UQM TECHNOLOGIES 10-K 2006
Documents found in this filing:
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 development of markets for our products, and the adequacy of our cash balances and liquidity to meet future operating needs. Important Risk Factors that could cause actual results to differ from those contained in the forward-looking statements are listed below in Part I, Item 1A. Risk Factors.
UQM Technologies, Inc., ("UQM") is a developer and manufacturer of energy efficient, power dense, electric motors, generators and power electronic controllers. Our primary focus is incorporating our advanced technology into products aimed at existing commercial markets and emerging markets for electrically propelled vehicles that are expected to experience rapid growth. We operate our business in two segments: 1) technology - which encompasses the further advancement and application of our proprietary motors, generators, power electronics and software; and 2) power products which encompasses the manufacture of motors, generators, power electronic controllers and related products. Our $0.01 par value common stock trades on the American, Chicago and Pacific stock exchanges under the symbol "UQM."
The Companys revenue from continuing operations is derived from two principal sources: 1) funded contract research and development services performed for strategic partners, customers and the U.S. government directed toward either the advancement of our proprietary technology portfolio or the application of our proprietary technology to customers products; and 2) the manufacture and sale of products engineered by us.
We have two principal operating companies: 1) UQM Technologies, Inc., located in Frederick, Colorado, which includes the Corporate Headquarters and Engineering and Product Development Center; and 2) wholly-owned subsidiary UQM Power Products, Inc.("UQM Power"), also located in Frederick, Colorado, which is an ISO quality certified manufacturer of our products.
Our technology base includes a number of proprietary technologies and patents relating to brushless permanent magnet motors, generators and power electronic controllers, together with software code to intelligently manage the operation of our systems. See also "Patents" below.
The typical architecture of a UQM(R) motor consists of a stator winding employing a high pole count configuration, which allows for high copper utilization (minimizing energy loss and cost) and a hollow rotor upon which powerful rare earth permanent magnets are mounted on the outer circumference. The stator is affixed to an aluminum housing containing a mounting ring and bearings, which allows the rotor to be suspended within the stator. Commutation of the machine is accomplished electronically by sensing the position of the rotor in relation to the stator and intelligently pulsing electrical energy into the stator such that the electric field generated by the stator interacts with the magnetic field of the rotor producing rotational motion ("motor operation"). Conversely, the application of rotational motion to the rotor by an external force results in the generation of electrical power ("generator operation"). UQM(R) machines can be operated in either a forward or reverse direction of rotation and either in motor or generator mode and can dynamically change from one mode of operation to another in millisecond response time. The hollow design of the rotor permits the packaging of other components such as gears and electromechanical brakes in the interior of the machine. These design features contribute to lower usage of copper and iron and other materials generally (due to smaller package dimensions), reducing manufacturing cost over those for conventional machines of similar power. In addition, the utilization of neodymium-iron-boron ("NdFeB") magnet material in a wide range of consumer devices, such as cell phones, disk drives and medical devices, has dramatically improved the availability, performance and price of this material, allowing us to price our advanced motors and controls competitively with lesser performing conventional motors which we believe will accelerate the rate of commercialization of our technology.
Attributes of our permanent magnet motor technology include brushless electronic commutation; a relatively large air-gap dimension; the use of powerful rare earth NdFeB magnet material; good heat rejection; low iron content; and low mechanical losses. As a result, UQM(R) motors have high operating efficiencies, high power density (high power output to weight ratio) and generally have smaller external dimensions and weight for a given power output, improving packageability.
Attributes of our microprocessor-based digital power electronic controllers include high power operation (600 amps at 400 volts), four-quadrant control (forward/reverse and motoring/generation), reduced switching losses, intelligent control and controller area network ("CAN") capability.
In addition, we have developed and patented a method of control embodied in electronic component architecture and software code (Phase Advance Control) which allows UQM(R) motors to deliver both high output torque at low operating speeds and continuous power at high operating speeds from the same machine. Conventional permanent magnet motor designs are limited to operating at either high torque at low speeds or continuous power at high speeds, but not both. In most vehicle propulsion applications, high torque is required to launch the vehicle from a standing stop transitioning to high power as the vehicle is accelerated to highway speeds. In conventional internal combustion engine powered vehicles, the transition from high torque to high power is typically accomplished through the multiple gear changes performed by a mechanical transmission. UQM(R) motors, incorporating phase advance technology, are suited as propulsion drives in electric, hybrid electric and fuel cell electric vehicles due to the ability to power a vehicle from a standing stop to highway speeds without mechanical gear changes, thereby eliminating the size, weight and cost of mechanical transmissions.
We have also developed a technology that allows our permanent magnet motors to achieve a 10 to 1 top speed to base speed ratio. This technology also provides both high torque and high-speed capability in the same machine, but at levels greater than that of other motor technology. Many electric motor applications require high torque capability for starting and low speed operation, but must also achieve high speed. For military vehicles, high torque at low speed translates into obstacle and grade climbing capability, while high speed enables pursuit, dash and evasive maneuvers as well as on-road convoy transport. Many commercial applications have similar requirements. Conventional vehicles achieve the high torque required for launch and low end acceleration and the constant power required for high road speed by using a transmission and multiple gear changes. Prior to this performance breakthrough, UQM(R) systems incorporating phase advance were able to achieve a top speed to base speed ratio of 4 to 1. Electrically propelled vehicles designed around a 4 to 1 limitation, sometimes require unwanted gearing and/or have less than desired performance. This has particularly been the case in the more demanding off-highway equipment and military vehicle applications. Providing vehicle developers with electric propulsion systems capable of a top speed to base speed ratio of 10 to 1 overcomes a significant limitation and opens up potential new application opportunities for UQM(R) systems.
We also recently developed a new method of electronic control for our permanent magnet motor and generator systems, which further improved their performance. The new method of control incorporates sophisticated techniques that extract power from substantially the entire electrical cycle of the motor, resulting in maximized power output and efficiency. These performance enhancements increased peak power output by 33 percent; continuous power output increased by 50 percent and system efficiency at various operating points improved by 2 to 8 percent. In addition, the new method of control includes enhanced user configurable functionality and increased data transmission and processing speeds, which improve feedback, prognostics and diagnostic capabilities, all of which enhance the durability and functionality of the systems.
The majority of our research and development activities are the result of projects contracted with and funded by customers, for which we typically retain intellectual property rights in the resulting technology developed. Customer funded development activities are recorded in our financial statements as contract services revenue and the associated development costs are shown as cost of contract services.
In recent years, we have focused our research and development activities on the development of commercial products and production engineering activities to lower the cost of manufacture, as well as enhance the performance and capability of our systems, as opposed to basic research in the field. We believe our future growth is dependent, in part, on the continued advancement of our technology portfolio and our ability to commercialize our technology in additional product applications and markets. Accordingly, we expect to continue to pursue additional customer funded programs and to selectively invest in internally funded development projects to accomplish these objectives.
Our primary focus is the commercialization of our technology in both existing and emerging markets for electrically powered vehicle propulsion systems and auxiliary systems for vehicles.
Today there are numerous well-established markets for products that incorporate electric motors, generators and power electronic controllers that are targets for replacement by our advantaged systems. Examples of existing electric vehicle markets that we believe present opportunities for the commercialization of our proprietary technology include electric wheelchairs, golf carts, forklift trucks and other warehouse vehicles, aircraft tugs and other support equipment, commercial floor cleaning equipment and other similar markets where the product application generally requires high torque and variable speed operation. In addition, there are a multitude of electric auxiliary motors used on conventional vehicles that provide a further opportunity for replacement by our systems.
We have developed and commercialized several products for existing markets that are currently being manufactured by our wholly-owned subsidiary, UQM Power. These products include a direct-drive propulsion motor used in Invacare Corporations Storm(R) electric wheelchair for which we are supplying field service and warranty units, fan blower motors used in aircraft air conditioning systems manufactured by Keith Products, Inc. and a recently introduced vehicle auxiliary motor for a new customer.
Nearly all existing market applications utilize low cost components, making it difficult for the customer to justify the adoption of more costly and technologically superior components. In order to successfully compete in these cost driven markets, we have adopted a part sourcing and manufacturing strategy designed to provide high quality and low pricing for our customers. In 1998, our manufacturing operations achieved ISO 9002 quality certification, and we are currently in the process of adopting the Advanced Product Quality Planning ("APQP") automotive procedures.
