UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

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

For the transition period from _____ to _____

Commission File Number 1-10869

                   UQM TECHNOLOGIES, INC.               

(Exact name of registrant as specified in its charter)

        7501 Miller Drive, Frederick, Colorado 80530       

(Address of principal executive offices) (Zip Code),

                              (303) 278-2002                                

(Registrant’s telephone number, including area code)

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets, Continued

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Report contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. These statements appear in a number of places in this Report and include statements regarding our plans, beliefs or current expectations, including those plans, beliefs and expectations of our officers and directors with respect to, among other things the development of markets for our products; the adequacy of our cash balances and liquidity to meet future operating needs, and our ability to issue equity or debt securities; and the effect of legal actions and claims that we are involved in. Important Risk Factors that could cause actual results to differ from those contained in the forward-looking statements are listed below in Part II, Item 5 Other Information.

Financial Condition

Cash and cash equivalents at June 30, 2004 were $2,887,678 and working capital (the excess of current assets over current liabilities) was $3,239,000 compared with $3,005,709 and $3,972,559, respectively, at March 31, 2004. The decrease in cash and cash equivalents and working capital is primarily attributable to cash used by operating activities during the first quarter.

Accounts receivable declined $18,597 to $494,398 at June 30, 2004 from $512,995 at March 31, 2004. The decrease is primarily attributable to lower revenue levels.

Costs and estimated earnings on uncompleted contracts increased $81,550 to $327,534 at June 30, 2004 versus $245,984 at March 31, 2004. The increase is due to less favorable billing terms on contracts in process at June 30, 2004. Estimated earnings on contracts in process declined to $72,381 or 2.5 percent of contracts in process of $2,942,226 at June 30, 2004 compared to estimated earnings on contracts in process of $305,943 or 12.2 percent of contracts in process of $2,500,059 at March 31, 2004. The decrease in estimated margins on contracts in process is attributable to anticipated cost overruns on certain engineering projects.

Inventories increased $203,247 to $631,685 principally due to higher levels of raw material, work-in process and finished goods inventories which increased $75,357, $109,715 and $18,175, respectively. The increase in raw materials inventories is attributable to higher stocking levels associated with renewed production of wheelchair propulsion motors during the quarter. The increase in work-in-process inventories is attributable to higher production levels for low volume propulsion systems and fuel cell air compressor drive motors that will be shipped in future periods.

Prepaid expenses increased to $256,943 at June 30, 2004 from $72,649 at March 31, 2004 reflecting the prepayment of insurance premium costs on our commercial insurance coverages.

Assets of discontinued operations was nil at June 30, 2004 compared to $1,226,943 at March 31, 2004 due to the completion of the divestiture of the equipment and inventory of our electronic products segment on May 18, 2004 and the subsequent cessation of operations. See also note 7 above.

We invested $30,895 for the acquisition of property and equipment during the first quarter of the fiscal year compared to $44,733 for the comparable quarter last year. The decrease in capital expenditures is primarily due to a planned reduction in capital spending by the technology segment.

Accounts payable increased to $504,746 at June 30, 2004 from $392,474 at March 31, 2004, primarily due to the increased material purchases in our technology and motor manufacturing segments.

Other current liabilities increased $130,779 to $389,037 at June 30, 2004 from $258,258 at March 31, 2004. The increase is primarily attributable to a severance payment to an executive who retired and higher levels of employee benefits, property taxes, accrued engineering losses and customer deposits.

Note payable increased to $96,393 at June 30, 2004 compared to nil at March 31, 2004 due to the financing of premiums on our commercial insurance coverages.

Liabilities of discontinued operations was nil at June 30, 2004 compared to $542,617 at March 31, 2004 due to the completion of the divestiture of the equipment and inventory of our electronic products segment on May 18, 2004 and the subsequent cessation of operations. See also note 7 above.

