WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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)

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

Yes   X   No       

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes        No   X  

The number of shares outstanding (including shares held by affiliates) of the registrant’s common stock, par value $0.01 per share at November 1, 2004 was 19,574,730.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

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)

Non-cash Investing and Financing Transactions:

During the six months ended September 30, 2004, we retired property and equipment with an original cost of $88,870 and accumulated depreciation of $88,538.

See accompanying notes to consolidated financial statements.

 

 

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(unaudited)

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 values to the lower of cost or market for estimated declines in the realizable value of our inventories.

 

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)

Warrants

In October 2003, we completed a secondary offering of 720,000 shares of our 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 as a reduction of the proceeds of the offering. All of these warrants were outstanding at September 30, 2004.

In April 2002, we completed a secondary offering of 1,160,095 shares of common stock together with two-year warrants to acquire an additional 232,019 shares of our 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 as a reduction of the proceeds of the offering. All warrants, other than the placement agent’s warrants expired unexercised. All of the placement agent warrants were outstanding at September 30, 2004.

 

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

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 $198,447 at September 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.

In January 2004, we announced our intention to exit the contract electronics manufacturing business whose results we reported as the electronic products segment. On May 18, 2004, we completed the divestiture of the equipment and inventory of this business for $0.9 million in cash and a 15% ownership interest in the purchaser. We have not recorded 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 accrued lease obligation totaling $198,447 at September 30, 2004, which is our estimate of the amount which will not be recoverable under the sublease agreement.

The operating results of this business for the quarters and six months ended September 30, 2004 and 2003 have been reported separately as discontinued operations. Loss from discontinued operations 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 business as discontinued operations.

 

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"), requires presentation of both basic earnings per share and diluted earnings per share. Basic earnings per share is computed by dividing income or loss available to common stockholders by the weighted average number of common shares outstanding during the periods presented. Diluted earnings per share is computed by dividing income or loss available to common stockholders by all outstanding and dilutive potential shares during the periods presented, unless the effect is antidilutive. At September 30, 2004 and 2003, outstanding options to purchase 2,570,105 and 2,770,025 shares of common stock, respectively, and warrants to purchase 188,009, and 536,278 shares of common stock, respectively, were outstanding. For the quarters ended September 30, 2004 and 2003, respectively, options and warrants for 2,248,038 and 2,575,732 shares were not included in the computation of diluted loss per share because the option or warrant exercise price was greater than the average market price of the common stock. For the six months ended September 30, 2004 and 2003, respectively, options and warrants for 1,978,725 and 2,878,930 shares were not included in the computation of diluted loss per share because the option or warrant exercise price was greater than the average market price of the common stock. In-the-money options and warrants determined under the treasury stock method to acquire 26,655 shares and 88,601 shares of common stock for the quarters ended September 30, 2004 and 2003, respectively, and 66,476 shares and 42,727 shares of common stock for the six months ended September 30, 2004 and 2003, respectively, were potentially includable in the calculation of diluted loss per share but were not included, because to do so would be antidilutive.

 

UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

(unaudited)

At September 30, 2004, we have two reportable segments: technology and mechanical products. The technology segment encompasses our technology-based operations including core research to advance our technology, application engineering and product development and job shop production of prototype components. The mechanical products segment encompasses the manufacture and sale of permanent magnet motors. Salaries of the executive officers and corporate general and administrative expense are allocated to our segments annually based on a variety of factors. The percentage allocated to the technology segment and mechanical products segment were 93 percent and 7 percent for the quarter and six months ended September 30, 2004, and for the quarter and six months ended September 30, 2003 were 67 percent and 33 percent, respectively.

Intersegment sales or transfers which were eliminated upon consolidation were $97,650 and $33,406 for the quarters ended September 30, 2004 and 2003, respectively, and $152,250 and $49,624 for the six months ended September 30, 2004 and 2003, respectively.

The technology segment leases office, production and laboratory space in a building owned by the mechanical products segment, based on a negotiated rate for the square footage occupied. Intercompany lease payments, were $44,085 and $41,146 for the quarters ended September 30, 2004 and 2003, respectively, and $88,170 and $82,292 for the six months ended September 30, 2004 and 2003, respectively, and were eliminated upon consolidation.