Our strategy for the near term is to source components with quality suppliers and to perform final assembly, testing, pack-out and shipping from our Frederick, Colorado facility. We have established relationships with many low cost suppliers, including a number of international companies. We also have completed a re-layout of our manufacturing area, including assembly of a mezzanine second level, which has doubled our available production floor space. We are in the process of putting in place highly automated, flexible, mixed model assembly systems which will be computer controlled and monitored for quality assurance and consistent performance. Depending on product complexity and mix, we believe the capacity of our current 30,000 sq. ft. facility is up to 250,000 units per shift per year. We also own 2.5 acres of land adjacent to our current facility where we can construct an additional 25,000 sq. ft. of manufacturing floor space.
We expect to continue to aggressively pursue the commercialization of both technologically advanced and low cost products that we develop to customer specifications in these large, established markets.
Potentially large markets are developing in conjunction with the electrification of a wide-range of vehicle platforms. Electrification of vehicles is being pursued for a variety of application specific reasons including: 1) improved fuel economy, 2) lower vehicle emissions, 3) greater reliability and lower maintenance, 4) the need for higher levels of available onboard electric power to run electrical devices, and 5) improved performance and vehicle control. Of these reasons, improved fuel economy has emerged as a significant factor in the development and potential rate of growth of the emerging markets as crude oil prices continue to rise, recently exceeding $75 per barrel, and consumers and businesses alike contend with gasoline and diesel prices of over $3.00 per gallon. This trend toward higher fuel prices is expected to continue for the foreseeable future driven by tight supply levels, geopolitical turmoil in key oil producing countries and increasing world demand driven principally by escalating consumption of fossil fuels by developing countries such as China and India.
Crude oil consumption in the United States as reported by the Transportation Energy Data Book; Edition 22 and the EIA Annual Energy Outlook 2003 averages approximately 20 million barrels per day. Of this amount, approximately two-thirds is used for transportation.
The electrification of conventional vehicles, ranging from passenger vehicles and over-the-road trucks to off-road vehicles such as agricultural tractors, construction equipment and military vehicles, can potentially offer improvements in fuel economy and emissions. Nearly all conventional vehicles are powered by a gasoline or diesel fueled internal combustion engine that converts the energy stored in the fuel to rotating power out of the engine. The power out of the engines rotating shaft is used to propel the vehicle and operate all of the vehicles auxiliaries either directly with belts, pulleys and gears or indirectly through electricity generated from a belted alternator.
Internal combustion engines are relatively inefficient, converting only 30 to 40 percent of the input energy in the fuel to the output shaft to do useful work. The remaining 60 to 70 percent of the input energy is wasted by the engine as heat loss. Electric motors on the other hand, are much more efficient in converting input electric energy to the rotating shaft to do useful work. UQM(R) electric propulsion systems have some of the highest efficiencies (input energy to output work) in the industry ranging from 80 to 95 percent.
The electrification of vehicles can range from simply replacing inefficient belt and gear driven under-the-hood auxiliaries (water pump, power steering, HVAC, cooling fans etc.) with efficient electric powered ones, to eliminating the internal combustion engine entirely and replacing it with full electric propulsion such as in a battery or fuel cell powered vehicle. Generally, as the vehicle powerplant content becomes increasingly more electric, the fuel efficiency improves and the cost and complexity increases. With rising fuel prices, vehicle makers are finding it much more feasible to justify this added complexity and cost.
We believe that the trend toward increasing electrification of vehicles will continue at an accelerated pace. Accordingly, we have developed and continue to develop, with funding from our customers, electric propulsion systems and other motor and electronic products that will enable our customers to introduce alternative powered vehicles in the markets they serve, should they elect to do so. An expanded description of the different degrees of vehicle electrification follows:
Electrification of engine driven auxiliaries - In most existing conventional gasoline and diesel-powered vehicles, under-the-hood components, such as water, oil and fuel pumps, power steering systems, cooling fans and air conditioning compressors are powered by engine belts, pulleys and gears. These devices perform their functions very inefficiently and represent a significant load on the engine. Because they are directly connected to the engine, there is no way to independently vary their speed or modulate their power. The electrification of these components provides numerous advantages including: 1) variable speed and power operation which improves efficiency and fuel economy, 2) the ability to locate them strategically anywhere in the vehicle because an electric component does not require proximity to an engine driven belt or gear, 3) improved controllability and reliability and 4) flexible architectures and improved access for service and maintenance. Existing conventional alternators do not provide enough power to electrify the engine driven auxiliaries and must be replaced with a higher power generator. The typical UQM(R) generator is smaller, nearly twice as efficient and provides five times the power of a conventional alternator. In addition, these higher power generators can provide export power to power other on-board or off-board equipment. This electrification strategy is easily adopted because required changes to vehicle design and operation are the least disruptive and can improve vehicle fuel economy by 7 to 15 percent. Parallel hybrids Parallel hybrid vehicles incorporate an electric motor to join the internal combustion engine in propelling the vehicle. In a low power configuration, often referred to as a "mild hybrid", a starter/motor/generator that is typically integrated into the flywheel of an engine, is used to combine three separate functions in one electric machine. The machine starts the engine, eliminating the need for a conventional starter, performs power generation, eliminating a conventional belt driven alternator, and can be run in motoring mode, supplying supplemental power to the driveline to improve acceleration and vehicle performance. Higher power parallel hybrids incorporate additional system features such as regenerative braking and automatic engine shutdown and all-electric propulsion during certain operating conditions. In a typical parallel hybrid vehicle, acceleration from a standing-stop is generally performed by the motor in all-electric mode up to a given speed at which time the engine starts and the engine and electric motor work in parallel to accelerate the vehicle. Once the vehicle achieves highway speed, the motor ceases operation and the vehicle is propelled using the engine only. During braking operations, the motor is switched to power generation mode and used to recapture and store energy into a battery pack that is normally lost as brake heat in conventional vehicles. The stored energy is then consumed by the electric motor in the next acceleration cycle. If the batteries need additional charging, the engine drives the machine in generator mode sending electricity to charge the battery pack. These vehicles have sufficient battery charging capacity to be self-sustaining thereby eliminating the need to plug the vehicle into the electric power grid. Depending on the vehicles level of electric motive power and its duty cycle, parallel hybrids can achieve fuel economy improvements of 10 to 45 percent. Series hybrids Series hybrid vehicles contain a greater degree of electrification than parallel hybrids. In a typical series hybrid vehicle, all of the motive power for the vehicle is supplied by electric motors, thereby eliminating conventional driveline components such as the transmission and drive shaft. Generally, series hybrids contain a larger amount of batteries to store electrical energy and the engines principal function is to turn a separate generator to produce the electrical energy necessary to maintain the state of charge of the onboard battery pack. As in a parallel hybrid, during braking operations, the motor is switched to power generation mode and used to recapture and store energy into the battery pack that is normally lost as brake heat in conventional vehicles. The stored energy is then consumed by the electric motor in the next acceleration cycle. Also, as in the parallel hybrid, a series hybrid vehicle has sufficient battery charging capacity to be self-sustaining thereby eliminating the need to plug the vehicle into the electric power grid. Because the engine serves as an under-the-hood powerplant, series hybrids typically have large amounts of available onboard power to perform additional functions while the vehicle is operating or when it reaches its final destination. Depending on vehicle configuration and duty cycle, series hybrids can achieve fuel economy improvements of 35 to 50 percent. Plug-in hybrids A plug-in hybrid vehicle can be configured as either a parallel or a series hybrid, although the most common is the parallel configuration. What distinguishes this category of hybrid is that it is designed to operate in all-electric only mode for a range of 20 to 40 miles and be charge depleting therefore requiring it to be periodically plugged into and recharged from the electric grid. Because a portion of the energy consumed by a plug-in hybrid vehicle is acquired at a relatively low cost from the electrical grid in addition to the efficiencies obtained from its hybrid configuration, this category of vehicle can achieve fuel economy improvements of 60 to 75 percent. All-electric battery and fuel cell vehicles All-electric battery and fuel cell vehicles are powered entirely from electric energy stored onboard in batteries or generated onboard by a fuel cell. In this category of vehicle all motive power is produced by electric motors and there is no engine and associated transmission, driveline and exhaust components. Similarly, many vehicle functions currently performed by auxiliaries attached to the engine through belts or gears, such as power steering and air conditioning, must be performed using electric motors. As with hybrid electric vehicles, all-electric battery powered vehicles can switch the propulsion motor during braking operations to power generation mode and recapture and store energy into the battery pack that is normally lost as brake heat in conventional vehicles. The stored energy is then consumed by the electric motor in the next acceleration cycle. The energy needs of all-electric battery powered vehicles are obtained by recharging their batteries using the electric power grid. Fuel cells are energy production devices that generate electricity through a chemical reaction of hydrogen and oxygen. The by-product of this reaction is water therefore allowing for the total elimination of vehicle exhaust emissions in this category of vehicle. Because there is no battery energy storage in a fuel cell powered vehicle, there is no opportunity for regenerative braking energy recapture. Fuel economy improvements for all-electric battery and fuel cell vehicles are generally 75 percent or greater.
