(1) Basis of Presentation
The accompanying consolidated condensed financial statements are unaudited; however, in the opinion of management, all adjustments, which were solely of a normal recurring nature, necessary to a fair presentation of the results for the interim periods, have been made. The results for the interim periods are not necessarily indicative of the results to be expected for the fiscal year. The Notes contained herein should be read in conjunction with the Notes to our Consolidated Financial Statements filed on Form 10-K for the fiscal year ended March 31, 2016.
(2) New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for us for the first fiscal year beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We are in the process of determining the impact on our financial statements.
In August 2014, the FASB issued guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.
We expect the new standard to increase the disclosures we provide regarding our liquidity and cash obligations.
In July 2015, the FASB issued guidance on simplifying the measurement of inventory from the lower of cost or market to the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. This guidance is effective for years beginning after December 15, 2016, including interim periods within those fiscal years. Prospective application is allowed as of the beginning of an interim or annual reporting period. An entity is only required to disclose the nature of and reason for the change in accounting principle in the first interim and annual period of adoption. We are in the process of determining the impact of this guidance on our financial statements.
In March 2016, the FASB issued guidance on improvements to employee share-based payment accounting for stock compensation. The new standard addresses the topics of accounting for income taxes, classification of excess tax benefits on the Statement of Cash Flows, forfeitures, minimum statutory tax withholding requirements, classification of employee taxes paid on the Statement of Cash Flows when an employer withholds shares for tax withholding purposes. This is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted within any interim or annual period. Any adjustments should be reflective as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all the amendments in the same period. We are in the process of determining the impact of this guidance on our financial statements.
Stock Purchase Plan Activity
During the three months ended June 30, 2016 and 2015, we issued 18,097 and 34,508 shares of common stock, respectively, under the Stock Purchase Plan. Cash received by us upon the purchase of shares under the Stock Purchase Plan for the three months ended June 30, 2016 and 2015 was $9,591 and $23,125, respectively.
(7) Stockholders’ Equity
Changes in the components of stockholders’ equity during the three month period ended June 30, 2016 were as follows:
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Number
of
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common
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Additional
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Total
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shares
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Common
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|
paid-in
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|
Accumulated
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|
stockholders’
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issued
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stock
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|
capital
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|
deficit
|
|
equity
|
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|
Balances at April 1, 2016
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|
48,330,286
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|
$
|
483,303
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|
$
|
128,103,861
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|
$
|
(106,875,426)
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|
$
|
21,711,738
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Issuance of common stock under employee stock purchase plan
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18,097
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181
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|
9,410
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-
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9,591
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|
Issuance of common stock under stock bonus plan
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|
3,667
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37
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|
(37)
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-
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-
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|
Common stock used for tax withholdings
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(1,368)
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(14)
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(958)
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-
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(972)
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|
Compensation expense from employee and director stock option and common stock grants
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-
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-
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53,768
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-
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53,768
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|
Net loss
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-
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-
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-
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|
(1,954,030)
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|
(1,954,030)
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Balances at June 30, 2016
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48,350,682
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$
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483,507
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|
$
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128,166,044
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$
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(108,829,456)
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$
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19,820,095
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In February 2014, we completed a follow-on offering consisting of 2,864,872 shares of our common stock, and common stock purchase warrants to purchase 1,432,436 shares of our common stock. The warrants have an exercise price of $2.1275 per whole share of common stock and are exercisable on or after August 6, 2014 and on or before August 5, 2018. In addition, the placement agent was issued warrants to purchase 57,297 shares of common stock, on substantially the same terms as the warrants issued to the purchasers. Warrants from this offering to acquire 1,489,733 shares of our common stock were outstanding at both June 30, 2016 and March 31, 2016.
In October 2015, we completed a follow-on offering consisting of 8,000,000 shares of our common stock, and common stock warrants to purchase 4,000,000 shares of our common stock. The warrants have an exercise price of $1.31 per whole share of common stock and are exercisable for a period beginning April 30, 2016 through October 30, 2020. Warrants from this offering to acquire 4,000,000 and zero shares were outstanding at June 30, 2016 and March 31, 2016, respectively.
