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UQM > SEC Filings for UQM > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for UQM TECHNOLOGIES INC


5-Nov-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 management 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 and in our annual report on Form 10-K for the fiscal year ended March 31, 2013.

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 annually recurring higher volume production sales, prototype low volume sales, which are generally sold to a broad range of customers, 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 a global effort 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 bus, commercial truck and van and passenger automobile markets, the amount of government grants and loans available to encourage the development and introduction of clean vehicles, tax incentives to purchasers of these vehicles, and progressively more challenging Consumer Average Fuel Economy Standards ("CAFE") and carbon dioxide emission regulations. Domestically, the federal government offers a tax credit of up to $7,500 on the purchase of passenger electric vehicles, and various states offer additional rebates and incentives. Based on the success of California's Hybrid and Zero Emission Truck and Bus Voucher program, a point-of-sale purchase incentive program, other states including New York, New Jersey, Oregon, Illinois and Michigan are considering implementing similar subsidy plans. There are additional subsidies worldwide to encourage growth of the electric passenger car, bus and truck markets

We have entered into multi-year agreements to 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. EVI has supplied UPS 100 all-electric delivery vans powered by our electric propulsion systems as a test program for their fleet of vans. 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 that quarter and will continue during the remainder of fiscal year 2014.

We supply our electric propulsion systems and generators to several international automakers 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 of the test program have been very favorable. Also, we have renewed our discussions with National Electric Vehicle Sweden AB ("NEVS"), formerly SAAB, to supply them with our electric propulsion systems.


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. In September, 2013, China's National Development and Reform Commission and three other ministries jointly announced a new round of New Energy Vehicle supportive policies for 2013 - 2015. Various levels of government subsidies for electric vehicles were announced, including subsidies for pure electric buses of RMB 500,000 each (approximately $80,000), electric trucks of RMB 150,000 each (approximately $24,000) and plug-in electric and fuel cell passenger vehicles of RMB 60,000 each (approximately $9,600).

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.

On May 1, 2013, our former customer CODA Automotive ("CODA") filed for reorganization under the U.S. Bankruptcy Code. We have filed 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 September 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.

At September 30, 2013, we had received reimbursements from the DOE under the Grant totaling $21.2 million and had funds receivable under the Grant of $2.4 million. Subsequent to the end of the quarter, the DOE paid $2.2 million against the funds receivable.

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 September 30, 2013 were $5,071,049 and working capital was $15,496,534, compared with $4,527,899 and $16,011,344, respectively, at March 31, 2013. The increase in cash and cash equivalents 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 $871,086 to $3,083,481 at September 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 September 30, 2013 and March 31, 2013,


we had an allowance for bad debts of zero and $3,838,092, respectively. The allowance for bad debts as of March 31, 2013 relates to amounts owed to us by CODA.

Costs and estimated earnings on uncompleted contracts increased $51,875 to $230,139 at September 30, 2013 versus $178,264 at March 31, 2013. The increase is due to timing of billings on certain contracts in process at September 30, 2013 versus March 31, 2013. Estimated earnings on contracts in process increased to $575,264 on revenue recognized of $1,788,328 at September 30, 2013, compared to estimated earnings on contracts in process of $515,299 on revenue recognized of $1,353,545 at March 31, 2013. The increase in estimated earnings is attributable to higher levels of funded engineering contracts in process, partially offset by lower expected margin on certain contracts in process at September 30, 2013.

Inventories decreased $470,941 to $10,527,520 at September 30, 2013, reflecting increased shipments of PowerPhase Pro® and PowerPhase HD® propulsion systems.

Prepaid expenses and other current assets increased to $332,291 at September 30, 2013 from $309,957 at March 31, 2013 primarily due to prepayments on commercial insurance policies.

We invested $177,877 and $420,355 for the acquisition of property and equipment, before reimbursements under the DOE Grant, during the quarter and six month period ended ended September 30, 2013 compared to $107,431 and $311,580 during the comparable quarter and six month period last fiscal year. The increase in capital expenditures is primarily attributable investments in production equipment for our PowerPhase HD® propulsion system during the first half of this fiscal year. Cash reimbursements for capital assets under the DOE Grant for the quarter and six month period ended September 30, 2013 were $149,769 and $174,708, respectively. Cash reimbursements for capital assets under the DOE Grant for the quarter and six month period ended September 30, 2012 were $98,991 and $143,136, respectively.