We have historically focused our resources on the development of products for the electrification of vehicles including electric motors, generators and electronic controls to power under-the-hood auxiliaries such as water, oil and fuel pumps, power steering, cooling fans and air conditioning compressors. In addition, we have developed highly efficient electric propulsion systems for each category of vehicle described above with power levels of 0.5 Kw to 120 Kw, which are suitable for vehicles ranging from wheelchairs to passenger automobiles to large trucks, tractors, construction equipment and military vehicles. In addition we are pursuing the commercialization of our technology and products designed by us in numerous large existing markets where we intend to replace an existing supplier through the introduction of technologically advanced products or lower cost systems or a combination of both.
We believe that our technology and products are well-suited for application in a wide range of vehicles as the trend toward electrification continues to gain momentum. In this regard, we have focused our attention on several niche markets where we believe we can most effectively compete and which we expect to have higher than average rates of growth and expansion. A brief description of each of these markets follows:
Over-the-road trucks The U.S. Department of Energy estimated that in 2004, trucks consumed 8 million barrels of crude oil per day and they project that by 2025, trucks will consume approximately two-thirds of all crude oil used in transportation, or 12 million barrels of crude oil per day.
There are approximately 6 million trucks, buses and other heavy-duty on-road vehicles sold in the United States each year. The market for these vehicles is characterized by a large number of suppliers, a wide-range of vehicle designs and configurations, diverse power and performance levels and relatively low production volumes for each model. As a result, the typical truck manufacturer is unlikely to have the technical expertise or financial resources to internally develop products that can compete in emerging markets for increasingly electrified vehicles. Accordingly, we expect truck manufacturers to purchase products from suppliers who have developed technologically advanced electric motors, generators and power electronic energy management controls that can be applied to their vehicles. We are working with a number of customers in the development and application of our products to both trucks and buses and expect to continue to aggressively pursue the commercialization of our products as this market emerges over the next several years. Our customers in the over-the-road truck market include Eaton Corporation and International Truck and Engine Company for heavy-duty hybrid propulsion systems and related electronic products; and Engineered Machined Products, Inc. for a variety of pump and cooling fan under-the-hood auxiliaries.
Off-road vehicles There are a wide range of off-road vehicles sold in the United States each year. These vehicles range from the small - wheelchairs, golf carts, fork trucks, riding lawn mowers, snowmobiles, all-terrain vehicles, etc., to large construction, agricultural and mining equipment. The markets for small vehicles are typically characterized by relatively high volumes, low power levels, and commodity pricing. We have been supplying wheelchair motors to Invacare Corporation for the last five years and expect to continue to supply field service parts for wheelchairs for the foreseeable future. In addition, we expect to continue to compete selectively in markets where the customer requires advanced technology or superior performance and where acceptable gross profit margins are obtainable. The market for large equipment- tractors, construction, mining and other specialty equipment- possesses many of the same characteristics as the over-the-road truck market described above. It is estimated that approximately 500,000 of these vehicles are sold in the United States each year. Accordingly, we expect these vehicle manufacturers to purchase products with similar specifications as those required in over-the-road trucks from suppliers who have developed technologically advanced electric motors and power electronic energy management controls that can be applied to their vehicles. Although these vehicles are produced in relatively lower volumes, they nevertheless represent a substantial opportunity due to higher power levels, substantial technical complexity and therefore substantially higher product content and dollar value per vehicle. Our customers in the off-road vehicle market are Deere & Company for whom we have developed a variety of propulsion systems for construction and agricultural equipment, as well as small lawn and grounds care products; and Engineered Machined Products, Inc. for a variety of motors and controllers to power under-the-hood auxiliary devices.
Military vehicles The U.S. military purchases a wide range of ground vehicles each year including combat vehicles such as tanks, self-propelled artillery and armored personnel carriers, as well as a variety of light, medium and heavy-duty trucks for convoy and supply operations and for the transport of fuel used on the battlefield. The military is particularly interested in the electrification of vehicles because the attributes these vehicles possess offer exceptional potential for the military to achieve its long-term objectives of developing a highly mobile, lethal fighting force. Fuel economy improvements in military vehicles transfer into substantial savings in support infrastructure and transportation costs associated with transporting fuel to the battlefield, which is typically thousands of miles from the United States. For example, if fuel economy improvements of 25 percent are achieved in the average truck, a corresponding amount of fuel does not have to be transported and therefore a corresponding number of airplanes or tankers are not required in the transportation process. Also, the availability of onboard electrical power on vehicles opens up new opportunities for the development of sophisticated surveillance, detection and battlefield monitoring equipment and for laser, microwave and electrical pulse weapon systems. It is estimated that the military purchases approximately 8,000 trucks per year and greater numbers during periods of armed conflict. As is the case with large off-road equipment, these vehicles are produced in relatively lower volumes, operate at higher power levels, have substantial technical complexity and therefore substantially higher product content and dollar value per vehicle. Our customers in the military vehicle market include Stewart & Stevenson Tactical Vehicle Systems, LP for medium tactical truck parallel hybrid propulsion systems and DRS Technologies, Inc for HMMWV (pronounced "HUMVEE") and series hybrid propulsion systems, Engineered Machined Products, Inc. for a variety of motors and controllers to power under-the-hood auxiliary devices.
Distributed power generation As the price of crude oil and natural gas has continued to rise over the last several years, there has been an increased focus on the development and adoption of clean, renewable energy products including wind turbine power generators, solar panels and stationary fuel cell power generators. In addition, many experts believe that power users will increasingly consider on-site power generation using diesel or natural gas fueled internal combustion engine generators as an alternative to power supplied over the electrical grid. We have developed and expect to continue to develop generators for this market. In addition, we have also developed DC to AC electronic power inverters for use in distributed power generation applications to convert the DC output of these devices to usable AC power for the homeowner or business.
Other markets We have also developed and expect to continue to develop electric products for the aircraft and aerospace market and the boat and marine market. In the aerospace market, our focus is on auxiliary power units for the generation of onboard power and other electric auxiliary systems such as components for aircraft air conditioning systems. We have also developed hybrid propulsion systems for various boat applications. We believe that the fuel efficiency benefits of vehicle electrification can also be realized in the boat and marine markets. Accordingly, we are pursuing a variety of opportunities for our electric motors, generators and electronic controls in these potentially large niche markets.
At March 31, 2006, we had two reportable segments. These reportable segments are strategic business units that offer different products and services and are managed separately because of their different business strategies.
Our technology segment encompasses the operations of our Engineering and Product Development Center which shares a 28,000 square foot facility located in Frederick, Colorado with our motor manufacturing operations which are reported in the power products segment. The Engineering and Product Development Center is equipped with research and development laboratories, prototype build and test facilities for electric motors, generators, power electronic controllers, software, and vehicle integration activities. The technology segment conducts customer funded and internally-funded research and engineering activities directed toward: 1) the development of new motors, generators, and power electronic controllers to meet the requirements of customers specific product applications; 2) integration of our motors, generators and power electronic controllers into customers products; and 3) support of our power products segment and the low volume manufacture of motors, generators and power electronic controllers.
Power Products Segment
Our power products segment encompasses the operations of our wholly-owned subsidiary, UQM Power and shares a 28,000 square foot facility located in Frederick, Colorado with the technology segment. UQM Power is ISO 9002 quality certified manufacturer of motors and electronic products designed by the company.
