UQM Technologies Earnings 2018-12-31

 

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

 

OR

 

Commission file number 1-10869

 

UQM TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:  (303) 682-4900

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  [  ]   No  [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes  [  ]   No  [X]

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X]   No  [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

   Yes  [X]  No  [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [  ]

 

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

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  [  ]   No  [X]

 

The aggregate market value of the registrant’s common stock (“Common Stock”) held by non-affiliates as of December 31,2018, based on the closing price of the Common Stock as reported by the NYSE American on such date was approximately $46,127,324. As of March 27, 2019, there were 56,222,188 shares of the registrant’s Common Stock outstanding.

 

 

 

 

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Table of Contents

 

 

 

 

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PART I

 

BUSINESS

 

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 could be 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, uncertainty regarding the timing and effect of the Plan of Merger and Merger Agreement (as described below) entered into between the Company and Danfoss Power Solutions (US) Company (“Danfoss), disruption in our business, customers and suppliers in connection with the Danfoss Merger agreement, failure or a delay in the contemplated merger with Danfoss, litigation related to the Danfoss Merger, risks related to change in control provisions or delisting of the Company’s Common Stock, general business and economic conditions, international trade issues and geopolitical risks, our ability to enforce intellectual property rights in the U.S. and other countries, the impact of existing and future laws and regulations governing our products and operations, our ability to recruit and retain key executive and technical employees, the sufficiency of our cash and other resources to support our continued operations and liquidity needs over the coming twelve months, new product developments, future orders to be received from our customers, sales of products from inventory, future financial results, liquidity and the continued growth of the electric-powered vehicle industry. Important Risk Factors that could cause actual results to differ from those contained in the forward-looking statements are listed below in Part I, Item 1A. Risk Factors.

 

ITEM 1.       

 

Overview

 

UQM Technologies, Inc., (“UQM”, “Company”, “we”, “our”, or “us”) develops, manufactures and sells power dense, high efficiency electric motors, generators, power electronic controllers and fuel cell compressors for the commercial truck, bus, automotive, marine, and industrial markets. Our primary focus is incorporating our advanced technology as propulsion systems for electric, hybrid electric, plug-in hybrid electric and fuel cell electric vehicles, delivering the heart of the electric vehicle.

 

We believe our proprietary permanent magnet propulsion motor and motor control technology delivers exceptional performance at a competitive cost. Our principal products include propulsion motors and generators with power ratings from 50 kilowatts to 250 kilowatts, auxiliary motors and electronic controls and DC-to-DC converters. The principal attributes that we believe differentiate our proprietary products are their compact size, high torque delivery, high power density (the ratio of power output to weight), our design and manufacture of integrated motor/controller systems, and superior energy efficiency with full system ratings as high as 95%.

 

Our management team has significant experience in the automotive and electric propulsion industry with critical experience in state-of-the-art design and high quality production.  We are IATF 16949 certified, the highest level of quality certification in the automotive supplier industry, and ISO 14001 certified, the highest environmental standards.  We have an approximately 130,000 square foot combined headquarters and manufacturing facility located in Longmont, Colorado.  We were incorporated in 1967 as a Colorado corporation.

 

In August 2017, pursuant to a longstanding strategy to expand our presence internationally and particularly in China, we entered into a definitive stock purchase agreement (“SPA”) with China National Heavy Duty Truck Group Co., Ltd. through its wholly owned subsidiary, Sinotruk (BVI) Limited (collectively, “CNHTC”), the parent company of Sinotruk (Hong Kong) Limited (“Sinotruk”), a leading Chinese commercial vehicle manufacturer, and also announced that UQM and CNHTC planned to create a joint venture to manufacture and sell electric propulsion systems for commercial vehicles and other vehicles in China.  CNHTC has headquarters in Jinan, China.  CNHTC’s investment is was expected to occur in two stages.  In the first stage, which closed on September 25, 2017,  UQM issued to CNHTC purchased newly issued shares representing 9.9 percent of the Company’s outstanding common stock.

 

 

On May 9, 2018, the Company announced that the Committee on Foreign Investment in the United 
States (“CFIUS”) had advised UQM and CNHTC that it would likely not approve the second stage investment by CNHTC.  Following that announcement, we have investigated other potential funding alternatives.    Our review of the CFIUS decision led to the parties agreeing to jointly explore other options to accomplish their shared business goals in support of UQM’s funding and expansion outside the U.S.  Consequently, on on January 16, 2019 we terminated the SPA.

 

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In light of the continued focus and strategy to obtain necessary capital to expand our presence into key markets outside the U.S., on January 21, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Danfoss Power Solutions (US) Company, a Delaware corporation (“Danfoss”), and Danfoss-2019 Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Danfoss (the “Merger Sub”). Under the terms of the Merger Agreement, Merger Sub will be merged  with and into the Company (the “Merger”), as a result of which the Company will continue as the surviving corporation and a wholly-owned subsidiary of Danfoss.

 

Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of the Company’s common stock (each a “Company Share”), other than shares owned by Danfoss, Merger Sub, or any wholly-owned subsidiary of the Company, or held in the Company’s treasury, will be cancelled and converted into the right to receive $1.71 per share in cash (the “Merger Consideration”). Each option to purchase Company Shares that is outstanding as of the Effective Time (whether vested or unvested) will be cancelled in exchange for the right to receive the excess of the Merger Consideration over the exercise price of such option, less applicable taxes required to be withheld. Restricted stock that is not vested immediately prior to the Effective Time will be automatically fully vested and free of any restrictions immediately prior to the Effective Time, and will be treated as Company Shares for all purposes of the Merger Agreement, including the right to receive the Merger Consideration, subject to applicable withholdings. Outstanding warrants that are outstanding at the Effective Time will be cancelled and the holders issued a replacement warrant that will be exercisable for an amount in cash equal to the aggregate number of Common Shares underlying the warrant multiplied by the excess, if any of the Merger Consideration over the per share exercise price of the warrant.

 

The board of directors of the Company  unanimously approved and declared advisable the Merger, the Merger Agreement, and the other transactions contemplated thereby.

 

Completion of the transaction is subject to the satisfaction or waiver of specified closing conditions, including (i) the approval of the Merger Agreement by the holders of a two-thirds of the issued and outstanding Company Shares, (ii) receipt of required regulatory approvals, including from the Committee on Foreign Investment in the United States, and (iii) other customary closing conditions, including the accuracy of each party’s representations and warranties (except where the failure of such representations and warranties to be true and correct would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect (as defined in Merger Agreement)), each party’s performance in all material respects of its obligations under the Merger Agreement, and the absence of a Company Material Adverse Effect since the date of the Merger Agreement. Assuming the satisfaction of conditions, the Company expects the transaction to close in the second quarter of 2019. Holders of outstanding Common Shares that do not vote in favor of the Merger are entitled to exercise dissenter’s rights if they exercise such rights in compliance with the terms, conditions and procedures of the Colorado Business Corporation Act and to receive the payment of the fair value of such shares.

 

 

If the transactions contemplated by the Merger Agreement are consummated, the Company Shares will be delisted from the NYSE American stock exchange and deregistered under the Securities Exchange Act of 1934, as amended.

 

 

 

The Market

 

The global electrified vehicle market is an emerging market with growth potential being driven by several factors. In China, the market for electric vehicles is driven by strong government pressure to address air quality concerns in its major cities.  The government has a number of initiatives to encourage electric vehicle market growth including mandates for purchases of New Energy Vehicles by municipalities, incentives and other tools.  We are observing strong demand for electric buses across several cities and regions in China.  We also observed demand for electric buses, delivery vans, trucks and taxi fleets across several cities and regions in China.  As China is the world’s largest market for electric vehicles, we believe that our presence in China is critical to our long-term success.  Therefore, we continue to devote significant time and resources to business development efforts in China.  