Our reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different business strategies.

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)

On November 1, 2004 we completed a secondary offering of   3,600,000 shares of our common stock resulting in cash proceeds to the Company, before deducting underwriting commissions and expenses of the offering, of $7,740,000.

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 September 30, 2004 were $2,408,770 and working capital (the excess of current assets over current liabilities) was $2,825,694 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 and cash used in discontinued operations offset, in past, by cash provided by investing activities during the first six months. On November 1, 2004 we completed a secondary offering of  3,600,000 shares of our common stock resulting in cash proceeds to the Company, before deducting underwriting commissions and expenses of the offering, of $7,740,000.

Accounts receivable declined $97,059 to $415,936 at September 30, 2004 from $512,995 at March 31, 2004. The decrease is primarily attributable to faster collections on trade receivables.

Costs and estimated earnings on uncompleted contracts increased $157,355 to $403,339 at September 30, 2004 versus $245,984 at March 31, 2004. The increase is due to less favorable billing terms on contracts in process at September 30, 2004. Estimated earnings on contracts in process declined to $156,038 or 5.9 percent of contracts in process of $2,632,834 at September 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 and lower levels of overhead absorption.

Inventories increased $24,844 to $453,282 principally due to higher levels of raw material, work-in process and finished goods inventories which increased $6,003, $11,036 and $7,805, 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 increases in work-in-process and finished goods inventories are attributable to higher production levels for low volume propulsion systems drive motors and controllers that will be shipped in future periods.

Prepaid expenses increased to $224,917 at September 30, 2004 from $72,649 at March 31, 2004 primarily reflecting the prepayment of insurance premium costs on our commercial insurance coverages.

Assets of discontinued operations was nil at September 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 and the subsequent cessation of operations during the first fiscal quarter. See also note 7 above.

We invested $55,642 for the acquisition of property and equipment during the first six months of the fiscal year compared to $62,612 for the comparable six months last year. The decrease in capital expenditures is primarily due to lower capital spending by the technology segment.

Accounts payable decreased to $364,153 at September 30, 2004 from $392,474 at March 31, 2004, primarily due to the payment of property taxes during the first quarter.

Other current liabilities increased $121,931 to $380,189 at September 30, 2004 from $258,258 at March 31, 2004. The increase is primarily attributable to higher levels of accrued payroll and employee benefits, accrued personal property and real estate taxes, customer deposits and note payable.

Liabilities and commitments of discontinued operations was $99,538 at September 30, 2004 compared to $554,564 at March 31, 2004. The decrease was due to the completion of the divestiture of the equipment and inventory of our electronic products segment and the subsequent cessation of operations during the first fiscal quarter. The balance represents the current portion of the accrued lease obligations reflecting the estimated obligation for future lease payments on subleased facilities of our discontinued electronic products segment. 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.

Billings in excess of costs and estimated earnings on uncompleted contracts decreased $82,605 to $106,647 at September 30, 2004 from $189,252 at March 31, 2004 reflecting billings on engineering contracts at a rate slower than the performance of the associated work during the first six months of the fiscal year.

Long-term debt, less current portion decreased $65,933 to $880,490 at September 30, 2004 reflecting principal repayments on the mortgage debt for our Frederick, Colorado facility.

Long-term accrued lease obligation was $98,909 at September 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. See also note 7 above.

Common stock and additional paid-in capital increased to $195,747 and $58,030,883, respectively, at September 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. On November 1 , 2004 we completed a secondary offering of 3,600,000 shares of our common stock resulting in an increase in common stock and additional paid-in capital, before deducting underwriting commissions and expenses of the offering, of $7,740,000.

Results of Continuing Operations

Continuing operations for the quarter ended September 30, 2004 resulted in a loss of $378,461 or $0.02 per common share on total revenue of $1,234,477 compared to a loss from continuing operations of $458,224 or $0.02 per common share on total revenue of $1,209,023 for the comparable quarter last year. Operations for the second quarter resulted in a net loss of $380,251 or $0.02 per common share versus a net loss of $1,001,981 or $0.05 per common share for the second quarter last year.