Electronic Products Segment Discontinued Operations
In May 2004, we completed the divestiture of the assets of our electronics product segment. This business consisted of the manufacture of thru-hole and surface mount electronic printed circuit board assemblies, wire harness assemblies, value-added component assemblies incorporating either printed circuit board assemblies, wire harness assemblies or both, and complete turn-key electronic product builds. The operations of this divested business are reported as discontinued operations in our statements of operations for the fiscal years ended March 31, 2006, 2005 and 2004. See also "Managements Discussion and Analysis of Financial Condition and Results of Operations" below.
All of the markets in which we operate are highly competitive. The markets served by the technology segment are additionally characterized by rapid changes due to technological advances that can render existing technologies and products obsolete.
The technology segment has developed advanced electric propulsion systems and components which we hope to market to vehicle original equipment manufacturers and their Tier I suppliers throughout the world for use in electric, hybrid electric and fuel cell electric vehicles. In recent years, the market for hybrid electric automobiles has begun to emerge led by the introduction and market success of the Toyota Prius and the Honda Insight and Civic hybrid electric passenger cars. As a result, additional vehicle makers have introduced hybrid passenger vehicles and other vehicle manufacturers in both on-road and off-road markets are expected to develop and introduce a variety of hybrid electric vehicles as the market acceptance of these vehicles continues to grow. We cannot assure you that we will be able to compete successfully in this market or any other market that now exists or may develop in the future. There are numerous companies developing products that do or soon will compete with our systems. Some of these companies possess significantly greater financial, personnel and other resources than we do, including established supply arrangements and volume manufacturing operations. We believe our principal competitors include Honda, Toyota, Hitachi, Toshiba, Siemens, Delphi and Ballard Power Systems.
The power products segment competes primarily in the automotive, heavy equipment, military, aerospace and medical products industries. Each of these industries is extremely competitive. We face substantial competition on a continuing basis from numerous companies, many of whom possess longer operating histories, significantly greater financial resources and marketing, distribution and manufacturing capability. We believe our principal competitors include Advanced DC, Allied Motion, Emerson Electric, General Electric, Moog, Rockwell International, and Baldor.
We hold several groups or families of patents.
U.S. Patent Nos. 5,004,944, 5,311,092 and 5,319,844 disclose and claim an electromagnetic transducer and method of making the same. Corresponding applications have been filed and issued in several foreign countries. Some of the foreign patents have expired.
U.S. Patent No. 5,107,151 discloses and claims a switching circuit employing semi-conductor devices in series with an inductor to avoid commutation breakdown and extending the current range of switching by using IGBT devices. Corresponding applications have been filed in foreign countries, some of which have issued, and some of which have been abandoned.
U.S. Patent No. 5,592,731 and U.S. Patent No. 5,382,859 relate to a stator for high-power density electric motors and generators, and a method of constructing the same. Corresponding applications have been filed in foreign countries.
U.S. Patent No. 5,677,605 discloses and claims a brushless motor and drive system using phase timing advancement. Corresponding applications have been filed in foreign countries, some of which are issued, some of which have been abandoned, and some of which are pending.
U.S. Patent No. 5,982,063 discloses and claims an electric motor having an internal brake. Corresponding patent applications have been filed in foreign countries. Some of the foreign applications have issued, and others are still pending.
U.S. Patent Nos. 6,522,130 and 6,693,422 disclose and claim a method for controlling a brushless electric motor having a rotor, and relates to a method for sensing rotor position and detecting rotational speed. Corresponding applications have been filed and are pending in several foreign countries. The foreign applications have either issued or are still pending.
In 1994, we executed an agreement with Alcan Aluminium Limited ("Alcan") in which Alcan assigned to us all of its rights, title and interests in certain motor technology developed under a program funded by Alcan. This agreement further provides that we shall pay to Alcan royalties of one-half of one percent on revenue derived from the manufacture and sale of products or processes embodying the related technology. Royalty payments under this agreement for the fiscal years ended March 31, 2006, 2005 and 2004 were $19,377, $20,833 and $23,208, respectively.
We also intend to rely on the unpatented proprietary know-how we have developed and now utilize in our products. We cannot provide assurance that others will not independently develop, acquire or obtain access to our technology. Although we protect our unpatented proprietary rights by executing confidentiality agreements with our management, employees and others with access to our technology, these measures may not be adequate to protect us from disclosure or misappropriation of our proprietary information.
We own three U.S. Trademark Registrations for "UNIQ" (International Class 7 for power transducers, Class 12 for utility land vehicles, and Class 16 for publications). The Class 12 trademark is subject to renewal in June 2006; the Class 7 trademark is subject to renewal in August 2006; and the Class 16 trademark is subject to renewal in February 2007.
We have registered the letters "UQM" in the U.S. Patent and Trademark Office. Counterpart applications have been filed in numerous countries throughout the world, most of which have granted registrations or indicated them to be allowable. Those trademarks are directed to the same trademark classes as the mark "UNIQ". The foreign trademark registrations and applications include major markets where we are doing business or establishing business contacts.
We have also registered the trademark "POWERPHASE" which we use in conjunction with certain of our propulsion systems. Corresponding applications for trademark registration were filed in 11 countries. The trademark is registered in the European Community and various other foreign countries.
Our technology segment had unperformed service contracts from customers, which will provide future revenue upon completion totaling approximately $2.2 million and an order backlog for prototype motors and controllers of approximately $0.1 million at April 30, 2006 compared to $1.3 million and $0.1 million, respectively at April 30, 2005. All such service contracts are subject to amendment, modification or cancellation. We expect to complete all unperformed service contracts over the next seventeen months and ship motor and controller backlog products over the next two months.
Our power products segment had an order backlog of approximately $2.1 million at April 30, 2006 compared to $0.7 million at April 30, 2005. We expect to ship all backlog products within the next twelve months.
Customers and Suppliers
We have one significant customer, Invacare Corporation, which is a customer of our power products segment and accounted for revenue of $681,000, or 15.8 percent of consolidated total revenue in the fiscal year ended March 31, 2006 and $1,370,792, or 28.8 percent, and $1,643,215, or 32.6 percent of consolidated total revenue, for the fiscal years ended March 31, 2005 and March 31, 2004, respectively. This customer also represented nil and 36.5 percent of total accounts receivable at March 31, 2006 and 2005, respectively. Inventories consisting of raw materials, work-in-process and finished goods for Invacare Corporation were 10.2 percent and 24.9 percent of consolidated total inventories at March 31, 2006 and 2005, respectively.
Principal raw materials and components purchased by us include iron, steel, electronic components, magnet material and copper wire. Most of the above items are available from several suppliers. Certain components used by us are custom designs and if our current supplier no longer made them available to us, we could experience production delays.
U.S. Government Contracts
Revenue derived from contracts with agencies of the U.S. Government and from subcontracts with U.S. Government prime contractors was $1,847,300, or approximately 42.7 percent of our consolidated total revenue, for the year ended March 31, 2006, $1,271,781, or approximately 26.7 percent of consolidated total revenue, for the year ended March 31, 2005 and $1,011,818, or approximately 20.1 percent of consolidated total revenue, for the year ended March 31, 2004. Accounts receivable from government-funded contracts represented 50 percent and 18 percent of total accounts receivable as of March 31, 2006 and 2005, respectively.
Some of our business with the U.S. Government was performed on a cost plus fixed fee basis. These contracts provide for reimbursement of costs, to the extent allocable and allowable under applicable regulations, and payment of a fee. Certain other contracts with the U.S. Government provide for the reimbursement of costs on a 50 percent cost-sharing basis based on not-to-exceed billing rates negotiated between the U.S. Government and us. Other U.S. Government business is performed under firm fixed price contracts. On "cost-share" and "firm fixed price" contracts, we can incur an actual loss in the performance thereof if incurred costs exceed the contract amount. All of our U.S. Government contracts are subject to modification or cancellation at the convenience of the Government.
Employee and Labor Relations
As of April 30, 2006, we had 47 full-time employees. We have entered into employment contracts with two of our executive officers, one of these contracts expires on December 31, 2007 and the other expires on December 31, 2010. None of our employees are covered by a collective bargaining agreement. We believe our relationship with employees has been generally satisfactory.
In addition to our full-time staff, we from time to time engage the services of outside consultants and contract labor to meet peak workload or specialized program requirements. We do not anticipate any difficulty in locating additional qualified engineers, technicians and production workers, if so required, to meet expanded research and development or manufacturing operations.
