board of Directors to the conclusion that he or she should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards. They each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to our company and our Board.

While we do not have a formal diversity policy, our Board of Directors believes it’s important for our Board to have diversity of knowledge base, professional experience and skills, and takes age, gender and ethnic background into account when considering director nominees. As part of its annual self-evaluation, our compensation committee will assess whether it properly considered diversity in identifying director nominees.

Risk Management

Our Board of Directors is responsible for reviewing and assessing business enterprise risk and other major risks facing the Company, and evaluating management’s approach to addressing such risks. At each quarterly meeting, our Board reviews all key risks facing the Company, management’s plans for addressing these risks and the Company’s risk management practices overall. To assist the Board in this oversight role, our Board of Directors seeks to have one or more directors with experience managing business enterprise risk. In addition, the committees of our Board of Directors consider and address risk as they perform their respective committee responsibilities. For example, financial risks are overseen by our Audit Committee and our compensation committee periodically reviews the most important enterprise risks to ensure that our compensation programs do not encourage excessive risk-taking. All committees report to the full Board of Directors as appropriate, including when a matter rises to the level of a material or enterprise risk.

Our management is responsible for day-to-day risk management and regularly reports on risks to our Board of Directors or relevant committee. Our accounting and legal departments fulfill the primary monitoring and testing functions for company-wide policies and procedures, and manage the day-to-day oversight of the risk management strategy for our ongoing business. This oversight includes identifying, evaluating, and addressing potential risks that may exist at the enterprise, strategic, financial, operational, and compliance and reporting levels.

We believe the division of risk management responsibilities described above is an effective approach for addressing the risks facing our company and that the leadership structure of our Board of Directors supports this approach.

Compensation Risk Assessment

In setting each element of executive compensation, our Board of Directors and compensation committee is also mindful of the level of risk-taking that any element may promote. Our Board of Directors and compensation committee believe it is important to incentivize our executive officers to achieve annual Company and individual objectives, but balance promotion of such short-term interests with incentives that promote building long-term stockholder value. Our Board of Directors and compensation committee believe the amount of long-term equity incentives included in our executive compensation packages mitigates the potential for excessive risk-taking. All of our named executive officers’ equity awards vest over a period of time, generally annually over four years from the date of grant, rather than upon achievement of specific performance objectives, and our Board of Directors has historically granted additional equity awards annually, which incentivizes these officers to continue to focus on our long-term interest.

Our compensation committee has conducted an internal assessment of our compensation policies and practices in response to current public and regulatory concern about the link between incentive compensation and excessive risk taking by corporations. We concluded that our compensation program does not motivate excessive risk-taking and any risks involved in compensation are not reasonably likely to have a material adverse effect on our company. Included in the analysis were such factors as the behaviors being induced by our fixed compensation system, the absence of any incentive awards, the oversight of our compensation committee in the operation of our incentive plans and the high level of Board involvement in approving material investments and capital expenditures.

Compensation Discussion and Analysis

Overview

Our compensation program is designed to attract and retain talented employees, motivate them to achieve our key financial, operational and strategic goals and reward them for superior performance. We believe that attracting and retaining high caliber executives and employees and providing them with appropriate compensation plans is critical to helping us achieve our financial, operational, personnel and strategic goals and building long-term value for our stockholders.

Compensation Determinations

Prior to this offering, we have been a private company and we have not been subject to exchange listing requirements requiring us to have a majority independent board or to exchange or SEC rules relating to the formation and functioning of board committees, including the audit committee and the compensation committee. As such, most, if not all, of our compensation policies, and determinations applicable to our named executive officers, have been the product of negotiation between our named executive officers and our Board of Directors.

In October 2009, our Board of Directors formed an audit committee and a compensation committee. Effective upon the closing of this offering, our Board of Directors will amend the charter and function of the compensation committee to make it a compensation, nominating and corporate governance committee. The current compensation committee and the compensation, nominating and corporate governance committee are referred to in this prospectus as the “compensation committee.”

The compensation committee is responsible for recommending to our full Board of Directors for approval the annual compensation and compensation plans for the members of our executive team, which currently includes the following executives:


	•	Chief Executive Officer

	•	Chief Financial Officer

	•	Chief Operating Officer

	•	Chief Technical Officer and Vice President, Business Development

	•	President, Bicycle Products Division

	•	Vice President, Intellectual Property

	•	Vice President, Operations

	•	Vice President, Product Development

The compensation committee also approves the compensation programs for our other employees on an annual basis. The compensation of these employees is typically based on the level and scope of their responsibilities and their individual performance during the fiscal year as determined through an annual review process.

Overview of Executive Compensation Program

The elements of our executive compensation program include:


	•	Base salary

	•	Short-term cash incentives

	•	Stock option awards

We also provide the members of our executive team with insurance and a limited number of additional benefits that are typical for companies in our industry. Each of these compensation elements is described in more detail below.

In recommending to our Board of Directors the appropriate compensation to be awarded to the members of our executive team, our compensation committee includes the following objectives:


	•	Equity Awards Should Comprise a Portion of Executive Compensation. We believe that a portion of executive compensation should be delivered in the form of stock option awards in order to align the long-term interests of our executives with those of our stockholders and in order to provide a retention incentive to our executives.

	•	Our Executive Compensation Should Be Competitive and Fair. In order to help us attract and retain talented executives, we believe that our compensation programs should be competitive when compared to our peers and also be perceived as fair, when considered both externally as well as internally.

Compensation Process

Our compensation committee conducts a formal review of our compensation program annually. As part of this process, the compensation committee evaluates the existing compensation of each member of our executive team, each member’s individual contributions and performance, our overall financial performance, including our revenue and gross margin, and our success in achieving our overall financial, operational and strategic goals during the fiscal year. In December 2009, we engaged the services of a compensation consultant James F. Rada & Associates LLC, to make recommendations to our compensation committee regarding our compensation policies and individual compensation determinations.

Components of Compensation

As indicated above, we compensate the members of our executive team through base salary, short-term cash incentives and stock option awards, with the overall goal of motivating our key executives to help us achieve our key financial, operational and strategic goals and build long-term value for our stockholders.

Base Salary

We provide the members of our executive team with a base salary to compensate them for services provided to our company during the fiscal year.

In recommending to our Board of Directors the base salaries for our executive team members, the compensation committee considers the individual performance and contributions of the executive, our overall financial performance and relevant market data. The compensation committee evaluates the base salaries for our executive team members on an annual basis in connection with performance reviews, as well as upon a promotion or other change in responsibility.

For fiscal 2009, the base salaries of the members of our executive team were as follows:


Name and Title	Base Salary

William G. Klehm III, Chairman and Chief Executive Officer	$	400,000
Nicole T. Nicks, Chief Financial Officer, Treasurer and Assistant Secretary	$	150,000
Alan M. Nordin, President, Bicycle Products Division	$	213,500
Paul A. DeHart, Chief Operating Officer	$	200,000
George L. Lowe, Vice President, Operations	$	200,000
Robert A. Smithson, Chief Technology Officer and Vice President, Business Development	$	168,000
Jeffrey A. Birchak, Vice President of Intellectual Property	$	160,000
David W. Markley, Vice President Product Development	$	125,000

In December 2009, our Board of Directors approved the same base salaries for our executive team for fiscal 2010.

Short-Term Cash Incentives

Although we have provided annual cash bonus awards to members of our executive team in the past to reward our executives for their performance, there are no bonus plans currently in place. Our compensation committee is responsible for recommending to our Board of Directors target and maximum bonus amounts that may be awarded and approving the corporate and individual performance goals and criteria that will be evaluated following the completion of the fiscal year in determining any bonus amounts to be awarded. After the end of each fiscal year, the compensation committee, with input from our Chief Executive Officer, will evaluate our company’s fiscal position and each executive’s performance relative to the corporate and individual performance goals set for the fiscal year. Following this evaluation, the compensation committee is responsible for recommending to our Board of Directors the actual, if any, bonus amounts to be awarded.

Stock Option Awards

Our Board of Directors, upon recommendation of our compensation committee, grants stock options under our 2004 Stock Plan. The stock options have an exercise price equal to the fair market value of our common stock on the date of grant. Typically, 25% of the stock underlying the stock options vest and become exercisable on the one year anniversary of the date of grant with the remaining 75% vesting over 36 equal monthly installments thereafter. Vesting may be accelerated in the event of certain corporate transactions in accordance with the terms of the 2004 Stock Plan and terms in employment agreements with certain of the executive management team (as discussed below).

Other Benefits

In order to attract, retain and pay market levels of compensation, we provide the members of our executive team with the following benefits:

Health Insurance. We provide the members of our executive team and their eligible dependents, health, dental and vision insurance coverage. For fiscal 2009, the aggregate cost of these benefits was approximately $82,000.

Life and Disability Insurance. We provide our executives with life insurance coverage equal to one times the executive’s annual salary up to a maximum of $50,000. We provide disability and/or additional life insurance coverage for our Chairman and Chief Executive Officer, William G. Klehm III. By agreement with the Board of Directors, Mr. Klehm pays 15% of the premium for the policy on his life and his estate is the named beneficiary of 15% of any distributions from that policy.

Pension Benefits. We do not provide pension arrangements or post-retirement health coverage for our executives.

Perquisites. We do not have a policy of providing perquisites to our executive officers. They may on a case-by-case basis, if included in their initial offer of employment, receive reimbursement for some relocation expenses and they may receive other benefits of nominal value.

Stock Option Plans

2004 Stock Plan

Our 2004 Stock Plan was adopted by our Board of Directors and approved by our stockholders on April 16, 2004.

The 2004 Stock Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock and other stock-based awards. Our officers, employees, consultants, advisors and directors, and those of any subsidiaries, are eligible to receive awards under the 2004 Stock Plan; however, incentive stock options may only be granted to our employees. In accordance with the terms of the 2004 Stock Plan, our Board of

Directors administers the 2004 Stock Plan and our Board of Directors has the authority to select the recipients of awards and to determine:


	•	the number of shares of common stock covered by options and the dates upon which those options become exercisable;

	•	the exercise prices of options;

	•	the duration of options;

	•	the methods of payment of the exercise price; and

	•	the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of those awards, including the conditions for repurchase, issue price and repurchase price.

Pursuant to the terms of the 2004 Stock Plan, in the event of a change of control, the 2004 Stock Plan provides for acceleration of vesting of stock options under certain circumstances described below under “Executive Compensation—Employment, Termination of Employment and Change in Control Arrangements.”

As of December 31, 2009, there were outstanding options to purchase an aggregate of 12,994,466 shares of common stock under the 2004 Stock Plan at a weighted average exercise price of $0.24 per share, and there were 3,505,062 shares of common stock reserved for issuance upon exercise of options available for future grant under the 2004 Stock Plan. An aggregate of 269,351 shares of common stock have been issued upon the exercise of stock options.