Revenue from contract services declined $114,680 or 16.2 percent to $591,309 for the second quarter of fiscal 2004 compared to $705,989 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 increased 27.9 percent to $643,168 compared to $503,034 for the comparable quarter last year. Mechanical products segment product sales revenue increased $66,977 or 19.7 percent to $406,130 compared to $339,153 for the comparable quarter last year due to increased shipments of fuel cell air compressor drive motors. Technology segment product sales revenue increased $73,157 to $237,038 for the quarter ended September 30, 2004 compared to $163,881 for the comparable period last year due to increased shipments of propulsion systems.

Gross profit margins for the second quarter decreased to 8.3 percent compared to 14.4 percent for the comparable quarter last year. Gross profit margins on contract services decreased to 1.5 percent for the second quarter compared to 14.5 percent margin for the comparable quarter last year. The decrease in contract services margins for the quarter is attributable to cost overruns on certain engineering contracts. Gross profit margin on product sales during the second quarter increased to 14.5 percent compared to 14.3 percent for the comparable quarter last year. The increase in margins on product sales resulted from increased overhead absorption associated with higher production levels in both the technology segment and the mechanical products segment.

Research and development expenditures were $43,639 for the quarter ended September 30, 2004 compared to $151,724 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 September 30, 2004 decreased to $436,050 from $463,825 for the comparable quarter last year. The decrease in general and administrative expenses is attributable to lower insurance premium costs in the current quarter versus the comparable prior year quarter.

Interest income increased to $8,422 for the second quarter compared to $4,483 for the prior year second quarter. The increase is attributable to higher levels of invested cash and higher yields on invested cash balances during the quarter versus the comparable quarter last year.

Interest expense decreased by $2,870 to $19,117 for the quarter ended September 30, 2004 versus $21,987 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.

Continuing operations for the six months ended September 30, 2004, resulted in a loss of $1,076,182 or $0.06 per common share on total revenue of $1,918,473 compared to a loss from continuing operations of $642,222 or $0.03 per common share on total revenue of $3,088,919 for the comparable period last year. Operations for the six months ended September 30, 2004 resulted in a net loss of $1,095,154 or $0.06 per common share versus a net loss of $1,392,307 or $0.07 per common share for the same period last year.

Revenue from contract services declined $332,005 or 24.8 percent to $1,007,299 for the six months ended September 30, 2004 compared to $1,339,304 for the comparable period last year. The decrease is primarily attributable to cost overruns on certain engineering contracts which negatively impacted revenue recognition during the first half of the year.

Product sales revenue for the first half declined 47.9 percent to $911,174 compared to $1,749,615 for the comparable period last year. Mechanical products segment product sales revenue for the six months period decreased $721,681 or 53.5 percent to $627,536 compared to $1,349,217 for the comparable period last year due to decreased shipments of wheelchair propulsion motors. Technology segment product sales revenue decreased $116,760 to $283,638 for the six months ended September 30, 2004 compared to $400,398 for the comparable period last year due to lower levels of product sales due to the transfer of certain production products to our mechanical products segment.

Gross profit margins for the first half decreased to a negative 1.6 percent compared to 19.1 percent for the comparable period last year. Gross profit margins on contract services decreased to a negative 15.6 percent for the six months ended September 30, 2004 compared to 22.4 percent margin for the comparable period last year. The decrease in contract services margins for the current fiscal period is attributable to estimated cost overruns on certain engineering contracts. Gross profit margin on product sales during the first half declined to 13.9 percent compared to 16.6 percent for the comparable period last year. The decrease in margins on product sales resulted from higher production costs related to our newly released propulsion system which includes our new microprocessor platform for its power electronic controls decreased overhead absorption associated with lower production levels for wheelchair motors.

Research and development expenditures were $95,675 for the six months ended September 30, 2004 compared to $296,513 for the comparable period last year. The decrease was primarily due to reduced investment in the internally funded development of a new microprocessor platform for our power electronic controls in the first half of the year versus the comparable prior year period.

