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QTWW > SEC Filings for QTWW > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

Form 10-Q for QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.


9-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and notes to condensed consolidated financial statements included elsewhere in this report. This discussion contains forward-looking statements, which generally include the plans and objectives of management for future operations, estimates or projections of future economic performance, and our current beliefs regarding revenues, profits and losses, capital resources and liquidity. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those set forth under the "Risk Factors" section and elsewhere in this report.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

All statements included in this report and any documents incorporated herein by reference, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Forward-looking statements can generally be identified by words such as "may," "could," "will," "should," "assume," "expect," "anticipate," "plan," "intend," "believe," "predict," "estimate," "forecast," "outlook," "potential," or "continue," or the negative of these terms, and other comparable terminology. Examples of forward-looking statements made herein and in the documents incorporated by reference herein include, but are not limited to, statements regarding: our expected liquidity needs; our belief that we will need to raise additional capital to fund our future operations and to support our existing and new customer programs; our expectation that we will be able to raise a sufficient level of debt or equity capital to repay our debt and fund our operations; our belief that our current operating plan will allow us to achieve profitability; our expectations and forecasts of future revenue, expenses, gross margin and operating profit (loss); our potential revenue under our contract awards; the level of growth in the compressed natural gas (CNG), hybrid, plug-in hybrid, fuel cell and other alternative fuel industries; our expectation that our revenues from Fisker Automotive during 2012 and the foreseeable future will continue to represent a significant portion of our total revenues; our expectation that we will devote substantial capital resources to, among other things, funding operations and expanding our CNG tank production facility; our expectation that we will be able to significantly reduce our corporate overhead costs in the near term as a result of our implementation of cost reduction initiatives; when our Q-Drive powertrain architecture and other products and technologies will be commercialized; our expectation that initial commercialization for our hydrogen and fuel cell vehicle products will begin in the 2013-2015 time frame followed by scaled market adoption in the second half of this decade; our plans to develop new lower cost technologies; if and when Fisker Automotive will go to high volume production; the number of vehicles that Fisker Automotive expects to sell; our expectation that the Fisker Karma line of vehicles will continue over the next five to six years; our belief that we will be a supplier to Fisker Automotive on a long-term basis; our plan to continue the development of our hybrid drive systems and hydrogen vehicle and refueling technologies to meet market opportunities; our belief that our fuel cell and hydrogen-based enabling products of fuel storage, fuel delivery and battery and electronic control systems along with our vehicle-level system integration experience can be effectively applied in the transportation and hydrogen refueling infrastructure markets, our plan to increase our participation in hybrid, plug-in hybrid and hydrogen vehicle programs and enhance our leadership position as a tier-one automotive supplier of advanced propulsion systems, alternative fuel systems, powertrain engineering, and system integration services; our expectation that we will realize improvement in our gross margins as we anticipate increased shipments of our CNG storage systems and increased shipments of our Q-Drive components to Fisker Automotive; our ability to launch our F-150 plug-in hybrid electric vehicle production program in 2013; our expectation that the U.S., state and local governments will continue to support the advancement of alternative fuel technologies through loans, grants and tax credits; our belief that we have a competitive advantage over our competitors; our expectation that we will face increased competition in the future as new competitors enter the market and advanced technologies become available; our belief that establishing and maintaining strong strategic relationships with valued customers and OEMs are the most significant factors protecting us from new competitors; our intentions to establish and expand joint development programs and strategic alliances with automotive OEMs, major lithium ion battery producers, commercial fleets and other leaders in the alternative energy industry and to secure outside funding to support these programs; our intention to pursue opportunities to expand our business in China and India; our belief that there are expanding opportunities to provide the initial refueling products such as mobile refueling units, compact stationary refueling units, and hydrogen storage for bulk transport trailers; our plan to leverage our storage, metering and control technologies, and integration capabilities to capitalize on the need for mobile and stationary hydrogen refueling units; our plan to utilize our full array of storage technologies, developed for automotive and refueling applications, in broader applications within the energy industry; our belief that the price of natural gas will stay relatively low for the foreseeable future, which we expect will continue to drive demand for our carbon composite high capacity CNG storage systems; our belief that our CNG storage systems are the lightest in the industry and that lightweight tanks help to lower operation and maintenance costs and improve gas mileage; our belief that lightweight tanks enable trucks and buses to carry significantly more fuel on board and operate for long distances without compromising their payload capacity or driving characteristics; our relationship with General Motors and the impact such relationship will have on our ability to develop our products; our expectation that we will not pay any cash dividends in the foreseeable future and that we will retain our future earnings for use in the operation and expansion


