(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) Change in Fiscal Year
During the second quarter of fiscal year 2017, the Company decided to change its fiscal year from one ending on March 31
st
to one ending on December 31
st
. This will be effective as of December 31, 2016.
(3) 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. The impact on our financial statements cannot be determined at this time.
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. The impact of this guidance on our financial statements cannot be determined at this time.
(8) Stockholders’ Equity
Changes in the components of stockholders’ equity during the six month period ended September 30, 2016 were as follows:
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|
Number
of
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|
|
|
|
|
|
|
|
|
|
|
|
|
common
|
|
|
|
|
Additional
|
|
|
|
|
Total
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|
|
|
shares
|
|
Common
|
|
paid-in
|
|
Accumulated
|
|
stockholders’
|
|
|
|
issued
|
|
stock
|
|
capital
|
|
deficit
|
|
equity
|
|
Balances at April 1, 2016
|
|
|
48,330,286
|
|
$
|
483,303
|
|
$
|
128,103,861
|
|
$
|
(106,875,426)
|
|
$
|
21,711,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
18,097
|
|
|
181
|
|
|
9,410
|
|
|
-
|
|
|
9,591
|
|
Issuance of common stock under stock bonus plan
|
|
|
3,667
|
|
|
37
|
|
|
(37)
|
|
|
-
|
|
|
-
|
|
Common stock used for tax withholdings
|
|
|
(1,368)
|
|
|
(14)
|
|
|
(958)
|
|
|
-
|
|
|
(972)
|
|
Compensation expense from employee and director stock option and common stock grants
|
|
|
-
|
|
|
-
|
|
|
53,768
|
|
|
-
|
|
|
53,768
|
|
Net loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,954,030)
|
|
|
(1,954,030)
|
|
Balances at June 30, 2016
|
|
|
48,350,682
|
|
$
|
483,507
|
|
$
|
128,166,044
|
|
$
|
(108,829,456)
|
|
$
|
19,820,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
26,175
|
|
|
262
|
|
|
12,826
|
|
|
-
|
|
|
13,088
|
|
Issuance of common stock under stock bonus plan
|
|
|
142,488
|
|
|
1,425
|
|
|
(1,425)
|
|
|
-
|
|
|
-
|
|
Retirement of vested shares
|
|
|
(16,085)
|
|
|
(161)
|
|
|
(9,545)
|
|
|
-
|
|
|
(9,706)
|
|
Compensation expense from employee and director stock option and common stock grants
|
|
|
-
|
|
|
-
|
|
|
196,017
|
|
|
-
|
|
|
196,017
|
|
Net loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,368,245)
|
|
|
(2,368,245)
|
|
Balances at September 30, 2016
|
|
|
48,503,260
|
|
$
|
485,033
|
|
$
|
128,363,917
|
|
$
|
(111,197,701)
|
|
$
|
17,651,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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 September 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 September 30, 2016 and March 31, 2016, respectively.
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. 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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|
In June 2016, we signed a definitive stock issuance and purchase agreement with a subsidiary of Hybrid Kinetic Group, Ltd. (“HKG”).
The
HKG investment a
greement calls for HKG, through its wholly-owned subsidiary, to purchase newly issued UQM common shares for approximately $48 million in exchange for a majority ownership of UQM. This investment will provide us with the growth capital needed to execute on our global expansion strategy, particularly in China which is the largest market in the world for electric vehicles. The closing of this investment is contingent upon, among other conditions, the approval of our shareholders at the next annual shareholder’s meeting, scheduled to be held on November 22, 2016. We expect the investment agreement to close before the end of 2016.
|
|
·
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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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|
We provide service and support to our customers from pilot and test activities through commissioning processes and then ultimately to volume production operations.
|
|
·
|
|
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.
|
|
·
|
|
We provide customized solutions to meet specification requirements that some customers require.
|
|
·
|
|
We participate in trade show events globally to demonstrate our products and engage with users of electric motor technology.
|
|
·
|
|
We actively involve all functional groups within the Company to support the requests of our customers.
|
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
During the second quarter, we signed an extension to our long-term supply agreement with our customer Proterra
®
to support Proterra’s growth demands for electric transit buses. UQM is the primary supplier of electric propulsion systems to Proterra. The extension reflects the increased demand in the US marketplace for the Proterra buses and the expected increased production volume of the UQM PowerPhase HD® systems.