 

In other global markets, including the United States, the drivers for growth in the electric commercial truck and bus market include the demand for zero tailpipe emissions from full electric vehicles or during the electric only range for hybrids, improved operating costs due to a more efficient powertrain on a gas equivalent basis and reduced maintenance costs for the powertrain system and other systems, such as improved brake life.  Moreover, there is general community support for cleaner buses and trucks operating in congested areas, along with government incentives and requirements to purchase electric and hybrid

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vehicles.  In the automotive market, these same growth drivers exist, as well as growing consumer acceptance of electric vehicles due to their excellent performance, quiet operation, zero or reduced tailpipe emissions and improved operating cost. In addition, Corporate Average Fuel Economy (“CAFE”) standards in the United States are expected to accelerate further electrification of vehicle fleets.

 

Many studies have been conducted indicating the potential growth for electric vehicles over the next several years.  For example, certain Morgan Stanley Research has forecasted that almost 20 million electric vehicles will be sold by 2025.

 

Several economic drivers support this anticipated growth of electric vehicles.  First, and perhaps most important, battery costs, which comprise the single largest component cost in any electric vehicle, have declined dramatically.  In 2010, the cost per kW- hour of a lithium-ion battery was about $1,000; in 2015, this cost had fallen to about $200, and is projected to continue to fall.  This decline in battery costs has spurred higher demand.  Second, published studies have shown that ownership costs of electric vehicles are significantly lower than diesel powered vehicles.  A diesel bus, for example, has a range of four miles per gallon; an electric bus has the equivalent of twenty-one miles per gallon.  Third, maintenance costs of electric vehicles are significantly lower than diesel powered vehicles.  The same studies showed that a diesel bus costs about one dollar per mile to maintain; the maintenance cost for an electric bus was about six cents per mile.  All of these economic benefits are helping to drive the market for electric vehicles.

 

Governments around the world have implemented financial incentives to promote the sales of electric vehicles.  For example, the U.S. federal government currently offers up to a $7,500 federal tax credit for the purchase of an electric passenger vehicle, and there are additional tax credits and other benefits such as HOV lane access in various states for purchasers of qualifying vehicles.  In China, beginning on January 1, 2017, subsidies for electric buses varied depending on the efficiency performance of the vehicle, and could reach a maximum subsidy of $120,000 per bus.  In Europe, a majority of European Union member states provide tax incentives for electrically chargeable passenger vehicles, with Norway providing the most generous package of subsidies totaling almost EUR 17,000 (approximately $19,000).  The government of India has announced its desire that plug-in vehicles would represent 30 percent of new sales by 2030.

 

We believe that the trend toward increasing electrification of vehicles coupled with the government subsidies offered world-wide and lower battery and vehicle operating costs provide a substantial opportunity for the broad commercial application of our products.

 

Business Strategy

 

We are focused primarily on the transportation markets, with a strong emphasis on the commercial truck and bus space, followed by automotive and then marine, and other applications. We have developed two basic frame size propulsion systems: the PowerPhase® Pro for passenger car, light commercial applications, light duty marine and other lighter duty applications and the PowerPhase® HD lineup of products for heavier commercial bus and truck applications and heavier duty marine and other applications.  In addition, we sell the PowerPhase® DT, a fully integrated electric drivetrain combining the motor, inverter, transmission and transmission control unit.  We also utilize these products, customized versions of these products and all new custom solutions in these markets to meet various customer requirements.  We provide motor and controller systems for full-electric, hybrid electric, plug-in hybrid and fuel cell applications.  We also provide units for non-automotive markets including auxiliary systems and motor and controller systems for aircraft.   Further, we manufacture fuel cell compressor systems for the fuel cell business.

 

Our products are used in the following applications:

 

 

 

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Our business strategy is also comprised of the following:

 

 

 

 

 

 

 

Products

 

We offer a full range of motors and controllers for electric, hybrid electric, plug-in hybrid electric and fuel cell electric commercial trucks, vans, buses and automobiles.  Our current core electric propulsion products are:

 

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Product Development Activities

 

We continue to develop new variations of our product lineup to meet expanding customer requirements and work on custom solutions for new prospective customers meeting their precise specifications.  We are also developing the next generation of PowerPhase Pro®  and PowerPhaseHD®  products designed to be smaller, lighter weight, more energy efficient and producible at lower cost with equal or better performance than our current PowerPhase systems. The resulting products from this development effort are expected to launch in the next two years. Development targets include a substantial size and cost reduction of the motor controllers.  Adopting new generation components and control strategies are also elements of this development.  Target applications include automotive and light commercial truck, medium and heavy-duty truck, and bus, markets.

 

 

In January 2017, we announced a development agreement with Meritor, Inc. to jointly develop and supply full electric axle systems (E-axles) targeting the medium and heavy-duty commercial vehicle market.  This next-generation technology could accelerate market demand over the next few years due to improved component packaging, lower costs from integration, and increased vehicle performance.  We continue to provide product development services to Meritor.

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Competition

 

All of the markets in which we operate are highly competitive and are characterized by changes due to technological advances that could render existing technologies and products obsolete, although we are not currently aware of any such advances that could render our current product portfolio obsolete.  We believe our competitors are large automotive OEMs, Tier 1 suppliers to OEMs, Chinese electric motor manufacturers offering lower cost options, and numerous other competitors in nearly every region of the world.

 

As a result, additional vehicle makers in both on-road and off-road markets are expected to develop and introduce a variety of hybrid electric and all-electric vehicles as market acceptance of these vehicles continues to grow. We cannot assure that we will be able to compete successfully in this market or any other market that now exists or may develop in the future. There are numerous companies developing products that do or soon will compete with our systems. Some of these companies possess significantly greater financial, personnel and other resources than we do, including established supply arrangements, volume manufacturing operations and access to governmental incentive programs.

 

Customers and Suppliers

 

We derive our revenue from the following sources: 1) the sale of products designed, engineered and manufactured by us primarily to OEMs, Tier 1 suppliers of OEMs, and vehicle integrators; 2) funded contract research and development services performed for strategic partners, customers, and in the past from the U.S. government, directed toward either the advancement of our proprietary technology portfolio or the application of our proprietary technology to customers’ products; and 3) after-market services and remanufacture.

 

Our business is subject to revenue fluctuation based on the buying cycles of our customers.  Specific customers that reach 10% or more of revenues in any given fiscal quarter or year will also vary depending on these buying cycles.  In the fiscal year ended December 31, 2018, three customers individually comprised 10% or more of our total revenues.  Any loss of business with these customers could have a material adverse effect on our business, financial condition and results of operation.

 

Principal raw materials and components purchased by us include iron, steel, electronic components, rare-earth magnets and copper wire. Most of these items are available from several suppliers. In the fiscal year ended December 31, 2018 , one supplier comprised 10% or more of our total purchases. Certain components used by us are custom designs and if our current supplier no longer made them available to us, we could experience production delays.

 

We can experience significant price fluctuation in the cost of magnets used in our motors, which contain the rare-earth elements neodymium and dysprosium and are primarily sourced from China. We have not experienced any disruption in supply of magnets, and magnet prices may continue to be volatile until mining operations outside of China increase or restart.

 

 

Backlog

 

Our order backlog for products at January 31, 2019 was approximately $7.2 million versus $2.4 million at January 31, 2018. Certain orders are blanket purchase orders which are subject to the issuance of subsequent release orders directing the number and timing of actual deliveries. We had backlog of service contracts from customers, which will provide future revenue upon completion, totaling approximately $500,000 at January 31, 2019 versus $200,000 at January 31, 2018. Substantially all of the backlog amounts at January 31, 2019 and 2018 are subject to amendment, modification or cancellation.  We expect to ship motor and controller backlog products over the next twelve months.

