-
Commitments and Contingencies
Employment Agreements
We have entered into employment agreements with three of
our officers which expire on August 22, 2012. We have also entered into an
employment agreement with our chief executive officer which expires on August
31, 2015. The aggregate future base salary payable to these four executive
officers under the employment agreements, over their remaining terms is
$2,915,500. In addition, we have recorded a liability of $1,288,728 and
$1,155,416 at December 31, 2010 and March 31, 2010, respectively, representing
a severance payment payable on June 1, 2011 of $739,200 to our former chief
executive officer who retired on November 30, 2010, and the potential future
compensation payable under the retirement and voluntary termination provisions
of the employment agreements of the Company's current officers.
Lease Commitments
At December 31, 2010 there were no operating leases with
initial non-cancelable terms in excess of one year.
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, although adverse developments in these
matters could have a material impact on a future reporting period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
OF OPERATIONS
TOC
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,
orders to be received under our supply agreement with CODA Automotive, our
ability to successfully expand our manufacturing facilities 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.
Introduction
We generate revenue from two principal activities: 1)
research, development and application engineering services that are paid for by
our customers; and 2) the sale of motors, generators and electronic controls.
The sources of engineering revenue typically vary from year to year and
individual projects may vary substantially in their periods of performance and
aggregate dollar value. Our product sales consist of both prototype low volume
sales, which are generally sold to a broad range of customers, and annually
recurring higher volume production.
Demand for our electric propulsion system and generator
products remained strong during the quarter and we expect this trend to continue
for the foreseeable future as vehicle makers continue to focus on the
development and introduction of electric and hybrid electric vehicles as part of
the restructuring of the global automotive industry to provide a broader
selection of highly fuel efficient vehicles to consumers. The trend towards
additional electrification of passenger automobiles, medium duty truck and
transit buses is being driven by a variety of factors including fuel economy and
emissions regulations around the world, competition among vehicle manufacturers
for technology leadership and government incentives for both producers and
consumers of "clean" vehicles.
We have a ten year Supply Agreement with CODA Automotive to
supply UQM® PowerPhase®
electric propulsion systems for the CODA all-electric four-door sedan. The CODA
sedan is expected to be introduced in the California market in the fall of 2011
and in Hawaii in 2012. The Supply Agreement provides a framework for our supply
of CODA's propulsion systems needs, however, a binding purchase obligation is
created only for certain firm deliveries under a blanket purchase order as
provided for in the Supply Agreement. CODA has stated previously that it hopes
to sell 14,000 vehicles in the twelve month period following the introduction of
its vehicle reaching an annual run rate of 20,000 vehicles, which, if achieved,
would result in annual revenue to us well in excess of $50 million. We are
currently delivering pre-production units and have received a production
purchase order from CODA for initial production deliveries, although the firm
delivery schedule necessary to make a portion of the purchase order
noncancellable has not yet been received.
The CODA all-electric sedan is propelled by a 100 kW UQM®
PowerPhase® electric propulsion system. In September, 2010, CODA
began accepting refundable purchase deposits of $499 and announced that the CODA
passenger sedan would be priced at $44,900 before application of federal and
California tax credits of up to $7,500 and $5,000, respectively, which could
potentially reduce the net purchase cost of the vehicle to as low as $32,400.
Hawaii offers a tax credit of $4,500 per vehicle.
We have begun deliveries to Saab on an initial order for over fifty PowerPhase® electric propulsion systems as part of their fleet build and vehicle development
activities. Deliveries are scheduled
to occur through the first eight months of calendar 2011. Automobile companies
typically build test fleets to evaluate new vehicles that are under development
prior to their production launch.
During the quarter we also continued deliveries to Proterra,
Inc., a manufacturer of all-electric composite transit buses pursuant to a
Supply Agreement completed in September 2010. The Proterra bus is powered by a
UQM® PowerPhase® 150 electric propulsion system.
Qualified reimbursements under our $45.1 million Grant from
the DOE under the American Recovery and Reinvestment Act during the quarter and
nine month period ended December 31, 2010 totaled $1,246,190 and $6,339,263,
respectively. The DOE Grant is designed to accelerate the manufacturing and
deployment of electric vehicles, batteries and components in the United States.