Patent costs decreased to $204,646 at September 30, 2013 versus $206,287 at March 31, 2013 primarily due to the systematic amortization of patent issuance costs. Similarly, trademark costs decreased to $108,284 at September 30, 2013 versus $110,528 at March 31, 2013 primarily due to the systematic amortization of trademark costs.

Accounts payable increased $87,409 to $704,606 at September 30, 2013 from $617,197 at March 31, 2013, primarily due to the timing of vendor payments.

Other current liabilities decreased to $2,519,340 at September 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, partially offset by increased levels of accrued warranty costs and higher levels of customer deposits at September 30, 2013.

Short-term deferred compensation under executive employment agreements was $524,000 at both September 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 $142,229 at September 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 $368,644 and $116,031,005, respectively, at September 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 Stock Bonus Plan, and the periodic expensing of non-cash share-based payments associated with option grants under our Equity Incentive Plan and Stock Bonus Plan.

Results of Operations

Quarter Ended September 30, 2013


Product sales revenue for the current quarter increased 118 percent to $1,838,676 versus $845,470 for the comparable quarter last fiscal year. The increase is primarily due to increased shipments of PowerPhase HD®, PowerPhase Pro®, PowerPhase Select® and other propulsion systems to a variety of customers.

Revenue from contract services decreased to $203,282 at September 30, 2013 versus $350,634 for the comparable quarter last year. This was driven by a change in mix of contracts in process during the current quarter and by a change in our cumulative estimate of reimbursable rates under a cost-reimbursement type contract which resulted in a decrease in contract services revenue of $95,000.

Gross profit margins for the quarter ended September 30, 2013 increased to 41.6 percent compared to 38.8 percent for the quarter ended September 30, 2012.
Gross profit margin on product sales for the second quarter this year increased to 47.0 percent compared to 38.6 percent for the second quarter last year primarily due to lower overhead costs arising from higher volumes. Gross profit margin on contract services decreased to negative 7.4 percent for the second quarter this fiscal year compared to 39.1 percent for the quarter ended September 30, 2012, resulting from a change in mix of contracts in process in the current quarter and the change in our cumulative estimate of reimbursable rates noted above.

Research and development expenditures for the quarter ended September 30, 2013 increased to $59,637 compared to $19,810 for the quarter ended September 30, 2012 reflecting increased levels of activity on cost-sharing government research programs.

Production engineering costs were $939,887 for the second quarter versus $1,505,103 for the comparable quarter last fiscal year. The decrease is attributable to higher than normal product qualification and testing activities during the comparable quarter last year associated with product qualification and testing activities for our PowerPhase HD propulsion system.

Reimbursement of product qualification and testing costs under the DOE Grant was $1,352,201 for the quarter ended September 30, 2013 versus $965,564 for the comparable quarter last fiscal year. During the quarter ended September 30, 2013, we changed our cumulative estimate of reimbursable rates under the Grant which resulted in an increase in our quarterly reimbursement recorded of $817,000. This increase was partially offset by decreased levels of reimbursable production engineering activities versus the comparable quarter last fiscal year. We expect our DOE reimbursements to return to approximate historical levels for the duration of the program.

Selling, general and administrative expense for the quarter ended September 30, 2013 was $1,615,075 compared to $2,472,653 for the same quarter last year, a decrease of 35 percent. The decrease is primarily attributable to cost reduction efforts versus the comparable quarter last fiscal year.

Interest income decreased to $941 for the quarter ended September 30, 2012 versus $2,260 for the same quarter last fiscal year. The decrease is attributable to lower yields on invested cash balances.

As a result, net loss for the quarter ended September 30, 2013 was $412,269, or $0.01 per common share, compared to a net loss of $2,563,548, or $0.07 per common share, for the comparable quarter last year.

Six Months Ended September 30, 2013

Product sales for the six month period ended September 30, 2013 increased 23 percent to $3,525,936 compared to $2,876,519 for the comparable period last year. The increase is primarily due to increased shipments of PowerPhase HD® and PowerPhase Pro® propulsion systems, partially offset by decreased levels of PowerPhase Select® propulsion systems.