 

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Intellectual Property

 

We have numerous patents in the United States and in other countries to protect our intellectual property.

 

We determine if our intellectual property should be treated as a trade secret or submitted to the patent application process by deciding whether a technology successfully passes through three evaluation gates.  The first gate is an assessment of whether the expected breadth of the patent would offer a high level of protection or whether it will serve as an educational tool for competitors.  Based upon a patent and literature search, if the expected coverage is broad, the evaluation moves to the second gate, which is an assessment of infringement detection.  This is a review of whether or not it will be possible to detect patent infringement if a competitor were to adopt the technology.  Difficulty in detection reduces the value of a patent and will lead us to handle the technology as a trade secret rather than a patent.  The last gate is an assessment of whether the technology will have value for many years or whether the technology is a stepping stone to a different technology.  The patent process is a multi-year endeavor from the initial disclosure to the granted patent, which leads to the importance of this gate.  A technology that is expected to have value for five or more years will pass the final gate and the patent application process will then commence.

 

We also implement measures to protect our intellectual property, including the guarding and protection of source code, nondisclosure of control techniques, and protection of product design details, drawings and documentation.

 

Trademarks

 

We have registered the letters "UQM" in the U.S. Patent and Trademark Office. Counterpart applications have been filed in numerous countries throughout the world, most of which have granted registrations or indicated them to be allowable. We own three U.S. Trademark Registrations for "UQM" (International Class 7 for power transducers, Class 12 for utility land vehicles, and Class 16 for publications). The foreign trademark registrations and applications include major markets where we are doing business or establishing business contacts.

 

We have also registered the trademark "POWERPHASE" which we use in conjunction with certain of our propulsion systems. The trademark is registered in the European Community and several other foreign countries.  

 

Employee and Labor Relations 

 

As of January 31, 2019, we had 66 employees, all of whom are full-time employees. We have entered into employment agreements with our executive officers.  The employment agreements expire on December 31, 2019.  We believe our relationship with employees has been generally satisfactory.

 

In addition to our full-time staff, we from time to time engage the services of outside consultants and contract employees to meet peak workload or specialized program requirements. We do not anticipate any difficulty in locating additional qualified engineers, technicians and production workers, if so required, to meet expanded research and development or manufacturing operations.  

 

Available Information

 

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Anyone seeking information about our business can receive copies of our 2018 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports and other documents, filed with the SEC andmay be obtained, free of charge, by: contacting our Investor Relations office by e-mail at investor@uqm.com; by phone at (303) 682-4900; writing to UQM Technologies, Inc., Investor Relations, 4120 Specialty Place, Longmont, CO 80504-5400; or accessing our website at www.uqm.com. Our SEC filings are also available to the public at www.sec.gov.  We make our Transition Report on Form 10-KT, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, available on our website as soon as reasonably practicable after we file or furnish the materials electronically with the SEC. To obtain any of this information, go to www.uqm.com, select “Investor Relations” and select the form you would like to access. Our website also includes our Audit Committee Charter and Code of Business Conduct and Ethics as well as the procedures for reporting a violation of business ethics.  Information on our website does not constitute part of this Annual Report.

 

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ITEM 1A.        RISK FACTORS 

 

We operate in a challenging and changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. The risks, uncertainties and other factors set forth below may cause our actual results, performances or achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected.

 

The Merger is subject to several future conditions, including conditions that may not be within the power of UQM to complete and may not be completed on a timely basis, if at all.

 

The consummation of the Merger is subject to several closing conditions that may make the timing and completion of the Merger uncertain. The conditions include, among others, obtaining the approval of our shareholders, obtaining consent from the Committee on Foreign Investment in the United States (“CFIUS”), which in 2018 declined to approve an investment transaction involving the Company and its Chinese investor CNHTC, and the absence of any order or law of any governmental authority that enjoins or otherwise prohibits the consummation of the Merger. Failure to obtain the shareholder approval or CFIUS approval would prevent us from consummating the Merger.

 

Failure to complete the Merger in a timely manner, or at all, could negatively impact our future business and our financial condition and liquidity.

 

If the Merger cannot be completed, no merger consideration will be transferred until the conditions to closing are satisfied or waived, including the approval of our shareholders and the receipt of required approvals from CFIUS. The Merger Agreement provides that either party may terminate the Merger Agreement if the Merger is not consummated on or before October 31, 2019.  If the Merger is not completed for any reason, the holders of our Company Common Stock will continue to hold their shares in the Company and we will remain an independent public company.

 

If the Merger is not completed a timely manner, or at all, our ongoing business may be adversely affected, including with regard to the following risks:

 

 

 

 

 

 

 

 

 

In addition, in response to the announcement of the Merger, customers or suppliers of the Company may delay or defer product purchase or other decisions. Any delay or deferral in product purchase or other decisions by customers or suppliers could adversely affect the business of the Company, regardless of whether the Merger is ultimately completed. Similarly, current and prospective UQM employees may experience uncertainty about their future roles with the Company until the Merger is completed and until the Danfoss’ strategies with regard to the integration of operations of the Company and the Danfoss are announced or executed. This may adversely affect the Company’s ability to attract and retain key management, sales, marketing and technical personnel.

 

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The Proposed Merger may disrupt our business and operations.

 

Under the Merger Agreement, we must generally operate our business in the ordinary course pending consummation of the Merger.  The Merger Agreement restricts us, without Danfoss’ consent, from taking certain specified extraordinary corporate actions until the Merger is completed. These restrictions may limit our flexibility in executing our business strategies and may impact our financial position and ongoing liquidity.

 

We also are subject to litigation related to the proposed Merger, which could result in significant costs and expenses and create a further diversion of time for our management and advisors or affect overall shareholder sentiment.  We will also incur and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs related to the Merger, which in some cases are not recoverable if the Merger is not consummated.

 

The Merger Agreement generally precludes us from pursuing alternatives to the Merger unless it is a “superior proposal”.

 

Under the Merger Agreement, we are restricted, subject to limited exceptions, from pursuing or entering into alternative transactions with other strategic investors.  In general, unless the Merger Agreement is terminated, we are restricted from, among other things, soliciting, initiating, causing, knowingly facilitating or encouraging any inquiries, proposals or offers from any person that is or could reasonably be expected to lead to an alternative transaction proposal. We have the right to terminate the Merger Agreement and enter into a new agreement with respect to a “superior proposal” by an alternative investor only if specified conditions have been satisfied, which would be generally subject to payment of a termination fee of $3.5 million to Danfoss. These provisions could discourage a third party that may have an interest in UQM from proposing such an acquisition, even if such potential investor or partner were prepared to pay a higher per share price, in cash and/or equities, than the merger consideration offered by Danfoss.

 

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

 

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

 

 

 

As of December 31, 2018, we had an accumulated deficit of $131,174,812.

 

In the future, we plan to make additional investments in product development, facilities and equipment and other costs related to the commercialization of our products. As a result, we expect to continue to incur net losses for the foreseeable future.  

 

Our operating losses, anticipated capital expenditures and working capital requirements in the longer term may exceed our current cash balances.

 

Our net loss for the year ended December 31, 2018 was $6,503,562 versus a net loss for the year ended December 31, 2017 of $4,778,316. At December 31, 2018, our cash, cash equivalents and restricted cash totaled $2,214,884. We expect our losses to continue for the foreseeable future.

