UQM TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(unaudited)

13. Comprehensive Income

The Company's comprehensive loss for the quarter ended June 30, 2002 and 2001 was equal to its net loss.

 

Accumulated comprehensive loss as of June 30, 2002 and March 31, 2002 consists entirely of foreign currency translation adjustments.

 

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cash and cash equivalents at June 30, 2002 was $2,434,960 and working capital (the excess of current assets over current liabilities) was $6,577,494 compared with $1,411,509 and $3,184,735, respectively, at March 31, 2002. The increase in cash and cash equivalents is primarily attributable to proceeds from the sale of common stock, net of repayments of debt.

Accounts receivable declined $100,814 to $2,561,740 at June 30, 2002 from $2,662,554 at March 31, 2002. The decrease is primarily attributable to lower levels of contract service progress billings by the technology segment and improved collections at the Company's electronics segment during the quarter.

Costs and estimated earnings on uncompleted contracts decreased $19,802 to $422,411 at June 30, 2002 from the fiscal 2002 year-end level of $442,213. The decrease was due to accelerated billings of work-in-process on engineering contracts in process. Estimated earnings on contracts in process declined to $637,228 or 25.8 percent of contracts in process of $2,474,456 compared to estimated earnings on contracts in process of $1,025,313 or 29.2 percent of contracts in process of $3,511,911 at March 31, 2002. The decrease in estimated margins on contracts in process is attributable to anticipated cost overruns on certain engineering projects.

Inventories declined $394,308 to $4,242,004 principally due to a decline in raw material and work-in-process inventories which declined $445,149 and $102,184, respectively. The decline in raw materials inventories is attributable to reduced purchases, stocking levels and increased utilization of slow moving inventory in the electronic products segment. The decline in work-in-process inventories is attributable to lower production volumes in the electronic products segment.

Prepaid expenses increased to $439,277 at June 30, 2002 from $220,528 at March 31, 2002 reflecting the prepayment of insurance premium costs on the Company's commercial insurance coverages.

Other current assets declined $130,809 at June 30, 2002 primarily due to the application of deferred offering costs upon completion of a secondary stock offering during the quarter.

Equipment of discontinued operations held for sale, net declined to zero at June 30, 2002 compared to $1,253,432 at March 31, 2002 reflecting completion of the divestiture of the assets of the discontinued gear business.

The Company invested $155,911 for the acquisition of property and equipment during the first quarter compared to $267,808 for the comparable quarter last year. The decrease in capital expenditures is primarily attributable to higher level of expenditures for manufacturing equipment at the Company's electronic products segment during the prior year's first quarter associated with the purchase and installation of operations software.

Accounts payable declined to $2,448,988 at June 30, 2002 from $2,693,312 at March 31, 2002, primarily due to a decline in raw material inventory purchases during the quarter.

Other current liabilities increased $122,768 to $691,322 at the end of the first quarter from $568,554 at March 31, 2002. The increase is primarily attributable to increased levels of accrued payroll and employee benefits, accrued personal property and real estate taxes, and accrued warranty reserves which were partially offset by decreased accrued legal and accounting fees.

In fiscal year 2001, a limited partnership in which the Company was a 50 percent owner sold its principal asset, the Company's headquarters building in Golden, Colorado, and was subsequently liquidated. As a result of this transaction, the Company recorded a deferred gain that is being recognized ratably over the remaining term on the Company's facility lease which expires in September 2002. As a result deferred gain on sales of real estate decreased $161,069 to $161,070 at June 30, 2002.

In April the Company completed a secondary offering of 1,160,095 shares of common stock together with two year warrants to purchase 232,019 shares of common stock at an exercise price of $5.73 per share. Cash proceeds, net of offering expenses, were $4,431,254. Immediately following completion of the offering the Company applied $3,182,947 of the proceeds to the reduction of debt. Principally as a result of this transaction, current portion of long-term debt decreased $497,269 to $64,774, long-term debt decreased $637,116 to $470,907 and revolving line-of-credit declined $2,254,000 to zero at June 30, 2002.

Term debt and accrued future losses of discontinued operations decreased $789,960 to zero at June 30, 2002 due to the repayment of the equipment term loans and the completion of the divestiture of the discontinued gear manufacturing operations.

Billings in excess of costs and estimated earnings on uncompleted contracts declined $225,870 to $156,869 at June 30, 2002 from $382,739 at March 31, 2002 reflecting billings on engineering contracts at a rate greater than the performance of the associated work during the quarter.

Common stock and additional paid-in capital increased to $188,429 and $55,876,403 at June 30, 2002, respectively, compared to $176,798 and $51,444,359 at March 31, 2002. The increases were primarily attributable to completion of a secondary offering of common stock during the quarter.