Billings in excess of costs and estimated earnings on uncompleted contracts increased $12,520 to $201,772 at June 30, 2004 from $189,252 at March 31, 2004 reflecting billings on engineering contracts at a rate faster than the performance of the associated work during the first quarter of each fiscal year.

Long-term debt, less current portion decreased $32,680 to $913,743 at June 30, 2004 reflecting principal repayments on the mortgage debt for our Frederick, Colorado facility.

Long-term accrued lease obligation, less current portion was $155,764 at June 30, 2004 compared to $192,118 at March 31, 2004, reflecting the estimated obligation for future lease payments on subleased facilities of our discontinued electronic products segment. On May 18, 2004, we completed a sublease with the purchaser of the assets of this discontinued segment for the remaining term of our lease. However, we are the primary obligor on the lease and due to doubt regarding the sublessee’s financial capability to meet its obligation under the sublease, we have recorded the foregoing accrued lease obligation which is our estimate of the amount which will not be recoverable under the sublease agreement. See also note 7 above.

Common stock and additional paid-in capital increased to $195,747 and $58,030,883, respectively, at June 30, 2004 compared to $195,726 and $58,025,631 at March 31, 2004. The increase is attributable to cash proceeds from the sale of common stock under our Employee Stock Purchase Plan which accounted for $4,547 of the change and the exercise of common stock options issued under our 2002 Equity Incentive Plan which accounted for the remainder of the change.

Results of Continuing Operations

Continuing operations for the quarter ended June 30, 2004, resulted in a loss of $697,721, or $0.04 per common share, on total revenue of $683,996 compared to a loss from continuing operations of $183,998, or $0.01 per common share, on total revenue of $1,879,896 for the comparable quarter last year. Operations for the first quarter resulted in a net loss of $714,903, or $0.04 per common share, versus a net loss of $390,326, or $0.02 per common share, for the first quarter last year.

Revenue from contract services declined $217,325, or 34.3 percent, to $415,990 for the first quarter of fiscal 2004 compared to $633,315 for the comparable quarter last year. The decrease is primarily attributable to cost overruns on certain engineering contracts which negatively impacted revenue recognition during the quarter.

Product sales revenue for the quarter declined 78.5 percent to $268,006 compared to $1,246,581 for the comparable quarter last year. Mechanical products segment product sales revenue decreased $788,658, or 78.1 percent, to $221,406 compared to $1,010,064 for the comparable quarter last year due to decreased shipments of wheelchair propulsion motors. Technology segment product sales revenue decreased $189,917 to $46,600 for the quarter ended June 30, 2004 compared to $236,517 for the comparable period last year due to reduced shipments of low volume motors and controllers and the transfer of production of fuel cell air compressor drive motors to our mechanical products segment from the our technology segment.

Gross profit margins for the first quarter decreased to a negative 19.3 percent compared to 22.1 percent for the comparable quarter last year. Gross profit margins on contract services decreased to a negative 39.8 percent for the first quarter compared to 31.2 percent margin for the comparable quarter last year. The decrease in contract services margins for the quarter is attributable to estimated cost overruns on certain engineering contracts. Gross profit margin on product sales during the first quarter declined to 12.4 percent compared to 17.5 percent for the comparable quarter last year. The decrease in margins on product sales resulted from decreased overhead absorption associated with lower production levels for wheelchair motors.

Research and development expenditures were $52,036 for the quarter ended June 30, 2004 compared to $144,789 for the comparable quarter last year. The decrease was primarily due to reduced investment in the internally funded development of a new micro-processor platform for our power electronic controls in the current quarter versus the comparable prior year quarter.

General and administrative expense for the quarter ended June 30, 2004 increased to $499,707 from $437,793 for the comparable quarter last year. The increase in general and administrative expenses is attributable to higher levels of marketing costs and severance expense for an executive who retired.

Interest income increased to $8,367 for the first quarter compared to $6,587 for the prior year first quarter. The increase is attributable to higher levels of invested cash during the quarter versus the comparable quarter last year.

