UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

[X] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2015

 

 

[  ] Transition Report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

For the transition period from _____ to _____

 

 

Commission File Number 1-10869

 

                   UQM TECHNOLOGIES, INC.               

(Exact name of registrant, as specified in its charter)

 

 

        4120 Specialty Place, Longmont, Colorado 80504       

(Address of principal executive offices) (Zip code)

 

                              (303) 682-4900                                

(Registrant’s telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X     No         .

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    X     No          Not Applicable        .

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.   See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes         No   X    .

 

The number of shares outstanding (including shares held by affiliates) of the registrant’s common stock, par value $0.01 per share at November 9,  2015 was 48,437,814.    

 

 

 

 

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TABLE OF CONTENTS

 

 

 

 

 

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Part I – FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Condensed Balance Sheets 

 

 

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

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UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Condensed Balance Sheets, Continued

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

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Table of Contents 

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Operations (unaudited)

 

 

See accompanying notes to consolidated condensed financial statements.

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Table of Contents 

 

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Condensed Statements of Cash Flows (unaudited)

See accompanying notes to consolidated condensed financial statements.

 

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Table of Contents

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Condensed Financial Statements

(unaudited)

 

 

 

The accompanying consolidated condensed financial statements are unaudited; however, in the opinion of management, all adjustments, which were solely of a normal recurring nature, necessary to a fair presentation of the results for the interim periods, have been made.  The results for the interim periods are not necessarily indicative of the results to be expected for the fiscal year.  The Notes contained herein should be read in conjunction with the Notes to our Consolidated Financial Statements filed on Form 10-K for the fiscal year ended March 31, 2015.

 

(2)  New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for public entities for interim and annual reporting periods beginning after December 15, 2016. On July 9, 2015, the FASB deferred the effective date of this new standard to December 15, 2017 for public entities. Early application is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. We are in the process of determining the impact on our financial statements.

 

In August 2014, the FASB issued guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We expect the new standard to increase the disclosures we provide regarding our liquidity and cash obligations.

 

(3)  Contracts in Process

 

At September 30, 2015 and March 31, 2015, the estimated period to complete contracts in process ranged from one to seven months and one to thirteen months, respectively.  We expect to collect all accounts receivable arising from these contracts within sixty days of billing.

 

The following summarizes contracts in process:

 

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(4)  Inventories

 

Inventories at September 30, 2015 and March 31, 2015 consisted of:

 

 

 

 

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 assess our raw material and finished product inventories for potential impairment of value based on then available information, expectations and estimates and establish impairment reserves as appropriate. We concluded that there were no impairments for obsolete inventory during the six month periods ended September 30, 2015 and 2014, and we had no reserve for obsolete inventory as of September 30, 2015 or March 31, 2015.  

 

(5)   Government Grant

 

We had a grant (the “Grant”) with the DOE under the American Recovery and Reinvestment Act, which ended on January 12, 2015. The Grant provided funds to facilitate the manufacture and deployment of electric drive vehicles, batteries and electric drive vehicle components in the United States. Under the terms of the Grant, the DOE reimbursed us for 50 percent of qualifying costs for the purchase of facilities, tooling and manufacturing equipment, and for engineering related to product qualification and testing of our electric propulsion systems. Engineering costs that were incurred under the Grant were classified in our consolidated condensed statements of operations as production engineering.

 

With the expiration of the Grant, we launched and re-deployed resources from production engineering activities to several new internally funded projects aimed at developing and significantly improving our product portfolio. This led to a significant increase in research and development expenditures in the second quarter and first six months of fiscal year 2016 compared to the same periods last year, and we expect those resources to continue to be deployed on research and development activities and business development activities in the future.

 

The Grant was also subject to our compliance with certain reporting requirements. The American Recovery and Reinvestment Act imposed minimum construction wages and labor standards for projects funded by the Grant. If we dispose of assets acquired using Grant funding, we may be required to reimburse the DOE upon such sale date if the fair value of the asset on the date of disposition exceeds $5,000. The amount of any such reimbursement shall be equal to 50 percent of the fair value of the asset on the date of disposition.