The Grant requires a 50 percent cost-share by the Company. Capital expenditures
for facilities, tooling and manufacturing equipment and the qualification and
testing of products associated with the launch of volume production for CODA
Automotive and other customers are qualified for reimbursement under the DOE
Grant.
During the nine months ended December 31, 2010 the Grant was
amended to remove certain conditions related to the qualification of our
accounting system and the mutual agreement on updated total costs eligible for
reimbursement under the Grant. As a result of this amendment, certain
engineering costs incurred from August 5, 2009 through March 31, 2010 totaling
$1.5 million became eligible for reimbursement and have been recognized together
with certain engineering costs incurred after April 1, 2010 totaling $1.6
million during the nine month period ended December 31, 2010. Reimbursements
under the DOE Grant for capital assets are recorded at 50 percent of the cost
basis of the asset. As of December 31, 2010 we had recorded reimbursements under
the DOE Grant for capital assets and product qualification and testing costs of
$10,409,082.
During the quarter we completed the qualification of our high
volume production lines in preparation for the upcoming launch of volume
production operations for CODA Automotive. The production lines are located in
our recently occupied 129,304 square foot headquarters and manufacturing
facility located on a 30 acre site in Longmont, Colorado. Approximately 15 acres
of the site is available for future facility expansion. We expect our working
capital requirements to increase coincident with and following the launch of
deliveries under the CODA Supply Agreement later this calendar year potentially
increasing to more than $10 million depending on the timing and volume of
deliveries.
We are continuing to experience solid demand for our electric
propulsion systems and related products from a wide-range of customers
worldwide. We believe that the increased demand is due, in part, to an expansion
in the number of all-electric and hybrid electric vehicle platforms being
developed for potential introduction in the passenger automobile market and the
amount of government grants and loans available to encourage the development and
introduction of clean vehicles.
On November 30, 2010, the then Chairman and Chief Executive
Officer of the Company, William G. Rankin retired. Eric R. Ridenour, who joined
the Company on September 1, 2010 as President and Chief Operating Officer, was
appointed Chief Executive Officer upon Mr. Rankin's retirement. Mr. Rankin
will continue as the Chairman of the Company's Board of Directors. Mr.
Ridenour, a 26 year veteran of the automobile industry, began his career as a
powertrain engineer with General Motors Corporation. During his 21 years with
the Chrysler Group, Mr. Ridenour served in a series of progressively responsible
positions including Director of Advanced Vehicle Engineering, Vice President of
Product Planning, Vice President of the Premium Vehicle Product Team, Executive
Vice President of Product Development and Quality, and from 2005 through 2007,
as Chief Operating Officer and Member of the Board of Management at
DaimlerChrysler AG. Mr. Ridenour holds a Bachelor of Science Degree in
Mechanical Engineering and a Masters of Business Administration, both from the
University of Michigan. In his role as Chief Operating Officer at Chrysler, Mr.
Ridenour was responsible for a $10 billion operating budget and a workforce of
65,000 employees.
Contract services revenue for the fiscal quarter and nine
month period ended December 31, 2010 was $166,687 and $512,177, respectively,
versus $223,081 and $1,067,475 for the comparable periods last fiscal year.
Revenue for the quarter and nine month period was impacted by the application of
otherwise billable engineering resources to production engineering activities
and reduced levels of funded development programs. Gross profit margins on
contract services for the quarter increased to 42 percent versus 36 percent for
the comparable quarter last year. The increase is due primarily to lower
material purchases in the current quarter's projects versus the projects
underway in the same quarter last fiscal year. Gross profit margins on contract
services decreased
for the nine month period to 13 percent versus 32 percent for the comparable
nine month period last fiscal year due primarily to the modification of indirect
costs on government programs during the second quarter.
Product sales revenue for the fiscal quarter and nine month
period ended December 31, 2010 rose 7.8 percent and 15.4 percent to $1,923,787
and $6,161,179, respectively, versus $1,784,133 and $5,339,600 for the
comparable periods last fiscal year. The increases are due to continued strong
demand for electric propulsion systems and generators and the delivery of
pre-production units under the CODA Supply Agreement.
Gross profit margins on product sales for the quarter and
nine month period ended December 31, 2010 were 19 percent and 25 percent versus
32 percent and 32 percent for the comparable quarter and nine month period last
fiscal year. The decrease in gross profit margins for the quarter and nine month
period are due to deliveries of pre-production units which typically have lower
gross profit margins than other low volume product sales.