2010 Stock Plan

We currently plan to adopt a new 2010 Stock Plan prior to the closing of this offering. After the effective date of the 2010 Stock Plan, we will grant no further stock options or other awards under the 2004 Stock Plan. The 2010 Stock Plan will maintain a number of shares reserved or issuable pursuant to the plan equal to % of the common stock issued and outstanding.

Policies and Procedures for Related Person Transactions

In connection with this offering, we intend to adopt a written code of business conduct and ethics, or code of conduct, effective as of the date of, and applicable to transactions on or after, the offering, pursuant to which our executive officers, directors, and principal stockholders, including their immediate family members and affiliates, will not be permitted to enter into a related person transaction with us without the prior consent of our audit committee, or other independent committee of our Board of Directors in the event it is inappropriate for our audit committee to review such transaction due to a conflict of interest. Any request for us to enter into a transaction with an executive officer, director, principal stockholder or any of such persons’ immediate family members or affiliates, in which the amount involved exceeds $120,000, will first be presented to our audit committee (or the relevant independent committee) for review, consideration, and approval. All of our directors, executive officers, and employees will be required to report any such related person transaction to our audit committee. In approving or rejecting the proposed agreement, our audit committee shall consider the facts and circumstances available and deemed relevant to the audit committee (or the relevant independent committee), including, but not limited to, the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services or products, and, if applicable, the impact on a director’s independence. Our audit committee (or the relevant independent committee) shall approve only those agreements that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our audit committee (or the relevant independent committee) determines in the good faith exercise of its discretion. Under the policy, if we should discover related person transactions that have not been approved, the audit committee will be notified and will determine the appropriate action, including ratification, rescission, or amendment of the transaction.

Employment, Termination of Employment and Change in Control Arrangements

Employment Agreement with William G. Klehm III. We have entered into an employment agreement with our Chief Executive Officer, William G. Klehm III, effective May 3, 2007, which agreement was amended January 16, 2008. The initial term under this employment agreement expired May 2, 2008 and thereafter the agreement term is automatically extended for additional one-year periods unless either we or Mr. Klehm give written notice of the termination of the agreement at least 90 days prior to the end of any extension of the term.

This employment agreement provides that in the event of a termination of Mr. Klehm’s employment by us without cause or a termination of employment by him for good reason, Mr. Klehm’s remaining unvested stock awards will fully vest and Mr. Klehm will be entitled to payment of his base salary for 6 months (exclusive of bonus or incentive payments) and the continuation of his benefits for 6 months following the date of termination.

For purposes of this employment agreement, “cause” means, as determined in good faith by our Board of Directors, (i) willful misconduct which materially damages us; (ii) willful and material misappropriation of our assets; or (iii) conviction of, or a plea of “guilty” or “no contest” to a felony under the laws of the United States or any state thereof; and “good reason” means Mr. Klehm’s resignation within 60 days of (i) any reduction in his base salary, other than a reduction in base salary in connection with general cost-cutting objectives instituted by us which reduction is proportional when compared to reductions of other of our employees; (ii) termination of his service as a member of our Board of Directors (other than a termination as a result of his voluntary resignation from the Board of Directors); (iii) a change in title or a change in his position which materially reduces his duties, authority, reporting, position or level of responsibility without his consent; or (iv) any requirement that he relocate his place of employment by more than 50 miles from his then-current office without his consent.

Employment Agreements with other Named Executive Officers. We have entered into employment agreements with Nicole T. Nicks, Alan M. Nordin, and Robert A. Smithson, each of which were effective April 15, 2008, and George L. Lowe, effective January 22, 2010. Each agreement expires following a two-year term and thereafter will automatically extend for another twelve months unless either we or the executive give written notice of the termination of the agreement at least 30 days prior to the end of the term.

These employment agreements provide that in the event of a termination of the executive’s employment by us without cause or a termination of employment by the executive for good reason, the executive’s remaining unvested stock awards will fully vest and the executive will be entitled to payment of his base salary for 6 months (exclusive of bonus or incentive payments) and the continuation of his benefits for 6 months following the date of termination.

For purposes of these employment agreements, “cause” means (i) any willful and material breach of the agreement by the executive; (ii) any willful or gross neglect by the executive of his duties and responsibilities under the agreement; (iii) any fraud, criminal misconduct, breach of fiduciary duty, dishonesty, or gross and willful misconduct by the executive in connection with the performance of his duties and responsibilities under the agreement; (iv) the executive being legally intoxicated or under the influence of illegal or illegally obtained drugs during business hours or while on call, or being habitually drunk or addicted to drugs (provided that this shall not restrict the executive from taking physician-prescribed medication in accordance with the applicable prescription); (v) conviction of, or a plea of “guilty” or “no contest” to a felony or crime of moral turpitude under the laws of the United States or any state thereof; (vi) any action by the executive that may materially impair or materially damage our reputation; (vii) insubordinate disregard of any lawful direction of material consequence given to the executive by us; or (viii) repeated failure or refusal to comply with our policies and procedures; provided that if the executive is to be terminated pursuant to subsections (i), (ii), (vi), (vii), or (viii), the executive will receive notice and 30 days to cure; and “good reason” means (A) any reduction by us of the executive’s base salary, or (B) an action by us that causes the executive, without executive’s consent, to relocate to a facility or location more than 50 miles from his then current location; provided that in any of the above-circumstances, we shall not have cured any such matter within 30 days after written notice with executive’s intention to terminate for good reason has been given by the executive to us.

Change of Control Arrangements. Our 2004 Stock Plan provides that in the event of a corporate transaction (including without limitation a change of control), each outstanding option or stock purchase right shall be assumed or an equivalent option or right shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the successor corporation does not agree to assume the award or to substitute an equivalent option or right, in which case such option or stock purchase right shall terminate upon the consummation of the transaction; provided that in the event (i) of a change of control, and (ii) a person holding an option or stock purchase right assumed or substituted by a successor corporation or a parent or subsidiary of such successor corporation in the change of control, or holding restricted stock issued upon exercise of an option or stock purchase right with respect to which the successor corporation has succeeded to a repurchase right as a result of the change of control, is involuntarily terminated by the successor corporation without cause at the time of, or within eighteen months following the consummation of, the transaction, then any assumed or substituted option or stock purchase right held by the terminated participant at the time of termination shall accelerate and become exercisable as to the number of shares then unvested, and any repurchase right applicable to any shares shall lapse as to 100% of the number of shares as to which the repurchase right would otherwise be applicable, in each case assuming the participant remained in continuous service status for such period. The acceleration of vesting and lapse of repurchase rights provided for in the previous sentence would occur immediately prior to the effective date of termination of the participant’s continuous service status.

In addition, notwithstanding anything to the contrary in our 2004 Stock Plan, the stock option agreements of our first 30 employees, which includes William G. Klehm III, Nicole T. Nicks, Alan M. Nordin and Robert A. Smithson, provide for acceleration of vesting of stock options held by such persons as follows: in the event of a change of control, (i) if the optionee remains as a service provider with the successor corporation or a parent or subsidiary of the successor corporation after the change of control, then the stock options of each such optionee must be assumed or an equivalent option or right shall be substituted by the successor corporation; and (ii) if the optionee does not remain as a service provider with the successor corporation immediately after the consummation of the change of control, at the successor corporation’s election, or such optionee’s stock option is assumed or substituted by the successor corporation in the change of control and the optionee is subject to an involuntary termination by the successor corporation at the time of, or at any time following the consummation of the change of control and during the vesting period of such optionee’s stock option, then any assumed or substituted stock option of the successor corporation held by the terminated optionee at the time of termination shall accelerate and become exercisable as to the number of shares then unvested immediately prior to the effective date of termination of the optionee’s status as a service provider.

For these purposes, the following terms have the definitions described below under our 2004 Stock Plan:


	•	“corporate transaction” means a sale of all or substantially all of our assets, or a merger, consolidation or other capital reorganization or business combination transaction of us with or into another corporation, entity or person, or the direct or indirect acquisition (including by way of a tender or exchange offer) by any person, or persons acting as a group, of beneficial ownership or a right to acquire beneficial ownership of shares representing a majority of the voting power of our then outstanding shares of capital stock;

	•	“change of control” means (i) a sale of all or substantially all of our assets, or (ii) any merger, consolidation or other business combination transaction of us with or into another corporation, entity or person, other than a transaction in which the holders of at least a majority of the shares of our voting capital stock outstanding immediately prior to such transaction continue to hold (either by such shares remaining outstanding or by their being converted into shares of voting capital stock of the surviving entity) a majority of the total voting power represented by the shares of our voting capital stock (or the surviving entity) outstanding immediately after such transaction, (iii) the direct or indirect acquisition (including by way of a tender or exchange offer) by any person, or persons acting as a group, of beneficial ownership or a right to acquire beneficial ownership of shares representing a majority of the voting power of the then outstanding shares of our capital stock, or (iv) a contested election of directors, as a result of which or in connection with which the persons who were directors before such election or their nominees (the “incumbent directors”) cease to constitute a majority of our


		Board of Directors; provided however that if the election or nomination for election by our stockholders, of any new director was approved by a vote of at least 50% of the incumbent directors, such new director shall be considered as an incumbent director;


	•	“involuntary termination” means termination of status as a service provider under the following circumstances: (i) termination without cause; or (ii) voluntary termination within 30 days following (A) a material reduction in job responsibilities, provided that neither a mere change in title alone nor reassignment following a change of control to a position that is substantially similar to the position held prior to the change of control shall constitute a material reduction in job responsibilities; (B) relocation of the work site to a facility or location more than 50 miles from the principal work site at the time of the change of control; or (C) a reduction in the then-current base salary provided that an across-the-board reduction in the salary level of all other employees or consultants in similar positions by the same percentage amount as part of a general salary level reduction shall not constitute such a salary reduction; and

	•	“cause” means (i) the willful failure substantially to perform duties and responsibilities to us or a deliberate violation of our policies; (ii) commission of any act of fraud, embezzlement, dishonesty or any other willful misconduct that has caused or is reasonably expected to result in material injury to us; (iii) unauthorized use or disclosure of any of our proprietary information or trade secrets or the proprietary information or trade secrets of any other party to whom the person owes an obligation of nondisclosure as a result of his or her relationship with us; or (iv) willful breach of any obligations under any written agreement or covenant with us.

Indemnification of Officers

Our amended and restated certificate of incorporation provides that we may indemnify our officers to the fullest extent permitted by Delaware law.

Our amended and restated bylaws provide that (i) we are required to indemnify our officers to the fullest extent permitted by Delaware law, subject to certain very limited exceptions, (ii) we are required to advance expenses, as incurred, to our officers in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to certain very limited exceptions and (iii) the rights conferred in the amended and restated bylaws are not exclusive.