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of our business; the impact that new accounting pronouncements will have on our financial statements; the effect that an adverse result in Asola's dispute with its solar cell supplier would have on our financial statements; our belief that we are uniquely positioned to integrate advanced fuel systems, electric drive, software control strategies and propulsion control systems technologies; our belief that there is significant commercial opportunity for the Q-Drive system; our belief that a commercial market is developing for our Q-Drive system due to Fisker Automotive's use of that system in its Fisker Karma vehicle platform; our anticipated product shipments to Fisker Automotive; that if Fisker Automotive completes an initial public offering, it would have a positive impact on the overall value for Quantum stockholders; our belief that our contract awards demonstrate our leadership in advanced high pressure gaseous storage technologies and the automotive OEMs renewed focus on alternative fuel solutions; our expectation that long-term market conditions and the demand for alternative fuels will improve; our anticipation of increased revenues and improved profit margins, which we expect to reduce the levels of cash required for our operating activities as compared to historical levels of use; our intention to commercialize newly developed variations of our proprietary hybrid vehicle propulsion systems and subsystems into production programs with other automotive OEMs, utilities and fleets, military programs and other customer groups such as the U.S. Postal Service; our plan to commercialize certain proprietary hybrid drive subsystems including hardware and software controls, electronics and inverter systems; our intention to focus our product development efforts on advancing our hybrid propulsion systems and technologies to further improve performance, reduce cost and support broader commercialization; our plan to continue to develop and refine our hybrid drive systems and subsystems to capture new customers in a growing hybrid vehicle market; our plan to leverage our hybrid drivetrain technology and systems integration capabilities to continue to advance our hybrid control systems, motor control software and propulsion system control strategies; that we will continue to expand our customer base and commercialization partnerships in our efforts to further develop advanced and lower cost hybrid drive system component parts and secure customer funding and partnerships to make these advancements; our plan to continue to leverage our advanced fuel systems, and other alternative vehicle technologies to assist OEMs in advancing the commercialization of hydrogen, fuel cell and other alternative fuel and specialized vehicle applications; our intention to apply our expanded vehicle-level design, powertrain engineering, vehicle electronics and system integration expertise to emerging OEM and fleet vehicle programs to capture full scale production opportunities; our belief that our industry-leading hydrogen storage systems can enhance the availability of intermittent renewable resources, like wind and solar by providing cost effective storage options; our expectation that the increased demand for our CNG storage systems will continue during the fourth quarter of 2012 and during 2013; our expectation that we will recognize non-cash gains or losses on our derivative instruments each reporting period and that the amount of such gains or losses could be material; our anticipation that regulatory bodies will establish certification procedures and impose regulations on fuel cell enabling technologies; our belief that the insurance we carry is adequate given the nature of the covered risks and the costs of the coverage; and our expectation that the market price of our common stock will continue to fluctuate significantly.

Although we believe the expectations and intentions reflected in our forward-looking statements are reasonable, we cannot assure you that these expectations and intentions will prove to be correct. Various risks and other factors, including those identified in this report under the "Risk Factors" section and those included elsewhere in this report and in our other public filings that are incorporated herein by reference, could cause actual results, and actual events that occur, to differ materially from those contemplated by the forward looking statements.

Many of the risk factors are beyond our ability to control or predict. You should not unduly rely on any of our forward-looking statements. These statements are made only as of the date of this report. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect future events or developments. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report.

Company Overview

Unless the context otherwise requires, "we," "our," "us," "Quantum" and similar expressions refers to Quantum Fuel Systems Technologies Worldwide, Inc. and Subsidiaries. We are a United States (US) public company listed on The Nasdaq Capital Market with our corporate offices located in Lake Forest, California.