 

The application of grant funds to eligible capital asset purchases as of the end of the Grant are as follows:

 

 

 

 

 

 

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(6)   Other Current Liabilities

 

Other current liabilities at September 30, 2015 and March 31, 2015 consist of:

 

 

 

(7)   Stock-Based Compensation

 

 Share-Based Compensation Expense

 

 

 

The table below shows total share-based compensation expense for the quarters and six months ended September 30, 2015 and 2014 and the classification of these expenses:

 

Stock Option Plans Activity

 

Additional information with respect to stock option activity during the six months ended September 30, 2015 under our Stock Option Plans is as follows:

 

 

 

 

As of September 30, 2015, there was $293,873 of total unrecognized compensation costs related to stock options granted under our Stock Option Plans.  The unrecognized compensation cost is expected to be

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recognized over a weighted-average period of thirty-two months.  The total fair value of stock options that vested during the quarter and six months ended September 30, 2015 $308,951 and $316,641, respectively.

 

Stock Bonus Plan Activity

 

Activity with respect to non-vested shares under the Stock Bonus Plan as of September 30, 2015 and 2014 and changes during the six months ended September 30, 2015 and 2014 are presented below:

 

 

 

As of September 30, 2015, there was $108,566 of total unrecognized compensation costs related to common stock granted under our Stock Bonus Plan.  The unrecognized compensation cost at September 30, 2015 is expected to be recognized over a weighted-average period of fifteen months. 

 

Stock Purchase Plan Activity

 

During the six months ended September 30, 2015 and 2014, we issued 34,508 and 12,052 shares of common stock, respectively, under the Stock Purchase Plan.  Cash received by us upon the purchase of shares under the Stock Purchase Plan for the six months ended September 30, 2015 and 2014 was $23,125 and $22,055, respectively.

 

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(8) Stockholders’ Equity

 

Changes in the components of stockholders’ equity during the quarter and six month period ended September 30, 2015 were as follows: 

 

 

 

In February 2014, we completed a follow-on offering consisting of 2,864,872 shares of our common stock, and common stock purchase warrants to purchase 1,432,436 shares of our common stock. The warrants have an exercise price of $2.1275 per whole share of common stock and are exercisable on or after August 6, 2014 and on or before August 5, 2018.  In addition, the placement agent was issued warrants to purchase 57,297 shares of common stock, on substantially the same terms as the warrants issued to the purchasers. Warrants to acquire 1,489,733 shares of our common stock were outstanding at both September 30, 2015 and March 31, 2015.

 

 

 

 

 

 

 

 

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(9) Significant Customers 

 

We have historically derived significant revenue from a few key customers.  The following table summarizes revenue and percent of total revenue from significant customers for the quarters and six month periods ended September 30, 2015 and 2014:

 

The following table summarizes accounts receivable from significant customers as of September 30, 2015 and March 31, 2015:

 

 

 

(10)  Income Taxes

 

The Company currently has a full valuation allowance against its deferred tax assets, as it is management’s judgment that it is more-likely-than-not that net deferred tax assets will not be realized to reduce future taxable income. 

 

We recognize interest and penalties related to uncertain tax positions in “Other Income (expense),” net.  As of September 30, 2015 and 2014, we had no provisions for interest or penalties related to uncertain tax positions. 

 

The Company is subject to taxation in the U.S. and various state jurisdictions. As of September 30, 2015, the Company’s tax years for 2011 to 2014 are subject to examination by the tax authorities. As of December 15, 2015, the Company will no longer be subject to U.S. federal or state examination by tax authorities for years before 2012.    

 

(11) Loss Per Common Share

 

The following table sets forth the computation of basic and diluted net loss per share for the quarters and six month periods ended September 30, 2015 and 2014:

 

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The following table sets forth the potential shares of common stock that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive as of the end of each period presented:

 

 

 

 

(12) Fair Value of Financial Instruments

 

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments.

 

 

(13) Commitments and Contingencies

 

Employment Agreements

 

On July 21, 2015, the Company entered into new employment agreements with its four officers that expire on June 30, 2017. The aggregate future base salary payable to the executive officers over their remaining terms is $1,572,638.  The new employment agreements provide for future retention payments under the conditions and for the amounts specified in the agreements. These retention payments are being recorded over required service period and as a result, we have recorded a liability of $38,889 as of September 30, 2015. As of March 31, 2015 we had a liability of $268,357 representing the potential future compensation payable under the retirement and voluntary termination provisions of the previous employment agreements of the Company’s officers. These retirement and severance provisions were eliminated from the employment agreements when they were renewed.  