Before investing in our securities you should carefully consider the following factors and other information in this document and the information incorporated by reference.
We have incurred significant losses and may continue to do so.
We have incurred significant net losses as shown in the following tables:
We have had accumulated deficits as follows:
In the future we plan to make additional investments in product development and commercialization, which is likely to cause us to remain unprofitable.
Our operating losses and working capital requirements could consume our current cash balances.
Our net loss for the fiscal year ended March 31, 2006 was $2,784,970 versus a net loss for the comparable period last year of $1,868,896. At March 31, 2006, our cash and short-term investments totaled $10,086,200. If our losses continue, operations could consume some or all of our cash balances. We expect to make additional investments in human resources, manufacturing facilities and equipment, production and application engineering, among other things, in order to effectively compete in the emerging market for hybrid electric vehicles. We cannot assure, however, that our existing cash resources will be sufficient to complete our business plan. Should our existing cash resources be insufficient, we may need to secure additional funding. We cannot assure you, however, that funding will be available on terms acceptable to us, if at all.
Our government contracts can be cancelled with little or no notice and could restrict our ability to commercialize our technology.
Some of our technology has been developed under government funding by United States government agencies. In some cases, government agencies in the United States can require us to obtain or produce components for our systems from sources located in the United States rather than foreign countries. Our contracts with government agencies are also subject to the risk of termination at the convenience of the contracting agency and in some cases grant "march-in" rights to the government. March-in rights are the right of the United States government or the applicable government agency, under limited circumstances, to exercise a non-exclusive, royalty-free, irrevocable worldwide license to any technology developed under contracts funded by the government to facilitate commercialization of technology developed with government funding. March-in rights can be exercised if we fail to commercialize the developed technology. The implementation of restrictions on our sourcing of components or the exercise of march-in rights by the government or an agency of the government could restrict our ability to commercialize our technology.
We face intense competition in our motor development and may be unable to compete successfully.
In developing electric motors for use in vehicles and other applications, we face competition from very large domestic and international companies, including the worlds largest automobile manufacturers. These companies have far greater resources to apply to research and development efforts than we have, and they may independently develop motors that are technologically more advanced than ours. These competitors also have much greater experience in and resources for marketing their products.
If we fail to develop and achieve market acceptance for our products, our business may not grow.
We believe our proprietary systems are suited for a wide range of hybrid electric vehicle platforms. We currently expect to make substantial investments in human resources, manufacturing facilities and equipment, production and application engineering, among other things, to capitalize on the anticipated expansion in demand for products related to this market area. However, our experience in this market area is limited. Our sales in this area will depend in part on the market acceptance of and demand for our proprietary propulsion systems and future products. We cannot be certain that we will be able to introduce or market our products, develop other new products or product enhancements in a timely or cost-effective manner or that our products will achieve market acceptance.
If we are unable to protect our patents and other proprietary technology, we will be unable to prevent third parties from using our technology, which would impair our competitiveness and ability to commercialize our products. In addition, the cost of enforcing our proprietary rights may be expensive and result in increased losses.
Our ability to compete effectively against other companies in our industry will depend, in part, on our ability to protect our proprietary technology. Although we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be successful in doing so. We have historically pursued patent protection in a limited number of foreign countries where we believe significant markets for our products exist or where potentially significant competitors have operations. It is possible that a substantial market could develop in a country where we have not received patent protection and under such circumstances our proprietary products would not be afforded legal protection in these markets. Further, our competitors may independently develop or patent technologies that are substantially equivalent or superior to ours. We cannot assure that additional patents will be issued to us or, if they are issued, as to the scope of their protection. Patents granted may not provide meaningful protection from competitors. Even if a competitors products were to infringe patents owned by us, it would be costly for us to pursue our rights in an enforcement action, it would divert funds and resources which otherwise could be used in our operations and we cannot assure that we would be successful in enforcing our intellectual property rights. In addition, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country where we may operate or sell our products in the future. If third parties assert technology infringement claims against us, the defense of the claims could involve significant legal costs and require our management to divert time and attention from our business operations. If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay royalties to continue to use our technology. We may not be able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if these licenses are costly, our results of operations may suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.
Use of our motors in vehicles could subject us to product liability claims, and product liability insurance claims could cause an increase in our insurance rates or could exceed our insurance limits, which could impair our financial condition, results of operations and liquidity.
Because some of our motors are designed to be used in vehicles, and because vehicle accidents can cause injury to persons and property, we are subject to a risk of claims for product liability. We carry product liability insurance of $1 million covering all of our products. If we were to experience a large insured loss, it might exceed our coverage limits, or our insurance carriers could decline to further cover us or raise our insurance rates to unacceptable levels, any of which could impair our financial position 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 development of markets for our products, and the adequacy of our cash balances and liquidity to meet future operating needs. Important Risk Factors that could cause actual results to differ from those contained in the forward-looking statements are listed above in Part I, Item 1A. Risk Factors.
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 for two principal customers during the fiscal year ended March 31, 2006 Invacare Corporation and Keith Products, Inc. Revenue from funded engineering activities for the fiscal year ended March 31, 2006 rose to $2.5 million versus $2.3 million last fiscal year and declined versus the $2.7 million for the fiscal year ended March 31, 2004. Product sales revenue for the fiscal year ended March 31, 2006 declined to $1.8 million versus $2.5 million and $2.3 million for the fiscal years ended March 31, 2005 and 2004, respectively. In June 2005, we completed a private placement of our common stock to two institutional investors, which generated net cash proceeds of $3.9 million. We expect to use our available cash balances to fund our business strategy to invest in selective customer projects that we believe will result in volume production and to expand our production engineering and business development groups in anticipation of the continued emergence of the market for hybrid electric vehicles. Hybrid electric vehicles require electric motors and generators of the type we design and manufacture, and we intend to aggressively pursue both this emerging market as well as conventional markets where electric motors and generators are currently in use. Although we allocated greater engineering resources to internally funded research and development and production engineering activities, our revenue from funded engineering activities increased by approximately 10 percent to $2.5 million this fiscal year versus last fiscal year due principally to improved productivity and a strong order backlog. Expenditures on production engineering activities for the fiscal year rose to $0.8 million, versus $0.2 million and zero, in each of the preceding two fiscal years reflecting continuing implementation of our business strategy. The decrease in product sales revenue for the fiscal year is due to decreased shipments of production wheelchair motors offset by increased low volume prototype sales. Production of wheelchair motors for newly manufactured wheelchairs ceased in November; however, we expect to produce field service units for the foreseeable future.
In November 2005 we announced that we had received an order for 10,000 vehicle auxiliary motors from a new customer. Product shipments under this order commenced in March 2006, since the launch of production we have received orders for an additional 20,000 units deliverable in fiscal 2007. As a result we expect product shipments to grow substantially throughout fiscal 2007, which we expect will lead to substantial increases in product revenue, improved gross profit margin, and lower levels of operating losses.
Loss from continuing operations for the current fiscal year rose to $2.8 million, or $0.11 per common share, versus $1.8 million, or $0.09 per common share last fiscal year and $1.4 million, or $0.07 per common share, for the preceding fiscal year. The increase in losses versus last fiscal year is primarily attributable to our growing investment in production engineering activities research and development activities and higher levels of selling, general and administrative expense. The increase in losses versus the fiscal year ended March 31, 2004, is generally attributable to declining product revenue, lower gross profit margins and increased investments in production engineering activities.
In May 2004, we divested a contract electronics manufacturing business. Operating losses from this business for all periods presented have been reclassified to discontinued operations and contributed $0.03 million, or nil per common share, $0.05 million, or nil per common share, and $3.4 million, or $0.18 per common share, to our consolidated net loss for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.
We believe our existing cash and short-term investments, which amounted to approximately $10.1 million at fiscal year end, will be adequate to fund our business strategy described above, as well as the launch of new production products over the next several years.
Cash and cash equivalents and short-term investments at March 31, 2006 were $10,086,200 and working capital (the excess of current assets over current liabilities) was $10,415,409 compared with $8,008,826 and $8,788,826, respectively, at March 31, 2005. The increase in cash and short-term investments and working capital is primarily attributable to proceeds from a private placement completed in June 2005, which resulted in cash proceeds, net of placement costs, of $3,885,858, proceeds from the exercise of employee stock options and underwriter warrants which totaled $644,889 less reductions attributable to operating losses, higher levels of prepaid and other current assets, payments on trade accounts payable and debt, and investments in property and equipment, and cash used in discontinued operations.