We have entered into indemnification agreements with each of our executive officers to give these individuals additional contractual assurances regarding the scope of the indemnification set forth in our amended and restated certificate of incorporation and amended and restated bylaws and to provide additional procedural protections. We have obtained directors’ and officers’ insurance providing coverage for all of our officers for certain liabilities. We believe that these provisions and this insurance are necessary to attract and retain qualified officers.

Tax and Accounting Considerations

Deductibility of Executive Compensation. Section 162(m) of the Internal Revenue Code of 1986, as amended, generally limits the deductibility of certain compensation in excess of $1,000,000 paid in any one year to our chief executive officer and our other four highest paid executive officers. Qualifying performance-based compensation will not be subject to this deduction limit if certain requirements are met. The non-performance-based compensation paid in cash to our executive officers in 2009 did not exceed the $1 million limit per officer, and the compensation committee does not anticipate that the non-performance-based compensation to be paid to our executive officers for 2010 will exceed that limit.

The compensation committee has and will continue to periodically review and consider the deductibility of executive compensation under Section 162(m) in designing our compensation programs and arrangements. The compensation committee reserves the right to use its judgment to authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate and in the

best interests of the stockholders, after taking into consideration changing business conditions or the officer’s performance.

Compensation of Named Executive Officers

The following table sets forth the compensation earned by our principal executive officer, our principal financial officer and our three most highly compensated executive officers for the fiscal year ended December 31, 2009. These five officers are referred to as our “named executive officers” in this registration statement. Bonuses are generally paid in the year following the year in which the bonus is earned. The compensation described in this table does not include medical, group life insurance, or other benefits which are available generally to all of our salaried employees.


	2009 SUMMARY COMPENSATION TABLE
											Non-
											Equity
											Incentive
							Stock		Option		Plan		All Other
Name and Principal			Salary		Bonus		Awards		Awards		Compensation		Compensation			Total
Position	Year		($)⁽¹⁾		($)		($)		($)⁽²⁾		($)		($)			($)
William G. Klehm III, Chief Executive Officer		2009		400,000		50,000		—		164,373		—		—			614,373
Nicole T. Nicks, Chief Financial Officer		2009		148,022		8,000		—		7,322		—		—			163,344
Alan M. Nordin, President, Bicycle Division		2009		212,608		8,000		—		7,561		—		—			228,169
George L. Lowe, Vice President, Operations		2009		200,000		—		—		960		—		25,000	⁽³⁾		225,960
Robert A. Smithson, Chief Technology Officer and Vice President, Business Development		2009		164,737		22,000		—		18,448		—		—			205,185


(1)		Represents actual salary paid in the fiscal year ended December 31, 2009, as certain salaries were changed after January 1, 2009.


(2)		The value of the stock awards and option awards has been computed in accordance with Accounting Standards Codification (ASC) Topic 718, Compensation — Stock-Compensation, which requires that we recognize as compensation expense the value of all stock-based awards granted to employees in exchange for services over the requisite service period, which is typically the vesting period.


(3)		Mr. Lowe received a $25,000 allowance for relocation expenses.

Grant of Plan-Based Awards in Fiscal Year 2009

We made the following stock option grants or restricted stock awards to our named executive officers during the fiscal year ended December 31, 2009.


			No. of Securities		Option		Fair Market
			Underlying		Exercise Price		Value on Grant
Name	Grant Date		Options		per Share		Date
William G. Klehm III		2/08/2009		5,472,769	$	0.22	$	1,094,554
Nicole T. Nicks		2/08/2009		243,790	$	0.22	$	48,758
Alan M. Nordin		2/08/2009		251,740	$	0.22	$	50,348
Robert A. Smithson		2/08/2009		614,223	$	0.22	$	122,845
George L. Lowe		4/24/2009		25,000	$	0.22	$	5,000
		10/22/2009		25,000	$	0.10	$	2,500

Outstanding Equity Awards at 2009 Fiscal Year-End

The following table shows outstanding equity awards held by our named executive officers as of December 31, 2009.

Option Awards⁽¹⁾

Number of

Securities

Underlying

Option

Unexercised

Exercise

Option

Option (#)

Options (#)

Price

Expiration

Name

Grant Date

Exercisable

Unexercisable

($)

Date

William G. Klehm III

5/06/2004

⁽²⁾

1,315,734

146,193

0.0720

5/05/2014

7/13/2007

236,645

63,355

1.3000

7/12/2017

2/08/2009

5,472,769

0.2200

2/07/2019

Nicole T. Nicks

1/28/2005

10,000

–

0.1720

1/27/2015

6/25/2005

30,000

–

0.2300

6/24/2015

6/20/2006

12,000

–

0.7478

6/19/2016

9/10/2007

16,111

3,889

1.3000

9/09/2017

2/08/2009

243,790

0.2200

2/07/2019

Alan M. Nordin

1/28/2005

41,000

–

0.1720

1/27/2015

6/25/2005

22,000

–

0.2300

6/24/2015

6/20/2006

12,000

–

0.7478

6/19/2016

4/03/2007

8,000

–

1.3000

4/02/2017

2/08/2009

251,740

0.2200

2/07/2019

Robert A. Smithson

4/16/2004

⁽³⁾

248,600

0.0720

4/15/2014

6/20/2006

30,000

0.7478

6/19/2016

2/08/2009

614,223

0.2200

2/07/2019

George L. Lowe

4/24/2009

⁽⁴⁾

25,000

0.2200

4/23/2019

10/22/2009

25,000

0.1000

10/21/2019


(1)		Unless indicated otherwise, options to purchase common stock vest 1/3^rd on the first anniversary of the grant date and in 24 equal monthly installments thereafter.

(2)		Options to purchase 584,771 shares of common stock vest based on achievement of certain performance goals. Three of these performance goals were met as of December 31, 2005. The remaining options to purchase 877,156 shares of common stock vest 1/6^th after six months from the date of grant and in 30 equal monthly installments thereafter.

(3)		Vests monthly over 36 months.

(4)		Vests 1/4^th on the first anniversary of the date of grant and in 36 equal monthly installments thereafter.

Option Exercises and Stock Vested

Our named executive officers did not exercise any options in the fiscal year ended December 31, 2009 and there are currently no outstanding stock awards (other than options).

Director Compensation

The compensation committee is responsible for evaluating and recommending to our Board of Directors the compensation to be paid to the non-employee members of our Board of Directors for their service. No compensation is paid to any director who is also an employee of our company for the services provided as a director.

Current Director Compensation

Cash payments

Mr. Allan R. Kammerer receives a cash payment of $1,250 for each Board of Directors meeting that he attends in person. No other directors received cash payments for their director service in 2009. We reimburse all directors for reasonable expenses incurred to attend our board and board committee meetings.

Stock Option Awards

It is the current policy of the Board of Directors to grant to each individual who joins our board as a non-employee director at the time of such initial election or appointment, an option to purchase a number of shares of our common stock vesting over a three-year period. Each option granted is to have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a maximum term of ten years, subject to earlier termination should the optionee cease to serve as a member of our Board of Directors, and in such case within 90 days thereafter.

Future Director Compensation

In 2010, we will pay each director who is not an employee and does not represent a principal stockholder an annual cash retainer of $15,000. Additionally, we will pay each director that serves as a committee chair an annual cash retainer of $5,000. We intend to review our director compensation policies annually to determine if any changes to our director compensation are advisable.

Director Summary Compensation Table

2009 DIRECTOR COMPENSATION

Fees

Earned or

Non-Equity

All Other

Paid in

Stock

Option

Incentive Plan

Compensation

Name

Cash ($)

Awards ($)

Compensation ($)

($)

Total($)

Gary E. Jacobs

–

Steven E. Parry

–

Keimpe Keuning

–

Allan R. Kammerer

5,000

–

1,700

–

6,700

Edward L. Mercaldo

–

257

–

257

Vincenza Sera

–

188

–

188

Jeremiah B. Robins

–

Limitation of Liability and Indemnification of Directors

Our amended and restated certificate of incorporation limits the liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that a corporation may eliminate the personal liability of its directors for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following acts:


	•	breach of their duty of loyalty to us or our stockholders;

	•	acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

100


	•	unlawful payments of dividends or unlawful stock repurchases or redemptions; and

	•	any transaction from which the director derived an improper personal benefit.

Our amended and restated certificate of incorporation also provides that we may indemnify our directors to the fullest extent permitted by Delaware law.

Our amended and restated bylaws provide that (i) we are required to indemnify our directors to the fullest extent permitted by Delaware law, subject to certain very limited exceptions, (ii) we are required to advance expenses, as incurred, to our directors in connection with a legal proceeding to the fullest extent permitted by Delaware law, subject to certain very limited exceptions, and (iii) the rights conferred in the amended and restated bylaws are not exclusive.

We have entered into indemnification agreements with each of our directors to give these individuals additional contractual assurances regarding the scope of the indemnification set forth in our amended and restated certificate of incorporation and restated bylaws and to provide additional procedural protections. We have obtained directors’ and officers’ insurance providing coverage for all of our directors for certain liabilities. We believe that these provisions and this insurance are necessary to attract and retain qualified directors.

101

Certain Relationships and Related Party Transactions

Since January 1, 2006, we have engaged in the following transactions with our directors, executive officers and holders of more than 5% of our voting securities, and affiliates or immediate family members of our directors, executive officers and holders of more than 5% of our voting securities. We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties.

Series D Convertible Preferred Private Placement

November 2009 Private Placement

On November 16, 2009, we issued an aggregate of 10,020,040 shares of Series D convertible preferred stock to 28 accredited investors at a price of $0.3992 per share for aggregate proceeds of approximately $4 million. Immediately prior to the closing of this offering, these shares will automatically convert into 10,020,040 shares of common stock. The table below sets forth the number of shares of our Series D convertible preferred stock sold to our directors and 5% or greater stockholders and their affiliates in connection with our Series D convertible preferred stock financing in November 2009:


	Shares of Series D		Aggregate
	Convertible		Purchase
Name	Preferred Stock		Price

Affiliates of Robeco Group N.V.⁽¹⁾		2,156,054	$	860,697
NGEN III, L.P.⁽²⁾		1,628,256	$	650,000
Mercaldo Family Trust Dated October 8, 2002⁽³⁾		2,302,800	$	919,278
Jacobs Investment Company LLC⁽⁴⁾		556,286	$	222,069
Vincenza Sera⁽⁵⁾		187,875	$	75,000
Allan R. Kammerer⁽⁶⁾		125,250	$	50,000
Ron Mercaldo⁽⁷⁾		125,250	$	50,000
Lee H. Davis, Trustee of the Lee H. Davis Revocable Trust dated 9/1/75⁽⁸⁾		125,250	$	50,000
Barbara Mellman Davis Revocable Trust⁽⁹⁾		125,250	$	50,000

Total		7,332,271	$	2,927,044


(1)		Affiliates of Robeco Group N.V. includes Robeco Clean Tech Private Equity II (EUR) (“CT EUR”), Robeco Clean Tech Private Equity II (USD) (“CT USD”) (each of CT EUR and CT USD, a “Robeco Fund”) and Robeco Clean Tech Co-Investment Fund II, L.P (“CT II LP”). The Robeco Funds are Dutch law funds for joint accounts (fondsen voor gemene rekening). The Robeco Funds do not have legal status but are each formed by means of a contractual arrangement between a special purpose manager and a special purpose custodian. The manager is a Dutch law private limited liability company (besloten vennootschap) and the custodian is the Dutch law equivalent of a foundation (stichting). The custodians of CT EUR and CT USD are Stichting Custody Robeco Master Clean Tech II (EUR) and Stichting Custody Robeco Master Clean Tech II (USD), respectively. Each custodian is the legal owner of the assets of the respective Robeco Fund and investors in the funds are the economic beneficiaries of the funds. Robeco Institutional Asset Management BV (“RIAM”) owns and manages the manager of each Robeco Fund through a subsidiary limited liability company and controls each custodian. This construction indirectly gives RIAM full powers over the Robeco Funds and the custodians, including the power to vote and dispose of the shares of Fallbrook Technologies. RIAM has outsourced the investment advisory services of the Robeco Funds to SAM Private Equity AG. Keimpe Keuning, a member of our Board of Directors, is a Senior Investment Manager at and employed by SAM Private Equity AG.