We are a fully integrated alternative energy company and a leader in the development and production of compressed natural gas (CNG) storage systems, fuel cell and other advanced clean propulsion systems and renewable energy generation systems and services. We believe that we are uniquely positioned to integrate advanced fuel and electric drive systems, software control strategies and propulsion control system technologies for alternative fuel vehicles, in particular, natural gas, plug-in hybrid electric, electric, fuel cell and hydrogen hybrid vehicles based on our years of experience in vehicle-level design, system and component software development, vehicle electronics, system control strategies and system integration. Our customer base includes automotive Original Equipment Manufacturers (OEMs), military and governmental agencies, aerospace, and other strategic alliance partners.


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The consolidated financial statements include the accounts of Quantum Fuel Systems Technologies Worldwide, Inc. and our wholly owned subsidiary, Schneider Power Inc. (Schneider Power).

We classify our business operations into three reporting segments: Electric Drive & Fuel Systems, Renewable Energy and Corporate. The Renewable Energy business segment, consisting entirely of the operations of Schneider Power, is now classified as discontinued operations as discussed further below.

The chief operating decision maker allocates resources and tracks performance by the reporting segments. We evaluate performance based on profit or loss from operations before interest, non-operating income and expenses, and income taxes.

Business and Business Update

Electric Drive & Fuel Systems Segment

Our Electric Drive & Fuel Systems segment operations primarily consist of the manufacture and supply of packaged fuel systems for use in CNG vehicles and design, development, integration and supply of advanced propulsion systems for use in hybrid, plug-in electric hybrid, hydrogen, fuel cell, and other alternative fuel vehicles.

Our Electric Drive & Fuel Systems segment supplies lightweight, high-pressure natural gas and hydrogen storage tanks using advanced composite technology capable of storage at up to 10,000 psi. This segment's portfolio of technologies and products also include hybrid electric and plug-in hybrid electric powertrain systems, advanced battery control systems, proprietary vehicle control systems and software, fuel delivery products and control systems for use in natural gas, hybrid, fuel cell, and other alternative fuel vehicles. This segment's proprietary control systems and software is integrated into base vehicle components such as inverters, chargers, battery systems and converters to provide customized hybrid drive-train technologies and systems. The Electric Drive & Fuel Systems segment also designs and manufactures computerized controls, regulators and automatic shut-off equipment for fuel systems.

Our Electric Drive & Fuel Systems segment generates revenues from two sources - product sales and contract revenues. Product sales are derived primarily from
(i) the sale and installation of our alternative fuel (e.g. CNG and hydrogen) storage, delivery, and electronic control systems, (ii) the sale of drivetrain components to Fisker Automotive for use in its Fisker Karma vehicle, and
(iii) the sale of transportable hydrogen refueling stations.

Our Electric Drive & Fuel Systems segment generates contract revenue by providing engineering design and support to OEMs and other customers, so that our fuel systems and advanced propulsion systems integrate and operate with our customer's CNG, hybrid or fuel cell applications. Contract revenue is also generated from customers in the aerospace industry, military and other governmental entities and agencies.

Our packaged fuel systems are comprised of lightweight, high-pressure composite tanks, injection, regulation, monitoring, and electronics and control systems designed to improve efficiency, enhance power output, and reduce pollutant emissions from hybrids, plug-in hybrids, internal combustion engines, natural gas and hydrogen fuel cell vehicles. We also have a CNG storage system technology capable of allowing Class 8 trucks to travel 500 miles before refueling.

We believe there is a significant and immediate opportunity for us in the CNG market. The decrease in the cost of natural gas has resulted in a substantial increase in demand for our CNG storage tanks and systems. During the first nine months of 2012 and the first nine months of 2011, we received $14.2 million and $4.3 million in new purchase orders, respectively, for our CNG storage tanks and systems, representing a 230% increase in 2012. We believe the price of natural gas will stay relatively low for the foreseeable future, which we expect will continue to drive demand for our carbon-composite high-capacity CNG storage systems.

While we continue to perform development services for OEMs with respect to hydrogen storage systems, General Motors, our primary customer for hydrogen fuel storage systems, informed us that they plan to at least temporarily suspend activities under our contracts with them related to the development of hydrogen storage technologies. This suspension may negatively impact our future contract revenues, depending upon the duration of the program suspension.