Accounts receivable decreased $378,100 to $512,409 at March 31, 2006 from $890,509 at March 31, 2005. The decrease is primarily attributable to lower product sales and improved collections during the fourth quarter of fiscal 2006. During the fiscal year ended March 31, 2006 a customer with an outstanding account receivable balance filed for bankruptcy protection resulting in a charge to bad debt expense of $63,000. Despite the occurrence of this event, 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 March 31, 2006 and similarly, no allowance for bad debts was deemed necessary at March 31, 2005.
Costs and estimated earnings on uncompleted contracts increased $14,119 to $450,044 at March 31, 2006 versus $435,925 at March 31, 2005. The increase is due to less favorable billing terms on contracts in process at March 31, 2006 versus March 31, 2005. Estimated earnings on contracts in process increased to $221,382 or 8.2 percent of contracts in process of $2,695,407 at March 31, 2006 compared to estimated earnings on contracts in process of $190,619 or 5.4 percent of contracts in process of $3,534,389 at March 31, 2005. The increase in estimated margins on contracts in process is attributable to lower levels of anticipated cost overruns on engineering projects.
Inventories decreased $180,688 to $467,485 at March 31, 2006 principally due to lower levels of raw material, work-in-process and finished goods inventories which decreased $53,376, $80,084 and $47,228, respectively. The decrease in raw materials is due to the cessation of production of new wheelchair propulsion motors in November 2005. The decrease in work-in-process inventories is attributable to lower production levels of wheelchair propulsion motors and lower production levels of low volume motors and controllers. The decrease in finished goods inventories is attributable to reduced production levels for low volume motors and controllers at the end of the current fiscal year versus the prior fiscal year end.
Prepaid expenses and other current assets increased to $118,439 at March 31, 2006 from $109,198 at March 31, 2005 primarily due to higher levels of prepaid software costs at the end of the current fiscal year versus the prior fiscal year end.
We invested $420,990 for the acquisition of property and equipment during the fiscal year compared to $194,069 last fiscal year. The increase in capital expenditures is primarily due to purchases of warehousing and manufacturing equipment associated with the reconfiguration of our manufacturing floor space and the launch of a new product in March 2006.
Accounts payable decreased $143,579 to $534,428 at March 31, 2006 from $678,007 at March 31, 2005, primarily due to a contraction in payment terms for certain vendors, and the cessation of production of new wheelchair motors.
Other current liabilities increased $39,351 to $309,097 at March 31, 2006 from $269,746 at March 31, 2005. The increase is primarily attributable to higher levels of accrued professional fees, accrued payroll, employee benefits, and property taxes.
Current portion of long-term debt decreased $43,242 to $92,013 at March 31, 2006 from $135,255 at March 31, 2005 reflecting scheduled principal repayments and a principal prepayment on the mortgage debt for our Frederick, Colorado facility.
Liabilities and commitments of discontinued operations were $62,004 at March 31, 2006 compared to $154,287 at March 31, 2005. Similarly, long-term liabilities and commitments of discontinued operations was zero at March 31, 2006 compared to $57,051 at March 31, 2005. The decrease is attributable to a revision in our estimate of potential future obligations under our master lease on the facility previously occupied by our discontinued contract electronics business. See also Results of Discontinued Operations below and note 12 to the consolidated financial statements.
Billings in excess of costs and estimated earnings on uncompleted contracts increased $155,116 to $221,626 at March 31, 2006 from $66,510 at March 31, 2005 reflecting increased levels of billings on engineering contracts in process at the end of the fiscal year ended March 31, 2006 in advance of the performance of the associated work versus the prior fiscal year.
Long-term debt, less current portion decreased $189,230 to $621,685 at March 31, 2006 from $810,915 at March 31, 2005 reflecting scheduled principal repayments and a principal prepayment on the mortgage debt for our Frederick, Colorado facility.
Long-term deferred compensation under executive employment agreements increased to $210,861 from zero at March 31, 2006 reflecting our estimate of the potential liability for future severance payments under these contracts as of March 31, 2006.
Common stock and additional paid-in capital increased to $247,760 and $69,293,461, respectively, at March 31, 2006 compared to $231,771 and $64,767,975 at March 31, 2005. The increases were primarily attributable to completion of a private placement of common stock to two institutional investors and the exercise of common stock options and warrants. Net cash proceeds to the Company from these activities totaled $4,530,747.
Results of Continuing Operations
Continuing operations for the fiscal year ended March 31, 2006, resulted in a loss of $2,757,386, or $0.11 per common share, compared to a loss from continuing operations of $1,814,695, or $0.09 per common share, and $1,422,315, or $0.07 per common share, for the fiscal years ended March 31, 2005 and 2004, respectively. The increase in the current year loss from continuing operations is primarily attributable to higher expenditures for production engineering activities, and selling, general and administrative expenses, and the inclusion in the fiscal year ended March 31, 2004 of gain on sale of our Taiwan Joint Venture of $60,975, or nil per common share, offset by higher interest income in the current year.
Revenue from contract services increased $220,671, or 9.7 percent, to $2,502,098 for the fiscal year ended March 31, 2006 compared to $2,281,427 for the fiscal year ended March 31, 2005. The increase is primarily attributable to higher staff utilization on revenue generating programs versus the fiscal year ended March 31, 2005. Revenue from contract services decreased $466,406, or 17.0 percent, for the year ended March 31, 2005 compared to revenue for the year ended March 31, 2004. The decrease was attributable to lower staff utilization on revenue generating programs due to cost overruns on certain engineering projects and the application of certain engineering personnel that would typically be billed to revenue generating customer programs to internally funded production engineering activities.
Product sales this fiscal year decreased 26.6 percent to $1,820,468 compared to $2,481,864 for the year ended March 31, 2005. Product sales revenue for the fiscal year ended March 31, 2005 increased 8.2 percent to $2,481,864 from $2,293,071 for the year ended March 31, 2004. Power products segment revenue for the year ended March 31, 2006 decreased $811,511, or 48.5 percent, to $862,666 compared to $1,674,177 for fiscal year ended March 31, 2005 due to decreased shipments of wheelchair propulsion motors. Power products segment revenue for the year ended March 31, 2005 decreased $26,788, or 1.6 percent, to $1,674,177 compared to $1,700,965 for fiscal year ended March 31, 2004 due to decreased shipments of wheelchair propulsion motors. Technology segment product revenue for the fiscal year ended March 31, 2006 increased $150,115, or 18.6 percent, to $957,802 compared to $807,687 for fiscal year ended March 31, 2005 due to increased shipments of low volume prototype controllers. Technology segment product revenue for the fiscal year ended March 31, 2005 increased $215,581, or 36.4 percent, to $807,687 compared to $592,106 for fiscal year ended March 31, 2004 due to increased shipments of propulsion systems for hybrid electric bus programs and the hybrid electric unmanned ground combat vehicle program.
Gross profit margins for the fiscal year decreased to 4.2 percent compared to 5.7 and 17.2 percent for the fiscal years ended March 31, 2005 and 2004, respectively, primarily due to a decrease in gross profit margins on product sales for the current year, and a decrease in gross profit margins on contract services for the fiscal year ended March 31, 2005. Gross profit on contract services was 1.2 percent this fiscal year compared to a negative 9.4 and 19.4 percent for the fiscal years ended March 31, 2005 and 2004, respectively. The increase in contract services margins for the current fiscal year versus the fiscal year ended March 31, 2005 is attributable to fewer cost overruns on engineering contracts this year versus the prior fiscal year. The decrease in contract services margins for the fiscal year ended March 31, 2005 versus the fiscal year ended March 31, 2004 is attributable to decreased overhead absorption and cost overruns on certain engineering contracts in fiscal 2005 versus the prior fiscal year. Gross profit margin on product sales this fiscal year was 8.2 percent compared to 19.6 percent and 14.5 percent in the fiscal years ended March 31, 2005 and 2004, respectively. The decrease in margins on product sales for this fiscal year versus the prior fiscal year resulted from decreased overhead absorption associated with lower revenue levels in our power products segment. The increase in margins on product sales for the fiscal year ended March 31, 2005 versus the fiscal year ended March 31, 2004 is attributable to a more favorable product mix.
