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UQM > SEC Filings for UQM > Form 10-Q on 1-Aug-2013All Recent SEC Filings

Show all filings for UQM TECHNOLOGIES INC

Form 10-Q for UQM TECHNOLOGIES INC


1-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements appear in a number of places in this Report and include statements regarding our plans, beliefs or current expectations; including those plans, beliefs and expectations of our officers and directors with respect to, among other things, new product developments, future orders to be received from our customers, sales of products from inventory, future financial results, liquidity and the continued growth of the electric-powered vehicle industry. Important Risk Factors that could cause actual results to differ from those contained in the forward-looking statements are listed below in Part II, Item 1A. Risk Factors.

Introduction

UQM Technologies, Inc., ("UQM" or the "Company") is a developer and manufacturer of power dense, high efficiency electric motors, generators and power electronic controllers for the automotive, commercial truck, bus, marine and military markets. We generate revenue from two principal activities: 1) the sale of motors, generators and electronic controls; and 2) research, development and application engineering services that are paid for by our customers. Our product sales consist of prototype low volume sales, which are generally sold to a broad range of customers, annually recurring higher volume production, and revenues derived from the sale of refurbished and serviced products. The sources of engineering revenue typically vary from year to year and individual projects may vary substantially in their periods of performance and aggregate dollar value. Historically, quarterly product sales have fluctuated depending on our customers' buying cycles, and we expect this fluctuation to continue in the future.

We expect demand for our electric propulsion system and generator products to increase as vehicle makers continue to focus on the development and introduction of electric and hybrid electric vehicles as part of the restructuring of the global automotive industry to provide a broader selection of highly fuel efficient vehicles to consumers. This demand is due, in part, to an expansion in the number of all-electric and hybrid electric vehicle platforms being developed for potential introduction in the passenger automobile market, the amount of government grants and loans available to encourage the development and introduction of clean vehicles, tax incentives to purchasers of these vehicles, progressively more challenging Consumer Average Fuel Economy Standards ("CAFE") and carbon dioxide emission regulations, and a desire on the part of the global automotive industry to provide a broader selection of highly fuel efficient vehicles.

We supply electric propulsion systems to Proterra, a developer and manufacturer of all-electric composite transit buses, Boulder EV, a developer and manufacturer of all-electric delivery trucks and work utility trucks, and Electric Vehicles International ("EVI"), a developer and manufacturer of all-electric medium-duty delivery trucks, all under multi-year supply agreements. EVI recently completed an order from UPS for 100 all-electric delivery vans powered by our electric propulsion systems. We are also supplying an automotive qualified DC-to-DC converter to Eaton Corporation, which is used on board medium and heavy-duty hybrid trucks sold by Freightliner, International and Paccar. Also, during the quarter ended June 30, 2013, we announced a sales contract with Zenith Motors, LLC, to provide PowerPhase Pro 135 systems as the drivetrain in their all-electric shuttle vans. Shipments began in the quarter and will continue during the remainder of fiscal year 2014.

We supply our electric propulsion systems and generators to several international automakers and entrepreneurial automobile developers as part of their hybrid-electric, plug-in hybrid electric, all-electric and fuel cell all-electric vehicle development programs. In particular, our electric propulsion systems are powering a large fleet of all-electric Audi A1 e-tron development vehicles, and recent press reviews have been very favorable.

Also, National Electric Vehicle Sweden AB ("NEVS"), formerly SAAB, has announced that the Chinese city of Qingdao had approved a cash investment to purchase 22 percent of NEVS. NEVS has announced their intention to enter the electric vehicle market in 2014. In the past, we have supplied SAAB with electric propulsion systems for their test programs, and we are currently in discussions with NEVS to supply our products to them.

We are in discussions with several potential Chinese partners for both all-electric and hybrid-electric vehicles. We have signed a Memorandum of Understanding with one major Chinese company for the development and marketing of UQM electric propulsion systems for new energy vehicles in China. This agreement expands the global reach of UQM, and represents the initial step in our strategy to penetrate the Chinese market with our leading electric propulsion


products. Under the agreement, UQM and its China-based partner will work collaboratively to introduce UQM products into the Chinese market for use in new energy vehicles. The China State Council published its new energy vehicles plan in July, 2012, setting a goal of 500,000 energy-efficient and clean vehicles on the road in China by 2015, and five million vehicles by 2020.