Interest expense decreased by $2,754 to $19,860 for the quarter ended June 30, 2004 versus $22,614 for the comparable quarter last year. The decrease is attributable to lower average mortgage borrowings outstanding throughout the current fiscal quarter versus the comparable quarter last year.

Results of Discontinued Operations

In January 2004, we announced our intention to exit our contract electronics manufacturing business whose operations were reported as the electronic products segment. For all periods presented, we have reclassified operating results of the electronic products segment to loss from operations of discontinued electronic products segment. As of March 31, 2004, all segment assets were reclassified to the balance sheet caption "assets of discontinued operations", all segment liabilities other than future lease obligation were reclassified under the caption "liabilities of discontinued operations." Estimated future lease obligation were reclassified under the caption "accrued lease obligation". On May 18, 2004, we completed the divestiture of the assets of this business for $900,000 in cash and a 15% ownership interest in the purchaser. We did not record any value for the common stock of the purchaser received in this transaction. In addition, the purchaser executed a sublease on our St. Charles, Missouri manufacturing facility for the remaining term of our lease. However, we are the primary obligor on the lease and due to doubt regarding the sublessee’s financial capability to meet its obligation under the sublease, we have recorded an amount under the caption "accrued lease obligation" which is our estimate of the amount which will not be recoverable under the sublease agreement. See also note 7 above.

Loss from discontinued operations for the quarter ended June 30, 2004 was $17,182, or nil per common share, compared to a loss from discontinued operations of $206,328, or $0.01 per common share, for the prior year first quarter.

Liquidity and Capital Resources

Our cash balances and liquidity throughout the first quarter were adequate to meet operating needs. At June 30, 2004, we had working capital (the excess of current assets over current liabilities) of $3,239,000 compared to $3,972,559 at March 31, 2004. Working capital decreased by $733,559 primarily due to operating losses during the quarter.

Net cash used in operating activities of continuing operations was $798,352 for the quarter ended June 30, 2004 versus net cash used of $529,081 for the comparable period last year. The increased cash usage is primarily attributable to higher levels of operating losses.

Net cash provided by investing activities of continuing operations for the first quarter was $843,756 compared to cash used in investing activities of $85,301 for the comparable period last year. The increase is primarily due to cash proceeds from the divestiture of the assets of our contract electronics manufacturing business for $895,000, net of selling expenses.

Net cash provided by financing activities of continuing operations was $73,229 for the quarter ended June 30, 2004 versus $139,381 for the comparable period last year. The decrease is attributable to reduced proceeds from bank borrowings during the current fiscal year.

Our debt facilities require compliance with certain financial covenants in order for the financing to continue to be available on a long-term basis. At June 30, 2004 we were in compliance with all financial covenants. In the event our operating results are not sufficient to maintain compliance with these covenants, we could experience a material adverse change in liquidity.

We expect to manage our operations and working capital requirements to minimize the future level of operating losses and working capital usage, 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 current level of operations for at least fifteen months. During fiscal 2004, the emerging market for hybrid electric automobiles began to expand at an unexpected rate due to the market success of the Toyota Prius hybrid electric passenger car and the Honda Insight and Civic hybrid electric passenger cars. As a result, several auto makers have announced planned introductions of similar vehicles and others are expected to follow as the market acceptance of these vehicles continues to grow. As a result of this industry trend, we currently expect expanded demand for our proprietary propulsion systems which are suited for a wide range of hybrid electric vehicle platforms. In order to capitalize on this anticipated expansion in demand, we currently expect to make substantial investments in human resources, manufacturing facilities and equipment, production and application engineering among other things, and the scope of these investments may exceed our currently available cash resources. Accordingly, we expect to fund our future operations from existing cash balances and from the future issuance of equity or debt securities or a combination thereof. We can, however, not provide any assurance that financing or equity capital to fund planned operations will be available on terms acceptable to us. In the event financing or equity capital to fund future growth is not available, we will modify our strategy to align our operations with then available financial resources.