 

Our existing cash resources and cash generated from our revenues, are not expected to be sufficient to complete our business plan for the next twelve months.  Should those resources be insufficient, and we are unable to complete the Merger, we may need to renegotiate existing debt, secure additional debt or equity funding, which may not be available on terms acceptable to us, if at all.  Therefore, management believes there is substantial doubt about the Company’s ability to continue as a going concern.

 

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We may not be able to sell the remaining PowerPhase Pro® inventory and may recognize additional loss on the value of this inventory carried on our books.

 

We still have aged inventory of $579,824 in PowerPhase Pro® systems.  Based upon anticipated customer demand, we continue to believe there is still a market for this product.  If customers do not purchase the amount of inventory they have ordered or we are unable to find new customers for this inventory, it may become  obsolete, causing an adverse effect on our results of operations.

 

Our business depends, in part, on the expansion of the market for all-electric and hybrid electric vehicles.  

 

Although our electric propulsion systems may be used in a wide variety of products, the market for electric and hybrid vehicles is fairly new. At the present time, batteries used to power electric motors have limited life and require several hours to charge, and charging stations for electric motors are not widely available. Electric and hybrid vehicles also tend to be priced higher than comparable gasoline-powered vehicles. As a result, consumers may experience concerns about driving range limitations, battery charging time and higher purchase costs of electric or hybrid vehicles. If consumer preferences shift to vehicles powered by other alternative methods, or if concerns about the availability of charging stations cannot be overcome, the market for all-electric vehicles, and therefore our electric propulsion systems, may be limited. In addition, our electric propulsion systems are incorporated in buses used for mass transit in several U.S. cities. If passenger traffic in these mass transit systems declines or government funding to transportation districts declines from current levels, demand for our products may also decrease.

 

The popularity of alternative fuel based vehicles and “green energy” initiatives are highly dependent on macro-economic conditions, including oil prices and the overall health of the economy. When oil prices fall, interest in and resources allocated to the development of advanced technology vehicles and propulsion systems may diminish. We cannot predict how and the extent to which the recent substantial decrease of oil prices will affect the domestic interest in electric and hybrid vehicles.  Downturns in the world economy may also have a severe impact on the automotive industry, slowing the demand for vehicles generally and reducing consumers' willingness to pay more for environmentally friendly technology.

 

If our products do not achieve market acceptance, our business may not grow.  

 

Although we believe our proprietary systems are suited for a wide-range of vehicle electrification applications, our business and financial plan relies heavily on our introduction of new products that have limited testing in the marketplace. We have made substantial investments in manufacturing facilities and equipment, production and application engineering, among other things, to increase our production capacity in order to capitalize on the anticipated expansion in demand for electric propulsion systems and generators in the commercial truck, bus and automobile markets. We cannot be certain that our existing products will achieve broad market acceptance, or that we will be able to develop new products or product enhancements that will achieve broad market acceptance.  

 

Our sales cycle is inherently long.

 

We must go through lengthy processes to achieve supply contracts with our customers.  Our products must conform to the technical specifications of the customer and meet design requirements of the electric vehicle.  Typically prototype testing is required to ensure consistent system performance on an ongoing basis.  These steps can often take many months to multiple years until decisions are made on whether or not to take a vehicle to production.  We may spend considerable financial and human resources over an extended period of time and not end up with a completed supply contract.  Failure to secure volume production levels within a reasonable period of time could have an adverse effect on our results of operations and our liquidity.

 

A  reduction or elimination of government subsidies and economic incentives for alternative energy technologies, including our electric vehicle motor technology, could reduce demand for our products and services, lead to a reduction in our revenues and adversely impact our operating results.

 

We believe that the near-term growth of alternative energy technologies, including our electric vehicle motor technology, relies on the availability and size of government and economic incentives both in the United States and in other countries.  Many of these government incentives expire, phase out over time, exhaust the allocated funding, require renewal by the applicable authority, and/or could be reduced or discontinued for other reasons. The reduction, elimination, or expiration of government subsidies and economic incentives may result in the diminished demand from our customers and could materially and adversely affect our future operating results.

 

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We are subject to risks inherent in international operations.

 

Since we market our products both inside and outside the United States, our success depends in part, on our ability to secure international customers and our ability to manufacture products that meet foreign regulatory and commercial requirements in target markets. In addition, we are subject to tariff regulations and requirements for export licenses.  We can face numerous challenges in our international growth plans, including unexpected changes in regulatory requirements, potential conflicts or disputes that countries may have to deal with, fluctuations in currency exchange rates, longer accounts receivable requirements and collections, difficulties in managing international operations, potentially adverse tax consequences, restrictions on repatriation of earnings and the burdens of complying with a wide variety of international laws. Any of these factors could adversely affect our results of operations and financial condition.

 

Changes in U.S. trade relations may have a negative effect on our business.

 

Changes to U.S. trade policies, treaties and tariffs could have an adverse effect on global trade and, in particular, trade between the impacted nations and the United States. These changes could result in increased costs of goods imported into the U.S. for the Company and our third party suppliers. As a result, where we are responsible for the costs related to such trade policy changes, our profit margins may decrease. Our third party suppliers may also limit their trade with U.S. companies generally, including us. Such changes may materially and adversely affect our sales and our business.

 

Our revenue is highly concentrated among a small number of customers.

 

A large percentage of our revenue is typically derived from a small number of customers, and we expect this trend to continue.

 

Our customer arrangements generally are non-exclusive, have no long-term volume commitments and are typically done on a purchase order basis. We cannot be certain that customers that have accounted for significant revenue in past periods will continue to purchase our products. Accordingly, our revenue and results of operations may vary substantially from period to period. We are also subject to credit risk associated with the concentration of our accounts receivable from our customers. If one or more of our significant customers were to cease doing business with us, significantly reduce or delay its purchases from us or fail to pay us on a timely basis, our business, financial condition and results of operations could be materially adversely affected.  

 

Our business relies on third parties, whose success we cannot predict.

 

As a manufacturer of motors, generators, and other component parts, our business model depends on the ability of third parties in our industry to develop, produce and market products that include or are compatible with our technology and then to sell these products into the marketplace. Our ability to generate revenue depends significantly on the commercial success of our customers and partners. Failure of these third parties to achieve significant sales of products incorporating our products and fluctuations in the timing and volume of such sales could have a material adverse effect on our business, financial condition and results of operations.  

 

Our electric propulsion systems use rare-earth minerals and unavailability or limited supply of these minerals could prevent us from manufacturing our products in production quantities or increase our costs.

 

Neodymium and dysprosium, rare-earth minerals, are key elements used in the production of magnets that are components of our electric propulsion systems. We currently source our magnets from China, and China has indicated its intent to retain more of this mineral for China use, rather than exporting it. During calendar year 2011, for example, we experienced significant price escalation in the cost of magnets used in our motors. This price escalation was primarily due to rare-earth government policy in China. Rare-earth prices have decreased substantially since peaking in the summer of 2011, and are now approaching the baseline prices (defined as the beginning of calendar year 2011). We have implemented a magnet surcharge process to recover these additional costs in the event of another price escalation. Although rare-earth magnets are available from other sources, these alternative sources are currently more costly. Reduced availability of neodymium and dysprosium from China could adversely affect our ability to obtain magnets in sufficient quantities, in a timely manner, or at a commercially reasonable cost. In the event that China's actions cause us to seek alternate sources of supply for magnets, it could cause an increase in our product costs, thereby reducing or eliminating our profit margin on electric propulsion systems if we are unable to pass the increase on to our customers. Increasing prices to our customers due to escalating magnet costs may reduce demand for our motors and make it difficult or impossible to compete with other motor manufacturers whose motors do not use rare-earth minerals.

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Some of our contracts can be cancelled with little or no notice and could restrict our ability to commercialize our technology.