General and administrative expense for the six months ended September 30, 2004 increased to $937,991 from $902,427 for the same period last year. The increase in general and administrative expenses is attributable to severance expense for an executive who retired.

Interest income increased to $16,789 for the first half compared to $11,070 for the comparable prior year period. The increase is attributable to higher levels of invested cash and higher yields on invested cash balances during the six-month period versus the comparable period last year.

Interest expense decreased by $5,624 to $38,977 for the six months ended September 30, 2004 versus $44,601 for the comparable period last year. The decrease is attributable to lower average mortgage borrowings outstanding throughout the current fiscal period versus the comparable period 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 obligations were reclassified under the caption "accrued lease obligation". During the fiscal first qurater 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 and six months ended September 30, 2004 was $1,790 or nil per common share and $18,972 or nil per common share, respectively, compared to a loss from discontinued operations of $543,757 or $0.03 per common share and $ 750,085 or $0.04 per common share for the prior year quarter and six-month period.

Liquidity and Capital Resources

Our cash balances and liquidity throughout the first half of the fiscal year were adequate to meet operating needs. At September 30, 2004, we had working capital (the excess of current assets over current liabilities) of $2,825,694 compared to $3,972,559 at March 31, 2004. Working capital decreased by $1,146,865 primarily due to operating losses during the first half. On November 1 , 2004 we completed a secondary offering of 3,600,000 shares of our common stock resulting in net cash proceeds of $6,817,400.

Net cash used in operating activities of continuing operations was $1,178,131 for the six months ended September 30, 2004 versus net cash used of $677,251 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 half was $820,136 compared to cash used in investing activities of $109,013 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 used in financing activities of continuing operations was $3,680 for the six months ended September 30, 2004 compared to cash provided by financing activities of $36,964 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 September 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, including the cash proceeds from our secondary offering of common stock completed on October , 2004, are sufficient to fund our expected level of operations for at least two years. 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 automakers 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 expect to make substantial investments from the proceeds of our recently completed secondary offering of common stock 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 two years from existing cash 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, 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 September 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 is 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 $198,447 at September 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 September 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 September 30, 2004. A one-percent change in the prime interest rate would increase or decrease interest expense by $1,710 on an annual basis based on outstanding borrowings at September 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 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.

The Annual Meeting of the Shareholders of UQM Technologies, Inc. was held on August 11, 2004. The following is a summary of the matters submitted to a vote of securityholders and the results of the voting thereon:

Proposal 1: Election of Directors

The following factors, 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. For the quarters and six months ended September 30, 2004 and 2003 our net loss was $380,251 and $1,095,154, and $1,001,981 and $1,392,307, respectively. For the fiscal years ended March 31, 2004, 2003 and 2002 our net loss was $4,786,953, $3,598,650 and $8,592,655, respectively.

Our accumulated deficit at September 30, 2004 was $53,238,135 and our accumulated deficit at March 31, 2004 and 2003 was $52,142,981 and $47,356,028, respectively.

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 six months ended September 30, 2004 was $1,095,154 versus a net loss for the comparable period last year of $1,392,307. At September 30, 2004, our cash balances were $2,408,770. For our most recently completed fiscal year ended March 31, 2004 we had a net loss of $4,786,953 which includes the impairment of the carrying value of our discontinued electronic products segment and other estimated losses from the discontinuance of this business totaling $3,364,638. 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 we expect 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, 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 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. 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 receive 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 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.

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.

We are defending a lawsuit that has been brought against our wholly owned subsidiary, UQM Electronics, Inc., involving breach of contract and other claims. An adverse outcome of this lawsuit could have a material adverse effect on our financial condition, results of operations and liquidity.

A lawsuit has been filed against our wholly owned subsidiary, UQM Electronics, Inc., alleging breach of contract and other claims. For a description of this legal action, see "Item 1. Legal Proceedings." This action is in a preliminary phase and the ultimate outcome is uncertain. The claimed damages exceed our working capital. An adverse outcome of this lawsuit could have a material adverse effect on our financial condition, results of operations and liquidity.