		CT II LP is a Delaware limited partnership with a Delaware limited liability company as the general partner. A trust is the sole member of the general partner. The trust has U.S. natural persons not otherwise affiliated with Robeco as trustees. RIAM is appointed as investment manager to the fund. RIAM has outsourced the investment advisory services of the funds to SAM Private Equity AG.

(2)		Steven E. Parry, a member of our Board of Directors, is a managing director of NGEN Mgt. II, LLC, which is the manager of NGEN Partners III, LLC, which is the general partner of NGEN III, L.P.

(3)		Edward L. Mercaldo, a member of our Board of Directors, is the trustee of the Mercaldo Family Trust Dated October 8, 2002.

(4)		Gary E. Jacobs, a member of our Board of Directors, is the Managing Director of the Jacobs Investment Company LLC.


(5)		Vincenza Sera is a member of our Board of Directors.


(6)		Allan R. Kammerer is a member of our Board of Directors.


(7)		Ron Mercaldo is the brother of Edward Mercaldo, a member of our Board of Directors.


(8)		Lee H. Davis is a former member of our Board of Directors.


(9)		Barbara Mellman is the wife of Lee Davis, a former member of our Board of Directors.

102

December 2008 Private Placement

On December 18, 2008, we issued an aggregate of 63,607,402 shares of Series D convertible preferred stock to 28 accredited investors at a price of $0.3992 per share for gross proceeds before offering costs of approximately $20.6 million and $4.8 million conversion of principal and accrued interest on convertible debt. Immediately prior to the closing of this offering, these shares will automatically convert into 63,607,402 shares of common stock. The table below sets forth the number of shares of our Series D convertible preferred stock sold to our directors and 5% stockholders and their affiliates in connection with our Series D convertible preferred stock financing in December 2008:


	Shares of Series D		Aggregate
	Convertible		Purchase
Name	Preferred Stock		Price

Affiliates of Robeco Group N.V.⁽¹⁾		25,050,100	$	10,000,000
NGEN III, L.P.⁽²⁾		25,050,100	$	10,000,000
Affiliates of Fallbrook Series of LTS Capital Partners II, LLC		5,459,706	$	2,179,515
Jacobs Investment Company LLC⁽³⁾		4,128,391	$	1,648,054
Jeremiah B. Robins Trust⁽⁴⁾		654,356	$	261,219
Timothy S. Davis Trust⁽⁵⁾		22,287	$	8,897
Barry M. Davis, Trustee of the Benjamin Segall Davis Trust⁽⁶⁾		27,732	$	11,071
Mark S. Davis⁽⁷⁾		45,332	$	18,097
Hugh C. Thompson, III Revocable Trust 11/11/91⁽⁸⁾		62,625	$	25,000
Ernest H. Pomerantz⁽⁹⁾		260,754	$	104,093
Big Wood Holdings L.P.⁽¹⁰⁾		261,742	$	104,487
Davis Affiliates, LP⁽¹¹⁾		274,266	$	109,487
Madison Ventures, LLC⁽¹²⁾		523,155	$	208,843

Total		61,820,546	$	24,678,763


(1)		Affiliates of Robeco Group N.V. includes Robeco Clean Tech Private Equity II (EUR) (“CT EUR”), Robeco Clean Tech Private Equity II (USD) (“CT USD”) (each of CT EUR and CT USD, a “Robeco Fund”) and Robeco Clean Tech Co-Investment Fund II, L.P (“CT II LP”). The Robeco Funds are Dutch law funds for joint accounts (fondsen voor gemene rekening). The Robeco Funds do not have legal status but are each formed by means of a contractual arrangement between a special purpose manager and a special purpose custodian. The manager is a Dutch law private limited liability company (besloten vennootschap) and the custodian is the Dutch law equivalent of a foundation (stichting). The custodians of CT EUR and CT USD are Stichting Custody Robeco Master Clean Tech II (EUR) and Stichting Custody Robeco Master Clean Tech II (USD), respectively. Each custodian is the legal owner of the assets of the respective Robeco Fund and investors in the funds are the economic beneficiaries of the funds. Robeco Institutional Asset Management BV (“RIAM”) owns and manages the manager of each Robeco Fund through a subsidiary limited liability company and controls each custodian. This construction indirectly gives RIAM full powers over the Robeco Funds and the custodians, including the power to vote and dispose of the shares of Fallbrook Technologies. RIAM has outsourced the investment advisory services of the Robeco Funds to SAM Private Equity AG. Keimpe Keuning, a member of our Board of Directors, is a Senior Investment Manager at and employed by SAM Private Equity AG.


		CT II LP is a Delaware limited partnership with a Delaware limited liability company as the general partner. A trust is the sole member of the general partner. The trust has U.S. natural persons not otherwise affiliated with Robeco as trustees. RIAM is appointed as investment manager to the fund. RIAM has outsourced the investment advisory services of the funds to SAM Private Equity AG.

(2)		Steven E. Parry, a member of our Board of Directors, is a managing director of NGEN Mgt. II, LLC, which is the manager of NGEN Partners III, LLC, which is the general partner of NGEN III, L.P.

(3)		Gary E. Jacobs, a member of our Board of Directors, is the Managing Director of the Jacobs Investment Company LLC.

(4)		Jeremiah B. Robins, a member of our Board of Directors, is the trustee of the Jeremiah B. Robins Trust.


(5)		Timothy S. Davis is the brother of Lee Davis, a former member of our Board of Directors.


(6)		Barry M. Davis is the brother of Lee Davis, a former member of our Board of Directors.


(7)		Mark S. Davis is the brother of Lee Davis, a former member of our Board of Directors.


(8)		Hugh C. Thompson is a former member of our Board of Directors.


(9)		Ernest Pomerantz is a former member of our Board of Directors.


(10)		Big Wood Holdings L.P. is controlled by Jim Bartlett, a former member of our Board of Directors, or an affiliate of his.


(11)		Lee Davis is a former member of our Board of Directors.


(12)		Madison Ventures, LLC is controlled by Lee Davis, a former member of our Board of Directors, or an affiliate of his.

103

Viryd Technologies Inc.

We have entered into the following agreements with Viryd Technologies Inc.:


	•	License Agreement with Viryd Technologies Inc. (“Viryd”) dated February 14, 2008, as amended November 25, 2008 (the “License Agreement”). Under the terms of the License Agreement, we granted an exclusive license to Viryd under certain of our patents for use in the field of wind turbines for conversion of wind energy into electrical power, and potentially other fields of use if we reach agreement with Viryd in the future. Viryd will pay us a royalty for products it commercializes that incorporate our patented technology. Viryd has obligations it would need to satisfy in order to retain exclusivity under the License Agreement.

	•	Patent Assignment Agreement with Viryd Technologies, Inc. dated February 15, 2008, as amended November 25, 2008. We assigned certain patent applications to Viryd that had application in the field of wind turbines for conversion of wind energy into electrical power. Viryd will pay us a royalty for products it commercializes that incorporate the technology covered by the transferred patent applications, unless we are already receiving a royalty under the License Agreement on the same product or if the product incorporates a continuously variable transmission that we supplied to Viryd.

	•	Engineering Services Agreement with Viryd Technologies Inc. dated April 28, 2008, as amended June 10, 2008 and November 25, 2008. Under the terms of the Engineering Services Agreement, we provide services to Viryd that consist of optimizing our NuVinci technology for Viryd’s applications. Viryd pays us fees for these services.

	•	Master Agreement with Viryd Technologies Inc. dated November 25, 2008. We entered into this Master Agreement with Viryd in order to amend various terms of the License Agreement, Patent Assignment Agreement, Engineering Services Agreement and Support Services Agreement that we previously entered into with Viryd.

	•	Support Services Agreement with Viryd Technologies Inc. dated February 15, 2008, as amended by the First Amendment dated March 3, 2008. Under the terms of the Support Services Agreement, we provide various services to Viryd, including but not limited to engineering services, patent prosecution services, back-office support (including human resources and accounting). Viryd pays us fees for these services.

Our directors and executive officers as a group, and Gary E. Jacobs as an individual, beneficially own, as of December 31, 2009, approximately 21% and 20%, respectively, of the outstanding voting securities of Viryd Technologies Inc.

Agreements with our Stockholders

We have entered into a registration rights agreement with our holders of convertible preferred stock. The registration rights agreement provides (i) that holders of convertible preferred stock and certain holders of warrants to purchase common stock have the right to demand that we file a registration statement, subject to certain limitations, and (ii) that holders of convertible preferred stock and certain holders of warrants to purchase common stock have the right to request that their shares be covered by a registration statement that we are otherwise filing. See the “Shares Eligible for Future Sale—Registration Rights” section of this prospectus for a further discussion of these registration rights.

Agreements with Directors

We have entered into a Professional Services agreement with Automotive Support Group LLC, which is an entity affiliated with our director, Allan R. Kammerer. This agreement provides for payment of a fee of $1,250 plus approved expenses for each day or any substantial portion thereof that Mr. Kammerer provides services on site at the Company’s facilities as requested by the Company.

104

Gary E. Jacobs has personally guaranteed our line of credit with Wells Fargo. In consideration of such guarantee, we have issued to the Jacobs Family Trust a warrant to purchase 3,100,753 shares of the Company’s common stock at an exercise price of $0.3992.