 

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.

 

(14) Subsequent Events

 

On October 20, 2015, the Company entered into a ten-year supply agreement (“ITL Agreement”) with China-based ITL Efficiency Corporation (“ITL”), a subsidiary of Eastlake New Energy (“Eastlake”). Production is expected to begin in early calendar year 2017 following development, test and certification programs during calendar year 2016. The Company has received the first purchase order under the ITL Agreement for the initial 3,000 units which are expected to ship in 2017.

 

In October, 2015, we completed an offering consisting of 8,000,000 shares of our common stock, and common stock purchase warrants to purchase 4,000,000 shares of our common stock. The warrants have an exercise price of $1.31 per whole share of common stock and are exercisable for a period beginning April 30, 2016 through October 30, 2020. Cash proceeds, net of offering costs, were approximately  $5.8 million.  

 

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Table of Contents 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Report contains statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements appear in a number of places in this Report and include statements regarding our plans, beliefs or current expectations; including those plans, beliefs and expectations of our officers and directors with respect to, among other things, the amount of revenue that could potentially be generated over the term of the ITL Agreement, the timing and success of completing necessary test and certification processes for ITL to order our products, the number of units ordered by ITL under the ITL Agreement, the success of ITL in introducing its electric drive systems (including our products) into the vehicles produced by itself and its affiliates, and the continued growth of the electric-powered vehicle industry in the Chinese market, new product developments, future orders to be received from our customers, sales of products from inventory, future financial results, liquidity and the continued growth of the electric-powered vehicle industry. Important Risk Factors that could cause actual results to differ from those contained in the forward-looking statements are listed below in Part II, Item 1A. Risk Factors and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

 

Introduction

 

UQM Technologies, Inc., (“UQM”, “Company”, “we”, “our”, or “us”) is a developer and manufacturer of power dense, high efficiency electric motors, generators, power electronic controllers and fuel cell compressors for the commercial truck, bus, automotive, marine, military and industrial markets. We generate revenue from 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 revenue typically vary from year to year and individual projects may vary substantially in their periods of performance and aggregate dollar value.

 

We have invested considerable financial and human resources into the development of our technology and manufacturing operations. We have developed and production-validated a full range of products for use in full-electric, hybrid electric, plug-in-hybrid and fuel cell applications for the markets we serve. These products are all highly efficient permanent magnet designs and feature outstanding performance, package size and weight valued by our customers. Our production capabilities and capacity are sufficient to meet the demands of our current and future customers for the foreseeable future.  We are certified as an ISO/TS 16949 quality supplier, which is the highest level of quality standards in the automotive industry, and we are ISO 14001 certified, meeting the highest environmental standards.  We have a management team with significant experience in the automotive industry and the requirements for high quality production programs and very deep technical knowledge of the motor and controller business. This team has the ability and background to grow the business to significantly higher levels, and we believe we have adequate cash balances to fund our operations for at least the next twelve months.

 

Our most important strategic initiative going forward is to develop customer relationships that lead to longer-term supply contracts.  Volume production is the key to our ongoing operations.  We are driving business development in the following ways:

 

 

 

 

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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.

 

During the second quarter this fiscal year, we announced additional orders from numerous customers including Ballard Power Systems, Zenith Motors and Electric Vehicles International, and we experienced an increase in demand for our systems during the second quarter this year leading to product sales revenue for the quarter of $1.6 million, representing a 91 percent increase over the same quarter last year. 

 

On October 20, 2015, the Company entered into a ten-year supply agreement (“ITL Agreement”) with China-based ITL Efficiency Corporation (“ITL”), a subsidiary of Eastlake New Energy (“Eastlake”). Over the term of the ITL Agreement, revenues could exceed $400 million based on projected volume shipments.  Production is expected to begin in early calendar year 2017 following development, test and certification programs during calendar year 2016. The Company has received the first purchase order under the ITL Agreement for the initial 3,000 units which are expected to ship in calendar year 2017. Initially, the PowerPhase Pro® 135 electric propulsion system will be sold to address the 6-8 meter shuttle bus market in China, with larger delivery truck and transit bus applications slated to begin in early 2017 with the PowerPhase HD® 250 system.