 

Our contracts with government agencies are 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 exercise of march-in rights by the government or an agency of the government could restrict our ability to commercialize our technology.

 

Some of our orders for the future delivery of products are placed under blanket purchase orders which may be cancelled by our customers at any time. The amount payable to us, if any, upon cancellation by the customer varies by customer. Accordingly, we may not recognize as revenue all or any portion of the amount of outstanding order backlog we have reported.  

 

We face intense competition 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. Many of our competitors 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. For these reasons, potential customers may choose to purchase electric motors from our competitors rather than from us.

 

Changes in environmental policies could hurt the market for our products.  

 

The market for electric and other alternative fuel vehicles and equipment and the demand for our products are influenced, to a degree, by federal, state and local regulations relating to air quality, greenhouse gases and pollutants and other environmental laws and regulations. These laws and regulations may change, which could result in transportation or equipment manufacturers abandoning or delaying their interest in electric or hybrid electric vehicles or equipment. In addition, a failure by authorities to enforce current laws and regulations or to adopt additional environmental laws or regulations could limit the demand for our products.

 

Although many governments have identified as a significant priority the development of alternative energy sources, governments may change their priorities, and any change they make could materially affect our revenue or the development of our products. 

 

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 the United States and 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 may not 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

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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. Finally, patents may not deter third parties from attempting to reverse engineer our products and discovering our intellectual property.

 

We rely, in part, on contractual provisions to protect our trade secrets and proprietary knowledge, the adequacy of which may not be sufficient.

 

Confidentiality agreements to which we are party may be breached, and we may not have adequate remedies for any breach.  Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors.  Our inability to maintain the proprietary nature of our technology and processes could allow our competitors to limit or eliminate any competitive advantages we may have.

 

Use of our motors in vehicles could subject us to product liability claims or product recalls, 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.  

 

The automotive industry experiences significant product liability claims. As a supplier of electric propulsion systems or other products to vehicle OEMs, we face an inherent business risk of exposure to product liability claims in the event that our products, or the equipment into which our products are incorporated, malfunction and result in personal injury or death. We may be named in product liability claims even if there is no evidence that our systems or components caused an accident. Product liability claims could result in significant losses as a result of expenses incurred in defending claims or the award of damages. The sale of systems and components for the transportation industry entails a high risk of these claims, which may increase as our production and sales increase. In addition, we may be required to participate in recalls involving these systems if any of our systems prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a result of various industry or business practices or the need to maintain good customer relationships.

 

We carry product liability insurance of $10 million covering most 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. Any product liability claim brought against us also could have a material adverse effect on our reputation.  

 

We may be subject to warranty claims, and our provision for warranty costs may not be sufficient.  

 

We may be subject to warranty claims for defects or alleged defects in our products, and the risk of such claims arising will increase as our production and sales increase. In addition, in response to consumer demand, vehicle manufacturers have been providing, and may continue to provide, increasingly longer warranty periods for their products. As a consequence, these manufacturers may require their suppliers, such as us, to provide correspondingly longer product warranties. As a result, we could incur substantially greater warranty claims in the future.  

 

Our future success will depend on our ability to attract and retain qualified management and technical personnel.

 

Our future success is substantially dependent on the continued services and on the performance of our executive officers and other key management, engineering, manufacturing and operating personnel. The loss of the services of any executive officer, or other key management, engineering, manufacturing and operating personnel, could materially adversely affect our business. Our ability to achieve our growth plans will also depend on our ability to attract and retain additional qualified management and technical personnel, and we do not know whether we will be able to be successful in these regards. Our inability to attract and retain additional qualified management and technical personnel, or the departure of key employees, could materially and adversely affect our growth plans and, therefore, our business prospects, results of operations and financial condition.

 

The maintenance and security of our information systems are critical to our operations.

 

We rely on our information systems to be functioning at all times, and that the data in those systems is protected and secure from viruses, illegal access and any other form of unauthorized use.  Should our information systems be compromised in any way, our business operations could be severely impacted.

 

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Threats to information technology systems associated with cybersecurity risks and cyber incidents or attacks continue to grow. Cybersecurity attacks could include, but are not limited to, malicious software, viruses, attempts to gain unauthorized access, whether through malfeasance or error, either from within or outside of our organization, to our data or that of our customers or our customers’ customers which may be in our possession, and the unauthorized release, corruption or loss of the data, loss of the intellectual property, theft of the proprietary or licensed technology, whether ours, that of our customers or their customers, loss or damage to our data delivery systems, other electronic security breaches that could lead to disruptions in our critical systems, and increased costs to prevent, respond to or mitigate cybersecurity events. It is possible that our business, financial and other systems could be compromised, which might not be noticed for some period of time. Although we utilize various procedures and controls to mitigate our exposure to such risk, cybersecurity attacks are evolving and unpredictable and we cannot guarantee that any risk prevention measures implemented will be successful. The occurrence of such an attack could lead to financial losses and have a material adverse effect on our reputation, business, financial condition and results of operations.

 

Our stock price has been and could remain volatile.

 

The market price for our common stock has been and may continue to be volatile and subject to extreme price and volume fluctuations in response to market and other factors, including the following, some of which are beyond our control:

 

 

In the past, following periods of volatility in the market price of their stock, many companies have been the subjects of securities class action litigation.  If we become involved in securities class action litigation in the future, it could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business prospects, results of operations and financial condition.

 

Management believes completion of the Plan of Merger with Danfoss Power Solutions described above mitigates the substantial doubt raised by our historical operating result and fulfilling our estimated liquidity needs twelve months from the issuance of the financial statements.  The Plan of Merger with Danfoss Power Solutions is subject to approval by our shareholders and approval of the Committee on Foreign Investment in the United States (“CFIUS”) prior to completion so therefore we are unable to predict with certainty the completion of the Merger.

   

 

ITEM 1B.        UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.           PROPERTIES

 

We own our offices and manufacturing facility in Longmont, CO and believe the facility to be well maintained, adequately insured and suitable for its present and intended uses. We lease office space in Shanghai, China to provide a service center in one of our foreign markets.  Information concerning our facilities as of December 31, 2018 is set forth in the table below:

 

 

 

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ITEM 3.           LEGAL PROCEEDINGS

 

Litigation 

          

Between February 20, 2019 and March 5, 2019, six shareholder complaints were filed in Colorado court related to the proposed Merger. and on March 11, 2019 another shareholder compliant related to the proposed Merger was filed in the United States District Court for the Southern District of New York.

 

On February 20, 2019, a putative shareholder class action complaint captioned Carter v. UQM Technologies, Inc., et. al., (the ‘‘Carter Complaint’’) was filed in the United States District Court for the District of Colorado against the Company and the members of its board of directors. The Carter Complaint alleges that the Company directors breached their fiduciary duties and the Company aided and abetted in the breach of fiduciary duties in connection with the negotiation and approval of the Merger Agreement by failing to maximize shareholder value, and it brings claims under Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), based on alleged failure to disclose material information in the February 22, 2019 preliminary proxy statement on Schedule 14(A) filed with the. The Carter Complaint seeks to enjoin the Company and the directors and Company from proceeding with the stockholders meeting to vote on the Merger proposal and to otherwise enjoin the directors from consummating the Merger, an accounting by the defendants for alleged damages sustained as a result of the alleged failure to meet their fiduciary duties, and plaintiff’s costs and attorneys’ and experts’ fees.