The following table presents information about our contractual obligations and commitments as of June 30, 2004:

*Excludes sublease payments

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in United States requires management to make judgements, assumptions and estimates that effect the dollar values reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for but not limited to allowance for doubtful accounts receivables, costs to complete contracts, recoverability of inventories and warranty costs. Actual results could differ materially from these estimates. The following critical accounting policies are impacted significantly by judgements, 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. 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

On May 18, 2004, we completed the sale of the assets of our electronic products segment. Part of the consideration received from this divestiture was common stock of the purchasing entity, a privately-held corporation. In our judgement there is doubt regarding our ability in the future to sell or otherwise liquidate the common stock of the purchasing entity, and accordingly, we recorded the stock at no value as a result of this uncertainty. In the event we are able to realize value from the sale or liquidation of this asset at a future date, we would at that time record a gain equal to the amount of the value received. In addition, the purchaser completed a sublease agreement with us whereby it assumed the remaining lease obligation under our master lease. Similarly, in our judgement there is doubt regarding the purchaser’s financial capability to meets its obligations under the sublease agreement. Accordingly, we have recorded a liability of $195,257 at June 30, 2004 which represents the amount we estimate will not be recoverable under the sublease agreement. This estimate could be revised either up or down depending on future events, and any such changes could result in a material impact on our financial condition, results of operations and liquidity.

We maintain raw material inventories of electronic components, motor parts and other materials to meet our expected manufacturing needs for proprietary products. Some of these components may become obsolete or otherwise impaired due to bulk purchases in excess of customer requirements. Accordingly, we periodically assess 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 and any resulting change in our estimates. It is reasonably possible, that future events or changes in circumstances could cause the realizable value of our inventories to decline materially, resulting in 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 management’s best estimate of the total costs to be incurred to complete the project. Many of these contracts involve the application of our technology to customers’ products and other applications with demanding specifications. Management’s best estimates have sometimes been adversely impacted by unexpected technical challenges requiring additional analysis and redesign, failure of electronic components to operate in accordance with manufacturers’ published performance specifications, unexpected prototype failures requiring the purchase of additional parts and a variety of other factors that may cause unforeseen delays and additional costs. It is reasonably possible that total costs to be incurred on any of the projects in process at June 30, 2004 could be materially different from management’s estimates, and any modification of management’s estimate of total project costs to be incurred could result in material changes in the profitability of affected projects or result in material losses on any affected projects.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. We do not use financial instruments to any degree to manage these risks and do not hold or issue financial instruments for trading purposes. All of our product sales, and related receivables are payable in U.S. dollars. We are subject to interest rate risk on our debt obligations. One of our long-term debt obligations has a variable rate of interest indexed to the prime rate. The interest rate on these instruments approximates current market rates as of June 30, 2004. A one-percent change in the prime interest rate would increase or decrease interest expense by $1,829 on an annual basis based on outstanding borrowings at June 30, 2004 on debt with adjustable interest rate provisions.

Quarterly Controls Evaluation and Related CEO and CFO Certifications.

We conducted an evaluation of the effectiveness of the design and operation of our "disclosure controls and procedures" (Disclosure Controls) as of the end of the period covered by this Quarterly Report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Attached as exhibits to this Quarterly Report are certifications of the CEO and the CFO, which are required in accord with Rule 13(a)-15(e) of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Definition of Disclosure Controls

Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our Disclosure Controls include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in accordance with US generally accepted accounting principles. To the extent that components of our internal control over financial reporting are included within our Disclosure Controls, they are included in the scope of our quarterly controls evaluation.