 

The Department of Energy grant that was awarded to us in 2010 expired on January 12, 2015.  Since the beginning of the grant program, we were reimbursed a total of $27.1 million.  These cumulative reimbursements allowed us to achieve many milestones to support our business development efforts that we believe will lead to volume production opportunities.  Specifically, we were able to relocate our headquarters and production operations to an approximate 130,000 square foot facility with fifteen adjacent acres of land for future expansion.  Within this modern facility, we were able to develop and install manufacturing capacity and infrastructure to build and test our state-of-the-art traction motors and controllers. We have installed a flexible manufacturing footprint that allows us to build both the large and smaller frame size motors and controllers at production capacity levels consistent with the growth targets of our current and potential customers.   Throughout the program, the DOE grant supported product validation and release activities for both passenger vehicle and heavy duty truck and bus platforms.  In addition, the grant assisted us in implementing all of the required processes and systems to certify our facility to the ISO/TS 16949 quality standard that is a requirement to be a supplier to the automotive industry.

 

With the expiration of the Grant, we launched and re-deployed resources from production engineering activities to several new internally funded projects aimed at developing and significantly improving our product portfolio. This led to a significant increase in research and development expenditures in the first half of fiscal year 2016 compared to the same period last year, and we expect those resources to continue to be deployed on research and development activities and business development activities in the future.

 

In October, 2015, we completed an offering consisting of 8,000,000 shares of our common stock, and common stock purchase warrants to purchase 4,000,000 shares of our common stock. The warrants have an exercise price of $1.31 per whole share of common stock and are exercisable for a period beginning April 30, 2016 through October 30, 2020. Cash proceeds, net of offering costs, were approximately  $5.8 million.  

 

The funding from the DOE grant brought us to a position of strength with regards to product validation and manufacturing capabilities.  This, in addition to the ITL Agreement and other business development activities in place and the cash reserves we have to fund the operations for at least the next twelve months, makes us optimistic about the future of the Company.

 

 

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Financial Condition

 

Cash and cash equivalents at September 30, 2015 were $4,018,487 and working capital was $11,583,044, compared with $6,585,703 and $15,605,555, respectively, at March 31, 2015.  The decrease in cash and working capital is primarily attributable to operating losses.

 

Accounts receivable increased $156,732 to $679,149 at September 30, 2015 from $522,417 at March 31, 2015.  The increase is primarily due to increased levels of product sales in the second quarter this fiscal year versus the fourth quarter last fiscal year.  Our sales are conducted through acceptance of customer purchase orders or in some cases through supply agreements. For international customers and customers without an adequate credit rating or history, our typical terms are irrevocable letter of credit or cash payment in advance of delivery. For credit qualified customers, our typical terms are net 30 days. As of September 30, 2015 and March 31, 2015, we had no allowance for bad debts.  

 

Other receivable decreased to zero at September 30, 2015 from $855,000 at March 31, 2015 resulting from insurance proceeds received under a key-man life insurance policy.

 

Costs and estimated earnings on uncompleted contracts was  $29,917 at September 30, 2015 versus $49,917 at March 31, 2015. The decrease was due to timing of billings on certain contracts in process at September 30, 2015 versus March 31, 2015.

 

Inventories decreased $344,153 to $9,009,900 at September 30, 2015 reflecting shipments of PowerPhase Pro® and PowerPhase HD® propulsion systems.     

   

Prepaid expenses and other current assets increased to $315,557 at September 30, 2015 from $266,448 at March 31, 2015 primarily due to prepayments on commercial insurance policies.     

 

We invested $10,555 and $57,305 for the acquisition of property and equipment during the quarter and six month period ended September 30, 2015 compared to $122,192 and $167,650 during the comparable quarter and six month period last fiscal year. We believe that we have sufficient property and equipment in place to meet our production requirements for the foreseeable future. As a result we had a decreased level of capital expenditures in the first half this fiscal year versus the comparable period last fiscal year. There were no cash reimbursements for capital assets under the DOE Grant during the quarter and six month period ended September 30, 2015. Cash reimbursements for capital assets under the DOE Grant for the quarter and six month period ended September 30, 2014 were $18,208 and $141,678, respectively. 