On October 4, 2012, we announced that we had been awarded a new development contract from Fisker Automotive for advanced product development on the Fisker Karma. Under the contract, we continue to develop advanced features for the Fisker Karma vehicle to enable future product upgrades.


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On April 10, 2012, Fisker Automotive notified us that they believe our pricing for the components for which we have the exclusive right to supply to Fisker Automotive is not competitive by more than 10% and, as a result, they have asserted that, effective August 10, 2012, they have the right to resource all or part of the components we are currently supplying. We notified Fisker Automotive that its assertion is without merit and if Fisker Automotive resources any of the components we are currently supplying we will take whatever actions we deem necessary to defend and enforce our contract rights. Further, we believe that our hybrid control software, and our ongoing service and maintenance of this software, is of critical importance to Fisker Automotive's ability to manufacture and service the Fisker Karma production vehicle. The defense of our contractual rights on the components and related software would include all legal protections and may involve restrictions, or prohibition, on the use of our software in the Fisker Karma vehicle. As of the date of this report, we are not aware if Fisker Automotive has resourced any of the components which we supply.

Corporate Segment

The Corporate segment consists of general and administrative expenses incurred at the corporate level that are not directly attributable to the Electric Drive & Fuel Systems or Renewable Energy reporting segments. Corporate expenses consist primarily of personnel costs, share-based compensation costs and related general and administrative costs for executive, finance, legal, human resources, investor relations and our board of directors.

Discontinued Operations-Renewable Energy Segment Held For Sale

Our Renewable Energy segment consists solely of the business operations of Schneider Power. Schneider Power develops, builds, owns and operates wind electricity generation facilities and is planning similar development of solar power generating facilities. Schneider Power has a significant portfolio of wind and solar energy projects in various stages of development throughout North America and the Caribbean.

On August 9, 2012, we committed to a formal plan to sell the Schneider Power business and initiated steps to locate a buyer. As a result of these actions and our expectations for a completion of a sale of the business within the next year, the historical activities and balances of Schneider Power, are reported as discontinued operations held for sale in the accompanying condensed consolidated financial statements for all periods presented.


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Results of Operations

Three and Nine Months Ended September 30, 2011 and 2012

Total revenues and operating losses for our continuing business segments and
gross profit on our product sales for the three and nine months were as follows:



                                    Three Months Ended September 30,            Nine Months Ended September 30,
                                        2011                  2012                 2011                  2012
Total Revenue
Electric Drive & Fuel Systems     $     10,253,985        $   5,771,755       $    24,093,341        $  17,092,938
Corporate                                       -                    -                     -                    -

Total                             $     10,253,985        $   5,771,755       $    24,093,341        $  17,092,938


Operating Income (Loss)
Electric Drive & Fuel Systems     $        846,110        $  (1,493,266 )     $       919,619        $  (5,308,329 )
Corporate                               (3,248,795 )         (1,696,438 )          (9,722,958 )         (7,819,795 )

Total                             $     (2,402,685 )      $  (3,189,704 )     $    (8,803,339 )      $ (13,128,124 )


Product Gross Profit
Electric Drive & Fuel Systems:
Net product sales                 $      6,724,244        $   4,215,006       $    11,184,490        $  11,923,508
Cost of product sales                   (4,667,721 )         (2,957,154 )          (7,753,901 )         (8,746,208 )

Gross profit                      $      2,056,523        $   1,257,852       $     3,430,589        $   3,177,300

Electric Drive & Fuel Systems Segment

Revenue from product sales decreased $2.5 million, or 37%, in the third quarter of 2012, from $6.7 million in the third quarter of 2011 to $4.2 million in the third quarter of 2012, and increased $0.7 million, or 6%, from $11.2 million in the first nine months of 2011 to $11.9 million in the first nine months of 2012. Although product revenues from our CNG fuel storage systems increased by $1.8 million, or 92%, during the third quarter of 2012 as compared to the third quarter of 2011, we experienced an overall decline in product revenues compared to the same period in the prior year as a result of a significant decline in component shipments to Fisker Automotive in 2012. For the nine month period ended September 30, 2012, we experienced a slight increase in product revenues as compared to the first nine months in 2011, primarily due to an increase of $5.0 million in sales of our CNG fuel storage systems which was offset by a similar decrease in product sales of components to Fisker Automotive. We expect that the level of overall product revenues for the fourth quarter of 2012, including the makeup of the products expected to be shipped, will be similar to the levels realized in the third quarter of 2012.