Also during the quarter, we announced that we had secured global commercial customers as early adopters of our new full drivetrain solution, the PowerPhase
®
DT. These early adopters include Hybrid Kinetic Group, Wuzhoulong Motors and ITL for a Yangtse full-size bus in China and ADOMANI in the U.S. These customers will work in close collaboration with UQM, and suppliers Pi Innovo and Eaton, to develop heavy-duty commercial and transit all-electric vehicles, enabling them to rapidly deploy vehicles to market.
Finally, during the second fiscal quarter, we introduced our next generation PowerPhase® motor inverter. With a volume less than 7 liters and mass less than 10 kilograms, the new motor inverter will output 600A and operate at voltages up to 550V. The new inverter is designed for extremely high reliability and provides 135 kW peak and 100 kW continuously to power light and medium-duty commercial vehicles as well as high performance passenger vehicles.
U.S. Government Contract
We had 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 provided $3.0 million of funding for this three-year program and the Company provided $1.0 million of cost-share contribution. The objective of the program was 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 September 30, 2016, we had received reimbursements from the DOE under this program of $3.0 million with receivables of zero.
We have been granted a U.S. patent for our electric and hybrid electric vehicle motor design using non-rare earth magnets. This grant expired on September 30, 2016.
Financial Condition
Cash and cash equivalents at September 30, 2016 were $3,861,947 and working capital was $5,182,379, 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, which include higher legal and other expenses incurred relating to the HKG investment agreement.
Accounts receivable increased $2,696 to $484,100 at September 30, 2016 from $481,404 at March 31, 2016. The increase is primarily due to the mix in customer credit terms during the second 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 September 30, 2016 and March 31, 2016, we had no allowance for bad debts.
Costs and estimated earnings on uncompleted contracts was $46,246 at September 30, 2016 versus $60,296 at March 31, 2016. The decrease was due to timing of billings and completion of certain contracts in process at September 30, 2016 versus March 31, 2016.
Total inventories increased $38,247 to $9,149,688 at September 30, 2016 reflecting purchases for shipments of fuel cell systems.
Prepaid expenses and other current assets increased to $286,059 at September 30, 2016 from $272,597 at March 31, 2016 primarily due to prepayments on commercial insurance policies offset.
We invested $2,030 and $17,892 for the acquisition of property and equipment during the quarter and six month period ended September 30, 2016 compared to $10,555 and $57,305 during the comparable quarter and six month period 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 increased $2,570 due to new patent costs offset by amortization. Trademark costs decreased $2,248 due to amortization.
Accounts payable increased $417,654 to $782,495 at September 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 first quarter.
Other current liabilities increased to $1,135,460 at September 30, 2016 from $985,435 at March 31, 2016. The increase is primarily attributable to an increase in unearned revenue and accrued warranty costs offset by lower levels of accrued payroll and associated benefits.
Common stock and additional paid-in capital were $485,033 and $128,363,917, respectively, at September 30, 2016 compared to $483,303 and $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 September 30, 2016
Revenue
Product sales revenue for the current quarter decreased to $728,921 versus $1,618,666 for the comparable quarter last fiscal year, reflecting decreased shipments primarily of fuel cell motor systems and some reduction of PowerPhase HD
®
and PowerPhase Pro
®
propulsion systems.
Revenue from contract services increased to $292,204 at September 30, 2016 versus $116,144 for the comparable quarter last year. The increase is primarily due to higher billings for our Department of Energy grant program which expired as of September 30, 2016.
Gross Profit Margin
Gross profit margins for the quarter ended September 30, 2016 increased to 24.0 percent compared to 20.1 percent for the quarter ended September 30, 2015. Gross profit margin on product sales for the second quarter this year increased to 27.9 percent compared to 20.3 percent for the second quarter last year primarily due to a change in overhead absorption. Gross profit margin on contract services decreased to 14.0 percent for the second quarter this fiscal year compared to 17.3 percent for the quarter ended September 30, 2015, resulting from a change in the mix of contracts in process during the quarter ended September 30, 2016 versus the comparable quarter last year.