Production engineering expenditures, before reimbursements
from the DOE Grant decreased to $874,054 for the quarter and increased to
$2,534,370 for the nine month period ended December 31, 2010 versus $1,077,821
and $2,092,137, respectively, for the comparable periods last fiscal year. The
decrease in the current quarter is attributable to lower qualification part
costs, offset by an expansion of the group and it's activities in preparation
for the launch of higher volume manufacturing operations. The increase in
the current nine month period is attributable to increased staffing levels in
the production engineering group and the transfer of engineering resources from
the contract services group in support of our production launch activities for
CODA and our other customers' production engineering requirements. Accrued
cost reimbursements under the DOE Grant were $546,803 and $3,098,747 for the
quarter and nine month period ended December 31, 2010 versus zero for the
comparable periods last fiscal year. Reimbursements for the nine month period
ended December 31, 2010 included reimbursements arising from costs incurred
during the prior fiscal year of $1,546,446 which were recognized during the
second fiscal quarter this year upon satisfaction of a condition contained in
the DOE Grant.
Selling, general and administrative expenses for the fiscal
quarter and nine month period ended December 31, 2010 were $1,045,845 and
$4,045,663 versus $1,425,835 and $2,668,682, respectively, for the comparable
periods last year. The decrease in the current quarter is primarily attributable
to lower levels of compensation expense arising from a change in the period of
grant versus that for last year. The increase in the current nine month period
versus the comparable period last year was attributable to higher levels of
annual cash and non-cash incentive compensation grants, higher levels of
marketing expenses, costs arising from the recruitment and relocation of a new
chief executive officer, and moving expenses incurred with our relocation to a
new facility.
Other income was $265,269 for the nine month period ended
December 31, 2010, reflecting a cash recovery upon completion of a former
customer's bankruptcy proceedings.
Net loss for the quarter ended December 31, 2010 decreased to
$932,520, or $0.03 per common share, on total revenue of $2,090,474 versus a net
loss of $1,984,469 or $0.06 per common share on total revenue of $2,007,214 for
the comparable quarter last fiscal year. The reduction in net loss is primarily
attributable to reimbursements of product qualification and testing costs under
the DOE Grant and the timing of incentive compensation awards which were
recorded in the second quarter this fiscal year versus during the third fiscal
quarter last year. Net loss for the nine month period ended December 31, 2010
declined to $1,797,183, or $0.05 per common share on total revenue of
$6,673,356, versus a net loss of $3,109,622, or $0.11 per common share on total
revenue of $6,407,075, for the comparable period last year. The reduction in net
loss is primarily attributable to reimbursements of product qualification and
testing costs under the DOE Grant and lower levels of internally-funded research
and development expenditures.
Liquidity for the quarter and nine month period ended
December 31, 2010 was sufficient to meet our operating requirements. At December
31, 2010 we had cash and short-term investments totaling $24,762,309. Net cash
used in operating activities for the nine month period ended December 31, 2010
were $2,235,943 versus $1,204,494 for the same period last fiscal year. The
increase in cash used for the nine month period is primarily attributable to
increased levels of accounts receivable, inventory and prepaid expenses.
As the markets for electrified vehicles continue to emerge
and expand into additional vehicle platforms over the next several years, we
expect to experience potentially rapid growth in our revenue coincident with the
introduction of electric products for our customers. Should these expectations
be realized, our existing cash and short-term investments may not be adequate to
fund our anticipated growth and, as a result, we may need to secure additional
capital to fund the higher than currently anticipated growth in our business.
Financial Condition
Cash and cash equivalents and short-term investments at
December 31, 2010 were $24,762,309 and working capital (the excess of current
assets over current liabilities) was $27,854,560 compared with $30,148,783 and
$31,001,650, respectively, at March 31, 2010. The decrease in cash and
short-term investments and working capital is primarily attributable to
investments in property and equipment, operating losses, higher levels of
accounts receivable and inventories, and lower levels of accounts payable.