(8) Significant Customers
We have historically derived significant revenue from a few key customers. The following table summarizes revenue and percent of total revenue from significant customers for the quarters ended June 30, 2016 and 2015:
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Quarter Ended June 30,
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2016
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2015
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Customer A
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$
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353,435
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25
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%
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$
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121,682
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16
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%
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Customer B
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|
$
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250,519
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|
17
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%
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$
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34,863
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|
5
|
%
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Customer C
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|
$
|
225,105
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|
16
|
%
|
$
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150,316
|
|
20
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%
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Customer D
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|
$
|
147,500
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|
10
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%
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$
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-
|
|
-
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%
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|
Customer E
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|
$
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12,212
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|
1
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%
|
$
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201,157
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|
27
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%
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|
The following table summarizes accounts receivable from significant customers as of June 30, 2016 and March 31, 2016:
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June 30,
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March 31,
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2016
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|
2016
|
|
|
Customer A
|
|
32
|
%
|
22
|
%
|
|
Customer B
|
|
11
|
%
|
32
|
%
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|
Customer C
|
|
9
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%
|
12
|
%
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|
Customer D
|
|
24
|
%
|
-
|
%
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|
Customer E
|
|
-
|
%
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-
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%
|
(9) Income Taxes
The Company currently has a full valuation allowance against its deferred tax assets, as it is management’s judgment that it is more-likely-than-not that net deferred tax assets will not be realized to reduce future taxable income.
We recognize interest and penalties related to uncertain tax positions in “Other Income (expense),” net. As of June 30, 2016 and 2015, we had no provisions for interest or penalties related to uncertain tax positions.
The Company is subject to taxation in the U.S. and various state jurisdictions. As of June 30, 2016, the Company’s tax years for 2012 to 2015 are subject to examination by the tax authorities.
(10) Loss Per Common Share
The following table sets forth the computation of basic and diluted net loss per share for the quarters ended June 30, 2016 and 2015:
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Quarter Ended June 30,
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2016
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2015
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Numerator:
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Net loss
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$
|
(1,954,030)
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$
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(2,224,251)
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Denominator for basic and diluted net loss per common share:
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Weighted average number of shares of common stock outstanding - basic and diluted
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48,346,344
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40,040,673
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Net loss per common share - basic and diluted
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$
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(0.04)
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$
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(0.06)
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The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:
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June 30,
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2016
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2015
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Non-vested stock bonus plan shares
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82,974
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428,372
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Stock options outstanding
|
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2,488,838
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|
2,954,330
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Warrants to purchase common stock
|
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|
5,489,733
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|
1,489,733
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(11) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments.
(12) Commitments and Contingencies
Employment Agreements
On July 21, 2015, the Company entered into new employment agreements with its four officers
that expire on June 30, 2017.
The aggregate future base salary payable to the executive officers over their remaining terms is $1,014,604. The July 2015 employment agreements provide for future retention payments under the conditions and for the amounts specified in the agreements. These retention payments are being recorded over the required service period, and as a result, we have recorded a liability of $178,889 as of June 30, 2016.
Litigation
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, and based on current available information, the ultimate disposition of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flow.
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,
completion of the $48 million investment in us by Hybrid Kinetic Group Limited and our operations following such investment,
the amount of revenue that could potentially be generated over the term of the ITL Agreement, the timing and success of completing necessary test and certification processes for ITL to order our products, the number of units ordered by ITL under the ITL Agreement, the success of ITL in introducing its electric drive systems (including our products) into the vehicles produced by itself and its affiliates, and the continued growth of the electric-powered vehicle industry in the Chinese market, 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, 2016.
Introduction
UQM Technologies, Inc., (“UQM”, “Company”, “we”, “our”, or “us”) is a developer and manufacturer of power dense, high efficiency electric motors, generators, power electronic controllers and fuel cell compressors for the commercial truck, bus, automotive, marine, military and industrial markets. We generate revenue from three principal activities: 1) the sale of electric propulsion systems, which includes motors and controllers; and 2) the sale of auxiliary products including generators, fuel cell compressors, air conditioning compressor systems, and DC-to-DC converters; and 3) services, including research, development and application engineering contract services and remanufacturing services. Our product sales consist of annually recurring volume production, prototype low volume sales, and revenues derived from the sale of refurbished and serviced products. The sources of engineering contract revenue typically vary from year to year and individual projects may vary substantially in their periods of performance and aggregate dollar value.