The marine market is forecasted to be a growing segment of electrified vehicles, and we continue to see increased activity and interest within the marine segment. ReGen Nautic has three UQM based outboard motors, the E100, E180 and E300, along with several combinations of full electric and hybrid inboard combinations utilizing both the PowerPhase Pro and PowerPhase HD propulsion systems, and we continue to ship them product as their demand dictates. They have prominently displayed our product at several International Boat shows including Dusseldorf, Monaco and Miami, and in a variety of boats including the all-electric Mylne Bolt 18 yacht tender, the Bruce Runabout all-electric motorboat, the Goldfish 23 e-Fusion, Alibi Catamarans, Rhea Marine, Bering Yachts and Grand Banks.

We continue to expand our product offerings. In the quarter ended June 30, 2013, we announced the PowerPhase HD 950T. This is a high torque variant of our commercial motor/controller line-up of products, and is designed for larger or heavier applications that need higher torque or increased gradeability. This product is now available for sale.

On May 1, 2013, our former customer CODA Automotive ("CODA") filed for reorganization under the U.S. Bankruptcy Code. We plan to file all appropriate claims against the CODA bankruptcy estate; however, we expect to ultimately recover only a small percentage of the amount claimed, if any. As of June 30, 2013, we believe we have recorded all impairments and liabilities that have or could arise as a result of the CODA bankruptcy.

We have a $45.1 million grant (the "Grant") with the DOE under the American Recovery and Reinvestment Act. The Grant provides funds to facilitate the manufacture and deployment of electric drive vehicles, batteries and electric drive vehicle components in the United States. Pursuant to the terms of the Agreement, the DOE will reimburse us for 50 percent of qualifying costs for the purchase of facilities, tooling and manufacturing equipment, and for engineering related to product qualification and testing of our electric propulsion systems. The period of the Grant is through January 12, 2015. We recognize government grants when it is probable that the Company will comply with the conditions attached to the grant arrangement and the grant will be received.

Funding for qualifying project costs incurred is currently limited to $32.0 million. We were required to provide the DOE with an updated budget revision application no later than July 12, 2013, which we provided prior to the deadline. It is currently under review by the DOE. If the DOE does not find the revision application acceptable, it reserves the right to: (1) stop payment on the contract; (2) renegotiate the contract; or (3) declare the grant terminated by mutual agreement after we have been given thirty days advance written notice and an opportunity to cure any deficiencies.

The Grant is also subject to our compliance with certain reporting requirements. The American Recovery and Reinvestment Act imposes minimum construction wages and labor standards for projects funded by the Grant. If we dispose of assets acquired using Grant funding, we may be required to reimburse the DOE upon such sale date if the fair value of the asset on the date of disposition exceeds $5,000. The amount of any such reimbursement shall be equal to 50 percent of the fair value of the asset on the date of disposition.

While UQM has exclusive patent ownership rights for any technology developed with Grant funds, we are required to grant the DOE a non-exclusive, non-transferable, paid-up license to use such technology.

At June 30, 2013, we had received reimbursements from the DOE under the Grant totaling $20.0 million and had grant funds receivable of $2.1 million.

We had listed our former facility in Frederick, Colorado for sale with a commercial broker. As a result, the carrying value of the facility was classified as a current asset and listed under the caption facility held for sale at March 31, 2013. On June 6, 2013, we closed on the sale the building. The sales price was $1,650,000 and net proceeds were $1,565,032.


Financial Condition

Cash and cash equivalents at June 30, 2013 were $5,334,699 and working capital (the excess of current assets over current liabilities) was $15,456,110, compared with $4,527,899 and $16,011,344, respectively, at March 31, 2013. The increase in cash and short-term investments is primarily attributable to the sale of our former facility partially offset by operating losses. The decrease in working capital is primarily attributable to operating losses and investments in property and equipment.

Accounts receivable increased $513,800 to $2,726,195 at June 30, 2013 from $2,212,395 at March 31, 2013. The increase is primarily due to increased levels of billings outstanding under our DOE Grant. Many of our customers are large well-established companies of high credit quality. Our sales are conducted through acceptance of customer purchase orders or in some cases through supply agreements. For credit qualified customers our standard terms are net 30 days. For international customers and customers without an adequate credit rating or history our typical terms are irrevocable letter of credit or cash payment in advance of delivery. At both June 30, 2013 and March 31, 2013, we had an allowance for bad debts of $3,838,092, all of which relates to amounts owed to us by CODA.