Contract revenue decreased $2.0 million, or 56%, from $3.6 million in the third quarter of 2011 to $1.6 million in the third quarter of 2012, and decreased $7.7 million, or 60%, from $12.9 million in the first nine months of 2011 to $5.2 million in the first nine months of 2012. Contract revenue is derived primarily from system development, application engineering and qualification testing of our products and systems under funded contracts with OEMs and other customers. The higher contract revenue in 2011 was mainly due to the level of pre-production engineering services that we provided to Fisker Automotive during the first nine months of 2011 prior to and just after its launch of the Fisker Karma vehicle late in calendar 2011. Although we continue to provide engineering services to Fisker Automotive under an existing contract, we expect revenues from those services for the fourth quarter of 2012 to be significantly lower than the amount received in the fourth quarter of 2011. We also expect contract revenues in the near term to be negatively impacted as a result of General Motors' decision to suspend its fuel cell and hydrogen development activities.

Agility Fuel Systems (a natural gas fuel system integrator) comprised 30%, Fisker Automotive comprised 24%, and General Motors comprised 13% of the total Electric Drive & Fuel Systems segment revenue reported for the nine months ended September 30, 2012, respectively. We expect our Electric Drive & Fuel Systems segment to continue to derive a substantial portion of its revenue from a relatively small number of customers in the near term, although the make-up of those customers are expected to change as a result of expected decrease in sales to Fisker Automotive and General Motors' suspension of its fuel cell and hydrogen development activities.


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Cost of product sales decreased $1.7 million, or 36%, from $4.7 million in the third quarter of 2011 to $3.0 million in the third quarter of 2012, and increased $0.9 million, or 12%, from $7.8 million in the first nine months of 2011 to $8.7 million in the first nine months of 2012. The decrease in the third quarter of 2012 is primarily due to lower shipments to Fisker Automotive compared to the third quarter of 2011.

Gross profit on product sales decreased $0.8 million, or 38%, from $2.1 million in the third quarter of 2011 to $1.3 million in the third quarter of 2012, and decreased $0.2 million, or 6%, from $3.4 million in the first nine months of 2011 to $3.2 million in the first nine months of 2012, primarily due to lower revenues as a result of reduced shipments to Fisker Automotive compared to the prior year periods.

Research and development expense associated with development contracts decreased $1.2 million, or 55%, from $2.2 million in the third quarter of 2011 to $1.0 million in the third quarter of 2012, and decreased $4.5 million, or 54%, from $8.3 million in the first nine months of 2011 to $3.8 million in the first nine months of 2012. The decline is primarily attributable to the decrease in pre-production engineering activities on the Fisker Karma platform as the program went into production late in calendar 2011.

Internally funded research and development expense increased $0.7 million, or 44%, from $1.6 million in the third quarter of 2011 to $2.3 million in the third quarter of 2012, and increased $2.7 million, or 66%, from $4.1 million in the first nine months of 2011 to $6.8 million in the first nine months of 2012. Our internally funded research efforts include hybrid control strategies and proprietary software designed to precisely control hybrid propulsion and vehicle performance along with CNG and hydrogen storage, injection and regulation programs. Included in our internally funded research effort in 2012 are engineering activities related to our F-150 PHEV program under which we are integrating our hybrid propulsion system into a Ford F-150 truck platform. As a result of program delays associated with final battery pack validation and production vehicle validation of our F-150 PHEV, in addition to our need to utilize internal engineering resources for other programs, we suspended activities on the F-150 PHEV program in early November 2012.

Selling, general and administrative expenses for the Electric Drive & Fuel Systems segment increased by $0.1 million, or 11%, from $0.9 million in the third quarter of 2011 to $1.0 million in the third quarter of 2012, and . . .

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