 

Patent costs increased $3,506 due to new patent costs partially offset by amortization. Trademark costs decreased $2,060 due to amortization.

 

Accounts payable increased $196,007 to $594,575 at September 30, 2015 from $398,568 at March 31, 2015, primarily due to the timing of vendor payments.

 

Other current liabilities increased to $1,830,599 at September 30, 2015 from $1,544,971 at March 31, 2015. The increase is primarily attributable to higher levels of accrued payroll and benefits for a severance obligation associated with the departure of a former officer of the Company.

 

Billings in excess of costs and estimated earnings on uncompleted contracts decreased to $44,792 at September 30, 2015 versus $84,444 at March 31, 2015.  The decrease is due to timing of billings on certain contracts in process at September 30, 2015 versus March 31, 2015. 

 

Common stock and additional paid-in capital were $403,019 and $122,282,533, respectively, at September 30, 2015 compared to $400,000 and $121,866,061 at March 31, 2015. The increases in common stock and additional paid-in capital were primarily attributable to the periodic expensing of non-cash share-based payments associated with option and stock grants under our equity compensation plans and the issuance of shares under the Employee Stock Purchase Plan.

 

Results of Operations

 

Quarter Ended September 30, 2015

 

Revenue

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Product sales revenue for the current quarter increased to $1,618,666 versus $846,283 for the comparable quarter last fiscal year, reflecting increased shipments of fuel cell compressors, PowerPhase HD® and PowerPhase Pro® propulsion systems.

 

Revenue from contract services decreased to $116,144 at September 30, 2015  versus $270,496 for the comparable quarter last year. The decrease is primarily due to decreased levels of customer funded research activities, which vary from quarter to quarter.

 

Gross Profit Margin

   

Gross profit margins for the quarter ended September 30, 2015 decreased to 20.1 percent compared to 35.8 percent for the quarter ended September 30, 2014. Gross profit margin on product sales for the second quarter this year decreased to 20.3 percent compared to 42.2 percent for the second quarter last year primarily due to a change in overhead absorption resulting from the termination of our DOE Grant. Gross profit margin on contract services increased to 17.3 percent for the second quarter this fiscal year compared to 15.8 percent for the quarter ended September 30, 2014,  resulting from a change in the mix of contracts in process during the quarter ended September 30, 2015 versus the comparable quarter last year.    

 

Costs and Expenses

 

Research and development expenditures for the quarter ended September 30, 2015 increased to $912,395 compared to $92,801 for the quarter ended September 30, 2014.  Coincident with the contractual end of the DOE Grant on January 12, 2015, we launched and re-deployed resources to several new internally funded projects aimed at developing and significantly improving our product portfolio. This reallocation of expenses from production engineering to research and development led to the significant increase in research and development expenditures for the second quarter this fiscal year.

 

Production engineering costs were zero for the second quarter versus $1,065,810 for the second quarter last fiscal year.  With the expiration of the Grant, we re-deployed resources from production engineering activities to several new internally funded research and development activities. 

 

Reimbursement of product qualification and testing costs under the DOE Grant was zero for the quarter ended September 30, 2015 versus $539,329 for the comparable quarter last fiscal year. The reduction is attributable to the contractual expiration of the Grant.

 

Selling, general and administrative expense for the quarter ended September 30, 2015 was $1,855,214 compared to $1,771,713 for the same quarter last year. The increase is primarily attributable to higher legal and business development expenses during the current quarter.

 

Net Loss

 

As a result, net loss for the quarter ended September 30, 2015 was $2,409,047, or $0.06 per common share, compared to a net loss of $1,990,714, or $0.05 per common share, for the comparable quarter last year.

 

Six Months Ended September 30, 2015

 

Revenue

 

Product sales for the six month period ended September 30, 2015 increased to $2,249,332 compared to $1,669,315 for the comparable period last year, reflecting increased shipments of fuel cell compressors, PowerPhase HD® and PowerPhase Pro® propulsion systems.

 

Revenue from contract services decreased to $226,007 for the six month period ended September 30, 2015 versus $467,012 for the comparable period last year. The decrease is primarily due to decreased levels of customer funded research activities, which vary from period to period.

 

Gross Profit Margin

 

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Gross profit margins for the six month period ended September 30, 2015 decreased to 18.1 percent compared to 37.8 percent for the comparable six month period last fiscal year. Gross profit margin on product sales for the six month period ended September 30, 2015 decreased to 17.0 percent compared to 42.9 percent for the comparable period last year. The decrease is primarily due to a change in overhead absorption resulting from the termination of our DOE Grant. Gross profit margin on contract services increased for the six month period to 28.8 percent versus 19.5 percent for the comparable six month period last fiscal year resulting from a change in mix of contracts in process versus the prior comparable period.    

 

Costs and Expenses

 

Research and development expenditures for the six month period ended September 30, 2015 increased to $2,000,875 compared to $177,205 for the same period last year. Coincident with the contractual end of the DOE Grant on January 12, 2015, we launched and re-deployed resources to several new internally funded projects aimed at developing and significantly improving our product portfolio. This reallocation of expenses from production engineering to research and development led to the significant increase in research and development expenditures for the second quarter this fiscal year. 

 

Production engineering costs were zero for the first half this year versus $2,293,001 for the first half last fiscal year.  With the expiration of the Grant, we re-deployed resources from production engineering activities to several new internally funded research and development activities.

 

Reimbursement of product qualification and testing costs under the DOE Grant was zero for the six month period ended September 30, 2015 versus $1,255,343 for the comparable period last fiscal year. The reduction is attributable to the contractual expiration of the Grant. 

 

Selling, general and administrative expense for the six month period ended September 30, 2015 was $3,100,588 compared to $2,900,244 for the same period last year. The increase is primarily attributable to an increase in legal and business development expenses during the current period.

 

Net Loss

 

As a result, net loss for the six month period ended September 30, 2015 was $4,633,298, or $0.12 per common share, compared to a net loss of $3,300,751, or $0.08 per common share, for the comparable period last year.

 

Liquidity and Capital Resources

 

Our cash balances and liquidity throughout the quarter ended September 30, 2015 were adequate to meet operating needs.  At September 30, 2015, we had working capital of $11,583,044 compared to $15,605,555 at March 31, 2015. 

 

For the six month period ended September 30, 2015, net cash used in operating activities was $2,430,817 compared to net cash used in operating activities of $2,007,452 for the comparable period last fiscal year. The increase in cash used for the first half of this fiscal year is primarily attributable to increased net losses, partially offset by decreased levels of inventory and by the collection of the key-man life insurance receivable of $855,000. 

 

Net cash used in investing activities for the first half of this fiscal year was $66,933 compared to net cash used in investing activities of $47,028 for the comparable six month period last fiscal year. The decrease for the six months ended September 30, 2015 was primarily due to no DOE reimbursements for property and equipment purchases due to the expiration of the Grant, partially offset by a reduction in expenditures for the acquisition of property and equipment.

 

Net cash used in financing activities for the first half this fiscal year was $69,466 compared to net cash used in financing activities of $145,188 for the comparable period last fiscal year. The decrease in cash used was primarily attributable to an decrease in cash paid for retirement of vested shares during the first half of this fiscal year.  

 

We expect to fund our operations over the next year from existing cash and cash equivalent balances and the reduction of inventories. 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

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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. In October, 2015, we completed a registered offering consisting of 8,000,000 shares of our common stock, and common stock purchase warrants to purchase 4,000,000 shares of our common stock. Cash proceeds, net of offering costs, were approximately $5.8 million.  Based on our current level of operations, we believe we have sufficient cash and cash equivalents with the completion of the offering to fund our operations for at least the next twelve months.

 

Contractual Obligations

 

The following table presents information about our contractual obligations and commitments as of September 30, 2015:

 

 

 

 

 

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, 2015 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. There have been no material changes in any of our critical accounting policies during the six months ended September 30, 2015.    

 

  

 

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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. 

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. 

 

As of September 30, 2015, we performed an evaluation under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the U.S. Securities and Exchange Act of 1934).  Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2015.    

 

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.