Revenue from contract services decreased to $464,533 for the six month period ended September 30, 2013 versus $716,013 for the comparable period last year. This was driven by a change in mix of contracts in process during the current six month period and by a change in our cumulative estimate of reimbursable rates under a cost-reimbursement type contract which resulted in a decrease in contract services revenue of $79,400.

Gross profit margins for the six month period ended September 30, 2013 decreased to 37.9 percent compared to 38.8 percent for the comparable six month period last fiscal year. Gross profit margin on product sales for the six month period ended September 30, 2013 increased to 41.0 percent compared to 37.4 percent for the comparable period last


year. The increase is primarily due to changes in product mix and lower overhead costs arising from higher volumes. Gross profit margin on contract services decreased for the six month period to 14.1 percent versus 44.6 percent for the comparable six month period last fiscal year resulting from a change in mix of contracts in process in the current period and the change in our cumulative estimate of reimbursable rates noted above.

Research and development expenditures for the six month period ended September 30, 2013 increased to $114,545 compared to $32,457 for the same period last year reflecting increased levels of activity on cost-sharing government research programs.

Production engineering costs were $2,032,956 for the six month period ended September 30, 2013 versus $2,655,322 for the comparable six month period last year. The decrease is attributable to higher than normal product qualification and testing activities during the prior comparable six month period associated with product qualification and testing activities for our PowerPhase HD propulsion system.

Reimbursements of costs under the DOE Grant were $2,125,659 for the six months ended September 30, 2013 versus $1,730,200 for the comparable period last year.
During the six month period ended September 30, 2013, we changed our cumulative estimate of reimbursable rates under the Grant which resulted in an increase in our first half reimbursement recorded of $958,000. This increase was partially offset by decreased levels of reimbursable production engineering activities versus the comparable period last fiscal year. We expect our DOE reimbursements to return to approximate historical levels for the duration of the program.

Selling, general and administrative expense for the six month period ended September 30, 2013 was $2,859,476 compared to $4,295,500 for the same period last year, a decrease of 33 percent. The decrease is primarily attributable to cost reduction efforts versus the comparable period last fiscal year.

Interest income decreased to $1,070 for the six month period ended September 30, 2013 versus $5,006 for the comparable period last year. The decrease is attributable to lower yields and lower levels of invested cash balances.

As a result, net loss for the six month period ended September 30, 2013 was $1,328,623, or $0.04 per common share, compared to a net loss of $3,850,982, or $0.11 per common share, for the comparable period last year.

Liquidity and Capital Resources

Our cash balances and liquidity throughout the quarter ended September 30, 2013 were adequate to meet operating needs. At September 30, 2013, we had working capital of $15,496,534 compared to $16,011,344 at March 31, 2013.

For the six month period ended September 30, 2013, net cash used in operating activities was $779,447 compared to net cash used in operating activities of $4,902,266 for the comparable period last fiscal year. The decrease in cash used for the first half of 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, partially offset by increased levels of accounts receivable.

Net cash provided by investing activities for the first half of this fiscal year was $1,300,996 compared to cash provided by investing activities of $52,730 for the comparable six month period last fiscal year. The change for the first half of this fiscal year 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 half this fiscal year was $21,601 compared to net cash used in financing activities of $7,957 for the comparable period last fiscal year. The increase in cash provided was primarily attributable to a reduction in purchases of treasury stock during the first half of this fiscal year.

We expect to fund our operations over the next year from existing cash 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 and we may need to raise additional capital. 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 September 30, 2013, the DOE had


approved credit to UQM for matching funds of up to a total of $32 million, of which $23.6 million had been expended under the Grant.

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 or increased working capital needs, 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 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 September 30, 2013:


                                                               Payments due by Period
                                            Less Than                                       More than
                              Total          1 Year        2 - 3 Years      4 - 5 Years      5 Years
Purchase obligations       $   666,158    $   666,158     $           -    $           -    $         -
Executive employment
agreements (1)                 666,229        524,000                 -                -       142,229
Total                      $ 1,332,387    $ 1,190,158     $           -    $           -    $  142,229

(1) Includes severance pay obligations under executive employment agreements contingently payable upon six months' notice by five 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, accrued warranty costs, accrued vendor settlement obligations, accrued import duties, deferred compensation under executive employment agreements, 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 collectability 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 current 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 September 30, 2013, the allowance for bad debts has been written off. In light of current economic conditions, we may need to . . .

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