Research and development expenditures for the fiscal year ended March 31, 2006 increased to $241,563 compared to $171,918 and $461,223 for the fiscal years ended March 31, 2005 and 2004, respectively. The increase in research and development expenditures for the fiscal year ended March 31, 2006 compared to the prior fiscal year was primarily due to higher levels of work applied to cost-share type contracts and internally funded programs. The decrease in research and development expenditures for the fiscal year ended March 31, 2005 compared to the prior fiscal year was primarily due to the completion of an internally funded development of a new microprocessor platform for our power electronic controls.
Production engineering costs were $783,579 for the fiscal year ended March 31, 2006 versus $211,933 and zero for the prior two fiscal years. The increase is attributable to our strategy to increase our manufacturing capability and infrastructure, and consists primarily of salary and overhead costs for newly hired manufacturing management, engineering and staff personnel.
Selling, general and administrative expense this fiscal year was $2,191,289 compared to $1,686,409 and $1,799,472 for the fiscal years ended March 31, 2005 and 2004, respectively. The increase for this fiscal year versus last fiscal year is primarily attributable to deferred compensation expense associated with executive employment agreements, higher levels of audit expenses associated with implementation of the Sarbanes-Oxley Act, selling expenses, and the write-down of a receivable from a customer who filed for bankruptcy protection. The decrease in general and administrative expenses for the fiscal year ended March 31, 2005 versus the fiscal year ended March 31, 2004 is primarily attributable to lower insurance premium costs.
Impairment of long-lived assets for the fiscal year ended March 31, 2006 of $2,963 is primarily attributable to the impairment and disposal of obsolete equipment and abandoned patent applications. The impairment of long-lived assets for the fiscal years ended March 31, 2005 and March 31, 2004 were $39,748 and $30,523, respectively, and are attributable to the write-down of costs associated with abandoned patent applications.
Interest income rose to $344,751 for the current fiscal year compared to $97,188 and $26,362 for the fiscal years ended March 31, 2005 and 2004, respectively. The increase is attributable to higher levels of invested cash and higher yields on invested balances during the fiscal year versus the two prior fiscal years.
Interest expense decreased to $63,003 for the year ended March 31, 2006 compared to $74,005 and $84,193 for the fiscal years ended March 31, 2005 and 2004, respectively. The decrease is due to lower average mortgage borrowings outstanding throughout the fiscal year as compared to the prior fiscal year.
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 for $0.9 million in cash and a 15 percent ownership interest in the purchaser. We did not record any value for the common stock of the purchaser received in this transaction due to uncertainty regarding our ability to realize economic value on the resale of our ownership interest. In addition, the purchaser executed a sublease on our St. Charles, Missouri manufacturing facility for the remaining term of our lease. Due to substantial doubt regarding the purchasers financial capability to meet its obligation under the sublease, we recorded a liability, at that time, of $204,985, which represented our best estimate of the present value of future cash outflows that may arise if the purchaser defaulted on the sublease prior to the completion of its term. During the quarter ended September 30, 2005, we wrote-off uncollectible past due rent receivables from the sublessee in the amount of $95,880 and reduced the fair value estimate of our potential liability under the master lease at that time by $67,122 to reflect our expectations regarding our ability to identify a new tenant and complete a new sublease on the facility. In December 2005, the purchaser sold the assets of its business to another business at a price which rendered our equity investment worthless. Coincident with this transaction we received a promissory note in the amount of $98,420 from the original purchaser together with an assignment of future commission income to be earned under a commission agreement between the buyer and the original purchaser. Income assignments are to cease when the promissory note is paid in full. Due to substantial doubt regarding our ability to receive payments under the assignment agreement and promissory note, we have fully reserved the value of the promissory note on our books reducing its recorded value to zero. The acquiring business entered into a sublease agreement on the facility with us for the remaining term of our master lease. At this time we believe our currently recorded liabilities for discontinued operations are adequate to cover potential future obligations that may arise.
The operating results of this business for the year ended March 31, 2006, 2005 and 2004, respectively, 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 discontinued operations for the fiscal year ended March 31, 2006 was $27,584, or nil per common share compared to a loss from discontinued operations of $54,201, or nil per common share, and $3,364,638, or $0.18 per common share, for the fiscal years ended March 31, 2005 and 2004, respectively. The current year loss represents legal fees incurred for litigation, and rent expense net of sublease payments on our Missouri manufacturing facility. See also Note 12 to the consolidated financial statements.
Liquidity and Capital Resources
Our cash balances and liquidity throughout the fiscal year ended March 31, 2006 were adequate to meet operating needs. At March 31, 2006, we had working capital (the excess of current assets over current liabilities) of $10,415,409 compared to $8,788,826 at March 31, 2005. The increase of $1,626,583 in working capital is primarily attributable to cash proceeds from a private placement and the exercise of employee stock options and underwriter warrants totaling $4,530,747, lower levels of accounts receivable and inventories, offset by operating losses and lower levels of accounts payable.
For the year ended March 31, 2006, net cash used in operating activities of continuing operations was $1,597,381 compared to net cash used in operating activities of continuing operations of $2,069,550 and $1,292,785 for the years ended March 31, 2005 and 2004, respectively. The decrease in cash used for the year ended March 31, 2006 is primarily attributable to lower levels of accounts receivables and inventories offset by higher operating losses, and lower levels of accounts payable. The increase in cash used in operating activities for the year ended March 31, 2005 versus cash used in operating activities for year ended March 31, 2004 was primarily due to higher levels of operating losses, accounts receivable and inventories.
Net cash used in investing activities of continuing operations for the fiscal year ended March 31, 2006 was $4,246,130 compared to $2,407,507 for the previous fiscal year. The change this fiscal year versus last fiscal year was primarily due to cash used for the purchase of short-term investment securities of $3,788,800, and investments in property and equipment of $420,990. The increase in cash used in investing activities for the year ended March 31, 2005 versus cash provided by investing activities for the year ended March 31, 2004 was primarily due to cash used for the purchase of short-term investment securities of $2,173,475.
Net cash provided by financing activities of continuing operations was $4,309,003 for the fiscal year ended March 31, 2006 versus $6,668,343 for the preceding fiscal year. The decrease is attributable to reduced cash proceeds from the sale of common stock this year versus last year. Net cash provided by financing activities for fiscal 2005 increased to $6,668,343 versus the fiscal 2004 level of $2,032,800 due to increased cash proceeds from the sale of common stock, partially offset by reduced proceeds from bank borrowings.
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; however, we cannot provide assurance that we will be successful in achieving these objectives. We believe our available cash resources are sufficient to fund our expected level of operations for the next several years. 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, among other things. We expect to fund our operations over at least the next several years 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.
The following table presents information about our contractual obligations and commitments as of March 31, 2006:
(1) Includes future salary payments, potential retirement pay, and severance pay obligations of which $210,861 has been recorded as long-term deferred compensation under executive employment agreements.
(2) Does not include sublease payments of $187,500 over the remaining term of a facility lease.
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 effect the dollar values reported in the consolidated financial statements and accompanying notes. Note 1 to the consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, allowance for doubtful accounts receivables, costs to complete contracts, recoverability of inventories, and potential future lease obligations arising from discontinued operations. 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.
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 customers particular business. During fiscal 2006 a large, well established customer filed for bankruptcy protection. As a result we charged-off $63,000 owed to us by the customer as a bad debt expense. Because substantially all of our customers are large well-established companies with excellent credit worthiness and our view that the bad debt expense associated with our customers bankruptcy filing is an isolated, customer specific event, we have not established a reserve at March 31, 2006 for potentially uncollectible trade accounts receivable. It is 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.