Limitations on the Effectiveness of Controls

Our management, including the CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

The evaluation of our Disclosure Controls included a review of the controls’ objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the controls evaluation, we sought to identify data errors, controls problems or acts of fraud and confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning controls effectiveness can be reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures made in our Annual Report on Form 10-K. Many of the components of our Disclosure Controls are also evaluated on an ongoing basis by personnel in our Finance organization, as well as our independent auditors who evaluate them in connection with determining their auditing procedures related to their report on our annual financial statements and not to provide assurance on our controls. The overall goals of these various evaluation activities are to monitor our Disclosure Controls, and to modify them as necessary.

Among other matters, we also considered whether our evaluation identified any "significant deficiencies" or "material weaknesses" in our internal control over financial reporting, and whether we have identified any acts of fraud involving personnel with a significant role in our internal control over financial reporting. This information was important both for the controls evaluation generally, and because item 5 in the certifications of the CEO and CFO require that the CEO and CFO disclose that information to our Board’s Audit Committee and to our independent auditors. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions," which are deficiencies in the design or operation of controls that could adversely affect our ability to record, process, summarize and report financial data in the financial statements. Auditing literature defines "material weakness" as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and the risk that such misstatements would not be detected within a timely period by employees in the normal course of performing their assigned functions.

Conclusions

PART II-OTHER INFORMATION

Litigation

Our wholly-owned subsidiary, UQM Electronics, Inc. filed a lawsuit in Circuit Court of St. Louis County, Missouri in June 2002 against Hussmann Corporation, a wholly owned subsidiary of Ingersoll Rand Corporation, a former contract manufacturing customer of our electronic products segment. The lawsuit sought payment for inventory purchased on behalf of the customer and lost profits on a cancelled production order of approximately $700,000 plus attorneys’ fees and other costs. The customer filed various counterclaims, including breach of contract for failing to meet certain deadlines established in the contract , and failure to deliver products that met the specifications of the contract with asserted damages of $6,200,000. On January 16, 2004, the Court issued a ruling dismissing our claims with prejudice. The Court also dismissed Hussmann’s counterclaims with prejudice to the extent they were affected by the commercial impracticability that the Court found to exist and without prejudice to the extent they were not affected by commercial impracticability. Neither party appealed this judgment and the time for appeals expired in February 2004. In May 2004, UQM Electronics, Inc. sold substantially all of its assets, and no longer conducts any business.

In June 2004, Hussmann re-filed suit against UQM Electronics, Inc. in Circuit Court of St. Charles County, Missouri on the same claims that were dismissed in January 2004. Hussmann’s current complaint alleges that its claims for damages with respect to product deliveries due prior to the date Hussmann purported to cancel the production order are not affected by any commercial impracticability. This claim is for damages in excess of $1,500,000 plus prejudgment interest, attorneys’ fees and other costs. Alternatively, Hussmann alleges that the Court had no jurisdiction to dismiss Hussmann’s claims with prejudice based on its finding of commercial impracticability. This claim is for damages in excess of $6,200,000 plus prejudgment interest, attorneys’ fees and other costs. We have answered the complaint and believe that Hussmann’s claims are without merit and intend to contest them vigorously. Nevertheless, this action is in a preliminary stage, and we cannot assure you that there will not be an adverse judgment.

In addition, we are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, and based on current available information, the ultimate disposition of these matters is not expected to have a material adverse effect on our financial position, results of operations or cash flow, although there can be no assurance that adverse developments in these matters could not have a material impact on a future reporting period.

ITEM 5. OTHER INFORMATION

Risk Factors

The following factors and other information in this document and the information incorporated by reference should be carefully considered before investing in our securities.

We have incurred significant losses and may continue to do so.

We have incurred significant losses as shown in the following tables:

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.

We had a net loss of $714,903 during the quarter ended June 30, 2004.  Cash balances were $2,887,678 at June 30, 2004. If our losses continue they could consume some or all of our cash balances. Management expects 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 which will expand our operating losses and require us to secure additional funding beyond our existing cash resources. We cannot assure you, however, that funding will be available on terms acceptable to us.

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 world’s 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.

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 competitor’s 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.