Accounts receivable increased $1,691,785 to $3,387,423 at
December 31, 2010 from $1,695,638 at March 31, 2010. The increase is primarily
due to higher levels of billings under our DOE Grant and increased average days
outstanding on commercial accounts. Substantially all of our customers are large
well-established companies of high credit quality. Our sales are conducted
through acceptance of customer purchase orders or in some cases through supply
agreements. For credit qualified customers our standard terms are net 30 days.
For international customers and customers without an adequate credit rating our
typical terms are irrevocable letter of credit or cash payment in advance of
delivery. No allowance for bad debts was deemed necessary at December 31, 2010
or March 31, 2010.
Costs and estimated earnings on uncompleted contracts
decreased $383,544 to $297,202 at December 31, 2010 versus $680,746 at March 31,
2010. The decrease is due to more favorable billing terms on certain contracts
in process at December 31, 2010 versus March 31, 2010. Estimated earnings on
contracts in process decreased to $523,410 or 11.2 percent of contracts in
process of $4,687,823 at December 31, 2010 compared to estimated earnings on
contracts in process of $544,417 or 11.8 percent of contracts in process of
$4,607,545 at March 31, 2010. The decrease is attributable to lower expected
margin on certain contracts in process at December 31, 2010.
Inventories increased $592,822 to $1,884,148 at December 31,
2010 principally due to higher levels of raw material inventories, partially
offset by lower levels of work-in-process inventories. Raw material inventories
increased $1,065,739, reflecting higher levels of inventory on hand for the CODA
production program at December 31, 2010. Work-in-process and finished goods
inventory decreased $466,750 and $6,167, respectively, reflecting increased
shipments of low volume propulsion systems from inventories on hand.
Prepaid expenses and other current assets increased to
$397,880 at December 31, 2010 from $140,285 at March 31, 2010 primarily due to
prepayments on raw material inventories.
We invested $1,627,878 and $6,069,182 for the acquisition of
property and equipment, before reimbursements recorded from the DOE Grant,
during the quarter and nine months ended December 31, 2010 compared to
$8,198,768 and $8,355,004 during the comparable quarter and nine months last
fiscal year. The decrease in capital expenditures is primarily attributable to the purchase of a new headquarters and
production facility during the third quarter last fiscal year. Cash reimbursements for capital equipment under the DOE Grant for the
nine months ended December 31, 2010 were $3,004,234, of which $524,208 were
reimbursements for costs incurred in the previous fiscal year.
Patent costs decreased to $271,179 at December 31, 2010
versus $297,623 at March 31, 2010 primarily due to the systematic amortization
of patent issuance costs. Similarly, trademark costs decreased to $119,453 at
December 31, 2010 versus $122,818 at March 31, 2010 primarily due to the
systematic amortization of trademark costs.
Accounts payable decreased $282,527 to $1,139,252 at December
31, 2010 from $1,421,779 at March 31, 2010, primarily due to a reduction in the
level of account payables arising from the renovation of our new facility
occupied during the second quarter.
Other current liabilities decreased to $953,532 at December
31, 2010 from $1,049,243 at March 31, 2010. The decrease is primarily
attributable to lower levels of customer deposits at December 31, 2010.
Billings in excess of costs and estimated earnings on
uncompleted contracts decreased to $42,418 at December 31, 2010 from $51,552 at
March 31, 2010 reflecting decreased billings on certain engineering contracts in
process at December 31, 2010 in advance of the performance of the associated
work versus March 31, 2010.
Short-term deferred compensation under executive employment
agreements increased $306,646 to $739,200 at December 31, 2010 from $432,554 at
March 31, 2010 reflecting retirement payments to the company's CEO who retired
during the third quarter. Retirement payments under the employment agreement are
payable on June 1, 2011.
Common stock and additional paid-in capital were $361,728 and
$113,201,855, respectively, at December 31, 2010 compared to $359,467 and
$112,211,227 at March 31, 2010. The increases in common stock and additional
paid-in capital were primarily attributable to annual non-cash share based
payments granted during the third quarter of fiscal 2011.
Results of Operations
Quarter Ended December 31, 2010
Operations for the third quarter ended December 31, 2010,
resulted in a net loss of $932,520, or $0.03 per common share, compared to a net
loss of $1,984,469, or $0.06 per common share for the comparable period last
year. The reduction in net loss is primarily attributable to reimbursements of
product qualification and testing costs under the DOE Grant and lower levels of
non-cash equity based compensation and cash compensation expense arising from a
change in the period of grant versus that for the last fiscal year.