We have invested considerable financial and human resources into the development of our technology and manufacturing operations. We have developed and production-validated a full range of products for use in full-electric, hybrid electric, plug-in-hybrid and fuel cell applications for the markets we serve. These products are all highly efficient permanent magnet designs and feature outstanding performance, package size and weight valued by our customers. Our production capabilities and capacity are sufficient to meet the demands of our current and future customers for the foreseeable future. We are certified as an ISO/TS 16949 quality supplier, which is the highest level of quality standards in the automotive industry, and we are ISO 14001 certified, meeting the highest environmental standards. We have a management team with significant experience in the automotive industry and the requirements for high quality production programs and very deep technical knowledge of the motor and controller business. This team has the ability and background to grow the business to significantly higher levels, and we believe we have adequate cash balances to fund our operations for at least the next twelve months.
Our most important strategic initiative going forward is to develop customer relationships that lead to longer-term supply contracts. Volume production is the key to our ongoing operations. We are driving business development in the following ways:
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·
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We have created a well-defined, structured process to target potential customers of vehicle electric motor technology in the commercial truck/van and shuttles, passenger buses, automotive, marine, military and other targeted markets both domestically and internationally. In particular, we are focused on developing customer relationships in China which is the world’s largest market for vehicle electrification products.
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·
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We have developed a customer pipeline where identified potential customers are synergistic and strategic in nature for longer-term growth potential.
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·
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We are building long term quantifiable and sustainable relationships within the identified target markets.
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·
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We provide service and support to our customers from pilot and test activities through commissioning processes and then ultimately to volume production operations.
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·
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We continually look for ways to improve our purchasing and manufacturing processes to develop competitive costs to ensure that our pricing to customers is market competitive.
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·
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We provide customized solutions to meet specification requirements that some customers require.
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·
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We participate in trade show events globally to demonstrate our products and engage with users of electric motor technology.
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·
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We actively involve all functional groups within the Company to support the requests of our customers.
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We believe that the successful execution of these activities will lead us to secure volume production commitments from customers, so that our operations will become cash flow positive and ultimately profitable.
Recent Announcements
We announced during the quarter that on June 28, 2016, we signed a definitive stock purchase and issuance agreement (“HKG Investment Agreement”) with a subsidiary of Hybrid Kinetic Group, Ltd. (“HKG”).
The
HKG Investment
Agreement calls for HKG, through its wholly-owned subsidiary, to purchase newly issued UQM common shares that will represent 58% of UQM, and 54% on a fully-diluted basis. The purchase price is $0.72 per share, which represents a 6.4% premium over the 90 day closing price average for the period ending on the last trading date before signing and a 14% premium over the closing price on the day of signing of the
HKG Investment
Agreement. The transaction will bring approximately $48 million in cash to UQM. The terms of the
HKG Investment
Agreement were unanimously approved by the Boards of Directors of both companies. UQM shareholders will continue to hold their shares in UQM and UQM stock will continue to be traded on the NYSE MKT.
The transaction, which is subject to usual and customary closing conditions, requires approval by two-thirds of UQM’s outstanding shares as well as the shareholders of HKG. Closing is expected to occur as soon as possible following shareholders’ approval and receipt of approval by the Committee on Foreign Investment in the United States (CFIUS) and the required Hong Kong regulatory authorities. The parties expect the closing will occur within the following six months.
Following the closing of the transaction, UQM will continue to support its existing customers around the world as well as new business development programs. UQM’s headquarters will remain in Longmont, Colorado.
As part of the
HKG Investment
Agreement, the parties have agreed that following the closing, UQM’s board will be increased to nine directors composed of UQM’s current CEO, three current UQM independent directors and five directors nominated by HKG.
HKG, which is publically listed on the Stock Exchange of Hong Kong (Stock Code: 01188), engages principally in the environmental automobile and related business. It develops and manufactures batteries and battery management systems and develops and manufactures electric and hybrid vehicles. HKG has a market capitalization of approximately $600 million.