 

On February 22, 2019, a putative shareholder class action complaint captioned Franchi v. UQM Technologies, Inc., et al.,  (the ‘‘Franchi Complaint’’) was filed in state District court in Weld County, Colorado against the Company and the members of its board of directors. The Franchi Complaint asserts claims for (i) breach of fiduciary duty by the directors; (ii) indemnification by the Company to the plaintiff class; (iii) an injunction against the proposed merger; (iv) breach of fiduciary duty as a derivative action; and (v) waste of corporate assets against the individual directors on behalf of the Company. The Franchi Complaint seeks, among other things, certification of a plaintiff class, injunctive relief ordering the directors to fulfill their fiduciary duties to the Company and class, an accounting by the defendants for alleged damages sustained as a result of the alleged failure to meet their fiduciary duties, and plaintiff’s costs and attorneys’ and experts’ fees. The Defendants accepted service of the Franchi Complaint on February 26, 2019.

 

On February 25, 2019, a plaintiff shareholder complaint captioned Lopez v. UQM Technologies, et al. (the ‘‘Lopez Complaint’’)  was filed in the United States District Court for the District of Colorado. The Defendants accepted service of the Lopez Complaint on February 26, 2019. On March 1, 2019, a plaintiff shareholder complaint captioned ETS Logistics, Inc. v. UQM Technologies, et al., (the ‘‘ETS Complaint’’) was filed in the United States District Court for the District of Colorado. On March 5, 2019, a putative shareholder class action complaint captioned Poston v. UQM Technologies, et al., (the ‘‘Poston Complaint’’) was filed in the United States District Court for the District of Colorado. Also on March 5, 2019, a putative shareholder class action complaint captioned Arukala v. UQM Technologies, et al., (the ‘‘Arukala Complaint’’) was filed in the United States District Court for the District of Colorado. The Lopez Complaint, the ETS Complaint, the Poston Complaint, and the Arukala Complaint bring claims under Section 14(a) and Section 20(a) of the Exchange Act based on alleged failure to disclose material information in the February 22, 2019 preliminary proxy statement filed with the Securities and Exchange Commission. The class action complaints seek, among other things, certification of a plaintiff class, and each of the Lopez Complaint, ETS Complaint, Poston Complaint, and Arukala Complaint seeks injunctive relief to prevent the parties from proceeding with, consummating, or closing the Merger and the subsequent merger contemplated by the Merger Agreement unless allegedly omitted material information is disclosed in the proxy statement; an accounting by the defendants for alleged damages sustained by the plaintiffs; and unspecified plaintiff’s costs and attorneys’ and experts’ fees. 

 

On March 11, 2019, a putative shareholder class action complaint captioned David Gunderson v. UQM Technologies, Inc., et al. (the ‘‘Gunderson Complaint’’) was filed in United States District Court for the Southern District of Southern New York against the Company and the members of its board of directors. The Gunderson Complaint asserts claims under Section 14(a) and Section 20(a) of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), based on alleged failure to disclose material information in the March 7, 2019 definitive proxy statement on Schedule 14(A) filed with the SEC.

 

The Company believes each of the claims asserted in the above captioned complaints relating to the Merger are without merit and the Company and its directors intend to vigorously contest them.

 

 

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ITEM 4.           MINE SAFETY DISCLOSURES

 

Not applicable.

 

Part II

 

ITEM 5.           MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock trades on the NYSE American under the symbol UQM.

On March 26, 2019 the closing price of our common stock, as reported on the NYSE American, was $1.65 per share and there were 504 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these beneficial holders.

 

We have not paid any cash dividends on our common stock since inception and we intend for the foreseeable future to retain any earnings to finance the growth of our business. Future dividend policy will be determined by our Board of Directors based upon consideration of our earnings, capital needs and other factors then relevant.

 

PERFORMANCE GRAPH 1  

 

The following graph represents the yearly percentage change in the cumulative total return on the common stock of UQM , the group of companies comprising the S&P Electrical Components & Equipment Index, and those companies comprising the S&P 500 Index for the five year period from March 31, 2014 through December 31, 2018:

 

 

 

*$100 invested on 3/31/14 in stock or index, including reinvestment of dividends Fiscal year ending December 31.

        Copyright 2018 S&P Global Market Intelligence.  All rights reserved.

 

1  The stock price performance graph depicted is not “soliciting material,” is not deemed "filed" with the SEC, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the

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Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation contained in such filing.

 

2  The Company changed its fiscal year end from March 31 to December 31 in 2016.

 

ITEM 6.           SELECTED FINANCIAL DATA

Selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this document.

 

UQM Technologies, Inc.

Selected Consolidated Financial Data

 

 

 

 

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ITEM 7.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

UQM develops, manufactures and sells power dense, high efficiency electric motors, generators, power electronic controllers and fuel cell compressors for the commercial truck, bus, automotive, marine, and industrial markets.  We generate revenue from two principal activities: 1) the sale of motors, generators, electronic controls, and fuel cell compressors; and 2) research, development and application engineering contract services. Our product sales consist of annually recurring volume production, prototype low volume sales, and revenues derived from the sale of refurbished and serviced products. The sources of engineering service revenue typically vary from year to year and individual projects may vary substantially in their periods of performance and aggregate dollar value.

 

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

 

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

 

 

 

 

 

 

 

 

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We believe that the successful execution of these activities will lead us to secure volume production commitments from customers, so that our operations will become cash flow positive and ultimately profitable.

 

Recent Events

 

In January 2018, we announced the first significant purchase order from KESHI, a major Chinese manufacturer of commercial mining vehicles. The purchase order is for explosion-proof E-drive systems and was valued at $1.2 million. Shipments began during 2018.  While we signed a cooperation agreement with KESHI in 2015, KESHI’s production launch was delayed due to the market conditions, but now has made a major commitment to this new energy market application. KESHI plans to move forward with their strategy to do final assembly and test in China under our current cooperation agreement for explosion-proof electric propulsion systems in China.

 

On March 7, 2018 we announced that we received the first purchase order from Ashok Leyland, a major commercial vehicle manufacturer in India. The purchase order was for fifty-one UQM PowerPhase® eDT systems to be shipped during 2018 for a demonstration program for electric transit buses in India.  The purchase order signified the first step in the development program to gain market leadership and drive the overall 2030 India electrification initiative.

 

On July 31, 2018, we announced that we had signed a lease agreement in Shanghai, China to open a customer service center for both our fuel cell compressor systems and propulsions systems. The facility should allow us to provide quick turnaround for service and spare parts to our customers in China, and eventually assemble the fuel cell compressor systems in that region.

 

On August 9, 2018, we announced that we had received new fuel cell compressor system purchase orders from several new and existing Chinese customers, including our major Chinese OEM customer. The new purchase orders were valued at approximately $3.0 million. All these orders represent incremental new business with shipments expected to be delivered through 2018 and into 2019.

 

On August 30, 2018, we announced that we had received an order from Lightning Systems for our eDT 220 electric propulsion systems for use in several new projects, including Class 6 vehicles for Zeem Solutions, located in New York, and a city bus program for Via Mobility, located in Boulder, Colorado. Shipments are currently expected to commence in 2018 and continue into 2019. We supply various powertrain components to Lightning Systems, including the UQM E-Drive paired with different gearbox solutions, making us the Tier 1 provider for the full assembly.

 

On September 11, 2018, we announced that we had unveiled our newest product launch at the Electric & Hybrid Vehicle Technology Expo held in Novi, Michigan. We introduced a full lineup of PowerPhase ® HD2 electric motor inverters, which complements our signature motors and software controls, to further serve our customers in the electric vehicle market.

 

On January 21, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Danfoss Power Solutions (US) Company, a Delaware corporation (“Danfoss”), and Danfoss-2019 Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Danfoss (the “Merger Sub”). Under the terms of the Merger Agreement, Merger Sub will be merged (the “Merger”) with and into the Company, as a result of which the Company will continue as the surviving corporation and a wholly-owned subsidiary of Danfoss.