Revenue from contract services decreased to $166,687 at
December 31, 2010 versus $223,081 for the comparable quarter last year. The
decrease is primarily due to the application of engineering resources from the
contract services group to support production engineering and low volume
production.
Product sales revenue for the third quarter rose 7.8 percent
to $1,923,787 versus $1,784,133 for the comparable period last fiscal year. The
increase is due to continued strong demand for electric propulsion systems and
generators and the delivery of pre-production units under the CODA Supply
Agreement. Power products segment revenue for the quarter ended December 31,
2010 decreased to $557,450 from $619,040 for the comparable quarter last fiscal
year due to decreased levels of actuator motor shipments, offset by higher
levels of DC-to-DC converter shipments. Technology segment product revenue for
the quarter ended December 31, 2010 increased to $1,366,337, compared to
$1,165,093 for the quarter ended December 31, 2009 due to increased shipments of
prototype propulsion motors and controllers.
Gross profit margins for the quarter ended December 31, 2010
decreased to 21 percent compared to 32 percent for the quarter ended December
31, 2009. Gross profit margin on contract services was 42 percent for the third
quarter this fiscal year compared to 36 percent for the quarter ended December
31, 2009, the improvement is primarily attributable to lower project material
purchases this quarter versus the comparable quarter last fiscal year. Gross
profit margin on product sales for the third quarter this year decreased to 19
percent compared to 32 percent for the third quarter last year. The decrease is
primarily due to the delivery of pre-production units to CODA, which generally
have a lower gross profit margin than sales of other low volume products and
higher overhead costs associated with our new larger facility in Longmont,
Colorado.
Research and development expenditures for the quarter ended
December 31, 2010 decreased to $10,537 compared to $138,821 for the quarter
ended December 31, 2009 reflecting reduced levels of cost-sharing on government
research programs and lower levels of on-going internally-funded software
research activities.
Production engineering costs were $874,054 for the third
quarter versus $1,077,821 for the third quarter last fiscal year. The decrease
is attributable to lower qualification part costs, offset by an expansion of the
group and its activities in preparation for the launch of higher volume
manufacturing operations.
Reimbursement of costs under the DOE Grant were $546,803 for
the quarter ended December 31, 2010 versus zero for the comparable period last
fiscal year, representing reimbursable product qualification and testing costs
under our DOE Grant.
Selling, general and administrative expense for the quarter
ended December 31, 2010 was $1,045,845 compared to $1,425,835 for the same
quarter last year. The decrease is primarily attributable to lower levels of
compensation expense arising from a change in the period of grant versus that
for the last fiscal year.
Interest income decreased to $11,150 for the quarter ended
December 31, 2010 versus $17,410 for the same period last fiscal year. The
decrease is attributable to lower invested balances and lower yields on invested
cash balances.
Nine Months Ended December 31, 2010
Operations for the nine month period ended December 31, 2010,
resulted in a net loss of $1,797,183, or $0.05 per common share, compared to a
net loss of $3,109,622, or $0.11 per common share for the comparable period last
year. The reduction in net loss is primarily attributable to reimbursements of
product qualification and testing costs under the DOE Grant, partially offset by
higher levels of annual cash and non-cash incentive compensation grants, higher
levels of marketing expenses, costs arising from the recruitment and relocation
of a new Chief Executive Officer, and moving expenses incurred during the nine
month period associated with our relocation to a new facility.
Revenue from contract services decreased to $512,177 for the
nine month period ended December 31, 2010 versus $1,067,475 for the comparable
period last year. Revenue for the nine month period was impacted by adjustments
to indirect costs on a cost-plus government contract, the application of
engineering resources to production engineering activities and reduced levels of
funded development programs.
Product sales for the nine month period ended December 31,
2010 increased to $6,161,179, compared to $5,339,600 for the comparable period
last year. Power products segment revenue for the nine month period ended
December 31, 2010 increased to $2,094,303 from $1,649,688 for the comparable
period last fiscal year due to increased shipments of pre-production CODA
systems and shipments under our supply agreement with Electric Vehicles
International. Technology segment product revenue for the nine month period
ended December 31, 2010 increased to $4,066,876, compared to $3,689,912 for the
comparable period last year due to increased shipments of prototype propulsion
motors and controllers.