During the quarter, we announced the beginning of a development and production program with Eaton’s Vehicle Group and Pi Innovo, both located in Michigan. The alliance calls for Eaton to develop and supply to UQM a 2-speed transmission for an EV application, and Pi Innovo will develop and supply to UQM the transmission control unit. Together, the components will be combined with our current PowerPhase® HD220/HD250 motor and inverter system to create a full electric drivetrain system called the “UQM PowerPhaseDT.” The development and production of a full electric drivetrain system will support the overarching need for full transmission systems as enhanced performance and
efficiency requirements are mandated by customer drive cycle needs as well as the need to reduce battery costs and meet more stringent environmental regulations. The drivetrain allows for better packaging, efficiency, greater payload capacity and lower cost when compared with direct drive or single speed drivetrain strategies. We believe this new product offering will open up additional customer and market opportunities.
We also announced during the quarter a key business relationship in Columbia with Creatti Labs SAS, an electric vehicle integrator that is designing the next generation EV transportation systems for Colombia and other South American markets. Creatti Labs and UQM are collaborating on an electric transit bus platform for the major bus operators in Cali, Medellin and Bogota, which are the three major transportation systems in Colombia.
U.S. Government Contract
We have a $4.0 million program with the DOE to develop non-rare-earth magnet electric motors for use in electric and hybrid vehicles. The DOE is providing $3.0 million of funding for this three-year program and the Company is providing $1.0 million of cost-share contribution. The objective of the program is to identify and evaluate magnet materials and technology that can deliver performance comparable to our rare-earth magnet motors, broaden our product portfolio, potentially lower magnet costs and limit our exposure to price and supply concerns associated with rare-earth magnets. At June 30, 2016, we had received reimbursements from the DOE under this program of $2.6 million.
We have been granted a U.S. patent for our electric and hybrid electric vehicle motor design using non-rare earth magnets. This grant will expire on September 30, 2016.
Financial Condition
Cash and cash equivalents at June 30, 2016 were $5,497,556 and working capital was $7,
160
,
100
, compared with $7,030,230 and $8,765,522, respectively, at March 31, 2016. The decrease in cash and working capital is primarily attributable to operating losses.
Accounts receivable increased $198,056 to $679,460 at June 30, 2016 from $481,404 at March 31, 2016. The increase is primarily due to the mix in customer credit terms during the first quarter this fiscal year versus the fourth quarter last fiscal year. Our sales are conducted through acceptance of customer purchase orders or in some cases through supply agreements. 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. For credit qualified customers, our typical terms are net 30 days. As of June 30, 2016 and March 31, 2016, we had no allowance for bad debts.
Costs and estimated earnings on uncompleted contracts was $71,689 at June 30, 2016 versus $60,296 at March 31, 2016. The increase was due to timing of billings on certain contracts in process at June 30, 2016 versus March 31, 2016.
Total inventories decreased $58,107 to $9,053,334 at June 30, 2016 reflecting shipments of PowerPhase Pro
®
and PowerPhase HD
®
propulsion systems.
Prepaid expenses and other current assets increased to $274,322 at June 30, 2016 from $272,597 at March 31, 2016 primarily due to prepayments on commercial insurance policies offset by a decrease in miscellaneous prepaid expenses.
We invested $15,862 for the acquisition of property and equipment during the quarter ended June 30, 2016 compared to $46,750 during the comparable quarter last fiscal year. We believe that we have sufficient property and equipment in place to meet our production requirements for the foreseeable future.
Patent costs decreased $1,347 due to new patent costs offset by amortization. Trademark costs decreased $1,124 due to amortization.
Accounts payable increased $453,772 to $818,613 at June 30, 2016 from $364,841 at March 31, 2016, primarily due to the timing of vendor payments and increased legal and other expenses incurred relating to the HKG Investment Agreement that was signed during the quarter.
Other current liabilities decreased to $858,636 at June 30, 2016 from $985,435 at March 31, 2016. The decrease is primarily attributable to lower levels of accrued payroll and associated benefits and lower property tax accrual offset by an increase in accrued warranty costs.
Common stock and additional paid-in capital were $483,507 and $128,166,044, respectively, at June 30, 2016 compared to $483,303and $128,103,861 at March 31, 2016. The increases in common stock and additional paid-in capital were primarily attributable to the periodic expensing of non-cash share-based payments associated with option and stock grants under our equity compensation plans and the issuance of shares under the Employee Stock Purchase Plan.