Costs and estimated earnings on uncompleted contracts decreased $20,238 to $158,026 at June 30, 2013 versus $178,264 at March 31, 2013. The decrease is due to more favorable billing terms on certain contracts in process at June 30, 2013 versus March 31, 2013. Estimated earnings on contracts in process increased to $595,816 on contracts in process of $1,614,795 at June 30, 2013, compared to estimated earnings on contracts in process of $515,299 on contracts in process of $1,353,545 at March 31, 2013. The increase in estimated earnings is attributable to higher expected margins on certain contracts in process at June 30, 2013.

Inventories decreased $239,539 to $10,758,922 at June 30, 2013 principally due to lower levels of raw material and finished goods inventories, partially offset by an increase in work-in-process inventories. Raw material and finished goods inventories decreased $212,917 and $173,270, respectively, reflecting reduced levels of inventories on hand for several product lines at June 30, 2013.
Work-in-process inventory increased $146,648, reflecting increased levels of low volume propulsion system builds in process at June 30, 2013.

Prepaid expenses and other current assets increased to $316,117 at June 30, 2013 from $309,957 at March 31, 2013 primarily due to prepayments on commercial insurance policies.

We invested $242,478 for the acquisition of property and equipment, before reimbursements under the DOE Grant, during the quarter ended June 30, 2013 compared to $204,149 during the comparable quarter last fiscal year. The small increase in capital expenditures is primarily attributable to increased levels of equipment acquisitions in the first quarter this fiscal year versus the comparable quarter last fiscal year. Cash reimbursements for capital assets under the DOE Grant for the quarter ended June 30, 2013 and June 30, 2012 were $24,939 and $44,145.

Patent costs decreased to $199,532 at June 30, 2013 versus $206,287 at March 31, 2013 primarily due to the systematic amortization of patent issuance costs. Similarly, trademark costs decreased to $109,407 at June 30, 2013 versus $110,528 at March 31, 2013 primarily due to the systematic amortization of trademark costs.

Accounts payable increased $278,256 to $895,453 at June 30, 2013 from $617,197 at March 31, 2013, primarily due to the timing of vendor payments.

Other current liabilities decreased to $2,418,396 at June 30, 2013 from $2,599,435 at March 31, 2013. The decrease is primarily attributable to reduced levels of accrued personal property taxes, real estate taxes, accrued vendor settlements and accrued audit fees at June 30, 2013.

Short-term deferred compensation under executive employment agreements was $524,000 at both June 30, 2013 and March 31, 2013 reflecting a retirement payment obligation that will be paid in December 2013. Long-term deferred compensation under executive employment agreements was $122,294 at June 30, 2013 versus $103,412 at March 31, 2013 reflecting periodic accruals of future severance obligations under executive employment agreements.

Common stock and additional paid-in capital were $366,695 and $115,739,573, respectively, at June 30, 2013 compared to $366,641 and $115,573,331 at March 31, 2013. The increases in common stock and additional paid-in capital were primarily attributable to the issuance of shares under the Employee Stock Purchase Plan and the periodic expensing of non-cash share-based payments associated with option grants under our equity incentive plan.


Results of Operations

Quarter Ended June 30, 2013

Operations for the quarter ended June 30, 2013 resulted in a net loss of $916,354, or $0.02 per common share, compared to a net loss of $1,287,434, or $0.04 per common share for the comparable quarter last year. The decrease in net loss is primarily attributable to lower operating costs as a result of a reduction in force and other strategic cost reductions.

Revenue from contract services decreased to $261,251 at June 30, 2013 versus $365,379 for the comparable quarter last year. The decrease is primarily due to decreased levels of customer funded research activities.

Product sales revenue for the first quarter decreased to $1,687,260 versus $2,031,049 for the comparable period last fiscal year. During the first quarter last fiscal year we had sales to Audi of $728,000 for their A1 e-tron development program. In addition, the current quarter was positively impacted by increased levels of shipments of PowerPhase HD systems to EVI and Proterra.