Gross profit margins for the nine month period ended December
31, 2010 decreased to 24 percent compared to 32 percent for the comparable nine
month period last fiscal year. The decrease is primarily due to the delivery of
pre-production units to CODA, which generally have a lower gross profit margin
than sales of other low volume products and higher overhead costs associated
with our new larger facility in Longmont, Colorado. Gross profit margin on
contract services decreased for the nine month period to 13 percent versus 32
percent for the comparable nine month period last fiscal year primarily due to
adjustments to indirect costs on a cost-plus government contract during the
second fiscal quarter. Gross profit margin on product sales for the nine month
period ended December 31, 2010 decreased to 25 percent compared to a 32 percent
for the comparable period last year. The decrease is due to deliveries of
pre-production units during the period which typically have lower gross profit
margins than other low volume product sales and higher overhead costs associated
with our new larger facility in Longmont, Colorado.
Research and development expenditures for the nine month
period ended December 31, 2010 decreased to $282,484 compared to $452,656 for
the same period last year. The decrease is primarily due to reduced levels of
internally funded programs.
Production engineering costs were $2,534,370 for the nine
month period ended December 31, 2010 versus $2,092,137 for the comparable nine
month period last year. The increase is attributable to higher qualification
part costs and the addition of engineering resources to our production
engineering group.
Reimbursements of production engineering costs under DOE
Grant was $3,098,747 for the nine months ended December 31, 2010 versus zero for
the comparable period last year representing reimbursable product qualification
and testing costs. Reimbursements for the nine month period ended December 31,
2010 included reimbursements arising from costs incurred during the prior fiscal
year of $1,546,446 which were recognized during the second fiscal quarter this
year upon satisfaction of a condition contained in the DOE Grant.
Selling, general and administrative expense for the nine
month period ended December 31, 2010 was $4,045,663 compared to $2,668,682 for
the same period last year. The increase is attributable to higher levels of
annual cash and non-cash incentive compensation grants, higher levels of
marketing expenses, costs arising from the recruitment and relocation of a new
Chief Executive Officer, and moving expenses incurred during the nine month
period associated with our relocation to a new facility.
Interest income increased to $70,803 for the nine month
period ended December 31, 2010 versus $44,182 for the comparable period last
year. The increase is attributable to higher levels of invested cash balances
during the nine month period this year versus the same period last fiscal year.
Other income was $265,269 for the nine month period ended
December 31, 2010, reflecting a cash recovery upon completion of a former
customer's bankruptcy proceedings.
Liquidity and Capital Resources
Our cash balances and liquidity throughout the quarter and
nine month period ended December 31, 2010 were adequate to meet operating needs.
At December 31, 2010, we had working capital (the excess of current assets over
current liabilities) of $27,854,560 compared to $31,001,650 at March 31, 2010.
For the nine month period ended December 31, 2010, net cash
used in operating activities was $2,235,943 compared to net cash used in
operating activities of $1,204,494 for the comparable nine month period last
fiscal year. The increase in cash used for the nine month period this fiscal
year is primarily attributable to increased levels of accounts receivable,
inventory and prepaid expenses.
Our sales are conducted through acceptance of customer
purchase orders or in some cases through supply agreements. In cases where
credit is granted to customers, our standard terms are net 30 days. Significant
increases in revenue or a change in our credit policies to offer extended
payment terms could potentially result in material increases in our working
capital requirements. In addition, judgments regarding customers credit quality
and their ability to meet their financial obligations to us could be incorrect,
resulting in bad debts which could have a material adverse effect on our
financial results and liquidity.
Net cash used in investing activities for the third quarter
was $2,554,396 compared to cash used in investing activities of $17,647,988 for
the comparable nine month period last fiscal year. The change in cash used by
investing activities for the nine months ended December 31, 2010 was primarily
due to increased levels of short-term investment maturities, lower levels of
capital expenditures associated with the establishment of high volume
manufacturing capability and capacity for the CODA vehicle launch later this
calendar year, partially offset by increased levels of short-term investment
purchases.