Results of Operations
Quarter Ended June 30, 2016
Revenue
Product sales revenue for the current quarter increased to $1,173,261 versus $630,666 for the comparable quarter last fiscal year, reflecting
increased shipments of
PowerPhase HD
®
and PowerPhase Pro
®
propulsion systems offset by a decrease in fuel cell motor systems
.
Revenue from contract services increased to $261,819 at June 30, 2016 v
ersu
s $109,863 fo
r the comparable quarter last year. The increase is primarily due to higher billings for our Department of Energy grant program.
Gross Profit Margin
Gross profit margins for the quarter ended June 30, 2016 increased to 30.6 percent compared to 13.3 percent for the quarter ended June 30, 2015. Gross profit margin on product sales for the first quarter this year increased to 35.3 percent compared to 8.4 percent for the first quarter last year primarily due to
a change in overhead absorption as a result of higher volumes shipped in the current fiscal year
. Gross profit margin on contract services decreased to 9.5 percent for the first quarter this fiscal year compared to 41.0 percent for the quarter ended June 30, 2015,
resulting from a
change in the mix of contracts in process during the quarter ended June 30, 2016 versus the comparable quarter last year.
Costs and Expenses
Research and development expenditures for the quarter ended June 30, 2016 decreased to $718,918 compared to $1,088,480 for the quarter ended June 30, 2015.
The decrease is related to a reduction of payroll and related expenses in addition to lower overhead rates.
Selling, general and administrative expense for the quarter ended June 30, 2016 was $1,684,645 compared to $1,245,374 for the same quarter last year. The increase is primarily attributable to additional legal and other expenses incurred relating to the HKG Investment Agreement that was signed during the quarter.
Net Loss
As a result, net loss for the quarter ended June 30, 2016 was $1,954,030, or $0.04 per common share, compared to a net loss of $2,224,251, or $0.06 per common share, for the comparable quarter last year.
Liquidity and Capital Resources
Our cash balances and liquidity throughout the quarter ended June 30, 2016 were adequate to meet operating needs. At June 30, 2016, we had working capital of $7,
160,100
compared to $8,765,522 at March 31, 2016. The decrease in working capital is primarily attributable to operating losses.
For the three month period ended June 30, 2016, net cash used in operating activities was $1,521,635 compared to net cash used in operating activities of $931,401 for the comparable period last fiscal year. The primary reason for this
increase in the use of cash this quarter is that in the comparable period last year, we received life insurance proceeds of $855,000. In addition, accounts receivable increased in the quarter ended June 30, 2016 versus the prior year quarter. This was offset by lower operating losses in the current quarter.
Net cash used in investing activities for the three month period of this fiscal year was $19,658 compared to net cash used in investing activities of $49,202 for the comparable three month period last fiscal year. The decrease for the three months ended June 30, 2016 was primarily due to reduction in expenditures for the acquisition of property and equipment.
Net cash provided by financing activities for the three month period of this fiscal year was $8,619 compared to net cash used in financing activities of $21,717 for the comparable period last fiscal year. The decrease in cash provided was primarily attributable to a decrease in cash received for shares exercised under the employee stock purchase plan.
We expect to fund our operations over the next year from existing cash and cash equivalent balances, the reduction of inventories, and the anticipated proceeds upon the successful closing of the HKG Investment Agreement. 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.
If our existing financial resources are not sufficient to execute our business plan, 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 cash equivalents with the completion of the offering to fund our operations for at least the next twelve months.
Contractual Obligations
The following table presents information about our contractual obligations and commitments as of June 30, 2016:
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Payments due by Period
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Less Than
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More than
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Total
|
|
1 Year
|
|
2 - 3 Years
|
|
4 - 5 Years
|
|
5 Years
|
|
|
Purchase obligations
|
|
$
|
52,158
|
|
$
|
52,158
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Executive employment agreements
(1)
|
|
|
178,889
|
|
|
178,889
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
231,047
|
|
$
|
231,047
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
(1)
|
|
Includes retention bonus payable under executive employment agreements if our officers remain employees of UQM continuously through June 30, 2017, but not annual cash compensation under the agreements. This is reflected in other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets.
|
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, 2016 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. There have been no material changes in any of our critical accounting policies during the three months ended June 30, 2016.