Continuing operations for the quarter ended June 30, 2002, resulted in a net loss of $412,920 or $0.02 per common share compared to a net loss of $172,679 or $0.01 per common share for the quarter ended June 30, 2001. EBITDA from continuing operations for the first quarter declined by $370,508 to ($50,858) or nil per common share compared to $319,650 or $0.02 per common share for the first quarter last year.

EBITDA is a broadly used financial term which many investment professionals use as an approximation of the operating cash flow generated by a business. Management believes that this information may be useful to investors in the Company due to the amount of non-cash depreciation and amortization charges reported by the Company. Investors are cautioned, however, that EBITDA is not a replacement or substitute for net earnings or loss determined by the application of generally accepted accounting principles and our calculation of EBITDA may not be comparable to similarly titled disclosures made by other companies.

Revenue from contract services rose $94,921 or 14 percent to $771,152 compared to $676,231 for the comparable quarter last year. The increase in contract services revenue is attributable to improved demand for development programs.

Product sales for the quarter declined 31 percent to $4,001,461 compared to $5,833,562 for the comparable quarter last year. Mechanical products segment revenue increased $162,428 or 17 percent to $1,094,963 compared to $932,535 for the comparable quarter last year due to increased shipments of wheelchair motors. Electronic products segment sales revenue for the quarter declined by $1,789,913 or 39 percent to $2,831,829 from $4,621,742 for the first quarter last year due to curtailment of shipments of handheld computers and reduced order flow from substantially all customers. In addition, the Company expects to experience an additional 25 percent decline in revenue at its electronic products segment during the second quarter. The anticipated reduction in second quarter revenues is due to the phasing-out of certain models of automobiles containing electronic assemblies designed by Tyco. The anticipated decline in revenue is not expected to have a material effect on operating results for the quarter due to improved pricing on remaining Tyco production. Technology product sales declined to $74,669 for the quarter ended June 30, 2002 compared to $279,285 for the prior year quarter due to reduced demand for propulsion systems.

Consolidated gross profit margins for the first quarter decreased to 7.9 percent compared to 14.1 percent for the comparable quarter last year. Gross profit margin on contract services decreased to 14.6 percent from 23.5 percent for the quarters ended June 30, 2002 and 2001, respectively. The decline in gross profit margin on contract services is attributable to changes in estimated completion costs on development programs which were recognized during the quarter. Gross profit margins on product sales during the first quarter declined to 6.6 percent compared to gross profit margins of 13.0 percent for the comparable quarter last year. The decrease in margins on product sales is primarily attributable to decreased overhead absorption due to declining revenue levels at the Company's electronic products segment.

General and administrative expense for the quarter ended June 30, 2002 declined to $875,833 compared to $905,950 for the comparable quarter last year. The decrease is primarily attributable to reduced general and administrative salary expense at the Company's electronics and mechanical products segments.

Interest income declined to $8,150 for the first quarter compared to $24,781 for the prior year first quarter. The decrease is attributable to lower levels of invested cash and lower interest rates on invested funds during the quarter versus the comparable quarter last year.

Interest expense decreased by $87,584 to $19,233 for the first quarter versus the comparable quarter last year. The decrease is due to the repayment of equipment term loans and line-of-credit borrowings during the quarter.

Gain on sale of real estate was $161,070 for the quarter ended June 30, 2002 compared to $28,936 for the prior year first quarter. The gain is attributable to the recognition of deferred gain arising from the sale of real estate on a pro-rata basis over the remaining term of the Company's lease on its Golden facility which expires in September 2002. The increase in the gain recognized during the quarter ended June 30, 2002 resulted in a reduction in term of the Company's lease.

Loss from operations of discontinued gear division for the quarter ended June 30, 2002 was $71,691, or nil per common share compared to a loss of $315,126, or $0.02 per common share for the prior year first quarter which were applied against the accrued future losses of discontinued gear division liability. During the quarter the Company completed the divestiture of its discontinued gearing operations and recorded an additional charge of $184,971 reflecting lower than anticipated sales proceeds on the divesture of gear manufacturing equipment, partially offset by lower than anticipated losses during the phase-out period.

The Company's cash balances and liquidity throughout the first quarter were adequate to meet operating needs, although liquidity was adversely impacted by a general tightening of bank credit discussed further below. At June 30, 2002, the Company had working capital, the excess of current assets over current liabilities, of $6,577,494 compared to $3,184,735 at June 30, 2001. Working capital increased by $3,392,759, primarily due to the proceeds from the Company's secondary offering generating cash, net of offering costs, of $4,431,254. Proceeds from the stock offering were partially applied to the repayment of term debt and revolving line-of-credit borrowings.