Agreements with Executive Officers

We entered into a Professional Services Agreement with Design and Conquer Creative Alliance, which is an entity affiliated with our vice president of operations, George L. Lowe. Mr. Lowe has not provided us any services under this agreement since his employment by the Company, but we continue to use the services of his associate under the same consulting agreement, and in 2009 we paid $500.00 for consulting services to his associate under this agreement. This agreement, as amended, provides for consulting services at compensation rates ranging from $75 to $96 per hour plus approved expenses. Mr. Lowe has not provided consulting services to us subsequent to his employment with us.

105

Principal Stockholders

The following table sets forth as of December 31, 2009 information regarding the beneficial ownership of shares of our common stock for:


	•	each person, or group of affiliated persons, known to us to own beneficially 5% or more of our outstanding shares of common stock;

	•	each of our directors;

	•	each of our executive officers; and

	•	all of our directors and executive officers as a group.

Information with respect to beneficial ownership has been furnished by each director, executive officer or beneficial owner of more than 5% of our common stock. Beneficial ownership has been determined in accordance with the rules of the SEC. The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within 60 days after such date, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power within 60 days after such date. Consequently, the denominator for calculating beneficial ownership percentages may be different for each beneficial owner. SEC rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and investment power with respect to those securities. Unless otherwise indicated by footnote, and subject to applicable community property laws, the persons and entities named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.

For purposes of calculating beneficial ownership, we have assumed that, as of December 31, 2009:


	•	There are 112,767,640 shares outstanding, assuming the conversion of all outstanding shares of preferred stock to 101,106,785 shares of common stock, immediately prior to the closing of this offering;


	•	We will issue shares of common stock in the offering; and

	•	The underwriters have not exercised their option to purchase additional shares.

Unless otherwise noted below, the address for each holder listed below is c/o Fallbrook Technologies Inc., 9444 Waples Street, Suite 410, San Diego, California 92121.

106


						Shares
	Shares					Beneficially
	Beneficially					Owned
	Owned Before Offering					After Offering
	Shares		Percent			Shares		Percent

5% or Greater Stockholders:
Entities associated with Robeco Group N.V.⁽¹⁾		27,206,154		24.1	%		27,206,154
NGEN III, L.P.⁽²⁾		26,678,356		23.7	%		26,678,356
Entities associated with Gary E. Jacobs⁽³⁾		13,691,491		12.1	%		13,691,491
Motion Systems, Inc.⁽⁴⁾		9,976,571		8.8	%		9,976,571
Entities associated with Richard Intrater⁽⁵⁾		5,459,706		4.8	%		5,459,706
Directors and Executive Officers:
William G. Klehm III⁽⁶⁾		3,544,836		3.0	%		3,544,836
Gary E. Jacobs⁽³⁾		13,691,491		12.1	%		13,691,491
Steven E. Parry⁽⁷⁾		26,678,356		23.7	%		26,678,356
Keimpe Keuning⁽¹⁾		27,206,154		24.1	%		27,206,154
Allan R. Kammerer⁽⁸⁾		142,750		*			142,750
Edward L. Mercaldo⁽⁹⁾		2,500,019		2.2	%		2,500,019
Vincenza Sera⁽¹⁰⁾		187,875		*			187,875
Jeremiah B. Robins⁽¹¹⁾		691,106		*			691,106
Nicole T. Nicks⁽¹²⁾		193,326		*			193,326
Paul A. DeHart		—		*			—
Alan M. Nordin⁽¹³⁾		209,296		*			209,296
Robert A. Smithson⁽¹⁴⁾		484,741		*			484,741
Jeffrey A. Birchak⁽¹⁵⁾		243,161		*			243,161
George L. Lowe		—		*			—
David W. Markley⁽¹⁶⁾		68,950		*			68,950
All directors and executive officers as a group (15 persons)		75,842,061		62.9	%		75,842,061
All 5% or greater stockholders, directors and executive officers as a group (17 entities and persons)		91,278,338		75.7	%		91,278,338


*		Represents beneficial ownership of less than 1%


(1)		Consists of (a) 8,229,861 shares of common stock held by Stichting Custody Robeco Master Clean Tech II (EUR) (re: RCTPE II (EUR)) issuable upon conversion of convertible preferred stock, (b) 6,733,524 shares of common stock held by Stichting Custody Robeco Master Clean Tech II (USD) (re: RCTPE II (USD) issuable upon conversion of convertible preferred stock, and (c) 12,242,769 shares of common stock held by Robeco Clean Tech Co-Investment Fund II, L.P. issuable upon conversion of convertible preferred stock. The address of Robeco is Coolsingel 120, 3011 AG Rotterdam, The Netherlands. Mr. Keuning disclaims beneficial ownership of the shares held by the Robeco entities, except to the extent of his pecuniary interest therein.


(2)		Consists of 26,678,356 shares of common stock issuable upon conversion of convertible preferred stock held by NGEN III, L.P. The address of NGEN III, L.P. is 1114 State Street, Suite 247, Santa Barbara, California 93101. NGEN Partners III, L.L.C, the general partner of NGEN III, L.P., through its manager, NGEN Mgt. II, LLC, may be deemed to have sole power to vote and dispose of the shares that are directly owned by NGEN III, L.P. and Peter Grubstein, Rosemary Ripley, Rob Koch and Mr. Parry, the managing directors of NGEN Mgt. II, LLC, may be deemed to have shared power to vote and dispose of such shares.

(3)		Consists of (a) 5,701,830 shares of common stock issuable upon conversion of convertible preferred stock held by Jacobs Investment Company LLC, (b) 34,730 shares of common stock and 2,456,507 shares of common stock issuable upon conversion of convertible preferred stock held by Jacobs Family Trust, (c) 1,171,169 shares of common stock issuable upon conversion of the convertible preferred stock held by Gary E. Jacobs Grantor Retained Annuity Trust dated January 12, 2010, (d) 1,171,169 shares of common stock issuable upon conversion of convertible preferred stock held by Jerri-Ann Jacobs Grantor Retained Annuity Trust dated January 12, 2010, (e) 3,100,753 shares of common stock issuable upon exercise of an outstanding

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		warrant held by Jacobs Family Trust and (f) 55,333 shares of common stock issuable upon exercise of outstanding options held by Mr. Jacobs. Mr. Jacobs, the manager of Jacobs Investment Company LLC and trustee of Jacobs Family Trust, trustee of Gary E. Jacobs Grantor Retained Annuity Trust dated January 12, 2010, and trustee of Jerri-Ann Jacobs Grantor Retained Annuity Trust dated January 12, 2010 may be deemed to have sole power to vote and dispose of the shares that are directly owned by Jacobs Investment Company LLC, Jacobs Family Trust, Gary E. Jacobs Grantor Retained Annuity Trust dated January 12, 2010, Jerri-Ann Jacobs Grantor Retained Annuity Trust dated January 12, 2010.

(4)		Consists of 9,976,571 shares of common stock issuable upon conversion of convertible preferred stock held by Motion Systems, Inc., Donald Miller, the president of Motion Systems, Inc, may be deemed to have sole power to vote and dispose of the shares that are directly owned by Motion Systems, Inc.

(5)		Consists of 5,459,706 shares of common stock issuable upon conversion of convertible preferred stock held by Fallbrook Series of LTS Capital Partners II, LLC. Mr. Intrater, the manager of LTS Capital Partners II, LLC, may be deemed to have sole power to vote and dispose of the shares that are directly owned by LTS Capital Partners II, LLC.

(6)		Consists of 3,544,836 shares of common stock issuable upon exercise of outstanding options held by Mr. Klehm.

(7)		Consists of 26,678,356 shares of common stock issuable upon conversion of convertible preferred stock held by NGEN III, L.P. NGEN Partners III, L.L.C, the general partner of NGEN III, L.P., through its manager, NGEN Mgt. II, LLC, may be deemed to have sole power to vote and dispose of the shares that are directly owned by NGEN III, L.P. and Peter Grubstein, Rosemary Ripley, Rob Koch and Mr. Parry, the managing directors of NGEN Mgt. II, LLC, may be deemed to have shared power to vote and dispose of such shares. Mr. Parry disclaims beneficial ownership in the shares held by NGEN III, L.P., except to the extent of his pecuniary interest therein.

(8)		Consists of 142,750 shares of common stock issuable upon conversion of convertible preferred stock held by Mr. Kammerer.

(9)		Consists of 2,500,019 shares of common stock issuable upon conversion of convertible preferred stock held by Mercaldo Family Trust Dated October 8, 2002. Mr. Mercaldo, the trustee of Mercaldo Family Trust Dated October 8, 2002, may be deemed to have sole power to vote and dispose of the shares that are directly owned by Mercaldo Family Trust Dated October 8, 2002.

(10)		Consists of 187,875 shares of common stock issuable upon conversion of convertible preferred stock held by Ms. Sera.

(11)		Consists of (a) 654,356 shares of common stock issuable upon conversion of convertible preferred stock held by the Jeremiah B. Robins Trust. (b) 36,750 shares of common stock issuable exercise of outstanding options held by Mr. Robins. Mr. Robins, the trustee of the Jeremiah B. Robins Trust, may be deemed to have sole power to vote and dispose of the shares that are directly owned by the Jeremiah B. Robins Trust.

(12)		Consists of (a) 20,000 shares of common stock and 22,841 shares of common stock issuable upon conversion of convertible preferred stock held by Jeffrey & Nicole Nicks Family Trust DTD 5/10/2002, and (b) 150,485 shares of common stock issuable upon exercise of outstanding options held by Ms. Nicks. Ms. Nicks, the trustee of the Jeffrey & Nicole Nicks Family Trust DTD 5/10/2002, may be deemed to have sole power to vote and dispose of the shares that are directly owned by the Jeffrey & Nicole Nicks Family Trust DTD 5/10/2002.

(13)		Consists of (a) 12,000 shares of common stock and 30,383 shares of common stock issuable upon conversion of convertible preferred stock held by The Alan M. Nordin and Megan E. Nordin Living Trust, and (b) 166,913 shares of common stock issuable upon exercise of outstanding options held by Mr. Nordin. Mr. Nordin, the trustee of The Alan M. Nordin and Megan E. Nordin Living Trust, may be deemed to have sole power to vote and dispose of the shares that are directly owned by The Alan M. Nordin and Megan E. Nordin Living Trust.

(14)		Consists of (a) 1,400 shares of common stock held by Mr. Smithson, and (b) 483,341 shares of common stock issuable upon exercise of outstanding options held by Mr. Smithson.

(15)		Consists of (a) 35,000 shares of common stock held by Mr. Birchak, and (b) 208,161 shares of common stock issuable upon exercise of outstanding options held by Mr. Birchak.

(16)		Consists of (a) 40,000 shares of common stock held by Mr. Markley, and (b) 28,950 shares of common stock issuable upon exercise of outstanding options held by Mr. Markley.