Asset Recovery and Realization Discontinued Operations
In May 2004, we completed the divestiture of equipment and inventory of our electronics product segment for $0.9 million in cash and a 15 percent ownership interest in the purchaser. We did not record any value for the common stock of the purchaser received in this transaction due to uncertainty regarding our ability to realize economic value on the resale of our ownership interest. In addition, the purchaser executed a sublease on our St. Charles, Missouri manufacturing facility for the remaining term of our lease. Due to substantial doubt regarding the purchasers financial capability to meet its obligation under the sublease, we recorded a liability, at that time of $204,985, which represented our best estimate of the present value of future cash outflows that may arise if the purchaser defaulted on the sublease prior to the completion of its term. During the quarter ended September 30, 2005, we wrote-off uncollectible past due rent receivables from the sublessee in the amount of $95,880 and reduced the fair value estimate of our potential liability under the master lease, at that time, by $67,122 to reflect our expectations regarding our ability to identify a new tenant and complete a new sublease on the facility. In December 2005, the purchaser sold the assets of its business to another business at a price which rendered our equity investment worthless. Coincident with this transaction we received a promissory note in the amount of $98,420 from the original purchaser together with an assignment of future commission income to be earned under a commission agreement between the buyer and the original purchaser. Income assignments are to cease when the promissory note is paid in full. Due to substantial doubt regarding our ability to receive payments under the assignment agreement and promissory note, we have fully reserved the value of the promissory note on our books reducing its recorded value to zero. The acquiring business entered into a sublease agreement on the facility with us for the remaining term of our master lease. At this time we believe our currently recorded liabilities for discontinued operations are adequate to cover potential future obligations that may arise.
Our assessments of the realizable value and collectability of the foregoing financial instruments together with our estimate of future sublease payments could change materially based on future developments and events. Any change in these estimates could result in a material change in our financial condition and results of operations.
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 the 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 managements 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. Managements 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 March 31, 2006 could be materially different from managements estimates, and any modification of managements 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.
New Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, "Inventory Costs-an amendment of ARB No. 43, Chapter 4" ("SFAS 151"), which is the result of its efforts to converge U.S. accounting standards for inventories with international accounting standards. SFAS 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect SFAS 151 to have a material effect on our consolidated financial statements when implemented.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, "Exchanges of Non-monetary Assets- An Amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions" ("SFAS 153"), which replaces the exception permitting non-monetary exchanges of similar productive assets from measurement based on the fair value of the assets exchanged with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS 153 will be effective for non-monetary asset exchanges occurring during fiscal years beginning after June 15, 2005. We do not expect SFAS 153 to have a material effect on our consolidated financial statements when implemented.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R eliminates the alternative to account for employee stock options using the intrinsic value method prescribed by APB 25 and requires the fair value of all share-based payments to employees, including the fair value of employee stock options, to be recognized in the income statement over the period the services are deemed to be performed, which is generally the vesting period.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107"), which provides additional implementation guidance for SFAS 123R. Among other things, SAB 107 provides guidance on share-based payment valuation, income statement classification and presentation, capitalization of costs and related income tax accounting.
In April 2005, the SEC announced the adoption of a new rule that amended the compliance date for SFAS 123R from the next reporting period after June 15, 2005 to the beginning of the first fiscal year beginning after June 15, 2005. SFAS 123R provides for adoption using either a modified prospective or modified retrospective transition method. We expect to adopt SFAS 123R using the modified prospective transition method. Under this transition method, the fair value of all employee stock option awards granted prior to April 1, 2006 and not vested prior to that date, as well as any stock options granted on or after that date, will be recognized as compensation cost in our statement of operations using the straight-line method over the requisite service period to the extent such options are expected to vest. Prior to adopting SFAS 123R, forfeitures were accounted for on the date of forfeiture. Estimated compensation cost arising from stock options granted prior to April 1, 2006, but not vested prior to that date under the modified prospective method that will be recognized in fiscal years beginning April 1, 2006 and later, is $1,179,017. We will continue to use the Black-Scholes-Merton option pricing model to estimate the fair value of stock option awards.
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.
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets, Continued
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows, Continued
See accompanying notes to consolidated financial statements.
(1) Summary of Significant Accounting Policies
(a) Description of Business
(b) Principles of Consolidation
(c) Cash and Cash Equivalents and Short-term Investments
As of March 31, 2006, held-to-maturity securities with a time to maturity of three to six months and six months to one year, respectively, were $651,879 and $5,357,515.
(e) Accounts Receivable
(g) Property and Equipment
(h) Patent and Trademark Costs
(i) Impairment of Long-Lived Assets
(j) Revenue and Cost Recognition
(k) Income Taxes
(l) Research and Development
(m) Equity Compensation
(n) Comprehensive Loss
(o) Loss per Common Share
(p) Use of Estimates
(r) New Accounting Pronouncements
(2) Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts and Billings in Excess of
Costs and Estimated Earnings on Uncompleted Contracts
Inventories at March 31, 2006 and 2005 consist of:
Our raw material inventory is subject to obsolescence and potential impairment due to bulk purchases in excess of customers requirements. We periodically assess our inventory for recovery of its carrying value based on available information, expectations and estimates, and adjust inventory carrying-value to the lower of cost or market for estimated declines in the realizable value.
(4) Investment in Taiwan Joint Venture
(5) Impairment of Long-Lived Assets
(6) Other Current Liabilities
(7) Long-Term Debt
(8) Income Taxes
As of March 31, 2006, we had net operating loss carry-forwards (NOL) of approximately $54 million for U.S. income tax purposes that expire in varying amounts through 2026. Approximately $4.3 million of the net operating loss carry-forwards are attributable to stock options, the benefit of which will be credited to additional paid-in capital if realized. However, due to the provisions of Section 382 of the Internal Revenue Code, the utilization of a portion of these NOLs may be limited. Future ownership changes under Section 382 could occur that would result in additional Section 382 limitations, which could further restrict the use of NOLs. In addition, any Section 382 limitation could reduce our ability for utilization to zero if we fail to satisfy the continuity of business enterprise requirement for the two-year period following an ownership change.
(9) Stockholders Equity
In October 2003 we completed a follow-on offering of 720,000 shares of common stock. The placement agent was issued four-year warrants to acquire 72,000 shares of our common stock at an exercise price of $3.96 per share, which were recorded at fair value. Cash proceeds, net of offering costs, were $2,127,400. All of these warrants were outstanding as of March 31, 2006.
In April 2002 we completed a follow-on offering of 1,160,095 shares of common stock together with two-year warrants to acquire an additional 232,019 shares of common stock. The warrants had an exercise price of $5.73 per share. The placement agent was issued four-year warrants to acquire 116,009 shares of our common stock at an exercise price of $5.17 per share, which were recorded at fair value. Cash proceeds, net of offering costs were $4,435,212. All warrants, other than the placement agents warrants, expired unexercised. All of the placement agents warrants were outstanding at March 31, 2006.
(10) Stock- Based Compensation
The following table summarizes activity under the plans:
Non-Employee Director Stock Option Plan
The following table presents summarized activity under the plan:
The company has a stock bonus plan administered by the Board of Directors, under which 554,994 shares of common stock are available for grant. Under the plan, shares of common stock may be granted to employees, key consultants, and directors who are not employees as additional compensation for services rendered. Vesting requirements for grants under the plan, if any, are determined by the Board of Directors at the time of grant. There were no shares granted under the plan during the fiscal years ended March 31, 2006 and 2005. During the fiscal year ended March 31, 2004, we granted 2,000 shares under the plan.
(11) Significant Customers
(12) Discontinued Operations
(13) Fair Value of Financial Instruments
(14) 401(k) Employee Benefit Plan
(17) Interim Financial Data (Unaudited)
(18) Valuation and Qualifying Accounts
Reference is made to our Current Report on Form 8-K (No. 1-10869) filed on September 21, 2004 regarding a change in independent accountants where there was no disagreement on accounting and financial disclosure, which is incorporated herein by reference.
Additional information required by Item 10 is incorporated by reference from and contained under the headings "Election of Directors", "Management" "Section 16(a) Beneficial Ownership Reporting Compliance" and "Code of Ethics" in our Definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 2, 2006.
The information required by Item 11 is incorporated by reference from and contained under the headings "Executive Compensation", "Option Grants during Fiscal Year 2006" and "Aggregate Option Exercises During Fiscal Year 2006 and Option Values at the End of Fiscal Year 2006 in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 2, 2006.
The information required by Item 12 is incorporated by reference from and contained under the heading "Security Ownership of Certain Owners and Management" in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 2, 2006.
The information required by Item 13 is incorporated by reference from and contained under the headings "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" in our definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 2, 2006.
The information required by Item 14 is incorporated by reference from and contained under the heading "Ratification of Selection of Independent Auditors" in our definitive Proxy Statement for the annual meeting of shareholders to be held August 2, 2006.
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, UQM Technologies, Inc. has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Frederick, Colorado on the 6th day of June, 2006.
UQM TECHNOLOGIES, INC.,
a Colorado Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of UQM Technologies, Inc., in the capacities indicated and on the date indicated.