(4) Going Concern
These Consolidated Condensed Financial Statements are presented assuming that the Company will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of March 31, 2018, the Company had sustained recurring losses from continuing operations, had working capital surplus of $3,164,052, and accumulated deficit of $126,604,048.
On March 15, 2017, the Company entered into a non-revolving line of credit for $5.6 million. The interest rate is variable based upon the one month LIBOR rate plus 4.0% per annum on the outstanding balance. The non-revolving line of credit will expire on March 15, 2019 and the amounts repaid during the term of the loan may not be re-borrowed. At the expiry date, all outstanding principal and interest are due. As of March 31, 2018, $3,164,529 was drawn on the line of credit. For additional information, see Note 9 of the Consolidated Condensed Financial Statements.
Based on management’s projections of operations and the Company’s cash position on March 31, 2018, the Company believes that it currently has sufficient cash to support day to day activities through operations as they become due and sustain operations for at least the next twelve months. In addition, the Company may consider other financing options, including debt and equity, to further support its cash position, although there can be no assurance that other options would be available.
(5) Revenue Recognition
Accounting Policies
Product Sales
- Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied. The majority of the Company’s contracts have a single performance obligation to transfer products. Accordingly, the Company recognizes revenue when title and risk of loss have been transferred to the customer, generally at the time of shipment of products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and is generally based upon a negotiated fixed price. The Company sells its products directly to customers under agreements with payment terms of prepayment or generally net 30 days for credit qualified customers.
Contract Services
- The majority of the Company’s contracts have a single performance obligation to transfer products or an agreed-upon task(s) over time. Accordingly, revenue is recognized using cost input methods, which recognize revenue and gross profit as work is performed based on the relationship between actual costs incurred compared to the total estimated costs of the contract, as the performance obligations are satisfied. Costs incurred towards contract completion may include costs associated with direct materials, labor, subcontractors, and other indirect costs.
Shipping and Handling Costs-
We account for shipping and handling activities related to contract with customers as costs to fulfill our promise to transfer the associated products. Accordingly, we record customer payment of shipping and handling costs as a component of net sales, and classify such costs as a component of cost of sales.
Product Warranties
- Our standard product warranty is for one year and provides assurance to the customer that the purchased product will function as intended and complies with agreed-upon specifications. A customer can negotiate an extended warranty period from four months up to four years. The cost of the warranty can be included in the price of the unit or separately stated as a line item in the contract. A majority of our customers have the warranty to be included in the sales price of the product which is then accounted for as a guarantee. Warranties that are stated as a separate line item in the contract are considered a single performance obligation which is recognized by the time elapsed input method.
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. 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 year ended December 31, 2017. Additionally, there may be other risks that are otherwise described from time to time in the reports that we file with the U.S. Securities and Exchange Commission (“SEC”). We assume no obligation to update, and, except as may be required by law, do not intend to update, any forward-looking statements.
Introduction
UQM develops, manufactures, and sells power dense, high efficiency electric motors, generators, power electronic controllers and fuel cell compressors for the commercial truck, bus, automotive, marine, and industrial markets. We generate revenue from two principal activities: 1) the sale of motors, generators, electronic controls, and fuel cell compressors; and 2) research, development, and application engineering contract 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 service 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 commercial bus and truck, automotive, marine, and industrial markets. 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. We believe this team has the ability and background to grow the business to significantly higher levels.
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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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, particularly in China.
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We hired our first employees in China in 2016. As China represents the largest market in the world for electric vehicles, our presence in that market is critical to our long-term success.
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On August 28, 2017, we entered into a definitive stock purchase agreement (“Stock Purchase Agreement”) with
China National Heavy Duty Truck Group Co., Ltd.
through its wholly-owned subsidiary, Sinotruk (BVI) Limited (collectively, “CNHTC”), the parent company of Sinotruk (Hong Kong) Limited (“Sinotruk”), a leading Chinese commercial vehicle manufacturer, and also announced that UQM and CNHTC plan to create a joint venture to manufacture and sell electric propulsion systems for commercial vehicles and other vehicles in China.