Net cash used by operating activities of continuing operations was $142,026 for the quarter ended June 30, 2002 versus net cash provided by operating activities of $1,352,011 for the comparable prior year quarter. The decline in cash provided by operating activities is primarily attributable the increased losses from continuing operations and reduced working capital generated from accounts receivables, inventories and billings in excess of costs and estimated earnings on uncompleted contracts during the quarter versus the comparable quarter last year.

Cash used by investing activities of continuing operations for the quarter ended June 30, 2002 was $160,456 compared to $287,282 for the comparable quarter last year, reflecting lower levels of capital expenditures during the quarter versus the comparable quarter last year.

Cash flows provided by financing activities of continuing operations was $1,048,688 for the quarter ended June 30, 2002 versus cash flow used by financing activities of $872,834 for the comparable quarter last year. The increase is primarily attributable to completion of a secondary offering during the quarter which resulted in net cash proceeds of $4,431,254, offset by repayments of debt and revolving line-of-credit of $3,388,385.

During the quarter ended June 30, 2002, the Company's liquidity was adversely impacted by a general tightening of credit in the banking industry which was partially offset by a secondary offering of common stock. The Company had a $4.0 million line-of-credit of which $2.25 million was outstanding at March 31, 2002 and term equipment loans at March 31, 2002 of $1.12 million. These facilities expired on May 15, 2002, unless renewed. In April 2002, the Company repaid approximately $3.2 million due on its line-of-credit and term debt facilities which were subsequently not renewed. The Company also had a $0.4 million line-of-credit with a second commercial bank. This facility expired on July 31, 2002, unless renewed. This facility was also not renewed. As a result of these events the Company has experienced a substantial decline in its liquidity during the quarter reflected by the application of approximately $3.2 million of cash to the repayment of these debt obligations and the elimination of then available additional borrowing availability of approximately $1.2 million. At June 30, 2002, cash and cash equivalents were $2.4 million and cash used by operating activities for the quarter was $142,026. The Company expects to manage its operations and working capital requirements to minimize the future level of operating losses and working capital usage, however, we cannot assure you that we will be successful in achieving these objectives. In addition, the Company began an approximately $1 million expansion of its Frederick, Colorado facility during the first quarter in anticipation of the relocation of its corporate headquarters and product engineering personnel from its Golden, Colorado facility upon expiration of its lease on the Golden facility in September 2002. Although the Company believes that financing for the facility expansion can be obtained on terms acceptable to the Company, we cannot assure you that we can obtain such financing. If we are not successful in obtaining financing for this project, our liquidity and cash reserves will be adversely impacted by the approximately $1 million investment associated with the facility expansion. In addition, some of the Company's significant customers have experienced downturns in their businesses as a result of deteriorating general economic conditions and other factors. To the extent these customers experience financial difficulties sufficient to impair their ability to honor their financial commitments or further reduce their orders for goods and services, the Company could experience a material adverse change in its financial condition, results of operations and liquidity.

The Company is actively considering possible future acquisitions at any given time and from time to time enters into non-binding letters of intent with respect to possible acquisitions. The Company expects to continue its strategy of growing its business through expanding its product line of permanent magnet motors and controllers, securing production orders from new and existing customers for electric assemblies, designing and introducing new products for manufacture, seeking strategic alliances to accelerate the commercialization of its technology and pursuing synergistic and accretive acquisitions. The Company expects to finance its operations and future growth from existing cash resources, cash flow from operations, if any, and through the issuance of equity or debt securities or a combination thereof. There can, however, be no assurance that existing cash resources will be sufficient to fund these objectives or that financing or equity capital will be available on terms acceptable to the Company. In the event existing cash resources are not sufficient to fund operations as currently configured, or financing or equity capital to fund future growth is not available, the Company will modify its strategy to align its operations with its then available financial resources.

The Company's trade accounts receivable are subject to credit risks associated with the financial condition of its customers and their liquidity. The Company evaluates all customers periodically to assess their financial condition and liquidity and sets appropriate credit limits based on this analysis. As a result, the collectibility of accounts receivable may change due to changing general economic conditions and factors associated with each customer's particular business. The Company has established a reserve for potentially uncollectible trade accounts receivable which is management's best estimate of the amount of trade accounts receivable that it believes may become uncollectible at a future date due to the foregoing factors. At June 30, 2002 the Company has recorded reserves for uncollectible trade accounts receivable of $33,054 based on its current assessment of potentially uncollectible accounts. It is reasonably possible, that future events or changes in circumstances could cause the realizable value of the Company's trade accounts receivable to decline materially, resulting in additional material losses.