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Description of Capital Stock

General

As of December 31, 2009, our authorized capital stock consists of 140,000,000 shares of common stock, $0.001 par value per share, of which 11,660,855 are outstanding, and 90,324,248 shares of preferred stock, $0.001 par value per share, designated in series, as follows:


Preferred Stock	Shares Authorized		Shares Outstanding
Series A		3,887,577		3,887,577
Series B		4,786,444		4,786,444
Series C		3,012,765		3,012,765
Series D		78,637,462		73,627,442

All outstanding shares of our preferred stock will be converted into shares of our common stock effective immediately prior to the completion of this offering.

Immediately after completion of this offering, our authorized capital stock will consist of shares of common stock, $ par value per share, and shares of undesignated preferred stock, $ par value per share.

The following description of the material provisions of our capital stock and our charter and bylaws is only a summary, does not purport to be complete and is qualified by applicable law and the full provisions of our charter and bylaws that will be in effect upon completion of the offering. You should refer to our charter and bylaws as in effect upon the closing of this offering, which will be included as exhibits to the registration statement of which this prospectus is a part.

Common stock

As of December 31, 2009, assuming conversion of all outstanding shares of preferred stock to 101,106,785 shares of common stock, there were 112,767,640 shares of our common stock outstanding which were held of record by approximately 250 stockholders.

Voting Rights. Holders of common stock are entitled to one vote per share on any matter to be voted upon by stockholders. All shares of common stock rank equally as to voting and all other matters. The shares of common stock have no preemptive or conversion rights, no redemption or sinking fund provisions, are not liable for further call or assessment and are not entitled to cumulative voting rights.

Dividend Rights. For as long as such stock is outstanding, the holders of common stock are entitled to receive ratably any dividends when and as declared from time to time by our Board of Directors out of funds legally available for dividends. We currently intend to retain all future earnings for the operation and expansion of our business and do not anticipate paying cash dividends on our common stock in the foreseeable future.

Liquidation Rights. Upon a liquidation or dissolution of our company, whether voluntary or involuntary, creditors will be paid before any distribution to holders of our common stock. After such distribution, holders of common stock are entitled to receive a pro rata distribution per share of any excess amount.

Warrants. As of December 31, 2009, there were outstanding warrants to purchase an aggregate of 5,217,487 shares of our common stock at a price of $0.3992 per share. This consisted of a warrant held by the Jacobs Family Trust to purchase 3,100,753 shares, which will be subject to the lock-up agreements described under “Underwriting” and will be eligible for sale following the 180-day lock-up period, and warrants to purchase a total of 2,116,734 shares, which we expect to be exercised as of the closing. In January 2010, we entered into a consulting agreement with ASL pursuant to which we issued to ASL warrants to purchase 50,000 shares of our common stock, which we expect to be exercised upon the closing, and pursuant to which ASL can earn, upon achievement of certain performance milestones, additional warrants to purchase up to 750,000 shares of our common stock, which we refer to as “contingent warrants” in this prospectus. All warrants are exercisable at a price of $0.3992 per share.

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Undesignated preferred stock

Under our charter, which will be effective upon the completion of this offering, our Board of Directors has authority to issue undesignated preferred stock without stockholder approval. Our Board of Directors may also determine or alter for each class of preferred stock the voting powers, designations, preferences, and special rights, qualifications, limitations, or restrictions as permitted by law. Our Board of Directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. Issuing preferred stock provides flexibility in connection with possible acquisitions and other corporate purposes, but could also, among other things, have the effect of delaying, deferring or preventing a change in control of our company and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock.

Anti-takeover matters

Charter and Bylaw Provisions

Our charter and bylaws will, upon completion of this offering, include a number of provisions that may have the effect of encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our Board of Directors rather than pursue non-negotiated takeover attempts. These provisions include the items described below.

No written consent of stockholders. Our charter will provide that all stockholder actions are required to be taken by a vote of the stockholders at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a meeting.

Special meetings of stockholders. Our bylaws will provide that only our Chairman, a majority of the members of our Board of Directors then in office or the Chief Executive Officer may call special meetings of stockholders. Our bylaws will limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.

Amendment to charter. As required by the Delaware General Corporation Law, or DGCL, any amendment of our charter must first be approved by a majority of our Board of Directors and, if required by law or our charter, thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment.

Amendment to bylaws. Our bylaws may be amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in the bylaws; and may also be amended by the majority of the outstanding shares entitled to vote on the amendment; except that the amendment of certain provisions of our bylaws, including provisions relating to stockholder action, directors, limitation of liability and the amendment of our bylaws, must be approved by no less than 80% of the voting power of all of the shares of capital stock issued and outstanding and entitled to vote at a meeting, voting together as a single class.

Blank check preferred stock. Our charter will provide for authorized shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable our Board of Directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest, or otherwise. For example, if in the due exercise of its fiduciary obligations, our Board of Directors were to determine that a takeover proposal is not in the best interests of us or our stockholders, our Board of Directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our certificate of incorporation grants our Board of Directors broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring, or preventing a change in control of us.

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Size of Board and Vacancies. Our charter will provide that the number of directors on our Board of Directors will be fixed exclusively by our Board of Directors. Newly created directorships resulting from any increase in our authorized number of directors will be filled solely by the majority vote of the remaining directors in office. Any vacancies in our Board of Directors resulting from death, resignation, retirement or removal from office or other cause will be filled solely by the majority vote of our remaining directors in office, even if less than a quorum of directors is present.

Delaware general corporate law

Upon completion of this offering, we will be subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested stockholder status, 15% or more of the corporation’s voting stock. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:


	•	before the stockholder became interested, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

	•	upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee stock plans, in some instances; or

	•	at or after the time the stockholder became interested, the business combination was approved by the Board of Directors of the corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

Limitations of director liability and indemnification directors, officers, and employees

As permitted by the DGCL, provisions in our charter and bylaws that will be in effect at the closing of this offering will limit or eliminate the personal liability of our directors to the fullest extent permitted by the DGCL. Consequently, directors will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:


	•	any breach of the director’s duty of loyalty to us or our stockholders;

	•	any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

	•	any unlawful payments related to dividends or unlawful stock repurchases, redemptions or other distributions; or

	•	any transaction from which the director derived an improper personal benefit.

These limitations of liability do not alter director liability under applicable securities laws and do not affect the availability of equitable remedies, such as an injunction or rescission.

In addition, our bylaws will provide that:


	•	we will indemnify our directors, officers and, in the discretion of our Board of Directors, certain employees, to the fullest extent permitted by the DGCL, subject to limited exceptions, including an

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		exception for indemnification in connection with a proceeding (or counterclaim) initiated by such persons; and


	•	we will advance expenses, including attorneys’ fees, to our directors and, in the discretion of our Board of Directors, certain officers and employees, in connection with legal proceedings, subject to limited exceptions.

We have entered into indemnification agreements with each of our executive officers and directors. These agreements provide that, subject to limited exceptions and among other things, we will indemnify each of our executive officers and directors to the fullest extent permitted by law and advance expenses to each indemnitee in connection with any proceeding in which a right to indemnification is available.

We also intend to maintain general liability insurance that covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons who control Fallbrook Technologies, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

These provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers.

At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.

Stock Exchange

Before the date of this prospectus, there has been no public market for our common stock. We intend to apply to have our common stock approved for listing on , subject to notice of issuance, under the symbol “ .”

Transfer agent and registrar

The transfer agent and registrar for our common stock is .

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Shares Eligible for Future Sale

Upon the closing of this offering, we will have outstanding an aggregate of approximately shares of common stock. Of these shares, shares of common stock to be sold in this offering, or shares if the underwriters exercise their over-allotment option in full, will be freely tradable without restriction or further registration under the Securities Act, unless the shares are held by any of our affiliates, as that term is defined in Rule 144 of the Securities Act. All remaining shares were issued and sold by us in private transactions and are eligible for public sale only if registered under the Securities Act or sold in accordance with Rule 144 or Rule 701, each of which is discussed below. In addition, upon completion of this offering, we will have outstanding stock options held by employees and directors for the purchase of shares of common stock.

As a result of the lock-up agreements described below and the provisions of Rule 144 and Rule 701 under the Securities Act, shares of our common stock (excluding the shares to be sold in this offering) will be available for sale in the public market as follows:


	•	shares will be eligible for sale on the date of this prospectus;

	•	shares will be eligible for sale under Rule 144 or Rule 701 beginning 90 days after the date of this prospectus; and

	•	shares will be eligible for sale upon the expiration of the lock-up agreements, as more particularly and except as described below, beginning after expiration of the lock-up period pursuant to Rule 144 or Rule 701.

We expect the remaining shares to become eligible for future sale in the public market pursuant to Rule 144 at varying times after six months from the date of this prospectus.

Rule 144

In general, under Rule 144, beginning 90 days after the date of this prospectus, a person who is not our affiliate, has not been our affiliate for the previous three months, and who has beneficially owned shares of our common stock for at least six months may sell all such shares.

An affiliate or a person who has been our affiliate within the previous 90 days, and who has beneficially owned shares of our common stock for at least six months, may sell within any three-month period a number of shares that does not exceed the greater of:


	•	one percent of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; and

	•	the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

All sales under Rule 144 are subject to the availability of current public information about us. Sales under Rule 144 by affiliates or persons who have been affiliates within the previous 90 days are also subject to manner of sale provisions and notice requirements.

Rule 701

In general, under Rule 701 as currently in effect, any of our employees, directors, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement in a transaction before the effective date of this offering that was completed in reliance on, and complied with the requirements of Rule 701 will, subject to the lock-up period described above, be eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.

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Registration Statement on Form S-8

We intend to file one or more registration statements on Form S-8 under the Securities Act covering up to shares of common stock reserved for issuance under our 2004 Stock Plan and our 2010 Stock Plan. These registration statements are expected to be filed soon after the date of this prospectus and will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market, unless such shares are subject to vesting restrictions with us or are otherwise subject to the lock-up agreements and manner of sale and notice requirements that apply to affiliates under Rule 144 described above.

Lock-up agreements

Our directors, executive officers and holders of more than 5% of our common stock are subject to lock-up agreements under which they have agreed, subject to certain exceptions, not to dispose of any of their common stock or securities convertible into or exchangeable for shares of common stock, during the period from the date of this prospectus continuing through the date that is 180 days after the closing of this offering.

Warrants

At the closing of this offering, 3,100,753 shares of common stock issuable upon exercise of a warrant held by the Jacobs Family Trust will be subject to the lock-up agreements described under “Underwriting” and will be eligible for sale following the 180-day lock-up period. At the closing of the offering, there will be no other warrants outstanding. However, there are contingent warrants to purchase up to 750,000 shares of our common stock that may be granted upon achievement of certain performance milestones.

Registration Rights

Beginning 180 days following the consummation of this offering, and subject to the lock-up restrictions described above, the holders of shares of common stock or their transferees will be entitled to various rights with respect to the registration of their shares under the Securities Act under the Registration Rights Agreement. Registration of these shares under the Securities Act would result in such shares becoming freely tradable without restrictions under the Securities Act immediately upon the effectiveness of registration, except for shares purchased by affiliates. See “Certain Relationships and Related Party Transactions – Agreements with Stockholders.”