Costs and Expenses
Research and development expenditures for the quarter ended September 30, 2016 decreased to $882,090 compared to $912,395 for the quarter ended September 30, 2015. The decrease is related to a reduction of payroll and related expenses.
Selling, general and administrative expense for the quarter ended September 30, 2016 was $1,738,439 compared to $1,855,214 for the same quarter last year. The decrease is primarily attributable to reduction in payroll and associated benefits, offset by higher legal and other expenses incurred relating to the HKG investment agreement that was signed during the first quarter.
Net Loss
As a result, net loss for the quarter ended September 30, 2016 was $2,368,245 or $0.05 per common share, compared to a net loss of $2,409,047, or $0.06 per common share, for the comparable quarter last year.
Six Months Ended September 30, 2016
Revenue
Product sales revenue for the six months decreased to $1,902,182 versus $2,249,332 for the comparable period last fiscal year, reflecting decreased shipments of PowerPhase Pro
®
propulsion systems and fuel cell motor systems.
Revenue from contract services increased to $554,024 at September 30, 2016 versus $226,007 for the comparable period last year. The increase is primarily due to higher billings for our Department of Energy grant program which expired as of September 30, 2016.
Gross Profit Margin
Gross profit margins for the quarter ended September 30, 2016 increased to 27.8 percent compared to 18.1 percent for the comparable six month period last fiscal year. Gross profit margin on product sales for the six month period ended September 30, 2016 increased to 32.5 percent compared to 17.0 percent for the comparable six month period last fiscal year primarily due to a change in product mix and overhead. Gross profit margin on contract services decreased to 11.9 percent for the six month period compared to 28.8 percent for the comparable six month period last fiscal year, resulting from a change in the mix of contracts in process during the period ended September 30, 2016 versus the comparable period last year.
Costs and Expenses
Research and development expenditures for the six months ended September 30, 2016 decreased to $1,601,008 compared to $2,000,875 for the same period last year. The decrease is related to a reduction of payroll and related expenses.
Selling, general and administrative expense for the six months ended September 30, 2016 was $3,423,084 compared to $3,100,588 for the same period last year. The increase is primarily attributable to higher legal and other expenses
incurred relating to the HKG investment agreement that was signed during the first quarter offset by lower payroll and associated benefits.
Net Loss
As a result, net loss for the six months ended September 30, 2016 was $4,322,275, or $0.09 per common share, compared to a net loss of $4,633,298, or $0.12 per common share, for the comparable period last year.
Liquidity and Capital Resources
Our cash balances and liquidity throughout the quarter ended September 30, 2016 were adequate to meet operating needs. At September 30, 2016, we had working capital of $5,182,379 compared to $8,765,522 at March 31, 2016. The decrease in working capital is primarily attributable to operating losses.
For the six month period ended September 30, 2016, net cash used in operating activities was $3,149,536 compared to net cash used in operating activities of $2,430,817 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 decreased in the quarter ended September 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 six month period of this fiscal year was $30,748 compared to net cash used in investing activities of $66,933 for the comparable six month period last fiscal year. The decrease for the six months ended September 30, 2016 was primarily due to reduction in expenditures for the acquisition of property and equipment.
Net cash provided by financing activities for the six month period of this fiscal year was $12,001 compared to net cash used in financing activities of $69,466 for the comparable period last fiscal year. The decrease in cash provided was primarily attributable to a decrease in cash paid for employee tax withholdings in exchange for return of common stock 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 September 30, 2016:
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|
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|
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|
Payments due by Period
|
|
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|
|
|
|
Less Than
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
1 Year
|
|
2 - 3 Years
|
|
4 - 5 Years
|
|
5 Years
|
|
Purchase obligations
|
|
$
|
108,083
|
|
$
|
108,083
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Executive employment agreements
(1)
|
|
|
225,555
|
|
|
225,555
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
333,638
|
|
$
|
333,638
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
(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 six months ended September 30, 2016.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. We do not use financial instruments to any degree to manage these risks and do not hold or issue financial instruments for trading purposes. All of our product sales, and related receivables are payable in U.S. dollars.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2016, we performed an evaluation under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the U.S. Securities and Exchange Act of 1934). Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2016.
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.