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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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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 leading to volume production operations.
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We improve our purchasing and manufacturing processes to develop competitive costs to ensure that our pricing to customers is market competitive.
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We provide customized solutions to meet specification requirements that some customers require.
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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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We actively involve all functional groups within the Company to support the needs 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 Events
On January 18, 2018, we announced that we had received
the first significant purchase order from KESHI, a major Chinese manufacturer of commercial mining vehicles. The purchase order is for explosion-proof E-drive systems and is valued at $1.2 million. Shipments are expected to occur during 2018. While we signed a cooperation agreement with KESHI in 2015, KESHI’s production launch was delayed due to the market conditions, but now has made a major commitment to this new energy market application. KESHI plans to move forward with their strategy to do final assembly and test in China under our current cooperation agreement for explosion-proof electric propulsion systems in China.
On February 15, 2018, we announced that we had received a new order from Proterra for our PowerPhase
®
HD electric drive systems, to be manufactured and shipped in 2018. We believe that an increase in demand for Proterra vehicles signals the economic viability of the all-electric transit bus and is a sign of an expanding market for electric buses in North America.
On March 5, 2018, we announced that we, along with China National Heavy Duty Truck Group Co., Ltd. (“CNHTC”), have decided to withdraw our joint application to the Committee on Foreign Investment in the United States (“CFIUS”) for the approval of the second stage investment provided for in the Stock Purchase Agreement. Based upon the request of CFIUS, the application was withdrawn to allow for more time for review and consultation.
On March 7, 2018, we announced that we had received the first purchase order from Ashok Leyland, a major India commercial vehicle manufacturer. The purchase order is for fifty-one UQM PowerPhase
®
eDT systems to be shipped during 2018 for a demonstration program for electric transit buses in India. The purchase order signifies the first step in the development program to gain market leadership and drive the overall 2030 India electrification initiative. Ashok Leyland manufactures commercial vehicles of all classes and is the second largest commercial vehicle manufacturer in India.
On March 15, 2018, we announced that we had received a follow-on purchase order from our major Chinese OEM customer for delivery of our R340 fuel cell compressor systems. The purchase order is valued at $1.3 million. We received the initial order valued at $2.2 million from this customer last year. Shipments are expected to begin in the spring of 2018 and be completed by fall of 2018. These compressor modules are a key component in hydrogen powered fuel cell systems. We have seen much success with our unique R340 fuel cell compressor system, which is designed for light-duty automotive applications for up to 75kW fuel cell stacks.
On April 27, 2018, we announced that Ballard Power Systems had issued a purchase order to UQM for assembly of FCveloCity
®
-HD 85-kilowatt Ballard fuel cell modules to be deployed in the U.S. We have capacity in our TS16949 certified manufacturing facility where we will contract assemble fuel cell modules for Ballard.
On May 2, 2018, we announced that Meritor, located in Troy, Michigan, has chosen us to be their supplier of choice for development and production plans for the 14Xe axle program. This opportunity is a culmination of more than one year of engineering development efforts that will support Meritor’s current customer base, along with identifying new customers and applications around the globe for the 14Xe electric axle product line. UQM and Meritor are supporting prototype deliveries for testing, as well as initial pilot electric axles.
On May 9, 2018, we announced that
UQM and China National Heavy Duty Truck Group Co., Ltd. (“CNHTC”) have decided to jointly explore other options to accomplish our shared business goals in support of our entry into the China new energy vehicle market. The Committee on Foreign Investment in the United States (“CFIUS”) has informed us that the second stage investment would likely not be approved in its current form, as provided for in the previously announced stock purchase agreement signed by both parties on August 25, 2017. For additional information regarding the stock purchase agreement, see our Current Report on Form 8-K filed with the Securities and Exchange Commission on August 30, 2017.
The decision was made following further analysis and discussions with CFIUS relating to the transaction. As previously disclosed, the closing of the second stage investment is subject to, among other things, the receipt of certain regulatory and government approvals, including approval from CFIUS. We intend to engage CNHTC in discussions to pursue the possibility of alternative arrangements, including with respect to the contemplated joint venture for which our funding obligation is contingent upon closing of the second stage investment.
Financial Condition
Cash and cash equivalents at March 31, 2018 were $5,454,159 and working capital was $3,164,052, compared with $6,309,269 and $7,762,363, respectively, at December 31, 2017. The change in cash and working capital is primarily attributable to operating losses offset by prepayments received from customers.
Restricted cash (current and long-term) at March 31, 2018 was $456,224 versus $500,056 at December 31, 2017. The restricted cash is reserved for payment of the interest on the line of credit.
Accounts receivable increased $522,799 to $1,346,592 at March 31, 2018 from $823,793 at December 31, 2017. The increase is primarily due to the mix in customer credit terms and increased customer shipments in March. 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 require irrevocable letters of credit or cash payment in advance of delivery. For credit qualified customers, our typical terms are net 30 days. As of March 31, 2018 and December 31, 2017, we had no allowance for bad debts.
Total inventories increased $539,312 to $2,880,672 at March 31, 2018 from $2,341,360 at December 31, 2017 reflecting an increase in raw materials and work-in-process for confirmed sales orders to be sold to customers in 2018.
Prepaid expenses and other current assets increased to $340,491 at March 31, 2018 from $233,566 at December 31, 2017, primarily due to an increase in vendor prepayments.
We invested $32,220 for the acquisition of property and equipment during the three months ended March 31, 2018, compared to $11,094 during the comparable period last year. We purchase property and equipment to augment and replace existing fixed assets.
Patent costs increased $8,771 for the three months ended March 31, 2018 due to new patent costs offset by amortization. Trademark costs decreased $1,124 for the three months ended March 31, 2018 due to amortization.
Accounts payable increased $189,030 to $1,137,905 at March 31, 2018 from $948,875 at December 31, 2017, primarily due to the timing of vendor payments and increased purchases of inventory.
Unearned revenue increased to $1,826,870 at March 31, 2018 from $153,944 at December 31, 2017. The increase is attributable to an increase in customer deposits for future shipments.
Other current liabilities increased to $855,585 at March 31, 2018 from $819,839 at December 31, 2017. The change is attributable to an increase in accrued payroll and employee benefits offset by a decrease in accrued property taxes.
Debt net of deferred financing costs (current and long-term) increased $9,326 during the three months ended March 31, 2018 due to amortization of the deferred financing costs.
Billings in excess of costs and estimated earnings on engineering services contracts were $364,950 and $199,160 at March 31, 2018 and December 31, 2017, respectively. The increase was due to timing of billings on a customer contract that was extended in 2018.
Other long-term liabilities decreased $5,000 to $116,667 at March 31, 2018 from $121,667 at December 31, 2017 due to amortization of a license fee received from a customer under a ten-year cooperation agreement.
Common stock and additional paid-in capital were $541,266 and $133,992,543, respectively, at March 31, 2018 compared to $541,085 and $133,901,406 at December 31, 2017. The increase in common stock and additional paid-in capital were primarily attributable to the issuance of common stock under the employee stock purchase plan and the periodic expensing of non-cash share-based payments associated with option and stock grants under our equity compensation plans.
Results of Operations
Three Months Ended March 31, 2018
Revenue
Product sales revenue for the three months ended March 31, 2018 increased to $1,405,364 versus $845,535 for the comparable period last year, reflecting increased shipments in all product lines.
Revenue from contract services was $206,210 for the three months ended March 31, 2018 versus $169,510 for the comparable period last year. The increase is due to customer contracts in progress.
Gross Profit Margin
Total gross profit margin for the three months ended March 31, 2018 decreased to 19.0 percent compared to 32.1 percent for the comparable period in the prior year. Gross profit margin on product sales for the three months this year decreased to 16.3 percent compared to 28.1 percent for the same period last year primarily due to increased production department expenses related to increased headcount to support anticipated higher production demands. Gross profit margin on contract services was 37.6 percent for the three months this year compared to 52.2 percent for the same period last year, resulting from a change in the mix of contracts in process during the respective periods.
Costs and Expenses
Research and development expenditures for the three months ended March 31, 2018 increased to $678,505 compared to $632,782 for the same period last year. The increase is related to a greater focus on internally funded development projects.
Selling, general and administrative expenses for the three months ended March 31, 2018 was $1,519,917 compared to $1,303,207 for the same period last year. The increase is primarily attributable to legal fees, audit fees, and business development costs, in the current period compared to the same period last year.
Other income and (expenses)
Interest income increased to $3,131 versus $1,650 for the three months ended March 31, 2018 compared to the same period last year. The increase is attributable to higher levels of invested cash balance.
Interest expense was $43,768 for the three months ended March 31, 2018 compared to $2,922 as of March 31, 2017. The increase is attributable to interest paid on the borrowings from the bank line of credit which was secured in March 2017.
Amortization of deferred financing costs was $9,327 for the three months ended March 31, 2018 versus zero in the same period last year.
Other income for the three months ended March 31, 2018 was $8,917 compared to $5,103 for the same period last year. The increase is primarily attributable to miscellaneous payments received in the respective periods.
Net Loss
As a result, net loss for the three months ended March 31, 2018 was $1,932,798, or $0.04 per common share, compared to a net loss of $1,606,026, or $0.03 per common share, for the comparable period last year.
Liquidity and Capital Resources
Our cash balances and liquidity throughout the three months ended March 31, 2018 were adequate to meet operating needs. At March 31, 2018, we had working capital of $3,164,052 compared to $7,762,363 at December 31, 2017. The decrease in working capital is primarily attributable to a higher unearned revenue and debt moving from long-term to current.
For the three months ended March 31, 2018, net cash used in operating activities was $870,856 compared to net cash used in operating activities of $997,156 for the comparable period last year. The decrease in cash used in operating activities is due to higher unearned revenue and accounts receivable.
Net cash used in investing activities for the three months ended March 31, 2018 was $46,043 compared to net cash used in investing activities of $16,433 for the comparable three months last year. The increase for the three months ended March 31, 2018 was primarily due to the acquisition of property and equipment
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Net cash provided by financing activities for the three months ended March 31, 2018 was $17,957 compared to net cash provided by financing activities of $1,950 for the comparable period last year. The change is primarily due to exercising of options under the employee stock purchase plan.
We expect to fund our operations over the next year from existing cash and cash equivalent balances, cash generated from operations, and bank financing resources.
On March 15, 2017, the Company entered into a non-revolving line of credit with a lender for $5.6 million. The interest rate is variable based upon the one month LIBOR rate plus 4.0% per annum on the outstanding balance. The non-revolving line of credit will expire on March 15, 2019 and the amounts repaid during the term of the loan may not be re-borrowed. At the expiry date, all outstanding principal and interest are due.
For additional information, see Note 8 of the Consolidated Condensed Financial Statements. 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, current cash balance and bank credit availability, we believe we have sufficient liquidity 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 March 31, 2018:
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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
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1 Year
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1 - 3 Years
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3 - 5 Years
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5 Years
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Long-term debt obligations
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$
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3,164,529
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$
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3,164,529
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$
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$
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$
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Purchase obligations
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3,447,213
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3,447,213
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Total
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$
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6,611,742
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$
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6,611,742
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$
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—
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$
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$
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—
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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 Condensed Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. There have been no material changes in our Condensed Consolidated Financial Statements based on any of our critical accounting policies including the adoption of ASC 606, during the three months ended March 31, 2018.
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 (as defined in Rules 13a-15 and 15d-15e under the U.S. Securities and Exchange Act of 1934 (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed with the 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 Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.
As of March 31, 2018, 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. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of March 31, 2018.
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 three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.