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Material U.S. Federal Tax Considerations for Non-U.S. Holders

The following is a general discussion of the material U.S. federal income and estate tax consequences to Non-U.S. Holders with respect to the acquisition, ownership and disposition of our common stock. In general, a “Non-U.S. Holder” is any beneficial owner of our common stock other than the following, as determined for U.S. federal income and estate tax purposes:


	•	a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the “substantial presence” test under section 7701(b)(3) of the Code;

	•	a corporation (or an entity treated as a corporation) created or organized in the United States or under the laws of the United States, any state thereof, or the District of Columbia;

	•	an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

	•	a trust, if (i) a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons can control all substantial decisions of the trust, or (ii) it has a valid election to be treated as a U.S. person in effect.

This discussion is based on current provisions of the Code, Treasury Regulations promulgated under the Code, judicial opinions, published positions of the Internal Revenue Service, or IRS, and all other applicable authorities, all of which are subject to change, possibly with retroactive effect. This discussion does not address all aspects of U.S. federal income and estate taxation or any aspects of state, local, or non-U.S. taxation, nor does it consider any specific facts or circumstances that may apply to particular Non-U.S. Holders that may be subject to special treatment under the U.S. federal income tax or estate tax laws, such as insurance companies, tax-exempt organizations, financial institutions, brokers, dealers in securities, and U.S. expatriates. If a partnership is a beneficial owner of our common stock, the treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. This discussion assumes that the Non-U.S. Holder will hold our common stock as a capital asset, generally property held for investment.

PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND NON-U.S. INCOME AND OTHER TAX CONSIDERATIONS OF ACQUIRING, HOLDING, AND DISPOSING OF SHARES OF COMMON STOCK.

Dividends

As described above under “Dividend Policy,” we do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. However, if we do make distributions on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current and accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed our current and accumulated earnings and profits, they will constitute a return of capital and will first reduce the recipient’s basis in our common stock, but not below zero, and then will be treated as gain from the sale of stock as described below under “— Gain on sale or other disposition of common stock.”

In general, dividends paid to a Non-U.S. Holder will be subject to U.S. withholding tax at a rate equal to 30% of the gross amount of the dividend, or a lower rate prescribed by an applicable income tax treaty, unless the dividends are effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States. Under applicable Treasury Regulations, a Non-U.S. Holder will be required to satisfy certain certification requirements, generally on IRS Form W-8BEN, directly or through an intermediary, in order to claim a reduced rate of withholding under an applicable income tax treaty. If tax is withheld in an amount in excess of the amount prescribed by an applicable income tax treaty, a refund of the excess amount may generally be obtained by filing an appropriate claim for refund with the IRS. In the case of a Non-U.S. Holder entitled to the benefits of the income tax treaty between the U.S. and Canada, the tax rate generally may be reduced to 15%.

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Dividends that are effectively connected with such a U.S. trade or business (and where a tax treaty applies, are attributable to a U.S. permanent establishment of the recipient) generally will not be subject to U.S. withholding tax if the Non-U.S. Holder files the required forms, including IRS Form W-8ECI, or any successor form, with the payor of the dividend, but instead generally will be subject to U.S. federal income tax on a net income basis in the same manner as if the Non-U.S. Holder were a resident of the United States. A corporate Non-U.S. Holder that receives effectively connected dividends may be subject to an additional branch profits tax at a rate of 30%, or a lower rate prescribed by an applicable income tax treaty, with respect to effectively connected dividends (subject to adjustment).

Gain on sale or other disposition of common stock

In general, a Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of the Non-U.S. Holder’s shares of common stock unless:


	•	the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States;

	•	the Non-U.S. Holder is an individual who holds shares of common stock as capital assets and is present in the United States for 183 days or more in the taxable year of disposition and various other conditions are met; or

	•	our common stock constitutes a U.S. real property interest by reason of our status as a “United States real property holding corporation,” or USRPHC, for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the Non-U.S. Holder’s holding period for our common stock.

If the recipient is a non-United States holder described in the first bullet above, the recipient will be required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates, and corporate non-United States holders described in the first bullet above may be subject to the branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. If the recipient is an individual non-United States holder described in the second bullet above, the recipient will be required to pay a flat 30% tax on the gain derived from the sale, which tax may be offset by United States source capital losses.

We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as a U.S. real property interest only if the Non-U.S. Holder actually or constructively held more than 5% of our common stock during the applicable period.

Information reporting and backup withholding

Generally, we must report annually to the IRS the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the recipient. These information reporting requirements apply even if withholding was not required because the dividends were effectively connected dividends or withholding was reduced by an applicable income tax treaty. Under tax treaties or other agreements, the IRS may make its reports available to tax authorities in the recipient’s country of residence.

Payments made to a Non-U.S. Holder that is not an exempt recipient generally will be subject to backup withholding, currently at a rate of 28%, unless a Non-U.S. Holder certifies as to its foreign status, which certification may be made on IRS Form W-8BEN.

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Proceeds from the disposition of common stock by a Non-U.S. Holder effected by or through a United States office of a broker (or, under certain circumstances, by or through a non-U.S. office of a broker) generally will be subject to information reporting and backup withholding, currently at a rate of 28% of the gross proceeds, unless the Non-U.S. Holder certifies to the payor under penalties of perjury as to, among other things, its address and status as a Non-U.S. Holder or otherwise establishes an exemption.

Backup withholding is not an additional tax. Rather, the amount of tax withheld is applied to the U.S. federal income tax liability of persons subject to backup withholding. If backup withholding results in an overpayment of U.S. federal income taxes, a refund may be obtained, provided the required documents are filed with the IRS.

Estate tax

Shares of our common stock owned or treated as owned by an individual who is not a citizen or resident of the United States (as specifically defined for U.S. federal estate tax purposes) at the time of death are considered U.S. situs assets includible in the individual’s gross estate for U.S. federal estate tax purposes and therefore may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise. The United States federal estate tax was automatically repealed effective January 1, for the estates of decedents dying in the year 2010. Accordingly, at present, there is no United States federal estate tax. However, Congress could pass a law reinstating the estate tax that has retroactive effect. In addition, unless Congress acts to make the current repeal permanent, the estate tax will be reinstated with respect to decedents who die after December 31, 2010. In view of the continuing uncertainty regarding the federal estate tax law, prospective investors are urged to consult their tax advisors regarding the U.S. federal estate tax considerations of acquiring, holding, and disposing of shares of common stock.

117

Underwriting

Subject to the terms and conditions contained in an underwriting agreement among us and the underwriters named below, such underwriters have agreed to purchase, and we have agreed to sell to them, the number of shares indicated below on the closing date:


Underwriter		Number of Shares

CIBC World Markets Inc.
Mackie Research Capital Corporation


Total

CIBC World Markets Inc. and Mackie Research Capital Corporation are the representatives of the underwriters. The underwriters are offering the common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The obligations of the underwriters under the underwriting agreement are conditional and may be terminated at their discretion if there has been a material adverse change in the state of the financial markets and may also be terminated in other stated circumstances and upon the occurrence of other stated events that they deem to be material and adverse. The underwriters are, however, severally obligated to take up and pay for all of the shares that they have agreed to purchase if any shares are purchased under the underwriting agreement. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option. We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933.

Commissions and Discounts

The underwriters’ representatives have advised us that the underwriters propose initially to offer the shares to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of per share. The underwriters may allow, and the dealers may re-allow, a discount not in excess of per share to other dealers.

The following table shows the public offering price, underwriting discounts and commissions and proceeds to us before expenses. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option to purchase additional shares of our common stock:


		Without	With
		Over-Allotment	Over-Allotment
	Per Share	Option	Option

Public offering price
Underwriting discounts and commissions
Proceeds, before expenses, to us

We estimate that our share of the total expenses of this offering, excluding the underwriting discounts and commissions, will be approximately $ .

Over-allotment Option

The underwriters have been granted an over-allotment option, exercisable for a period of 30 days from the closing of the offering, to purchase up to a total of additional shares from us (being 15% of the number of shares offered by us hereby) on the same terms as set out above solely to cover over-allotments, if any, and for market stabilization purposes.

118

Pricing of the Offering

Before this offering, there has been no public market for our common stock. The initial public offering price was determined through negotiations among us and the underwriters. In addition to prevailing market conditions, the factors considered in determining the initial public offering price included:


	•	the valuation multiples of publicly traded companies that the underwriters believe to be comparable to us;

	•	our financial information;

	•	the history of, and the prospects for, our company and the industry in which we compete;

	•	an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenue and cash flow;

	•	the present state of our development; and

	•	the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.

Standstill Provisions

We and our directors, executive officers and holders of more than 5% of our common stock, have agreed with the underwriters, subject to certain exceptions, not to dispose of any of our or their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date that is 180 days after the closing of this offering, except with the prior written consent of CIBC World Markets Inc. and Mackie Research Capital Corporation.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the shares is completed, Securities and Exchange Commission rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the underwriters’ representatives may engage in transactions that stabilize the price of our common stock, such as bids or purchases to peg, fix or maintain that price.

If the underwriters create a short position in the common stock in connection with the offering, (i.e., if they sell more shares than are listed on the cover of this prospectus), the underwriters’ representatives may reduce that short position by purchasing shares in the open market. The underwriters’ representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of such purchases.

Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the underwriters’ representatives or lead manager will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Legal Matters

The validity of the shares of common stock offered by this prospectus and other legal matters will be passed upon for us by DLA Piper LLP (US), San Diego, California. The underwriters have been represented by Torys LLP.

119

Experts

The consolidated financial statements as of December 31, 2009, and for the year then ended, included in this prospectus, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such consolidated financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

McGladrey & Pullen, LLP, independent registered public accounting firm, has audited our consolidated financial statements as of December 31, 2008, and for each of the two years in the two-year period ended December 31, 2008, as set forth in their report. We have included such consolidated financial statements in this prospectus and elsewhere in the registration statement in reliance on McGladrey & Pullen, LLP’s report, given their authority as experts in accounting and auditing.

Change in Accountants

We engaged Deloitte & Touche LLP (“Deloitte & Touche”) as our independent registered public accounting firm effective December 18, 2009. Concurrent with this appointment, we dismissed McGladrey & Pullen, LLP (“McGladrey & Pullen”), effective December 18, 2009. The decision to change our principal independent registered public accounting firm was approved by our audit committee.