 

Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of the Company’s common stock (each a “Company Share”), other than shares owned by Danfoss, Merger Sub, or any wholly-owned subsidiary of the Company, or held in the Company’s treasury, will be cancelled and converted into the right to receive $1.71 per share in cash (the “Merger Consideration”). Each option to purchase Company Shares that is outstanding as of the Effective Time (whether vested or unvested) will be cancelled in exchange for the right to receive the excess of the Merger Consideration over the exercise price of such option, less applicable taxes required to be withheld. Restricted stock that is not vested immediately prior to the Effective Time will be automatically fully vested and free of any restrictions immediately prior to the Effective Time, and will be treated as Company Shares for all purposes of the Merger Agreement, including the right to receive the Merger Consideration, subject to applicable withholdings. Outstanding warrants

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that are outstanding at the Effective Time will be cancelled and the holders issued a replacement warrant that will be exercisable for an amount in cash equal to the aggregate number of Common Shares underlying the warrant multiplied by the excess, if any of the Merger Consideration over the per share exercise price of the warrant.

 

The board of directors of the Company (the “Company Board”) unanimously approved and declared advisable the Merger, the Merger Agreement, and the other transactions contemplated thereby.

Completion of the transaction is subject to the satisfaction or waiver of specified closing conditions, including (i) the approval of the Merger Agreement by the holders of a two-thirds of the issued and outstanding Company Shares (the “Company Stockholder Approval”), (ii) receipt of required regulatory approvals, including from the Committee on Foreign Investment in the United States, and (iii) other customary closing conditions, including the accuracy of each party’s representations and warranties (except where the failure of such representations and warranties to be true and correct would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect (as defined in Merger Agreement)), each party’s performance in all material respects of its obligations under the Merger Agreement, and the absence of a Company Material Adverse Effect since the date of the Merger Agreement. Assuming the satisfaction of conditions, the Company expects the transaction to close in the second quarter of 2019. Holders of outstanding Common Shares that do not vote in favor of the Merger are entitled to exercise dissenter’s rights in accordance with the terms, conditions and procedures of the Colorado Business Corporation Act and to receive the payment of the fair value of such shares.  

 

If the transactions contemplated by the Merger Agreement are consummated, the Company Shares will be delisted from the NYSE American stock exchange and deregistered under the Securities Exchange Act of 1934, as amended.

 

Financial Condition

 

Cash and cash equivalents at December 31, 2018 were $1,918,570 and we had a working capital deficit of $836,263 compared with $6,309,269 and positive working capital of  $7,762,363, at December 31, 2017. The decrease in cash and cash equivalents was the result of operating losses. Working capital decreased in year ending December 31, 2018 due to our line of credit coming due within one year,     an  increase in current liabilities as we purchased more inventory to support customer demand and higher unearned revenue from customer deposits.

 

Restricted cash (current and long-term) at December 31, 2018 was $296,314 compared to $500,056 at December 31, 2017.  The decrease in restricted cash is related to the payment of the interest on the line of credit secured with a bank in March 2017.  The cash is reserved for payment of the interest on the line of credit.

 

Accounts receivable increased  $857,496 to $1,681,289 at December 31, 2018 from $823,793 at December 31, 2017. The increase is primarily due to the mix of prepaid versus credit term customers for our 2018 sales. Our sales are conducted through acceptance of customer purchase orders or in some cases through supply agreements. For credit qualified customers, our standard terms are net 30 days. For international customers and customers without an adequate credit rating or history, our typical terms are irrevocable letter of credit or cash payment in advance of delivery. At both December 31, 2018 and 2017, we had no allowance for doubtful accounts receivable.

 

 

Total inventories increased $2,442,527 to $4,783,887 at December 31, 2018 compared to $2,341,360 at December 31, 2017, reflecting an increase in raw materials and work-in-process for confirmed sales orders to be sold to customers in 2019.  In the year ended December 31, 2018, we increased our reserve for obsolete or slow moving inventory by $169,954 for parts that are unlikely to be sold.

 

Prepaid expenses and other current assets increased to $377,762 at December 31, 2018 from $233,566 at December 31, 2017, primarily due to increases in vendor prepayments.

 

We invested $373,347 for the acquisition of property and equipment during the year ended December 31, 2018 versus $83,838 during the year ended December 31, 2017. The increase in capital expenditures is primarily attributable to the purchase of production tooling and equipment during the year ended December 31, 2018.    

 

Patent costs increased to $260,021 at December 31, 2018 compared to $222,461 at December 31, 2017, primarily due to new patent applications being submitted for approval which was partially offset by the amortization of capitalized patent costs.

 

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Trademark costs decreased to $85,964 at December 31, 2018 compared to $90,460 at December 31, 2017 due to the amortization of capitalized trademark costs.

 

Accounts payable increased $2,046,757 to $2,995,632 at December 31, 2018 from $948,875 at December 31, 2017, primarily due to the timing of vendor payments and reflecting an increase in inventory purchases to support higher customer orders.

 

Current debt was $4,656,757 at December 31, 2018 versus $0 at December 31, 2017 due to our line of credit becoming due within one year.    

 

Other current liabilities increased $574,311 to $1,394,150 at December 31, 2018 from $819,839 at December 31, 2017. The increase is primarily attributable to the an increase in accrued payroll and employee benefits, warranty costs, and unearned revenue at December 31, 2018.

 

Billings in excess of costs and estimated earnings on engineering services contracts was $110,727 at December 31, 2018 versus $199,160 at December 31, 2017.  The decrease is due to timing of costs incurred versus billings on certain contracts that were in process in the respective fiscal year ends.

 

Long-term debt was  $0 at December 31, 2018 versus $3,119,450 at December 31, 2017 due to our line of credit being classified as current debt since it is due within one year.   

 

Other long-term liabilities decreased $15,508 to $106,159 at December 31, 2018 from $121,667 at December 31, 2017 due to the amortization of a license fee received from a customer under a ten-year cooperation agreement.

 

Common stock and additional paid-in capital increased to $542,674 and $134,645,911, respectively, at December 31, 2018 compared to $541,085 and $133,901,406, respectively, at December 31, 2017. The increases in common stock and additional paid-in capital were primarily attributable to the compensation expense from employee and director stock option and common stock grants.

 

Results of Operations – Year Ended December 31, 2018 Compared to Year Ended December 31, 2017 

 

Revenue

 

Product sales for 2018 increased 73 percent to $12,367,115 compared to $7,162,456 for 2017, reflecting an increase in orders from our customers, both domestically and internationally, especially from orders for fuel cell compressor systems from customers in China.

 

Revenue from contract services increased $1,191,376, or 193 percent, to $1,807,669 for 2018 versus $616,293 for 2017. This was driven by renewed development of products for our customers.

 

Gross Profit Margin

 

Gross profit margins on product sales for 2018 decreased to 21 percent compared to 39% percent for 2017. The decrease is primarily due to pricing pressure as volumes have increased and higher production operating costs incurred to support higher customer orders.

 

Gross profit margins on contract services decreased to 44 percent for 2018 compared to 54% percent for 2017, reflecting a change in the mix of contracts in process.

 

Costs and Expenses

 

Research and development expenditures for 2018 were $2,497,127 compared to $2,042,732 for 2017. In 2018,  resources were allocated to internally funded development projects in 2018.

 

Selling, general and administrative expenses for 2018 were $7,299,860 compared to $6,367,331 for 2017. The increase for 2018 is attributable to increases in employee and contract labor costs, professional fees, shareholder costs and insurance costs.

 

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Other

 

Interest income increased to $6,251 for 2018 from $5,127 for 2017. The increase is attributable to more favorable interest rates on invested cash balances.