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 may need to invest greater financial resources during the
remainder of fiscal 2011 and during fiscal 2012 on the commercialization of our
products, including a significant increase in human resources and increased
expenditures for equipment tooling. These capital requirements may be
substantially reduced by reimbursements from the Company's Grant from the DOE
which reimburses 50 percent of qualified capital costs. Working capital
requirements related to our supply agreement with CODA could exceed $10 million
if CODA achieves their twelve-month production target of 14,000 vehicles
following introduction of the CODA all-electric passenger vehicle. 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 the
execution of our business plan, our planned working capital requirements may
consume a substantial portion of our cash reserves at December 31, 2010. If
customer demand accelerates substantially, our losses over the short-term may
increase together with our working capital requirements. In addition, our $45.1
million DOE Grant requires us to provide matching funds of 50 percent on all
qualifying expenditures under the Grant. As of December 31, 2010 we have
received credit from the DOE for matching funds of $32 million, and we have an
obligation under our DOE Grant to demonstrate our ability to provide additional
matching funds of $13.1 million on or before July 13, 2011. We do not currently
have sufficient funds to meet this potential future funding requirement.
If our existing financial resources are not sufficient to
execute our business plan, including meeting future funding requirements under
the DOE Grant, 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 operation with then
available financial resources.
Contractual Obligations
The following table presents information about our
contractual obligations and commitments as of December 31, 2010:
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, 2010 describes the significant accounting policies and methods used in
the preparation of the consolidated financial statements. Estimates are used
for, but not limited to, allowance for doubtful accounts receivables, costs to
complete contracts, the recoverability of inventories, the fair value of
financial and long-lived assets and in the establishment of provisional billing
rates on certain government contracts. Actual results could differ materially
from these estimates. The following critical accounting policies are impacted
significantly by judgments, assumptions and estimates used in preparation of the
consolidated financial statements.
Accounts Receivable
Our trade accounts receivable are subject to credit risks
associated with the financial condition of our customers and their liquidity. We
evaluate all customers periodically to assess their financial condition and
liquidity and set appropriate credit limits based on this analysis. As a result,
the collectibility of accounts receivable may change due to changing general
economic conditions and factors associated with each customer's particular
business. Because substantially all of our customers are large well-established
companies with excellent credit worthiness, we have not established a reserve at
December 31, 2010 and March 31, 2010 for potentially uncollectible trade
accounts receivable. In light of current economic conditions we may need to
establish an allowance for bad debts in the future. It is also reasonably
possible, that future events or changes in circumstances could cause the
realizable value of our trade accounts receivable to decline materially,
resulting in material losses.
Inventories
We maintain raw material inventories of electronic
components, motor parts and other materials to meet our expected manufacturing
needs for proprietary products and for products manufactured to the design
specifications of our customers. Some of these components may become obsolete or
impaired due to bulk purchases in excess of customer requirements. Accordingly,
we periodically assesses our raw material inventory for potential impairment of
value based on then available information, expectations and estimates and
establish impairment reserves for estimated declines in the realizable value of
our inventories. The actual realizable value of our inventories may differ
materially from these estimates based on future occurrences. It is reasonably
possible that future events or changes in circumstances could cause the
realizable value of our inventories to decline materially, resulting in
additional material impairment losses.
Percentage of Completion Revenue Recognition on Long-term
Contracts: Costs and Estimated Earnings in Excess of Billings on
Uncompleted
Contracts
We recognize revenue on development projects funded by our
customers using the percentage-of-completion method. Under this method, contract
services revenue is based on the percentage that costs incurred to date bear to
management's best estimate of the total costs to be incurred to complete the
project. Many of these contracts involve the application of our technology to
customers' products and other applications with demanding specifications.
Management's best estimates have sometimes been adversely impacted by
unexpected technical challenges requiring additional analysis and redesign,
failure of electronic components to operate in accordance with manufacturers
published performance specifications, unexpected prototype failures requiring
the purchase of additional parts and a variety of other factors that may cause
unforeseen delays and additional costs. It is reasonably possible that total
costs to be incurred on any of the projects in process at December 31, 2010
could be materially different from management's estimates, and any
modification of management's estimate of total project costs to be incurred
could result in material changes in the profitability of affected projects or
result in material losses on any affected projects.