Gross profit margins for the quarter ended June 30, 2013 decreased to 34.0 percent compared to 38.8 percent for the quarter ended June 30, 2012. Gross profit margin on contract services was 30.8 percent for the first quarter this fiscal year compared to 49.9 percent for the quarter ended June 30, 2012. The decrease is primarily due to lower expected gross margins on certain contracts in process at June 30, 2013 versus the comparable quarter last fiscal year. Gross profit margin on product sales for the first quarter this year decreased to 34.5 percent compared to 36.8 percent for the first quarter last year due to changes in product mix.

Research and development expenditures for the quarter ended June 30, 2013 increased to $54,908 compared to $12,647 for the quarter ended June 30, 2012 reflecting increased levels of cost-sharing on government research programs.

Production engineering costs were $1,093,069 for the first quarter versus $1,150,219 for the first quarter last fiscal year. The decrease is attributable to lower levels of product qualification and testing activities during the current quarter.

Reimbursement of product qualification and testing costs under the DOE Grant was $773,458 for the quarter ended June 30, 2013 versus $764,636 for the comparable period last fiscal year reflecting increased estimated allowable reimbursement rates on product qualification and testing activities for the current fiscal year.

Selling, general and administrative expense for the quarter ended June 30, 2013 was $1,244,401 compared to $1,822,847 for the same quarter last year. The decrease is primarily attributable to a reduction in force and other strategic cost reductions including lower levels of marketing, legal, and recruiting and relocation expenses versus the comparable quarter last fiscal year.

Gain on sale of facility held for sale was $40,032 for the quarter ended June 30, 2013 versus zero for the first quarter last fiscal year. The increase is associated with the sale of our former facility located in Frederick, Colorado during the current quarter.

Interest income decreased to $129 for the quarter ended June 30, 2013 versus $2,746 for the same quarter last fiscal year. The decrease is attributable to lower invested balances.

Liquidity and Capital Resources

Our cash balances and liquidity throughout the quarter ended June 30, 2013 were adequate to meet operating needs. At June 30, 2013, we had working capital (the excess of current assets over current liabilities) of $15,456,110 compared to $16,011,344 at March 31, 2013.

For the quarter ended June 30, 2013, net cash used in operating activities was $541,001 compared to net cash used in operating activities of $3,176,186 for the comparable quarter last fiscal year. The decrease in cash used for the first quarter this fiscal year is primarily attributable to decreased net losses, significantly driven by lower operating costs as a result of a reduction in force and other strategic cost reductions, decreased levels of inventory purchases and higher levels of accounts payable, partially offset by increased levels of accounts receivable.


Net cash provided by investing activities for the first quarter was $1,344,229 compared to cash provided by investing activities of $271,755 for the comparable quarter last fiscal year. The change for the quarter ended June 30, 2013 was primarily due to cash proceeds from the sale of our former Frederick, Colorado facility, partially offset by decreased levels of net short-term investment maturities versus the prior comparable quarter.

Net cash provided by financing activities for the first quarter was $3,572 compared to net cash provided by financing activities of $15,647 for the comparable quarter last fiscal year. The decrease in cash provided was primarily attributable to lower levels of proceeds from share issuances under our Employee Stock Purchase Plan.

We expect to fund our operations over the next year from existing cash and short-term investment balances, the reduction of inventories and continuing operations. Although we expect to manage our operations and working capital requirements to minimize the future level of operating losses and working capital usage, our working capital requirements may increase in the future. If customer demand accelerates substantially, our working capital requirements may also increase substantially. In addition, our $45.1 million DOE Grant requires us to provide matching funds of 50 percent on all qualifying expenditures under the Grant. As of June 30, 2013, the DOE has approved credit to UQM for matching funds of up to a total of $32 million.

As the markets for electrified vehicles continue to emerge and expand into additional vehicle platforms over the next several years, we expect to experience potentially rapid growth in our revenue coincident with the introduction of electric products for our customers. We believe we have sufficient cash resources to fund our expected rate of future growth; however, if our future growth occurs at a rate higher than our expectations, our existing cash and short-term investments may not be adequate to fund our operations and we may need to raise additional capital.

If our existing financial resources are not sufficient to execute our business plan, including meeting future funding requirements under the DOE Grant, we may issue equity or debt securities in the future, although we cannot assure that we will be able to secure additional capital should it be required to implement our current business plan. In the event financing or equity capital to fund future growth is not available on terms acceptable to us, or at all, we will modify our strategy to align our operations with then available financial resources. Based on our current level of operations, we believe we have sufficient cash and short-term investments to fund our operations for at least the next two years.

Contractual Obligations



The following table presents information about our contractual obligations and
commitments as of June 30, 2013:


                                                               Payments due by Period
                                            Less Than                                       More than
                              Total          1 Year        2 - 3 Years      4 - 5 Years      5 Years
Purchase obligations       $   880,383        880,383                 -                -              -
Executive employment
agreements (1)                 646,294        524,000                 -                -       122,294
Total                      $ 1,526,677      1,404,383                 -                -       122,294

(1) Includes severance pay obligations under executive employment agreements contingently payable upon six months' notice by six officers of the Company, but not annual cash compensation under the agreements.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the dollar values reported in the consolidated financial statements and accompanying notes. Note 1 to the consolidated financial statements contained in our annual report on Form 10-K for the fiscal year ended March 31, 2013 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Estimates are used for, but not limited to, allowance for doubtful accounts receivables, costs to complete contracts, the recoverability of inventories, the fair value of financial and long-lived assets and in the establishment of provisional billing rates on certain government contracts. Actual results could differ materially from these estimates.


The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in preparation of the consolidated financial statements.

Accounts Receivable

Our trade accounts receivable are subject to credit risks associated with the financial condition of our customers and their liquidity. We evaluate all customers periodically to assess their financial condition and liquidity and set appropriate credit limits based on this analysis. As a result, the collectibility of accounts receivable may change due to changing general economic conditions and factors associated with each customer's particular business. Because substantially all of our customers are large well-established companies with excellent credit worthiness, we have not historically established a reserve for potentially uncollectible trade accounts receivable. However, during the fiscal year ended March 31, 2013, we established an allowance for bad debts of $3,838,092, principally due to the bankruptcy filing of CODA. At June 30, 2013, the allowance for bad debts remained at $3,838,092. In light of current economic conditions, we may need to maintain an allowance for bad debts in the future. It is also reasonably possible that future events or changes in circumstances could cause the realizable value of our trade accounts receivable to decline materially, resulting in material losses.

Inventories

We maintain raw material inventories of electronic components, motor parts and other materials to meet our expected manufacturing needs for proprietary products and for products manufactured to the design specifications of our customers. Some of these components may become obsolete or impaired due to bulk purchases in excess of customer requirements. Accordingly, we periodically assess our raw material inventory for potential impairment of value based on then available information, expectations and estimates and establish impairment reserves for estimated declines in the realizable value of our inventories. At June 30, 2013, we had $7,693,366 of inventory originally purchased or manufactured for CODA that is now available for sale to other customers. The actual realizable value of this inventory and our inventories generally may differ materially from these estimates based on future occurrences. It is reasonably possible that future events or changes in circumstances could cause the realizable value of our inventories to decline materially, resulting in additional material impairment losses.

Percentage of Completion Revenue Recognition on Long-term Contracts: Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts

We recognize revenue on development projects funded by our customers using the percentage-of-completion method. Under this method, contract services revenue is based on the percentage that costs incurred to date bear to management's best estimate of the total costs to be incurred to complete the project. Many of these contracts involve the application of our technology to customers' products and other applications with demanding specifications. Estimated costs for each project are developed by our engineering staff based upon a progression of technical tasks required to attain the project's objectives. These estimates typically include the number of hours of work required by each category of personnel, the cost of subcontracts, materials and components, as well as costs for consultants and project related travel. These estimated costs are reviewed throughout the project and revised quarterly, if necessary, to accurately reflect our best estimate of the remaining costs necessary to complete the project. Management's best estimates have sometimes been adversely impacted by unexpected technical challenges requiring additional analysis and redesign, failure of electronic components to operate in accordance with manufacturers published performance specifications, unexpected prototype failures requiring the purchase of additional parts, changes in actual overhead costs versus estimated overhead costs and a variety of other factors that may cause unforeseen delays and additional costs. It is reasonably likely that estimated project costs to complete the projects in process at June 30, 2013 could change materially in the future, and any modification of management's current estimate of total project costs to be incurred could result in material changes in the profitability of affected projects or result in material losses on any affected projects.

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