The reports of McGladrey & Pullen on our consolidated financial statements for each of the fiscal years ended December 31, 2007 and 2008 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles, except for certain effects of accounting for share-based compensation, warrants and note discount. Since inception through December 31, 2008, we previously elected to value our common stock, options and warrants using a method not in accordance with GAAP. We had previously determined fair value as allowed by Internal Revenue Code Section 409A, using a probability-weighted expected return valuation method. With the assistance of an unrelated valuation specialist, we have since reassessed the fair value of our common stock in accordance with GAAP by determining the total enterprise value and then allocating a portion of that total enterprise value to the common stock. See Note 10 in the accompanying consolidated financial statements for further discussion of the methodology used to determine the fair value of the Company’s common stock.

During our fiscal years ended December 31, 2007 and 2008, and during the subsequent period through the date of McGladrey & Pullen’s dismissal, there were no disagreements between us and McGladrey & Pullen whether or not resolved, on any matter of accounting principles or practices, consolidated financial statements disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of McGladrey & Pullen, would have caused McGladrey & Pullen to make reference in their reports on our audited consolidated financial statements except as originally described therein prior to restating our consolidated financial statements and as discussed in Note 16 to the consolidated financial statements included elsewhere in the registration statement. During the fiscal years ended December 31, 2007 and 2008, and during the subsequent period through the date of McGladrey & Pullen’s dismissal, there were no “reportable events” as such term is defined in Item 304(a)(1)(v) of Regulation S-K (“Reportable Event”), except for the material weakness resulting from the methodology previously utilized to determine the fair value of the Company’s common stock.

During the two years ended December 31, 2008, and through the date of our retention of Deloitte & Touche as our independent registered public accounting firm on December 18, 2009, we did not consult with Deloitte & Touche on matters that involved the application of accounting principles to a specified transaction, the type of audit opinion that might be rendered on our consolidated financial statements or any other matter that was either the subject of a disagreement or a Reportable Event.

We have provided McGladrey & Pullen with a copy of the above statements and have requested that it furnish a letter addressed to the SEC stating whether McGladrey & Pullen agrees with such statements. A copy of that letter is filed as an exhibit to the registration statement of which this prospectus forms a part.

120

Where You Can Find More Information

We have filed with the Securities and Exchange Commission a registration statement on Form S-1, which includes amendments and exhibits, under the Securities Act and the rules and regulations under the Securities Act for the registration of common stock being offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all the information that is in the registration statement and its exhibits and schedules. Certain portions of the registration statement have been omitted as allowed by the rules and regulations of the Securities and Exchange Commission. Statements in this prospectus that summarize documents are not necessarily complete, and in each case you should refer to the copy of the document filed as an exhibit to the registration statement. You may read and copy the registration statement, including exhibits and schedules filed with it, and reports or other information we may file with the Securities and Exchange Commission at the public reference facilities of the Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. In addition, the registration statement and other public filings can be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov.

Upon completion of this offering, we will become subject to information and periodic reporting requirements of the Exchange Act and we will file annual, quarterly and current reports, proxy statements, and other information with the Securities and Exchange Commission. We intend to make these filings available on our website once the offering is completed. You may read and copy any reports, statements or other information on file at the public reference rooms. You can also request copies of these documents, for a copying fee, by writing to the SEC, or you can review these documents on the SEC’s website, as described above.

121

Index to Consolidated Financial Statements


Report of Independent Registered Public Accounting Firm			F-2
Report of Independent Registered Public Accounting Firm			F-3
Consolidated Balance Sheets			F-4
Consolidated Statements of Operations			F-5
Consolidated Statements of Equity			F-6
Consolidated Statements of Cash Flows			F-7
Notes to Consolidated Financial Statements			F-9

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Fallbrook Technologies Inc.

San Diego, California

We have audited the accompanying consolidated balance sheet of Fallbrook Technologies Inc. and subsidiary (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fallbrook Technologies Inc. and subsidiary as of December 31, 2009, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

San Diego, California

March 25, 2010

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Fallbrook Technologies Inc.

San Diego, California

We have audited the accompanying consolidated balance sheet of Fallbrook Technologies Inc. and Subsidiary as of December 31, 2008 and the related consolidated statements of operations, equity and cash flows for each of the two years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above, as restated, present fairly, in all material respects, the financial position of Fallbrook Technologies Inc. and Subsidiary as of December 31, 2008, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the Company retrospectively revised the presentation and disclosure in the accompanying financial statements for the change in the method of accounting for noncontrolling interests. As discussed in Note 12 to the consolidated financial statements, the accompanying financial statements have been retrospectively adjusted for the adoption of the guidance originally issued in Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (codified in FASB ASC Topic 740 Income Taxes), effective January 1, 2007.

As discussed in Note 16 to the consolidated financial statements, the consolidated financial statements have been restated for errors in the application of accounting principles.

/s/ McGladrey & Pullen, LLP

San Diego, California

June 29, 2009, except for Notes 2, 3, 10, 12, 15 and 16,

as to which the date is February 15, 2010

F-3

FALLBROOK TECHNOLOGIES INC.

CONSOLIDATED BALANCE SHEETS


							Pro Forma
							As of
	As of December 31,						December 31,
	2008			2009			2009
	(As restated,						(Unaudited, Note 2)
	Note 16)
	(In thousands)

ASSETS
Current assets:
Cash and cash equivalents	$	14,565		$	9,213
Trade accounts receivable, net of allowance for doubtful accounts of $1 at December 31, 2008 and 2009		130			11
Accounts receivable, related party		101			–
Inventory		54			151
Investments		3,700			–
Deferred offering costs		–			636
Prepaid expenses and other current assets		154			389

Total current assets		18,704			10,400
Deferred contract costs		–			189
Equipment and leasehold improvements, net		4,118			465
Intangible assets, net		2,465			2,185
Inventory		–			260
Other assets		27			27

Total assets	$	25,314		$	13,526


LIABILITIES
Current liabilities:
Accounts payable	$	502		$	401
Accrued expenses		556			978
Capital lease obligation, current		9			–
Deferred revenue		65			164
Line of credit		2,000			2,000

Total current liabilities		3,132			3,543
Deferred rent		16			14
Deferred revenue		23			256

Total liabilities		3,171			3,813

Commitments and contingencies (Note 14)

EQUITY
Convertible preferred stock, aggregate liquidation preference of $52,502 and $56,502 at December 31, 2008 and 2009, respectively		48,566			52,456		$	–
Common stock, $0.001 par value; 125,000 and 140,000 shares authorized at December 31, 2008 and 2009, respectively; 11,655 and 11,661 issued and outstanding at December 31, 2008 and 2009, respectively; 112,768 shares outstanding pro forma at December 31, 2009 (unaudited)		12			12			113
Additional paid-in capital		1,826			2,732			55,087
Accumulated deficit		(28,261	)		(45,487	)		(45,487	)

Total equity		22,143			9,713		$	9,713

Total liabilities and equity	$	25,314		$	13,526

See notes to consolidated financial statements.

F-4

FALLBROOK TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	Year Ended December 31,
	2007			2008			2009
	(As restated, Note 16)
	(In thousands, except per share data)

Revenues:
Product sales	$	–		$	320		$	467
License fees and royalties		295			914			12
Engineering services		327			998			53
Related party revenues		–			19			512
Other		92			32			–

Total revenues		714			2,283			1,044

Cost of revenues:
Cost of product sales		–			1,158			6,639
Cost of license fees and royalties		1,005			368			–
Cost of engineering services		822			488			37
Cost of related party revenues		–			11			584
Cost of other revenues		65			23			–

Total cost of revenues		1,892			2,048			7,260

Gross (loss) profit		(1,178	)		235			(6,216	)

Operating expenses:
Research and development		2,985			5,939			5,426
Selling, general and administrative		2,842			4,382			5,097

Total operating expenses		5,827			10,321			10,523

Operating loss		(7,005	)		(10,086	)		(16,739	)

Other income (expense):
Interest and dividend income		447			127			87
Interest expense		–			(597	)		(574	)

Total other income (expense)		447			(470	)		(487	)

Net loss		(6,558	)		(10,556	)		(17,226	)

Less: Net loss attributable to the noncontrolling interest (Note 13)		–			–			–

Net loss attributable to Fallbrook Technologies Inc.		(6,558	)		(10,556	)		(17,226	)

Less: Discount related to beneficial conversion feature on Preferred Stock		–			(1,376	)		–

Net loss attributable to Fallbrook Technologies Inc. common stockholders	$	(6,558	)	$	(11,932	)	$	(17,226	)

Net loss per share—basic and diluted	$	(0.57	)	$	(1.04	)	$	(1.48	)
Weighted average shares outstanding—basic and diluted		11,437			11,462			11,656
Pro forma net loss per share—basic and diluted (unaudited)							$	(0.17	)
Pro forma weighted average shares outstanding—basic and diluted (unaudited)								103,978

See notes to consolidated financial statements.

F-5

FALLBROOK TECHNOLOGIES INC.

CONSOLIDATED STATEMENTS OF EQUITY

Additional

Convertible Preferred Stock

Common Stock

Paid-in

Accumulated

Noncontrolling

Total

Shares

Amount

Shares

Amount

Capital

Deficit

Interest

Equity

(In thousands)

Balance, January 1, 2007 (as restated)

11,687

24,721

11,423

1,115

(13,506

)

–

12,341

Increase in noncontrolling interest in consolidated subsidiary preferred stock

–

2,619

Exercise of stock options

–

Share-based compensation

–

293

–

293

Net loss

–

(6,558

)

–

(6,558

)

Balance, December 31, 2007 (as restated)

11,687

24,721

11,449

1,410

(20,064

)

2,619

8,697

Increase in noncontrolling interest in consolidated subsidiary preferred stock

–

218

Increase in noncontrolling interest in consolidated subsidiary common stock

–

Issuance of Series D Preferred Stock, net

51,589

19,047

–

190

–

19,237

Issuance of Series D Preferred Stock through conversion of debt and accrued interest

12,018

4,798

–

4,798

Beneficial conversion charge on Preferred Stock

–

(1,376

)

–

1,376

–

Accretion of beneficial conversion charge on Preferred Stock

–

1,376

–

(1,376

)

–

Beneficial conversion feature on convertible note

–

Warrants exchanged for consolidated subsidiary preferred stock

–

212

–

212

Exercise of stock options

–

206

–

Share-based compensation

–

153

–

169

322

Spin-off of noncontrolling interest in consolidated subsidiary

–

3,012

(3,012

)

–

Spin-off of net assets to noncontrolling interest in consolidated subsidiary

–

(865

)

–

(865

)

Net loss

–

(10,556

)

–

(10,556

)

Balance, December 31, 2008 (as restated)

75,294

48,566

11,655

1,826

(28,261

)

–

22,143

Issuance of Series D Preferred Stock, net

10,020

3,890

–

3,894

Warrant issued for consulting agreement

–

Warrant issued for guarantee on line of credit

–

476

–

476

Exercise of stock options

–

Share-based compensation

–

422

–

422

Net loss

–

(17,226

)

–

(17,226

)

Fallbrook Technologies Inc S-1/A