The Company maintains raw material inventories of electronic components, motor parts and other materials to meet its expected manufacturing needs for proprietary products and for products manufactured to the design specifications of its customers. Some of these components may become obsolete, unuseable due to design changes, or become unuseable in the manufacturing activities of the Company due to customers inability to honor their obligation to purchase from the Company. Accordingly, the Company periodically assesses its raw material inventory for potential impairment of value based on then available information, expectations and estimates and establishes impairment reserves for estimated declines in the realizable value of its inventories. The actual realizable value of the Company's inventories may differ materially from these estimates based on future occurrences and any resulting change in the Company's estimates. At June 30, 2002, the Company has recorded inventory reserves of $525,994 based on its current assessment of potential obsolete inventory. It is reasonably possible, that future events or changes in circumstances could cause the realizable value of the Company's 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

The Company recognizes revenue on the development projects funded by its 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 at the end of each reporting period. Many of these contracts involve the application of the Company's technology to customers products and other applications to demanding specifications. Accordingly, management's best estimates could be 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 could cause unforseen delays and additional costs. Accordingly, it is reasonably possible that total costs to be incurred on any of the projects in process at June 30, 2002 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.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligations be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. On April 1, 2002, the Company adopted SFAS No. 143 which had no material impact on the Company's financial condition and reports of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, and Amendment of FASB Statement No. 13, and Technical Corrections. This Statement, among other things, amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Certain provisions of SFAS No.145 are effective for fiscal years beginning after May 15, 2002, and other provisions related to specific transactions are effective for those transactions occurring after May 15, 2002. The Company expects that the adoption of SFAS No. 145 will not have a material impact on its financial condition or results of operations.

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company does not use financial instruments to any degree to manage these risks and does not hold or issue financial instruments for trading purposes. Subsequently, all of the Company's product sales, and related receivables are payable in U.S. dollars. The Company is subject to interest rate risk on its debt obligations. The long-term debt obligation has fixed interest rates. Interest rates on these instruments approximate current market rates as of June 30, 2002.

The following risk factors are applicable to our business:

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

We have had accumulated deficits as follows:

June 30, 2002  $ 44,355,269

March 31, 2002 $ 43,757,378

In the future we plan to make additional investments in product development and commercialization which is likely to cause us to remain unprofitable.

A significant portion of our total revenue has historically been concentrated among three large customers. Our electronic products segment manufactures products to customers' design specifications as a contract manufacturer. As such, we purchase inventory on behalf of customers for which the customer is financially obligated in the event his production order with us is cancelled or otherwise not fulfilled. Some of our significant customers have experienced downturns in their businesses as a result of deteriorating general economic conditions and other factors. To the extent any of these customers experiences financial difficulties sufficient to impair their ability to honor their financial commitments or further reduce orders for goods and services, we could experience an adverse material change in our liquidity and results of operations.

The Company did not renew its $4.0 million line-of-credit beyond its scheduled expiration date of May 15, 2002 or its $0.4 million line-of-credit beyond its scheduled expiration date of July 31, 2002. The Company does not expect to replace either of these lines-of-credit within the next year. The inability of the Company to replace its lines-of-credit and term borrowings has materially reduced the Company's liquidity. In addition, the expansion of the Company's Frederick, Colorado facility is expected to cost approximately $1.0 million.  If the Company is unable to obtain financing for the expansion, the Company's liquidity will be further reduced.  We expect to have operating losses during fiscal 2003. Cash balances stood at $2,434,960 at June 30, 2002.  If our losses become larger they could consume some or all of our current cash balances. Over the last several years we have experienced substantial growth in our revenue which has increased our working capital requirements. Should future growth resume at a similar rate or an accelerated rate, the working capital requirements to fund our operations may consume our existing cash balances.

We are actively pursuing acquisition opportunities as part of our business plan. We may need additional financing to complete acquisitions.

Our past rapid annual growth rate and acquisitions have increased our operating complexity. We are actively considering possible future acquisitions at any given time. To manage continued rapid growth we must:

• expand, train and manage our employee base and attract and retain additional highly skilled personnel

• expand and improve our computer systems and software tools to manage our manufacturing and engineering activities

• continue to develop and market new products and services

• integrate acquired operations with our existing operations

• control expenses and working capital requirements related to the expansion of our business

We cannot assure you that we will be able to satisfy these requirements, or otherwise manage our growth effectively, and any failure to do so could have a material adverse effect on our business, financial condition and results of operations.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 UQM Technologies, Inc.

           Registrant

 

Date: August 13, 2002                    By:  "Donald A. French"

  Donald A. French

  Treasurer

  (Principal Financial and

  Accounting Officer)