 

Interest expense was $208,076 in 2018 versus $108,146 in 2017.  The increase is attributable to higher outstanding balances and increased interest rates on the borrowings from the line of credit we secured in March 2017.

 

Amortization of deferred financing costs was $37,308 in 2018 versus $29,535 in 2017.  The financing costs are amortized over the life of the loan.

 

Gain on sale of long-lived assets was $0 in 2018 versus $606,006 in 2017.  The gain was recognized on the sale of vacant land in July, 2017.

 

Other income  for 2018 was 131,798 versus $32,734 for 2017. The increase between the years is attributable to royalties from a resource ownership interest.

Net Loss

 

As a result, net loss for 2018 was $6,503,562, or $0.12 per common share, compared to a net loss of $4,778,316, or $0.10 per common share, for 2017.

 

Liquidity and Capital Resources

Our cash balances and liquidity throughout 2018 were adequate to meet operating needs. At December 31, 2018, we had cash and cash equivalents of $1,918,570 and  a working capital deficit of $836,263 compared to $6,309,269 and positive working capital of $7,762,363 at December 31, 2017. Cash and working capital decreased as of December 31, 2018 compared to the prior year because in 2017 we reported a sale of vacant land (net proceeds of $1.4 million) and the closing of the first stage investment of the SPA with CNHTC of $5.1 million. 

 

For 2018, net cash used in operating activities was $5,735,405 compared to net cash used in operating activities of $4,870,626 for 2017. The increase in cash used in operating activities for 2018 versus 2017 is primarily attributable to increased net operating losses, increased purchases of inventory, and increased accounts payable.  

 

Net cash used by investing activities for 2018 was $428,268 compared to cash provided of $1,279,050 for 2017. The change for 2018 is primarily due to acquisition of property and equipment.

 

Net cash provided by financing activities was $1,569,232 for 2018 versus cash provided in financing activities of $8,300,812 for 2017.   In 2018 we borrowed $1.5 million against our line of credit.  In 2017 we received cash of $5.1 million from the closing of the first stage investment related to the Agreement with CNHTC and borrowed $3.1 million against our line of credit.

 

On March 15, 2017, the Company entered into a non-revolving line of credit with a bank for $5.6 million.  The interest rate is variable based upon the one month LIBOR rate plus 4.0% per annum on the outstanding balance.  The non-revolving line of credit will expire on September 15, 2019 and the amounts repaid during the term of the loan may not be reborrowed. At the expiry date, all outstanding principal and interest are due. As of December 31, 2018, $4,664,529 was drawn on the line of credit.  For additional information, see Note 8 of the Consolidated Financial Statements.

 

We expect to fund our operations over the next year from existing cash and cash equivalent balances and, to the extent all closing conditions are satisfied (including obtaining CFIUS approval), our merger with Danfoss Power Solutions.  In the event the merger is not completed, we will need to pursue other sources of capital that have not been identified.

 

Although we expect to manage our operations and working capital requirements to minimize the future level of operating losses and working capital usage, our working capital requirements may increase in the future. If customer demand accelerates substantially, our working capital requirements may also increase substantially.

 

If our existing financial resources are not sufficient to execute our business plan, we may need to raise additional capital in the future, although we cannot assure that we will be able to secure additional capital should it be required to implement our current

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business plan. In the event financing or equity capital to fund future growth is not available on terms acceptable to us, or at all, we will modify our strategy to align our operations with then available financial resources. Based on our current level of operations, management believes there is substantial doubt that we will have sufficient cash and cash equivalents to fund our operations for  the next twelve months.

 

Contractual Obligations

 

The following table presents information about our contractual obligations and commitments as of December 31, 2018:

 

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the dollar values reported in the consolidated financial statements and accompanying notes. Note 1 to our consolidated financial statements describes the significant accounting policies and methods used in preparation of the consolidated financial statements. Estimates are used for, but not limited to, allowance for uncollectible accounts receivables, costs to complete contracts, the recoverability of inventories and the fair value of financial and long-lived assets. Actual results could differ materially from these estimates. There have been no material changes in our Consolidated Financial Statements based on any of our critical accounting policies including the adoption of ASC 606, during the year ended December 31, 2018.  The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in preparation of the consolidated financial statements.

 

Inventories

 

We maintain raw material inventories of electronic components, motor parts and other materials to meet our expected manufacturing needs for proprietary products and for products manufactured to the design specifications of our customers. Some of these components may become obsolete or impaired due to bulk purchases in excess of customer requirements. Accordingly, we periodically assesses our raw material inventory for potential impairment of value based on then available information, expectations and estimates and establish impairment reserves as appropriate.

 

During the years ended December 31, 2018 and  2017, we recorded an expense to increase our inventory reserve for obsolete or slow moving inventory of $169,954, and $0, respectively.

 

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.

 

Accounts Receivable

 

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 collectability of accounts receivable may change due to changing general economic conditions and factors associated with each customer’s particular business.  In light of current economic conditions, we may need to maintain an allowance for bad debts in the future. It is also 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.

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Revenue Recognition on Long-term Contracts: Deferred Contract Assets and Deferred Contract Liabilities

 

We recognize revenue on 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. Estimated costs for each project are developed by our engineering staff based upon a progression of technical tasks required to attain the project's objectives.  These estimates typically include the number of hours of work required by each category of personnel, the cost of subcontracts, materials and components, as well as costs for consultants and project related travel. These estimated costs are reviewed throughout the project and revised quarterly, if necessary, to accurately reflect our best estimate of the remaining costs necessary to complete the project. 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, changes in actual overhead costs versus estimated overhead costs and a variety of other factors that may cause unforeseen delays and additional costs. 

 

Fair Value Measurements and Asset Impairment

 

Some of our assets and liabilities may be subject to analysis as to whether the asset or liability should be marked to fair value and some assets may be evaluated for potential impairment in value. The determination of fair value for those assets that do not have quoted prices in active markets is highly judgmental. These estimates and judgments may include fair value determinations based upon the extrapolation of quoted prices for similar assets and liabilities in active or inactive markets, for observable items other than the asset or liability itself, for observable items by correlation or other statistical analysis, or from our assumptions about the assumptions market participants would use in valuing an asset or liability when no observable market data is available. Similarly, management evaluates both tangible and intangible assets for potential impairments in value. In conducting this evaluation, management may rely on a number of factors to value anticipated future cash flows including operating results, business plans and present value techniques. Rates used to value and discount cash flows may include assumptions about interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of asset impairment. Changes in any of the foregoing estimates and assumptions or a change in market conditions could result in a material change in the value of an asset or liability resulting in a material adverse change in our operating results.

 

ITEM 7A.        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. One component of interest rate risk involves the short term investment of excess cash in short term, investment grade interest-bearing securities. If there are changes in interest rates, those changes would affect the investment income we earn on these investments and, therefore, impact our cash flows and results of operations, although we expect that the impact would be immaterial. We do not use financial instruments to any degree to manage these risks and do not hold or issue financial instruments for trading purposes. All of our product sales and related receivables are payable in U.S. dollars.

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ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

UQM Technologies, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of UQM Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern Uncertainty

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has sustained recurring losses from operations and had a working capital deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Moss Adams LLC

 

Denver, Colorado

March 27, 2019

 

We have served as the Company’s auditor since 2017.

 

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UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

 

See accompanying notes to consolidated financial statements.

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UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets, Continued

 

 

See accompanying notes to consolidated financial statements.

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UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations 

 

 

See accompanying notes to consolidated financial statements.

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UQM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

Consolidated Statements of Stockholders’ Equity

 

 

See accompanying notes to consolidated financial statements.