Fair Value Measurements and Asset Impairment
Some of our assets and liabilities may be subject to analysis
as to whether the asset or liability should be marked to fair value and some
assets may be evaluated for potential impairment in value. Fair value estimates
and judgments may be required by management for those assets that do not have
quoted prices in active markets. These estimates and judgments may include fair
value determinations based upon the extrapolation of quoted prices for similar
assets and liabilities in active or inactive markets, for observable items other
than the asset or liability itself, for observable items by correlation or other
statistical analysis, or from our assumptions about the assumptions market
participants would use in valuing an asset or liability when no observable
market data is available. Similarly, management evaluates both tangible and
intangible assets for potential impairments in value. In conducting this
evaluation, management may rely on a number of factors to value anticipated
future cash flows including operating results, business plans and present value
techniques. Rates used to value and discount cash flows may include assumptions
about interest rates and the cost of capital at a point in time. There are
inherent uncertainties related to these factors and management's judgment in
applying them to the analysis of asset impairment. Changes in any of the
foregoing estimates and assumptions or a change in market conditions could
result in a material change in the value of an asset or liability resulting in a
material adverse change in our operating results.
Cost-Sharing and Cost-Plus Type Contracts
Some of our business with the U.S. Government and prime
contractors is performed under cost-sharing of cost-plus fixed-fee type
contracts. These contracts provide for the reimbursement of costs, to the extent
allocable and allowable under applicable government regulations. Typically,
billings under these contracts are based on provisional rates, which are
estimates of the actual costs expected to be incurred during the relevant period
of performance. The final amounts qualified for reimbursement are determined in
arrears, typically annually, based on the actual costs incurred during the
relevant period of performance. The final costs eligible for reimbursement under
these contracts may differ materially from the provisional rates. If actual
costs incurred are less than the amounts estimated through provisional rates, we
will be obligated to return any excess of provisional payments over final
qualified costs, which could have a material adverse impact on our operating
results and liquidity.
New Accounting Pronouncements
In October 2009, the FASB issued new standards for revenue
recognition with multiple deliverables. These new standards impact the
determination of when the individual deliverables included in a multiple-element
arrangement may be treated as separate units of accounting. Additionally, these
new standards modify the manner in which the transaction consideration is
allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. These new standards
are required to be adopted in the first quarter of FY 2012; however, early
adoption is permitted. We do not expect these new standards to significantly
impact our consolidated financial statements.
In October 2009, the FASB issued new standards for the
accounting for certain revenue arrangements that include software elements.
These new standards amend the scope of pre-existing software revenue guidance by
removing from the guidance non-software components of tangible products and
certain software components of tangible products. These new standards are
required to be adopted in the first quarter of FY 2012; however, early adoption
is permitted. We do not expect these new standards to significantly impact our
consolidated financial statements.
In January 2010, the FASB issued amended standards that
require additional fair value disclosures. These amended standards require
disclosures about inputs and valuation techniques used to measure fair value as
well as disclosures about significant transfers, beginning in the first quarter
of 2010. Additionally, these amended standards require presentation of
disaggregated activity within the reconciliation for fair value measurements
using significant unobservable inputs (Level 3), beginning in the first quarter
of FY 2012. We do not expect these new standards to significantly impact our
consolidated financial statements.
In April 2010, the FASB issued a new standard on the
milestone method of revenue recognition. This new standard provides guidance on
the criteria that is necessary to apply the milestone method of revenue
recognition. This new standard is required to be adopted in the first quarter of
FY2012. We do not expect this new standard to significantly impact our
consolidated financial statements.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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.
We are not subject to interest rate risk on our debt obligations.
ITEM 4. CONTROLS AND PROCEDURES
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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 Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), as appropriate, to allow timely
decisions regarding required disclosure.
As of December 31, 2010, we performed an evaluation under the
supervision and with the participation of our management, including 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 December 31, 2010.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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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, although adverse developments in these matters could
have a material impact on a future reporting period.
ITEM 1A. RISK FACTORS
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Risk Factors
You should carefully consider the risks described below
before making an investment decision. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business operations.
Our business, financial condition or results of operations
could be materially adversely affected by any of these risks. The trading price
of our common stock could decline due to any of these risks, and you may lose
all or part of your investment.
This report also contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of a number of factors, including the risks described below.
We have incurred significant losses and may continue to do
so.
We have incurred significant net losses as shown in the following tables: