We believe our existing cash and short-term investments,
which amounted to approximately $11.1 million at September 30, 2007, will be
adequate to fund our anticipated growth for the fiscal year ended March 31, 2008
and beyond, however, if our growth continues to accelerate, or is greater than
what we currently anticipate we may require additional capital.
Financial Condition
Cash and cash equivalents and short-term investments at
September 30, 2007 were $11,075,008 and working capital (the excess of current
assets over current liabilities) was $12,203,893 compared with $7,934,005 and
$8,909,577, respectively, at March 31, 2007. The increase in cash and short-term
investments and working capital is primarily attributable to the completion of a
private placement of 1,250,000 shares of common stock during the first quarter
which resulted in net cash proceeds of approximately $5,183,677, offset by
higher operating losses, higher levels of inventories, prepaid and other current
assets, and investments in property and equipment.
Accounts receivable increased $408,497 to $1,843,183 at
September 30, 2007 from $1,434,686 at March 31, 2007. The increase is primarily
attributable to increased product shipments. Substantially all of our customers
are large well-established companies of high credit quality. Accordingly, we
have not established an allowance for bad debts at September 30, 2007 and
similarly, no allowance for bad debts was deemed necessary at March 31, 2007.
Costs and estimated earnings on uncompleted contracts
increased $15,643 to $203,556 at September 30, 2007 versus $187,913 at March 31,
2007. The increase is due to less favorable billing terms on certain contracts
in process at September 30, 2007 versus March 31, 2007. Estimated earnings on
contracts in process increased to $282,266 or 9.4 percent of contracts in
process of $3,002,785 at September 30, 2007 compared to estimated earnings on
contracts in process of $155,436 or 7.5 percent of contracts in process of
$2,071,818 at March 31, 2007. The increase in estimated margins on contracts in
process is attributable to improved overhead absorption.
Inventories increased $114,653 to $1,014,538 at September 30,
2007 principally due to higher levels of scheduled product shipments and higher
levels of raw material inventories associated with the sourcing of parts
internationally, offset by decreased levels of finished goods inventories due to
shipments of auxiliary motors.
Prepaid expenses and other current assets increased to
$318,516 at September 30, 2007 from $279,343 at March 31, 2007 primarily due to
the prepayment of insurance premium costs on our commercial insurance coverage.
We invested $236,388 and $364,351 for the acquisition of
property and equipment during the quarter and six month period ended September
30, 2007, respectively, compared to $77,481 and $319,367 during the comparable
quarter and six month period last fiscal year. The increase in capital
expenditures for the quarter and six month period is primarily due to increased
purchases of manufacturing equipment and building improvements.
Patent and trademark costs increased $2,881 to $485,184 at
September 30, 2007 versus $482,303 at March 31, 2007 primarily due to the
initiation of two new patent applications, offset by the systematic amortization
of patent issuance costs.
Accounts payable decreased $433,904 to $549,027 at September
30, 2007 from $982,931 at March 31, 2007, primarily due to improved payment
processing during the quarter.
Other current liabilities decreased $23,130 to $321,822 at
September 30, 2007 from $344,952 at March 31, 2007
.
The decrease is
primarily attributable to lower levels of customer deposits and accrued
royalties.
Short-term deferred compensation under executive employment
agreements increased to $340,437 at September 30, 2007 from $149,325 at March
31, 2007 reflecting an amendment to an executive employment agreement during the
second quarter which accelerated the recording of future severance obligations
under the agreement.
Billings in excess of costs and estimated earnings on
uncompleted contracts increased $651,005 to $963,542 at September 30, 2007 from
$312,537 at March 31, 2007 reflecting accelerated billings on certain
engineering contracts in process at September 30, 2007 in advance of the
performance of the associated work versus March 31, 2007.
Long-term debt, less current portion decreased $51,931 to
$470,994 at September 30, 2007 from $522,925 at March 31, 2007 reflecting
scheduled principal repayments on the mortgage debt for our Frederick, Colorado
facility.
Long-term deferred compensation under executive employment
agreements increased to $603,200 at September 30, 2007 from $396,214 at March
31, 2007 reflecting an amendment to an executive employment agreement during the
second quarter which accelerated the recording of future severance obligations
under the agreement.
Common stock and additional paid-in capital increased to
$265,089 and $76,948,320, respectively, at September 30, 2007 compared to
$251,769 and $71,376,462 at March 31, 2007. The increases were primarily
attributable to the completion of a private placement of 1,250,000 shares of
common stock during the first quarter this fiscal year and the recording of
non-cash share based payments under Statement of Financial Accounting Standards
No. 123 (revised),
Share-Based Payment
("
SFAS 123(R)"
).
See also note 2 to the consolidated financial statements.
Results of Continuing Operations
Quarter ended September 30, 2007
Continuing operations for the quarter ended September 30,
2007, resulted in a loss of $1,139,894, or $0.04 per common share, compared to a
loss from continuing operations of $864,930, or $0.04 per common share for the
comparable period last year. The increase in the current year loss from
continuing operations is primarily attributable to higher research and
development and production engineering expenditures and compensation expense
arising from amendments to the employment agreements of Messrs. Rankin and
French.
Revenue from contract services decreased $97,697, or 14.4
percent, to $581,429 for the quarter ended September 30, 2007 versus $679,126
for the comparable quarter last year. The decrease is attributable to the
increased allocation of engineering resources to product sales orders and
production engineering activities during the quarter ended September 30, 2007.
Product sales for the second quarter increased to $1,409,162,
compared to $935,092 for the comparable period last year reflecting increased
product revenue in both of the Company's business segments. Power products
segment revenue for the quarter ended September 30, 2007 increased $300,329 to
$784,019 compared to $483,690 for the comparable quarter last fiscal year due to
increased production levels for auxiliary motors and the launch of production of
electric propulsion systems and DC-to-DC converters for Phoenix Motorcars.
Technology segment product revenue for the quarter ended September 30, 2007
increased $173,741 to $625,143, compared to $451,402 for the quarter ended
September 30, 2006 due to increased shipments of prototype propulsion motors and
controllers.
Gross profit margins for the quarter ended September 30, 2007
increased to 18.3 percent compared to 7.5 percent for the quarter ended
September 30, 2006 due to increased gross profit margin on contract services and
product sales. Gross profit on contract services increased to 28.0 percent
during the second quarter this fiscal year compared to 9.7 percent for the
quarter ended September 30, 2006 due to improved program execution during the
current quarter. Gross profit margin on product sales for the second quarter
this year increased to 14.3 percent compared to 6.0 percent for the second
quarter last year. The improvement is primarily due to improved overhead
absorption due to higher production levels during the current quarter.
Research and development expenditures for the quarter ended
September 30, 2007 increased to $128,175 compared to $79,330 for the quarter
ended September 30, 2006. The increase is primarily due to increased levels of
internally funded software development projects.
Production engineering costs were $403,422 for the second
quarter versus $232,517 for the second quarter last fiscal year. The increase is
attributable to production engineering activities related to the launch of
production for the Phoenix Motorcars all-electric sport utility truck program.
Selling, general and administrative expense for the quarter
ended September 30, 2007 was $1,082,529 compared to $780,322 for the same
quarter last year. The increase is attributable to the amendment of executive
employment agreements in the second quarter which accelerated the expensing of
deferred compensation associated with the severance provisions of these
agreements.
Interest income rose to $120,683 for the quarter ended
September 30, 2007 versus $117,559 for the same period last fiscal year. The
increase is attributable to higher invested cash balances.
Interest expense decreased to $10,353 for the quarter ended
September 30, 2007 compared to $12,160 for the comparable period last fiscal
year. The decrease is due to lower average mortgage borrowings outstanding
throughout the current quarter.
Six Months Ended September 30, 2007
Continuing operations for the six month period ended
September 30, 2007, resulted in a loss of $2,268,645, or $0.09 per common share,
compared to a loss from continuing operations of $1,650,614, or $0.07 per common
share for the comparable period last year. The increase in the loss from
continuing operations for the six month period is primarily attributable to
higher levels of research and development and production engineering expenses
and compensation expense arising from amendments to the employment agreements of
Messrs. Rankin and French.
Revenue from contract services decreased $407,301 or 27
percent to $1,096,179 for the six month period ended September 30, 2007 compared
to $1,503,480 for the comparable period last year. The decrease is attributable
to the increased allocation of engineering resources to product sales orders and
production engineering activities during the six month period ended September
30, 2007.
Product sales for the six month period ended September 30,
2007 rose 66 percent to $2,348,864 compared to $1,412,070 for the comparable
period last year. Power Products segment revenue for the six month period ended
September 30, 2007 increased to $1,534,097 compared to $905,390 for the
comparable period last year. The increase is principally attributable to higher
revenue from vehicle auxiliary motors and the launch of production of electric
propulsion systems and DC-to-DC converters for Phoenix Motorcars. Technology
segment product revenue for the six month period ended September 30, 2007
increased to $814,767 compared to $506,680 for the comparable period last year
due to higher levels of low volume product shipments.
Gross profit margins for the six month period ended September
30, 2007 rose to 11.4 percent compared to a 8.4 percent for the comparable
period last year primarily due to improved overhead absorption associated with
increasing product revenue levels. Gross profit margin on contract services was
19.8 percent for the six month period ended September 30, 2007 compared to 15.6
percent for the comparable period last year. The increase is attributable to
improved program execution during the current six month period. Gross profit
margin on product sales for the six month period ended September 30, 2007 was
7.5 percent compared to 0.6 percent for the comparable period last year. The
increase is primarily due to improved overhead absorption due to higher
production levels during the current six month period.
Research and development expenditures for the six month
period ended September 30, 2007 rose to $226,499 compared to $174,481 for the
same period last year. The increase is primarily due to increased levels of
internally funded software development projects.
Production engineering costs were $949,455 for the six month
period ended September 30, 2007 versus $480,889 for the comparable six month
period last year. The increase is attributable to production engineering
activities related to the launch of production for the Phoenix Motorcars
all-electric sport utility truck program.
Selling, general and administrative expense for the six month
period ended September 30, 2007 was $1,712,365 compared to $1,452,839 for the
same period last year. The increase is attributable to the amendment of
executive employment agreements in the second quarter which accelerated the
expensing of deferred compensation associated with the severance provisions of
these agreements.
Interest income rose to $244,122 for the six month period
ended September 30, 2007 compared to $238,211 for the comparable period last
year. The increase is attributable to higher invested balances during the
current period.
Interest expense decreased to $21,253 for the six month
period ended September 30, 2007 versus $24,587 for the comparable period last
year. The decrease is due to lower average mortgage borrowings outstanding
throughout the current quarter.
Results of Discontinued Operations
In January 2004, we committed to a plan to exit our contract
electronics manufacturing business whose results were reported as the electronic
products segment. In May 2004, we completed the divestiture of equipment and
inventory of this business. We have recorded accounts receivable from
discontinued operations of $26,266 reflecting sublease income earned but not yet
paid.
The operating results of this business for the quarter and
six month periods ended September 30, 2007 and 2006 have been reported
separately as discontinued operations. Loss from discontinued operations
includes interest expense on debt used to acquire manufacturing machinery and
equipment but does not include allocations of general corporate overheads, which
have been allocated to other business segments. Operating results of all prior
periods presented have been adjusted to reflect the contract electronics
manufacturing as discontinued operations.
Loss from the discontinued electronic products segment for
the quarter and six month periods ended September 30, 2007 and 2006 was zero and
$16,752, respectively. See also Note 10 to the consolidated financial
statements.
Liquidity and Capital Resources
Our cash balances and liquidity throughout the six month
period ended September 30, 2007 were adequate to meet operating needs. At
September 30, 2007, we had working capital (the excess of current assets over
current liabilities) of $12,203,893 compared to $8,909,577 at March 31, 2007.
For the six month period ended September 30, 2007, net cash
used in operating activities of continuing operations was $1,728,075 compared to
net cash used in operating activities of continuing operations of $1,867,482 for
the six month period ended September 30, 2006. The decrease in cash used for the
six month period ended September 30, 2007 is primarily attributable to higher
levels of billings in excess of costs and estimated earnings on uncompleted
contracts, offset by higher levels of inventories and operating losses.
Net cash used in investing activities of continuing
operations for the six month period ended September 30, 2007 was $1,686,786
compared to $1,065,904 for the comparable six month period last year. The
increase for the current six month period is attributable to higher levels of
purchases of short-term investments, and expenditures for capital equipment
versus the comparable period last year.
Net cash provided by financing activities of continuing
operations was $5,224,708 for the six month period ended September 30, 2007
versus $1,003,058 for the same period last fiscal year. The increase is
attributable to the completion of a private placement in the first quarter this
year.
We expect our working capital requirements to increase during
fiscal 2008 due to expected growth in our total revenue. Although we expect to
manage our operations and working capital requirements to minimize the future
level of operating losses and working capital usage consistent with execution of
our business plan; our planned working capital requirements may consume a
substantial portion of our existing cash resources. In addition, we have begun,
and expect to continue, to make substantial investments from our available cash
resources in human resources, manufacturing facilities and equipment, production
and application engineering. We expect to fund our operations over the next year
from existing cash and short-term investment balances and from available bank
financing, if any. We can, however, not provide any assurance that our existing
financial resources will be sufficient to execute our business plan. If our
existing financial resources are not sufficient to execute our business plan, we
may issue equity or debt securities in the future. In the event financing or
equity capital to fund future growth is not available on terms acceptable to us,
we will modify our strategy to align our operation with then available financial
resources.
Contractual Obligations
The following table presents information about our
contractual obligations and commitments as of September 30, 2007: