XNAS:QTWW Quantum Fuel Systems Technologies Worldwide Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2012,

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from             to

Commission File No. 0-49629

 

 

Quantum Fuel Systems Technologies Worldwide, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   33-0933072
(State of Incorporation)   (IRS Employer I.D. No.)

17872 Cartwright Road, Irvine, CA 92614

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (949) 399-4500

 

 

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

Number of shares outstanding of each of the issuer’s classes of common stock, as of August 3, 2012:

47,761,119 shares of Common Stock, $.02 par value per share, and 49,998 shares of Series B Common Stock, $.02 par value per share.

 

 

 


Table of Contents

INDEX

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

 

Part I. Financial Information (Unaudited)

     1   

Item 1. Financial Statements:

     1   

Condensed Consolidated Balance Sheets – December 31, 2011 and June 30, 2012

     1   

Condensed Consolidated Statements of Operations – Three and Six Months Ended June  30, 2011 and June 30, 2012

     2   

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2011 and June  30, 2012

     3   

Notes to Condensed Consolidated Financial Statements

     4   

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     41   

Item 4. Controls and Procedures

     41   

Part II. Other Information

     42   

Item 1A. Risk Factors

     42   

Item 6. Exhibits

     44   

Signatures

     45   

 


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     December 31,     June 30,  
     2011     2012  
           (unaudited)  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 3,798,181      $ 5,566,119   

Accounts receivable, net

     7,446,063        6,159,847   

Inventories, net

     2,335,536        2,633,608   

Prepaids and other current assets

     1,706,670        3,146,727   
  

 

 

   

 

 

 

Total current assets

     15,286,450        17,506,301   

Property and equipment, net

     5,898,970        28,538,094   

Investment in and advances to affiliates

     5,495,343        5,013,298   

Intangible asset, net

     2,881,598        3,861,548   

Goodwill

     12,400,000        14,108,995   

Prepayments to affiliate

     3,887,040        3,797,880   

Deposits and other assets

     587,348        596,105   
  

 

 

   

 

 

 

Total assets

   $ 46,436,749      $ 73,422,221   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 4,727,503      $ 5,073,512   

Accrued payroll obligations

     1,106,657        837,096   

Deferred revenue

     1,186,417        2,071,662   

Accrued warranties

     317,954        457,804   

Derivative instruments

     953,000        852,000   

Other accrued liabilities

     1,692,668        2,575,118   

Facility exit obligation, current portion

     327,168        356,572   

Debt obligations, current portion

     8,689,380        4,192,151   
  

 

 

   

 

 

 

Total current liabilities

     19,000,747        16,415,915   

Facility exit obligation, net of current portion

     1,092,411        906,487   

Debt obligations, net of current portion

     38,160        27,395,061   

Deferred income taxes

     189,019        227,936   

Derivative instruments

     543,000        518,000   

Commitments and contingencies (note 15)

    

Stockholders’ Equity:

    

Preferred stock, $.001 par value; 20,000,000 shares authorized; none issued and outstanding for the periods presented

     —          —     

Series B common stock, $.02 par value; 100,000 shares authorized; 49,998 issued and outstanding for the periods presented

     1,000        1,000   

Common stock, $.02 par value; 49,900,000 shares authorized and 26,617,369 shares issued and outstanding at December 31, 2011; 149,900,000 shares authorized and 47,803,619 shares issued, of which 47,771,119 are outstanding and 32,500 are held in treasury at June 30, 2012

     532,347        956,072   

Additional paid-in-capital

     447,618,780        464,791,367   

Accumulated deficit

     (421,544,251     (436,425,382

Accumulated other comprehensive loss

     (1,034,464     (1,364,235
  

 

 

   

 

 

 

Total stockholders’ equity

     25,573,412        27,958,822   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 46,436,749      $ 73,422,221   
  

 

 

   

 

 

 

See accompanying notes.

 

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2012     2011     2012  

Revenue:

        

Net product sales

   $ 3,033,972      $ 4,354,782      $ 4,616,955      $ 7,989,075   

Contract revenue

     4,239,047        1,253,118        9,407,436        3,612,681   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     7,273,019        5,607,900        14,024,391        11,601,756   

Costs and expenses:

        

Cost of product sales

     1,972,261        3,501,469        3,118,476        6,037,288   

Research and development

     3,841,564        3,482,426        8,907,041        7,468,964   

Selling, general and administrative

     5,619,422        4,401,243        9,443,672        8,167,223   

Amortization and impairment of long-lived assets

     121,413        542,194        1,218,237        579,240   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     11,554,660        11,927,332        22,687,426        22,252,715   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (4,281,641     (6,319,432     (8,663,035     (10,650,959

Interest expense, net

     (590,097     (871,890     (1,449,806     (4,244,213

Fair value adjustments of derivative instruments, net

     708,000        20,000        4,089,000        126,000   

Gain (loss) on modification of debt and derivative instruments, net

     —          348,328        (1,513,359     348,328   

Gain (loss) on settlement of debt and derivative instruments, net

     36,181        —          (1,535,351     (95,450

Other

     —          26,467        —          26,467   

Equity in losses of affiliates, net

     (386,892     (228,296     (786,426     (349,886
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations before income taxes

     (4,514,449     (7,024,823     (9,858,977     (14,839,713

Income tax benefit (expense)

     212,311        (41,418     297,426        (41,418
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to stockholders

   $ (4,302,138   $ (7,066,241   $ (9,561,551   $ (14,881,131
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share data - Net loss:

        

Basic & diluted

   $ (0.37   $ (0.15   $ (0.87   $ (0.39

Weighted average shares outstanding:

        

Basic & diluted

     11,563,797        47,311,392        10,933,738        38,407,374   

Comprehensive loss:

        

Net loss attributable to stockholders

   $ (4,302,138   $ (7,066,241   $ (9,561,551   $ (14,881,131

Foreign currency translation adjustments, net of tax

     (86,679     (381,715     564,596        (329,771
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to stockholders

   $ (4,388,817   $ (7,447,956   $ (8,996,955   $ (15,210,902
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended
June 30,
 
     2011     2012  

Net cash used in operating activities

   $ (8,931,962   $ (7,476,254

Cash flows from investing activities:

    

Purchases and development of property and equipment

     (498,312     (587,207

Acquisition of Zephyr Wind Farm, net of cash acquired

     —          (3,511,727

Proceeds from sale of asset held for sale

     1,648,845        —     

Payments to non-controlling interests

     (706,648     —     

Other

     46,841        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     490,726        (4,098,934
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock and warrants, net of transaction fees

     12,028,181        14,638,529   

Proceeds from exercise of warrants

     —          569,500   

Proceeds from issuance of debt and warrants, net of transaction fees

     1,373,500        1,992,750   

Borrowings under revolving line of credit

     —          3,000,000   

Borrowings under non-revolving line of credit

     2,500,000        —     

Payment of commitment and other fees in connection with revolving line of credit

     —          (372,650

Payments on facility exit obligations, net

     —          (369,646

Payments on debt obligations

     (4,633,369     (6,105,736

Other

     17,500        —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     11,285,812        13,352,747   
  

 

 

   

 

 

 

Net effect of exchange rate changes on cash

     33,966        (9,621

Net increase in cash and cash equivalents

     2,878,542        1,767,938   

Cash and cash equivalents at beginning of period

     1,857,797        3,798,181   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 4,736,339      $ 5,566,119   
  

 

 

   

 

 

 

See accompanying notes.

 

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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2012

1. Background and Basis of Presentation

Background

Quantum Fuel Systems Technologies Worldwide, Inc. and Subsidiaries (collectively referred to as “Quantum,” “we,” “our” or “us”) is a leader in the development and production of advanced vehicle propulsion systems, fuel storage technologies, and alternative fuel vehicles.

We believe that we are uniquely positioned to integrate advanced fuel and electric drive systems, software control strategies and propulsion control system technologies for alternative fuel vehicles, in particular, natural gas, plug-in hybrid electric, electric, fuel cell and hydrogen hybrid vehicles based on our years of experience in vehicle-level design, system and component software development, vehicle electronics, system control strategies and system integration.

We provide powertrain design and engineering, system integration, manufacturing and assembly of components and packaged systems for natural gas, electric, hybrid-electric, plug-in hybrid-electric, range extended plug-in electric and hydrogen vehicles, including refueling and recharging stations and systems. We are also an independent power producer and developer of renewable energy projects and provider of related services.

Our portfolio of technologies and products include hybrid electric and plug-in hybrid electric powertrain systems, advanced battery control systems, proprietary vehicle control systems and software, fuel storage and fuel delivery products and control systems for use in natural gas, hybrid, fuel cell, and other alternative fuel vehicles. Our proprietary control systems and software is integrated into base vehicle components such as inverters, chargers, battery systems and converters to provide customized hybrid drive-train technologies and systems. We also design and manufacture computerized controls, regulators and automatic shut-off equipment, lightweight, high-pressure hydrogen and natural gas storage tanks using advanced composite technology and hydrogen refueling systems capable of storage at up to 10,000 psi.

Our customer base includes automotive Original Equipment Manufacturers (OEMs), military and governmental agencies, aerospace, and other strategic alliance partners.

We were incorporated in the state of Delaware in October 2000 as Quantum Fuel Systems Technologies Worldwide, Inc. and became a publicly traded company on July 23, 2002.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial reporting. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. These adjustments consist of normal and recurring accruals, as well as non-recurring charges. The condensed consolidated financial statements include the accounts of Quantum Fuel Systems Technologies Worldwide, Inc. and our wholly owned subsidiary, Schneider Power Inc. (Schneider Power).

On April 20, 2012, Schneider Power completed the acquisition of Zephyr Farms Limited, the owner of a 10 megawatt wind farm project (Zephyr Wind Farm) located in Ontario, Canada (See Note 4).

We also hold ownership interests in certain unconsolidated active businesses that are accounted for either under the equity or cost methods of accounting. These interests include: (i) in December 2010, we and the majority shareholder of Asola formed Asola Quantum Solarpower AG (AQS) to serve as a holding company for certain divisions of Asola’s business, (ii) on September 3, 2009, we acquired an ownership interest in Shigan Quantum Technologies PVT LTD (Shigan Quantum), a start-up manufacturer of fuel injectors based in New Delhi, India, (iii) on October 6, 2009, we acquired an ownership interest in Power Control and Design, Inc. (PCD), a power control electronics software developer based in Newbury Park, California, (iv) on January 4, 2008, we acquired an ownership interest in Asola, a solar module manufacturer located in Erfurt, Germany, and (v) on August 7, 2007, we co-founded Fisker Automotive, Inc. (Fisker Automotive) with Fisker Coachbuild, LLC, which was formed for the purpose of producing premium plug-in hybrid automobiles. See Note 5 for further discussion of these businesses.

 

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All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the historical amounts to conform to the presentation of the current period.

In preparing the condensed consolidated financial statements, we have evaluated subsequent events. For purposes of these condensed consolidated financial statements, subsequent events are those events that occurred after the most recent balance sheet date presented but before the condensed consolidated financial statements are issued or available to be issued.

Change in Fiscal Year

On January 13, 2012, our Board of Directors approved a change in our fiscal year-end from April 30 to December 31. The change was effective as of December 31, 2011 and we filed a transition report with the Securities and Exchange Commission (SEC) which covered the eight month period beginning May 1, 2011 and ending December 31, 2011. The accompanying condensed consolidated financial statements cover the period from January 1, 2012 through June 30, 2012, representing the first two quarters of our newly adopted calendar year period.

Comparative Financial Data

As a result of the change in our fiscal year end, the quarterly periods of our newly adopted fiscal year do not directly coincide with the historical quarterly periods that we have already reported. In our efforts to provide comparative prior year information, we have recast the historical financial information to coincide with the current year period. The comparative data has been prepared on a pro forma and unaudited basis and includes certain estimates.

Capital Resources

From our inception we have funded our operations and strategic investments primarily with proceeds from public and private offerings of our common stock, offerings of debt securities, and borrowings with financial institutions and our current senior lender. Since January 1, 2012, we have completed the following capital transactions:

 

   

On January 19, 2012, we received proceeds, net of underwriter discounts and commissions, of $0.2 million and issued 221,250 shares of common stock in connection with the exercise of an over-allotment option held by our underwriter arising from a public offering of common stock and warrants that we completed on December 21, 2011 (December 2011 Offering).

 

   

On February 10, 2012 and March 7, 2012, we issued 735,000 and 630,000 shares of our common stock, respectively, to our senior lender in satisfaction of $1.3 million of principal demands made by our senior lender under a debt obligation we refer to in our financial statements and notes thereto as the Consent Fee Term Note.

 

   

On March 23, 2012, we completed an underwritten public offering and received proceeds, net of underwriter discounts and commissions, of approximately $14.5 million from the sale and issuance of 18,825,000 shares of common stock (March 2012 Offering). The investors also received Series “B” Warrants and Series “C” Warrants in connection with the transaction. On May 3, 2012 and June 14, 2012, investors exercised 235,000 and 435,000 of the Series “C” Warrants, respectively, which provided us with a combined total of $0.6 million in proceeds.

 

   

On May 7, 2012, we executed a two year revolving asset based line of credit (Line of Credit) that provides us with the ability to draw up to $10.0 million in working capital advances at a variable interest rate represented by the greater of (i) 5.25% or (ii) the bank’s prime rate, plus 2.00%. The amount of advances that we can draw under the line of credit is dependent upon our future levels of eligible accounts receivables and inventories.

 

   

On June 22, 2012, June 28, 2012 and July 25, 2012, we sold a combined total of $7.1 million of 12.0% unsecured subordinated nonconvertible promissory notes (2012 Bridge Notes) and warrants to accredited investors in a private placement transaction in exchange for combined gross cash proceeds of $3.35 million and cancellation of a total of $3.75 million of convertible debt that we refer to as the “Unsecured “B” Convertible Notes” that was scheduled to mature on various dates in October 2012 and November 2012. The net amount received by us, after deducting placement agent fees and transaction expenses, was $2.78 million.

Liquidity

Our historical operating results, capital resources and financial position, in combination with current projections and estimates, were considered in management’s plan and intentions to fund our operations over a reasonable period of time, which we define as the twelve month period ending June 30, 2013. For purposes of liquidity disclosures, we assess the likelihood that we have sufficient available working capital and other principal sources of liquidity to fund our operating activities and obligations as they become due and the likelihood that we will be able to maintain compliance with the required provisions contained within our debt instruments over the twelve month period. We have historically incurred operating losses and negative cash flows from operating activities and we

 

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expect to use a significant amount of cash over the next year. Specifically, our business plan anticipates that over the next twelve months that we will increase investments in equipment and facility infrastructure to accelerate expansion of our CNG tank production capacity and we will utilize a significant amount of capital and internal engineering resources to complete the development of and to initiate the production launch of our F-150 PHEV platform.

Our principal sources of liquidity as of July 31, 2012 consisted of: (i) cash and cash equivalents of approximately $4.0 million and (ii) up to $7.0 million of potential availability under the Line of Credit. We anticipate that our debt service cash requirements for the period from July 31, 2012 through June 30, 2013 will be approximately $2.6 million, of which $1.6 million relates to Schneider Power’s renewable energy operations.

Based on current projections and estimates, we do not believe our principal sources of liquidity will be sufficient to fund our planned growth initiatives, operating activities and obligations as they become due over the next twelve months. In order for us to have sufficient capital to execute our business plan, fund our operations and meet our debt obligations over this twelve month period, we will need to raise additional capital. Although we have been successful in the past in raising debt and equity capital, we cannot provide any assurance that we will be successful in doing so in the future to the extent necessary to be able to fund all of our growth initiatives, operating activities and obligations through June 30, 2013, which raises substantial doubt about our ability to continue as a going concern.

The condensed consolidated financial statements that are included in this report have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. These condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern. An inability by us to raise additional capital to sufficiently fund our working capital needs would have a material adverse affect on our business and our ability to continue as a going concern.

In addition to our need to raise sufficient capital to cover our existing operations and debt service obligations, we will also need to raise additional capital in order to further develop future generations of our hybrid electric propulsion systems. Further, we will need to increase revenues and improve profit margins for our business to be sustainable over the long term.

Use of Estimates in the Preparation of Condensed Consolidated Financial Statements

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. These estimates include assessing our levels of liquidity needs through June 30, 2013, collectability of accounts receivable, estimates of contract costs and percentage of completion, the use and recoverability of inventory, the carrying amounts and fair value of long-lived assets, investments, prepayments and goodwill, including estimates of future cash flows and market valuations associated with asset impairment evaluations, the fair value of derivatives associated with debt instruments and warrants, the realization of deferred taxes, useful lives for depreciation/ amortization periods of assets and provisions for warranty claims, among others. The markets for our products are characterized by competition, technological development and new product introduction, all of which could impact the future realizability of our assets. Actual results could differ materially from those estimates.

Revenue Recognition

We generally manufacture products based on specific orders from customers. Revenue is recognized when the earnings process is complete and collectability is reasonably assured, which for product sales is generally upon shipment from our warehouse or shipment from warehouses of certain component suppliers that we have contractual relationships with. We include the costs of shipping and handling, when incurred, in cost of goods sold.

Contract revenue for customer funded research and development is principally recognized by the percentage of completion method or as earned on a time and material basis. For applicable contracts, we generally estimate percentage complete by determining cost incurred to date as a percentage of total estimated cost at completion. For certain other contracts, percentage complete is determined by measuring progress towards contract deliverables if it is determined that this methodology more closely tracks the realization of the earnings process. For contracts measured under the estimated cost approach, we believe we can generally make dependable estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue and profit are subject to revisions as the contract progresses to completion. Our estimates of contract costs are based on expectations of engineering development time and materials and other support costs. These estimates can change based on unforeseen technology and integration issues, but known risk factors and contract challenges are generally allowed for in the initial scope and cost estimate of the program. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.

 

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In certain circumstances, customers pay one price for multiple products and services. Consideration received from these multiple element arrangements is allocated among the separate units of accounting based on the relative selling price method.

Our revenues also include energy generation sales associated with two wind farms which is recognized at the time of generation and delivery to the purchasing utility providers as metered at the point of interconnection with the transmission systems. The rate paid by the purchasing utility providers is established in the Power Purchase Agreements (PPA) between us and the utility providers.

Recent Accounting Pronouncements Adopted

On January 1, 2012, we adopted Accounting Standards Update (ASU) No. 2011-05, “Presentation of Comprehensive Income” that improves the comparability, consistency, and transparency of financial reporting and increases the prominence of items reported in other comprehensive income. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The revised standard only impacted our financial statement presentation, which we elected to adopt by presenting comprehensive income in a single continuous statement, and did not have an effect on our consolidated results of operations and financial position.

On January 1, 2012, we adopted ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350).” ASU 2011-08 simplifies how entities test goodwill for impairment. Under the revised standard, an entity is no longer required to calculate fair value of a reporting unit unless the entity determines, based on qualitative factors to determine whether the existence of events or circumstances leads to a determination, that it is more likely than not that its fair value is less than the carrying amount. The modifications of this standard did not have an effect on our consolidated results of operations and financial position.

2. Accounts Receivable

Net accounts receivable consist of the following:

 

     December 31,     June 30,  
     2011     2012  

Customer accounts billed

   $ 6,441,695      $ 5,165,662   

Customer accounts unbilled

     1,277,526        1,299,202   

Allowance for doubtful accounts

     (273,158     (305,017
  

 

 

   

 

 

 

Accounts receivable, net

   $ 7,446,063      $ 6,159,847   
  

 

 

   

 

 

 

We assess the collectability of receivables associated with our customers on an ongoing basis and historically any losses have been within management’s expectations.

 

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3. Inventories

Inventories consist of the following:

 

     December 31,     June 30,  
     2011     2012  

Materials and parts

   $ 4,594,694      $ 4,671,208   

Work-in-process

     25,164        26,000   

Finished goods

     725,793        871,515   
  

 

 

   

 

 

 
     5,345,651        5,568,723   

Less: provision for obsolescence

     (3,010,115     (2,935,115
  

 

 

   

 

 

 

Inventories, net

   $ 2,335,536      $ 2,633,608   
  

 

 

   

 

 

 

4. Acquisition of Zephyr Wind Farm

On April 20, 2012, Schneider Power completed the acquisition of Zephyr Farms Limited (Zephyr Wind Farm), the owner of a 10 megawatt wind farm project located in Ontario, Canada. In connection with the acquisition, Schneider Power acquired 100% of Zephyr Wind Farm’s outstanding shares in exchange for $2.0 million in cash and assumed $22.9 million of term debt which is payable over 10 years at 6.5% interest (see Note 9), unpaid construction and other current liabilities of $2.9 million. In addition Schneider Power incurred $0.1 million in transaction related fees.

Schneider Power used a total of $3.5 million in net cash through June 30, 2012 to complete the purchase of the outstanding shares of the Zephyr Wind Farm and satisfy capitalized construction obligations assumed in connection with the transaction. A summary of the cash used in investing activities related to the transaction is as follows:

 

Payment of purchase consideration

   $ 1,981,741   

Less: cash acquired in acquisition

     (126,073

Payment of construction obligations, net

     1,656,059   
  

 

 

 

Net cash used for acquisition

   $ 3,511,727   
  

 

 

 

Construction of the Zephyr Wind Farm was completed near the end of April 2012 and placed into production in May 2012. The acquisition of Zephyr Wind Farm provides us with additional wind energy generation sales for our Renewable Energy segment. We anticipate that the Zephyr Wind Farm will generate annual revenues of approximately $3.0 million.

The allocation of the purchase price of Zephyr Wind Farms was accounted for under the purchase method of accounting in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. We began consolidating the results of Zephyr Wind Farm on the date of acquisition in our Renewable Energy business segment. We have not disclosed the pro forma effects of the acquisition for any periods prior to the acquisition date as Zephyr Wind Farm was not in operation at the time of the acquisition and disclosure of prior financial information would not be material to our consolidated results of operations or relevant to an understanding of future operations.

The June 30, 2012 condensed consolidated financial statements reflect the initial allocation of the $2.0 million purchase price to assets acquired and liabilities assumed based on preliminary estimates of fair values as of the date of acquisition. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets and liabilities has been recorded as goodwill representing the expected synergies and other intangible value that the Zephyr Wind Farm brings to our Renewable Energy segment. We expect to finalize our analysis in the second half of 2012 and our preliminary estimates of fair values may change as we obtain additional information.

 

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The following table sets forth the preliminary allocation of the purchase price to the Zephyr Wind Farm net assets acquired:

 

Tangible assets acquired at fair value:

  

Cash and cash equivalents

   $ 126,073   

Other current assets

     1,031,860   

Property and equipment

     23,771,157   
  

 

 

 

Total tangible assets acquired

     24,929,090   

Intangible assets acquired at fair value:

  

Power purchase agreement asset

     1,073,000   

Goodwill ascribed to transaction

     1,749,842   
  

 

 

 

Total assets acquired

     27,751,932   
  

 

 

 

Liabilities assumed at fair value:

  

Current liabilities

     (2,883,063

Debt obligations

     (22,887,128
  

 

 

 

Total liabilities assumed

     (25,770,191
  

 

 

 

Net assets acquired

   $ 1,981,741   
  

 

 

 

The majority of the assets acquired are associated with wind power generation machinery and equipment and a power purchase agreement intangible asset. The useful lives for the machinery and equipment and power purchase agreement intangible asset are expected to be 20 years and will be amortized on a straight-line basis.

The goodwill recorded is not deductible for tax purposes. Goodwill and the intangible asset for the Zephyr Wind Farm are reported under our Renewable Energy reporting segment (See Note 6).

The fair values of the tangible assets were estimated using replacement costs. The fair value of the power purchase agreement intangible asset was estimated using a discounted cash flow technique utilizing Level 3 inputs consistent with those described in Note 10.

5. Strategic Investments

Investment in Fisker Automotive

On August 7, 2007, we and Fisker Coachbuild, LLC, launched Fisker Automotive, Inc. (Fisker Automotive), for the purpose of designing and producing premium plug-in hybrid automobiles. We initially owned 62.0% of Fisker Automotive; however, Fisker Automotive has since raised a level of capital that has resulted in the dilution of our direct ownership interest to less than 1%. Our investment in Fisker Automotive, which is accounted for under the cost method, was zero as of December 31, 2011 and June 30, 2012.

Under our arrangements with Fisker Automotive, we ship production level component parts and provide engineering services to support Fisker Automotive’s Karma vehicle.

 

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Investment in Affiliates

We account for our affiliates, Asola, PCD, and Shigan Quantum, under the equity method of accounting. The components of investment in and advances to affiliates for the periods presented are as follows:

 

     December 31,      June 30,  
     2011      2012  

Quantum Affiliates:

     

Asola

   $ 5,491,918       $ 5,006,759   

PCD

     —           —     

Shigan-Quantum

     3,425         6,539   
  

 

 

    

 

 

 

Investment in and advances to affiliates

   $ 5,495,343       $ 5,013,298   
  

 

 

    

 

 

 

Asola

On January 4, 2008, we acquired a 24.9% ownership interest in Asola, a solar module manufacturer located in Erfurt, Germany. We account for our equity interest in Asola under the equity method of accounting. Although Asola is a variable interest entity, we are not considered the primary beneficiary as defined under GAAP.

In December 2010, we acquired a 24.9% interest in Asola Quantum Solarpower AG (AQS). AQS was established to serve as a holding company for certain divisions of Asola’s current business and Asola’s anticipated expansion. We include AQS as part of our overall disclosures for our investments in and advances to Asola for reporting purposes. The conversion rate of one euro to one US dollar was 1.30 to 1.0 as of December 31, 2011 and 1.27 to 1.0 as of June 30, 2012.

Asola maintains its books and records on a calendar-year basis and reports results under German generally accepted accounting principles as follows:

 

     Six months ended
June 30,
 
     2011      2012  
(Euros)      

Current assets

   18,936,722       12,011,047   

Non-current assets

     8,482,577         7,663,652   

Current liabilities

     9,981,475         8,001,320   

Long-term liabilities

     12,578,193         11,460,400   

Product sales

     20,443,335         14,124,107   

Gross profit on product sales

     1,683,436         603,787   

Net income (loss)

     1,842,690         (380,000
(US Dollars)      

Current assets

   $ 27,433,000       $ 15,206,000   

Non-current assets

     12,289,000         9,702,000   

Current liabilities

     14,460,000         10,129,000   

Long-term liabilities

     18,222,000         14,508,000   

Product sales

     28,443,000         18,090,000   

Gross profit on product sales

     2,342,000         773,000   

Net income (loss)

     2,564,000         (487,000

We recognized equity in net losses of Asola of $229,000 and $353,000 for the three and six month periods ended June 30, 2012, respectively. Our equity in net losses for the six month periods differs from the 24.9% of the net losses shown in the tables above due to adjustments to equity in net losses related to differences between German generally accepted accounting principles and US GAAP. Such differences are adjusted for in calculating our equity in earnings or losses under US GAAP.

 

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Asola Solar Cell Supply Agreement

Asola has a certain long-term solar cell supply agreement dated November 1, 2007 (Supply Agreement) with one of its suppliers of solar cells for Asola’s solar module manufacturing operations. We have a related unconditional commitment under a November 2007 agreement with Asola to purchase one-half of the solar cells and to provide our share of prepayments totaling 4.5 million euro to Asola in connection with the Supply Agreement. There is a dispute between the parties under the Supply Agreement that continues to be litigated in Germany. In light of the dispute, we have not purchased any solar cells under our agreement with Asola and have not fully provided our share of the scheduled prepayments that are contained in the Supply Agreement. To date, no information has come to our attention that changes our view that we do not have a loss contract that requires a charge to be recognized.

If Asola is unable to successfully modify its remaining commitments under the Supply Agreement, we may have to record a charge in the future equal to the sum of our prepayments made to date, plus the remaining unconditional commitments, less the estimated net realizable value of the solar cells to be acquired under our agreement with Asola. This amount cannot be reasonably estimated at this time based on the uncertainty with forecasting future market prices over the remaining period of the Supply Agreement; however, we currently believe that the range of a potential charge that we could be required to recognize would be limited to approximately $8.8 million, which amount represents the total of all solar cell prepayments and other advances made by us to Asola, plus our net investment in Asola at June 30, 2012.

Although we do not intend to purchase any cells from Asola or make additional prepayments under our arrangement with Asola until the contractual matter is resolved, our scheduled commitments, including amounts in arrears and prior to any potential modifications discussed above, to purchase solar cells from Asola and provide our share of prepayments to Asola over the remaining life of the Supply Agreement is approximately $143.4 million based on the currency exchange rate as of June 30, 2012.

Rollforward of Investment In and Advances to Asola

We recorded our initial investment in Asola at cost and adjust the carrying amount of the investment to recognize advances we provide to Asola, the impacts of foreign currency translation, our investment in AQS, and our share of the earnings or losses of Asola (including AQS) after the date of acquiring the ownership interest. The activity and carrying balance for the six months ended June 30, 2012, in US Dollars, is as follows:

 

Balance at December 31, 2011

   $ 5,491,918   

Equity in losses

     (353,000

Accrued interest on advance

     65,884   

Foreign currency translation

     (198,043
  

 

 

 

Balance at June 30, 2012

   $ 5,006,759   
  

 

 

 

Shigan Quantum

On September 3, 2009, we acquired a 25% interest in Shigan Quantum Technologies PVT LTD (Shigan Quantum), a start-up company organized under India’s Corporate Act, in exchange for giving Shigan Quantum certain rights to our gas injector intellectual property. Shigan Quantum intends to manufacture and sell gaseous fuel injectors using our technologies and variants thereof. Our net equity in earnings associated with Shigan Quantum for the six months ended June 30, 2012 was $3,114.

Power Control and Design

On October 6, 2009, we acquired a 22% interest in Power Control and Design, Inc. (PCD). PCD designs and develops control software for use in motor control, solar-to-grid, wind-turbine, electric vehicle charges and power conversion products and applications for infrastructure, automotive, aerospace and industrial markets. We no longer recognize our share of net losses of PCD under the equity method of accounting as we have no obligation to fund deficit balances of the business and the carrying amount of our investment is zero.

 

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6. Long-lived Assets

Property and equipment

Changes in property and equipment for the six months ended June 30, 2012 are as follows:

 

    Balance at
December 31,
2011
    Additions     Transfers     Deprecia-
tion
    Impair-
ment
    Foreign
Currency
    Balance at
June 30, 2012
 

Property and equipment in service, gross

  $ 32,678,307        —        $ 24,046,166      $ —        $ —        $ (539,864   $ 56,184,609   

Accumulated depreciation

    (28,010,141     —          —          (685,758     —          736        (28,695,163

Construction in progress:

             

Wind farm assets acquired

    —          23,771,157        (23,771,157     —          —          —          —     

Wind farm development

    608,273        204,484        —          —          —          662        813,419   

Solar module manufacturing line

    495,016        —          —          —          (495,016     —          —     

Plant equipment & other

    127,515        382,723        (275,009     —          —          —          235,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total construction in progress

    1,230,804        24,358,364        (24,046,166     —          (495,016     662        1,048,648   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total property and equipment, net

  $ 5,898,970      $ 24,358,364      $ —        $ (685,758   $ (495,016   $ (538,466   $ 28,538,094   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill and Intangible Assets

The changes in goodwill and intangible assets for the six months ended June 30, 2012 are as follows:

 

     Goodwill - Fuel
Systems
     Goodwill -
Renewable
Energy
    Total
Goodwill
    Intangible Assets  -
Renewable Energy
 

Balance as of December 31, 2011

   $ 12,400,000       $ —        $ 12,400,000      $ 2,881,598   

Zephyr Wind Farm Acquisition

     —           1,749,842        1,749,842        1,073,000   

Amortization

     —           —          —          (84,224

Foreign currency translation

     —           (40,847     (40,847     (8,826
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

   $ 12,400,000       $ 1,708,995      $ 14,108,995      $ 3,861,548   
  

 

 

    

 

 

   

 

 

   

 

 

 

In connection with our acquisition of Schneider Power in April 2010, we initially identified intangible project assets associated with Schneider Power’s renewable energy portfolio that we report in our Renewable Energy reporting segment. The intangible asset, net of an impairment charge recognized in a prior period, is being amortized over its estimated useful life on a straight-line basis of 20 years.

In connection with Schneider Power’s acquisition of the Zephyr Wind Farm on April 20, 2012, we identified goodwill and a power purchase agreement intangible asset. The intangible asset is being amortized over its estimated useful life on a straight-line basis of 20 years.

We believe that no event or circumstance currently exists that would indicate a potential impairment of the carrying values of property and equipment, goodwill, intangible assets, or any other significant long-lived asset as of June 30, 2012.

7. Facility Exit Obligation

On June 29, 2011, we entered into a sublease agreement with an unrelated third-party for one of our facilities located in Lake Forest, California, consisting of approximately 62,000 square feet. The term of the sublease commenced on July 1, 2011 and is scheduled to expire on May 31, 2015. Since we will incur costs in excess of the rent expected to be received under the sublease for the remaining term of our lease agreement related to the facility without realizing any economic benefit, we carry an obligation on the balance sheet which represents the fair value of the remaining excess lease costs. Included in selling, general and administrative costs on the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2012 are charges of $46,152 and $75,184, respectively, associated with accretion of the fair value discount under the obligation due to the passage of time. The total carrying value of the obligation as of June 30, 2012 was $1,263,059, of which $356,572 is classified as a current liability.

 

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8. Warranties

We offer a warranty for production level component parts and alternative fuel products that are shipped to Fisker Automotive, General Motors and other OEMs. The specific terms and conditions of those warranties vary depending on the contractual provisions and the platform and model year; however, warranty is generally provided for under terms similar to those offered by the OEM to its customers. We estimate the costs that may be incurred under our warranty provisions and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims, and cost per claim.

We generally disclaim all warranties on our prototype component parts and systems. At our discretion or under certain programs, we may provide for the replacement cost or perform additional tests of prototype component parts subsequent to product delivery. We include an estimate of these types of arrangements as part of our warranty liability. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

Changes in our product warranty liability for the six months ended June 30, 2012 are as follows:

 

Balance at December 31, 2011

   $ 317,954   

Warranties issued during the period

     143,541   

Settlements made during the period

     (3,691
  

 

 

 

Balance at June 30, 2012

   $ 457,804   
  

 

 

 

 

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9. Debt Obligations

Our debt obligations consist of the following:

 

     December 31,
2011
    June 30,
2012
 

Obligations to Secured Lenders:

    

Consent Fee Term Note: $2,390,000 principal and $5,955 accrued interest in December 2011

   $ 2,395,955      $ —     

Line of Credit: $3,000,000 principal and $11,375 accrued interest in June 2012

     —          3,011,375   

Bank Term Loan—Providence Bay Wind Farm

     1,162,348        1,128,417   

Turbine Supplier Term Loan—Zephyr Wind Farm: $22,358,195 principal and $286,620 accrued interest in June 2012

     —          22,644,815   

Obligations to Other Creditors:

    

August 2011 Bridge Term Notes: $1,150,000 principal, $61,210 accrued interest,less $33,631 debt discount in December 2011

     1,177,579        —     

Unsecured “A” Convertible Notes: $3,811,900 principal, $90,430 accrued interest,less $2,676,249 debt discount in December 2011

     1,226,081        —     

Unsecured “B” Convertible Notes: $3,950,000 principal, $76,139 accrued interest, less $1,323,711 debt discount in December 2011; $1,700,000 principal, $94,287 accrued interest, less $259,322 debt discount in June 2012

     2,702,428        1,534,965   

June 2012 Bridge Notes: $4,625,000 principal, $10,727 accrued interest, less $1,417,547 debt discount in June 2012

     —          3,218,180   

Other obligations

     63,149        49,460   
  

 

 

   

 

 

 

Debt obligations, current and non-current

     8,727,540        31,587,212   

Less: obligations classified as current, net of amortization of debt discounts

     (8,689,380     (4,192,151
  

 

 

   

 

 

 

Debt obligations, non-current

   $ 38,160      $ 27,395,061   
  

 

 

   

 

 

 

The following disclosures reflect the status of our debt obligations on an instrument by instrument basis as they existed at the beginning of 2012 and provide a summary of significant payment and other activities related to the outstanding debt instruments during the first six months of 2012.

Consent Fee Term Note

Pursuant to the terms of our credit agreement with our former senior lender, we were required to obtain the former senior lender’s consent to our acquisition of Schneider Power. On November 24, 2009, our former senior lender agreed to give its consent to the acquisition in exchange for a fee of $3,000,000, which we paid by our delivery of the Consent Fee Term Note.

At December 31, 2011 the significant contractual terms of the Consent Fee Term Note were as follows: (i) interest at 6.0% per annum, (ii) scheduled maturity date of January 16, 2015, (iii) principal and interest payable on demand, (iv) we had the option to settle payment demands in cash or stock, subject to certain conditions, including that we could only exercise our right to use shares if (a) the volume weighted average price (VWAP) of our common stock for the three consecutive trading days prior to the date a payment demand was made was at least $2.00 per share and (b) that any shares issued to satisfy principal repayments must be listed on the Nasdaq Global Market, (v) we had the right to make prepayments under the note at any time, and (vi) when a demand for payment or a prepayment is made, the actual amount due with respect to such demand or prepayment would be subject to upward adjustment based upon the VWAP for our common stock for the five business days immediately prior to the repayment date as follows: the greater of (1) the amount so demanded or called and (2) that amount determined by multiplying the principal amount so demanded or called by 0.04, with that product then multiplied by the lesser of (x) the VWAP Price and (y) $50.00. We refer to the payment amount formula discussed in the preceding sentence as the principal multiplier feature. If we elected to pay in stock, then the number of shares to be issued would be equal to the actual amount required to be paid (determined in accordance with the above formula) divided by the VWAP price. Based on the foregoing formula, the principal multiplier feature could have only increased the amount payable above the face value of the note (i.e. had “intrinsic value”) if our VWAP price was above $25.00 per share.

 

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On February 10, 2012, we entered into an agreement with our former senior lender to amend the terms of the Consent Fee Term Note. The material amendments to the Consent Fee Term Note were as follows: (i) we could settle payment demands using shares of our common stock as long as the VWAP for the three trading days preceding a payment demand was at least $0.95 per share, (ii) after taking into account the $700,000 payment demand made by our former senior lender concurrently with the execution of the amendment (see February 10, 2012 payment demand described below), the aggregate amount of future payment demands that our former senior lender could have made prior to April 10, 2012 was limited to $600,000 (see March 7, 2012 payment demand described below), and (iii) with respect to the $700,000 and $600,000 payment demands described below, a deemed VWAP price of $0.9524 per share was used to determine the number of shares delivered in settlement of those payment demands.

We concluded that the modifications to the Consent Fee Term Note on February 10, 2012 were not substantial and did not represent an implied exchange of the existing note instrument with a new debt instrument.

Concurrent with the amendment to the Consent Fee Term Note on February 10, 2012, our former senior lender made a payment demand of $700,000 on the Consent Fee Note. Pursuant to the terms of the amended note, we elected to settle the payment demand in shares and delivered 735,000 shares to the former senior lender on February 13, 2012 in settlement of the payment demand.

On March 7, 2012, our former senior lender made a payment demand of $600,000 on the Consent Fee Note. Pursuant to the terms of the amended note, we elected to settle the payment demand in shares and delivered 630,000 shares to the former senior lender on March 9, 2012.

We recognized a combined loss on settlements of $95,450 associated with the issuance of shares in settlement of the principal demands in the first quarter of 2012.

On April 10, 2012, our former senior lender demanded the remaining principal amount due under the Consent Fee Term Note of $1,090,000, which we paid in cash on April 11, 2012. As a result of the repayment, all of our obligations to our former senior lender have been paid in full, our Credit Agreement and Security Agreement with our former senior lender was terminated and the liens on the assets held by our former senior lender were discharged.

Line of Credit

On May 7, 2012, we executed a revolving line of credit facility with a financial institution that provides us the ability to draw up to $10.0 million in working capital advances at a variable interest rate represented by the greater of (i) 5.25% or (ii) the bank’s prime rate, plus 2.00% (Line of Credit). The credit facility requires monthly interest payments on outstanding advances and expires on May 7, 2014. The amount of advances that we can draw down under the facility is dependent upon our future levels of eligible accounts receivables and inventories. The lender obtained a senior secured position on substantially all of our assets other than our renewable energy segment’s wind farm assets. In connection with the execution of the credit facility and our initial drawdown under the facility, we paid the lender and our placement agent cash fees totaling $0.4 million and issued warrants to purchase shares of our common stock to the lender and placement agent with a combined fair value of $0.3 million (see Note 11). The loan fees and fair value of the warrants have been deferred and are being amortized to interest expense over the life of the credit facility. The credit facility requires an additional commitment fee of $0.1 million on the first anniversary of the facility and our placement agent is entitled to receive additional fees based on the level of borrowings under the facility. Based on our eligible levels of accounts receivable and inventories as of June 30, 2012, the maximum borrowing level allowed under the facility was limited to $3.8 million.

Bank Term Loan – Providence Bay Wind Farm

In connection with our acquisition of Schneider Power on April 16, 2010, we assumed a bank term loan that had an original principal amount of Canadian Dollar (CAD) 1.5 million upon its inception on April 3, 2007. The bank term loan was executed by our wholly-owned tier-two subsidiary, Schneider Power Providence Bay Inc. (SPI Providence Bay), and is secured by certain of SPI Providence Bay’s power generation machinery, equipment and other assets.

The significant terms of the Bank Term Loan as of December 31, 2011 were as follows: (i) scheduled maturity date of April 3, 2012, (ii) interest at 7.00% per annum, and (iii) required fixed cash payments of CAD 13,482 per month through March 10, 2012, with the remaining principal amount of CAD 1.2 million due on the maturity date.

 

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On March 29, 2012, SPI Providence Bay and the lender entered into a letter agreement (the “Letter Agreement”) pursuant to which SPI Providence Bay and the lender agreed to renew and amend the terms of the Bank Term Loan. The material amendments to the term loan were: (i) the maturity date was amended to April 10, 2017, (ii) the interest rate was amended to 6.0% per annum and (iii) the repayment terms were amended to provide for 60 monthly payments of CAD 12,899 and a final payment of CAD 667,422 on the maturity date. We concluded that the modifications in connection with the Letter Agreement represented a replacement of the existing debt instrument with a new debt instrument that we continue to refer to as the Bank Term Loan. There was no gain or loss recognized in connection with the loan replacement.

The conversion rate of one CAD to one US Dollar was 0.978 to 1.0 as of December 31, 2011 and 0.983 to 1.0 as of June 30, 2012.

Turbine Supplier Term Loan – Zephyr Wind Farm

In connection with Schneider Power’s acquisition of Zephyr Wind Farm on April 20, 2012, we assumed a term loan payable to the wind turbine supplier related to the project. The term loan had a principal amount of CAD 22.7 million as of the date of the acquisition. Pursuant to the terms of the Credit Agreement between Zephyr Farms Limited and Samsung Heavy Industries Ltd. (Samsung Debt), the Zephyr Wind Farm will make regularly scheduled semi-annual principal and interest payments, accruing at a rate of 6.5% per annum, for a period of nine years commencing nine months after the official commercial operation date (COD). The COD was subsequently determined to be May 15, 2012; thus, the first semi-annual payment is scheduled for February 2013.

The aggregate amount of such principal and interest payments will be approximately CAD 2.1 million per year. Additionally, the Samsung Debt, as amended, calls for a principal balloon payment in year five of CAD 5.3 million and a final balloon payment in year ten of CAD 9.6 million. The Samsung Debt is secured by the assets of the Zephyr Wind Farm and repayment of the Samsung Debt obligation is guaranteed by Schneider Power.

August 2011 Bridge Term Notes

On August 23, 2011, we received gross proceeds of $1,150,000 from the sale of senior subordinated promissory notes and warrants in a private placement transaction with accredited investors (the August 2011 Bridge Term Notes). The significant terms of the August 2011 Bridge Term Notes as of December 31, 2011 were as follows: (i) scheduled maturity date of January 31, 2012, (ii) interest at 15.0% per annum, payable in cash upon maturity, (iii) principal payable in cash and could not be prepaid, (iv) no conversion rights, and (v) notes were subordinate to outstanding obligations under debt instruments held by our former senior lender.

On January 31, 2012, we repaid the August 2011 Bridge Term Notes in full.

Unsecured “A” Convertible Notes

On September 29, 2011 and October 12, 2011, we received cumulative gross proceeds of $3,811,900 from the sale of 10.0% unsecured convertible promissory notes (the Unsecured “A” Convertible Notes) and warrants. We received gross proceeds of $1,949,500 in connection with the September 29, 2011 close and $1,862,400 in connection with the October 12, 2011 close.

The significant terms of the Unsecured “A” Convertible Notes as of December 31, 2011 were as follows: (i) maturity date of March 20, 2012, (ii) interest at 10.0% per annum; however, each of the holders were guaranteed to receive at least six months of interest regardless of the contractual maturity date, (iii) quarterly interest obligation payable in cash on January 1, 2012 with the remaining interest obligation due upon maturity (iv) holders of the notes had the right at any time to convert all or part of the outstanding principal amount into shares of our common stock at any time prior to the maturity date at a fixed conversion price of $2.124 per share for the September 29 investors and $1.9800 per share for the October 12 investors, and (v) the notes were subordinate to outstanding obligations under debt instruments held by our former senior lender.

None of the holders exercised their conversion rights prior to the contractual maturity date. On March 20, 2012, we repaid the Unsecured “A” Convertible Notes in full and recognized $2,676,249 of non-cash interest expense during the first quarter of 2012 associated with amortization of the remaining debt discount that was allocated to the debt instruments at the time the notes were issued.

 

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Unsecured “B” Convertible Notes

During the period of October 17, 2011 through November 15, 2011, we entered into private placement transactions with certain accredited investors for the purchase and sale of unsecured convertible promissory notes (the Unsecured “B” Convertible Notes). We received gross proceeds of $3,950,000 from the offering and the investors also received warrants to purchase shares of our common stock.

The significant terms of the Unsecured “B” Convertible Notes as of December 31, 2011 were as follows: (i) notes mature one year from the respective dates of issuance, (ii) interest at 10.0% per annum, (iii) quarterly interest obligations payable in cash, (iv) holders have the right at any time prior to the maturity date to convert all or part of the outstanding principal amount due under the notes into shares of our common stock at fixed conversion prices ranging from $2.7727 to $2.7832 per share, (v) we have the right to prepay all or part of the notes at any time upon 30 days prior written notice, and (vi) the notes were subordinate to outstanding obligations under debt instruments held by our former senior lender.

During June 2012, certain holders agreed to cancel their existing notes and warrants that they were issued in connection with the origination of the Unsecured “B” Convertible Notes in October and November 2011 with new unsecured and nonconvertible bridge notes and warrants that have significantly different terms. On June 22, 2012 and June 28, 2012, holders of combined principal amount of $2,250,000 replaced their existing notes with new notes at the same principal amounts that we refer to as the June 2012 Bridge Notes (discussed further below). These certain investors also received replacement warrants with a combined fair value of $769,323 (see Note 11).

We concluded that the exchange in connection with the replacement of notes and warrants was substantial and represented an extinguishment of the existing debt instruments with new debt instruments and we recognized a gain of $348,328 in connection with the replacement transactions.

In addition to the contractual interest cost recognized in connection with the Unsecured “B” Convertible Notes, we also recognized a total of $814,822 of non-cash interest expense during the first half of 2012 associated with (a) amortization of a portion of the debt discount that was allocated to the debt instruments at the time the notes were issued and (b) amortization of a portion of the debt issuance costs that were deferred in connection with the transactions. The remaining debt discount and deferred debt issuance costs are being amortized over the scheduled lives of the notes under the effective interest rate method.

June 2012 Bridge Notes

On June 22, 2012 and June 28, 2012, we received gross proceeds of $4,625,000 from the sale of 12.0% senior subordinated bridge notes (June 2012 Bridge Notes) and warrants to purchase up to 4,749,029 shares of our common stock in a private placement transaction with accredited investors, of which $2,250,000 was paid in cash and $2,375,000 was paid by the cancellation of unsecured convertible notes (Unsecured “B” Convertible Notes) owed by us to certain investors that participated in a private placement that were scheduled to mature on various dates during October 2012 and November 2012. The warrants have a term of five years and a fixed exercise price of $0.85.

The significant terms of the June 2012 Bridge Term Notes are as follows: (i) scheduled maturity dates of September 22, 2013 and September 28, 2013, (ii) interest at 12.0% per annum, (iii) quarterly interest obligations payable in cash, (iv) principal payable in cash and can be prepaid, in whole or in part, at any time without penalty, (v) no conversion rights, and (vi) notes subordinate to outstanding obligations under debt instruments held by our financial institution lender.

We incurred debt issuance costs of $0.4 million, of which a portion is deferred and amortized over the term of the notes and the remaining amount was attributed to the warrants and recognized as a reduction to additional paid-in-capital. In addition, we recorded a combined debt discount of $1.4 million on the origination dates of the June 2012 Bridge Notes that is being amortized over the term of the notes on the effective interest rate method.

Collateral and Covenants

We were not in compliance with a certain quarterly “Performance to Plan” financial covenant under the Line of Credit with our secured financial institution lender at June 30, 2012. Although we have not yet obtained a waiver of the covenant, we expect to receive a waiver from the lender in the near term and do not believe that our future ability to borrow under the Line of Credit will be negatively impacted. We were in compliance with all other existing covenants and other requirements of the Line of Credit and our other debt instruments as of June 30, 2012.

 

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Debt Maturities

The table below shows scheduled maturities of our debt obligations for each of the following years until maturity:

 

     Debt
Maturities
     Amortization
of Discount
    Net Maturities of Debt
Obligations
 

Twelve months ending June 30:

       

2013

   $ 5,501,474       $ (1,309,323   $ 4,192,151   

2014

     5,328,770         (367,546     4,961,224   

2015

     741,574         —          741,574   

2016

     783,872         —          783,872   

2017

     3,547,068         —          3,547,068   

Thereafter

     17,361,323         —          17,361,323   
  

 

 

    

 

 

   

 

 

 
   $ 33,264,081       $ (1,676,869   $ 31,587,212   
  

 

 

    

 

 

   

 

 

 

10. Derivative Instruments and Fair Value Measurements

We measure our financial assets and liabilities in accordance with Fair Value Measurements and Disclosures under GAAP, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. GAAP describes three different valuation techniques to be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three valuation techniques are consistent with generally accepted valuation methodologies. The hierarchy which prioritizes the inputs used to measure fair value from market based assumptions to entity specific assumptions are as follows:

Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

Our derivative instruments are measured on their respective origination dates, at the end of each reporting period and at other points in time when necessary, such as modifications, using Level 3 inputs. We do not report any financial assets or liabilities that we measure using Level 1 or Level 2 inputs and there were no transfers in or out of Level 3 for all periods reported.

The derivatives and their respective fair values measured using Level 3 inputs are as follows:

 

     December 31,      June 30,  
     2011      2012  

Derivative instruments classified as current liabilities:

     

Warrant contracts issued on October 27, 2006

   $ 882,000       $ 822,000   

Warrant contracts issued on August 25, 2008

     18,000         —     

Warrant Series “B” contracts issued on February 18, 2011

     53,000         30,000   
  

 

 

    

 

 

 
     953,000         852,000   
  

 

 

    

 

 

 

Derivative instruments classified as non-current liabilities:

     

Warrant contracts issued on September 29, 2011

     269,000         254,000   

Warrant contracts issued on October 12, 2011

     274,000         264,000   
  

 

 

    

 

 

 
     543,000         518,000   
  

 

 

    

 

 

 

Total balance of derivative instruments

   $ 1,496,000       $ 1,370,000   
  

 

 

    

 

 

 

 

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We determined the fair values of the derivative instrument liabilities associated with certain warrant contracts primarily based on option-pricing mathematical models generally referred to as “Black-Scholes” and “Monte Carlo” option-pricing models. These models determine the value of the derivative instruments based on complex mathematical formulas that assume that returns on our underlying stock are normally-distributed and that risk-free interest rates and stock volatilities will remain constant over the term of the contract. We use the Black-Scholes model to calculate the value of the derivative instrument liabilities associated with warrant contracts in which the contractual terms are fixed. For derivative warrant contracts that incorporate contingent terms, including exercise price reset provisions (the warrants issued on October 27, 2006, September 29, 2011 and on October 12, 2011), we utilize the Monte Carlo model which is similar to the Black-Scholes model; however, the Monte Carlo model simulates several thousand possible (but random) price paths for the underlying value of the derivative instruments. These random price paths were then averaged to determine the value of the derivative instruments as of the reporting date.

The following table summarizes the changes in the fair value for the derivative instrument liabilities using Level 3 inputs:

 

     Oct 27, 2006
Warrants
    Sept 29, 2011
Warrants
    Oct 12, 2011
Warrants
    Other
Derivative
Warrants
    Total  

Balance at December 31, 2011

   $ 882,000      $ 269,000      $ 274,000      $ 71,000      $ 1,496,000   

Adjustments resulting from change in value of underlying asset and passage of time recognized in earnings

     (33,000     (24,000     (25,000     (24,000     (106,000

Balance at March 31, 2012

   $ 849,000      $ 245,000      $ 249,000      $ 47,000      $ 1,390,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments resulting from change in value of underlying asset and passage of time recognized in earnings

     (27,000     9,000        15,000        (17,000     (20,000
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 822,000      $ 254,000      $ 264,000      $ 30,000      $ 1,370,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The fair value of derivative instrument liabilities measured with Level 3 inputs are revalued quarterly. The assumptions used in the calculations under our binomial and/or option pricing models for the following periods were as follows:

 

     Oct 27, 2006
Warrants
    Aug 25, 2008
Warrants
    Feb 18,  2011
“B”
Warrants
    Sept 29, 2011
Warrants
    Oct 12, 2011
Warrants
 

December 31, 2011:

          

Annual volatility (1)

     59.9     82.7     81.5     79.0     78.9

Risk-free rate

     0.3     0.6     0.6     0.8     0.8

Dividend rate

     0.0     0.0     0.0     0.0     0.0

Closing price of Quantum stock

   $ 0.73      $ 0.73      $ 0.73      $ 0.73      $ 0.73   

Conversion / exercise price

   $ 0.95      $ 38.60      $ 6.00      $ 0.95      $ 0.95   

June 30, 2012:

          

Annual volatility (1)

     54.8     58.1     74.1     79.1     79.1

Risk-free rate

     0.3     0.4     0.6     0.6     0.6

Dividend rate

     0.0     0.0     0.0     0.0     0.0

Closing price of Quantum stock

   $ 0.73      $ 0.73      $ 0.73      $ 0.73      $ 0.73   

Conversion / exercise price

   $ 0.83      $ 38.60      $ 6.00      $ 0.83      $ 0.83   

 

(1) Annual volatility is based on the historical average of our identified per group for a period consistent with the remaining term of the contract.

11. Stockholders’ Equity

Increase in Authorized Shares

At a special meeting of stockholders held on February 14, 2012, our stockholders authorized an increase in the number of authorized shares of common stock from 50,000,000 to 150,000,000, of which 100,000 shares are designated as Series B common stock.

Stock Incentive Plans

On October 27, 2011, our stockholders approved our 2011 Stock Incentive Plan (the 2011 Plan). The 2011 Plan replaced our 2002 Stock Incentive Plan (the 2002 Plan) and awards can no longer be issued under the 2002 Plan; however, awards issued under the 2002 Plan prior to its termination will remain outstanding in accordance with their terms.

Both stock incentive plans provide that awards of stock options and shares of restricted stock may be granted to directors, employees and consultants. The terms of the award are established by the administrator of the plans, our Compensation Committee. Historically, options expire ten years after the date of grant or 30 days after termination of employment, vest ratably at the rate of 25% on each of the first four anniversaries of the grant date and have an exercise price at least equal to the market price of our stock at the date of grant. Restricted stock awards generally cliff vest on the third anniversary of the grant date.

The 2011 Plan provides for an aggregate of 3,100,000 shares to be initially reserved for issuance and available for grant there under, subject to adjustment in the event of a stock split, stock dividend, or other similar change in our common stock or our capital structure. The 2011 Plan contains an “evergreen” provision under which the number of shares available for grant under the 2011 Plan will increase annually beginning on January 1, 2013 equal to the lesser of (x) 500,000 shares, (y) 3.0% of the number of shares outstanding as of such first day of each year or (z) a lesser number of shares determined by our Board of Directors.

On June 8, 2012, the Audit Committee granted 105,000 shares of restricted stock and 477,500 stock options under our 2011 plan to certain of our employees and executives. As of June 30, 2012, 2,517,000 shares remain available for issuance under the 2011 Plan.

 

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Table of Contents

Share-based Compensation

The share-based compensation expense related to stock options and restricted stock included in the accompanying condensed consolidated statements of operations and in the financial information by reportable business segment in Note 14 is:

 

     Electric Drive &
Fuel Systems
     Renewable
Energy
     Corporate      Total  

Three Months Ended June 30, 2011:

           

Cost of product sales

   $ 8,438       $ —         $ —         $ 8,438   

Research and development

     47,619         —           —           47,619   

Selling, general and administrative

     6,049         31,961         194,867         232,877   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation

   $ 62,106       $ 31,961       $ 194,867       $ 288,934   
  

 

 

    

 

 

    

 

 

    

 

 

 

Three Months Ended June 30, 2012:

           

Cost of product sales

   $ 7,024       $ —         $ —         $ 7,024   

Research and development

     30,408         —           —           30,408   

Selling, general and administrative

     4,040         31,344         101,506         136,890   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation

   $ 41,472       $ 31,344       $ 101,506       $ 174,322   
  

 

 

    

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2011:

           

Cost of product sales

   $ 16,827       $ —         $ —         $ 16,827   

Research and development

     98,987         —           —           98,987   

Selling, general and administrative

     12,220         60,529         404,570         477,319   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation

   $ 128,034       $ 60,529       $ 404,570       $ 593,133   
  

 

 

    

 

 

    

 

 

    

 

 

 

Six Months Ended June 30, 2012:

           

Cost of product sales

   $ 15,507       $ —         $ —         $ 15,507   

Research and development

     66,255         —           —           66,255   

Selling, general and administrative

     8,577         62,164         241,794         312,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation

   $ 90,339       $ 62,164       $ 241,794       $ 394,297   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share-based compensation includes costs of restricted stock of $120,279 and $240,588 for the three and six months ended June 30, 2011, respectively, and $59,905 and $150,406 for the three and six months ended June 30, 2012, respectively.

Shared-based compensation for the three and six month periods ended June 30, 2012 excludes certain unvested restricted stock and outstanding stock option awards that were forfeited as a result of the resignations of our former President/Chief Executive Officer and our former Executive Chairman of the Board in May 2012.

 

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Table of Contents

Stock Options

Below is a summary of the options activity:

 

     Number of
Shares
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Life (In Years)
     Aggregate
Intrinsic
Value
 

Options outstanding at December 31, 2011

     398,599      $ 16.08         

Granted

     477,500      $ 0.62         

Exercised

     —        $ —           

Forfeited

     (41,325        

Expired

     (85,037        
  

 

 

   

 

 

       

Options outstanding at June 30, 2012

     749,737      $ 6.19         8.6       $ 53,188   

Vested and expected to vest at June 30, 2012

     686,009      $ 6.19         7.4       $ 48,667   

Options exercisable at June 30, 2012

     162,601      $ 17.52         5.2       $ —     

The aggregate intrinsic value in the table above is based on our closing stock price of $0.73 per share as of the last business day of the six months ended June 30, 2012, which amount would have been received by the optionees had all options been exercised on that date.

Restricted Stock

We periodically issue restricted stock to our directors and executives as a form of equity-based compensation. The value of the shares, measured on the date of award based upon the closing price of our common stock, is recognized as compensation expense ratably over the vesting period, typically three years. Unvested restricted stock activity and amounts outstanding for the six months ended June 30, 2012 is as follows:

 

Unvested restricted stock outstanding at December 31, 2011

     93,750   

Granted

     105,000   

Vested

     (1,250
  

 

 

 

Forfeitures

     (32,500
  

 

 

 

Unvested restricted stock outstanding at June 30, 2012

     165,000   
  

 

 

 

As of June 30, 2012, there was $320,557 of unrecognized share-based compensation expense related to unvested restricted stock of which $257,102 is expected to be fully recognized by August 2013 and the remaining $63,455 is expected to be recognized by June 2015.

 

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Table of Contents

Warrants

Warrant activity and warrants outstanding, reportable in the equivalent number of shares of our common stock that can be purchased upon exercise of the warrants, is as follows:

 

Warrants outstanding at December 31, 2011

     18,578,718   

Issued—original number

     38,518,074   

Issued—additional number (1)

     430,609   

Exercised

     (670,000

Terminated (2)

     (880,478

Expired (3)

     (19,110,000
  

 

 

 

Warrants outstanding at June 30, 2012

     36,866,923   
  

 

 

 

 

(1) Associated with reset provisions of certain warrant contracts.
(2) Represents terminated warrants associated with the exchange of Unsecured "B" Convertible Notes with the June 2012 Bridge Notes.
(3) Represents the Series "C" Warrants issued in connection with the March 2012 Offering that expired in June 2012.

In connection with the exercise of an over-allotment option granted in connection with the December 2011 Offering, investors received warrants on January 19, 2012 to purchase up to 132,750 shares of our common stock at a fixed exercise price of $1.22 per share, which are currently exercisable and expire five years from the date of issuance.

In connection with the closing of the March 2012 Offering, investors received: (i) Series “B” Warrants to purchase up to 11,868,000 shares of our common stock at a fixed exercise price of $1.02 per share, which are currently exercisable and expire five years from the date of issuance and (ii) Series “C” Warrants to purchase up to 19,780,000 shares of our common stock at a fixed exercise price of $0.85 per share. For each Series “C” Warrant exercised, investors were to receive an additional 0.47 of a Series “B” Warrant. On May 3, 2012 and June 14, 2012, 235,000 and 435,000 Series “C” Warrants were exercised at $0.85 per share, respectively. In connection with the exercise, 110,450 and 204,450 Series “B” Warrants were issued, respectively. The remaining Series “C” Warrants expired in June 2012.

In connection with the Line of Credit executed on May 7, 2012, warrants to purchase shares of our common stock were issued as follows: (i) lender warrants to purchase up to 917,839 shares of our common stock at a fixed exercise price of $2.12 per share, which are exercisable after six months and expire one year from the date of issuance (ii) lender warrants to purchase up to 555,556 shares of our common stock at a fixed exercise price of $0.90 per share, which are exercisable after six months and expire seven years from the date of issuance and (iii) placement agent warrants to purchase up to 200,000 shares of our common stock at a fixed exercise price of $0.90 per share, which are exercisable after six months and expire seven years from the date of issuance.

In connection with the issuance of the June 2012 Bridge Notes, investors received warrants to purchase up to 4,029,851 and 719,178 shares of our common stock on June 22, 2012 and June 28, 2012, respectively, at a fixed exercise price of $0.85 per share, which are exercisable after six months and expire five years from the date of issuance. In connection with the transaction, holders of certain warrants to purchase our common stock that were issued in October and November 2011 agreed to cancel a combined total of 880,478 warrants that had an exercise price of $2.64 per share and were set to expire five years from the date of issuance.

 

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Table of Contents

A summary of our outstanding warrants as of June 30, 2012 is as follows:

 

Issue Date

  Expiration Date   Shares Subject
to Outstanding
Warrants
    Exercise
Price at End
of Period
    Exercise Price
Reset
Provision
 

October 27, 2006

  April 27, 2014     3,408,981      $ 0.83             (2) 

June 22, 2007

  December 22, 2014     257,583      $ 41.80             (1) 

August 25, 2008

  August 25, 2015     1,398,964      $ 38.60             (3) 

August 3, 2009

  August 3, 2014     32,005      $ 17.00             (1) 

September 4, 2009

  September 4, 2012     36,197      $ 17.00             (1) 

September 4, 2009

  September 4, 2014     83,476      $ 17.00             (1) 

April 30, 2010 through July 1, 2010

  April 30, 2015 through July 1, 2015     222,217      $ 18.20             (1) 

July 22, 2010

  July 22, 2013     96,859      $ 18.20             (1) 

October 13, 2010 and October 19, 2010

  October 13, 2015 and October 19, 2015     36,197      $ 13.40             (1) 

January 3, 2011

  February 18, 2014     277,777      $ 9.00             (1) 

January 12, 2011

  January 12, 2014     131,892      $ 9.20             (1) 

February 18, 2011

  February 18, 2016     759,370      $ 6.57             (1) 

February 18, 2011; Series “B”

  February 18, 2016     393,933      $ 6.00             (1) 

May 9, 2011

  May 8, 2014     78,455      $ 2.92             (1) 

May 20, 2011

  May 19, 2014     90,313      $ 2.92             (1) 

June 15, 2011

  June 15, 2016     1,445,862      $ 3.85             (1) 

June 15, 2011

  June 15, 2018     45,000      $ 3.12             (1) 

June 15, 2011

  June 15, 2018     120,271      $ 3.85             (1) 

June 20, 2011

  June 20, 2016     57,079      $ 3.90             (1) 

June 20, 2011

  June 20, 2018     132      $ 3.90             (1) 

July 6, 2011

  July 6, 2016     419,729      $ 3.85             (1) 

August 23, 2011

  August 23, 2016     115,000      $ 3.85             (1) 

September 29, 2011

  September 29, 2016     550,703      $ 0.83             (4) 

October 12, 2011

  October 12, 2016     564,348      $ 0.83             (4) 

October 17, 2011 through October 21, 2011

  October 17, 2016 through October 21, 2016     650,717      $ 2.64             (1) 

November 2, 2011

  November 2, 2014     540,000      $ 2.12             (1) 

December 21, 2011

  December 21, 2016     6,315,789      $ 1.22             (1) 

January 19, 2012

  January 19, 2017     132,750      $ 1.22             (1) 

March 20, 2012; Series “B”

  March 20, 2017     5,244,000      $ 1.02             (1) 

March 21, 2012; Series “B”

  March 21, 2017     6,624,000      $ 1.02             (1) 

May 3, 2012; Series “B”

  May 3, 2017     110,450      $ 1.02             (1) 

June 4, 2012; Series “B”

  June 4, 2017     204,450      $ 1.02             (1) 

May 8, 2012

  May 8, 2019     200,000      $ 0.90             (1) 

May 7, 2012

  May 7, 2013     917,839      $ 2.12             (1) 

May 7, 2012

  May 7, 2019     555,556      $ 0.90             (1) 

June 22, 2012

  June 22, 2017     4,029,851      $ 0.85             (1) 

June 28, 2012

  June 28, 2017     719,178      $ 0.85             (1) 
   

 

 

     

Total warrants outstanding at June 30, 2012

      36,866,923       
   

 

 

     

 

(1) No; contract does not provide for an exercise price reset provision.
(2) Yes; contract provides for full ratchet anti-dilution price protection.
(3) Yes; contract provides for a price reset provision; however, provision is no longer applicable.
(4) Yes; contract provides for a price reset provision; however, number of shares is fixed.

We evaluate the warrants we issue in accordance with applicable accounting guidance and we have concluded that liability classification is appropriate for the warrants issued on October 27, 2006, June 22, 2007, August 25, 2008, August 3, 2009, September 4, 2009, February 18, 2011 (Series “B”), September 29, 2011, and October 12, 2011. Although we mark to market all the warrants classified as liabilities each period (see Note 10), the fair values of the warrants issued on June 22, 2007, August 3, 2009 and September 4, 2009 were diminutive for the periods reported. We have further concluded that

 

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equity classification is appropriate for all other warrants that were outstanding during the periods presented due to the fact that these warrants are considered to be indexed to our own stock, are required to be physically settled in shares of our common stock and there are no provisions that could require net-cash settlement.

The proceeds we received from the transactions that gave rise to the issuance of the warrants have been allocated to the common stock or debt issued, as applicable, and the warrants based on their relative fair values. For those transactions in which proceeds were received in connection with the sale of common stock, we aggregate the values of those warrants that we do not classify as liabilities with the fair value of the stock issued as both of these types of instruments have been classified as permanent equity.

The classification as equity for certain of the warrants could change as a result of either future modifications to the existing terms of settlement or the issuance of new financial instruments by us that could be converted into an increased or unlimited number of shares. If a change in classification of certain warrants is required in the future, the warrants would be treated as derivatives, reclassified as liabilities on the balance sheet at their fair value, and marked to market each period, with the changes in fair values being recognized in the respective period’s statement of operations.

The warrants issued on October 27, 2006, June 22, 2007, August 25, 2008 and the Series “B” warrants issued on February 18, 2011 contain contractual provisions that could potentially require us to net-cash settle the value of the remaining outstanding warrants in the event of a change in control or other fundamental change in Quantum in the future. Since the contractual provisions that could require us to net-cash settle the warrants are deemed not to be within our control under applicable accounting guidance, equity classification is precluded. As such, we consider these warrants to be derivative instruments that are classified as current liabilities, recorded at fair value and marked to market each period, with the changes in fair values being recognized in the respective period’s statement of operations.

The warrants issued on August 3, 2009 and September 4, 2009 contain cashless exercise provisions whereby the settlement calculation may incorporate the book value per share of common stock if there is not a public market for the common stock, and the warrants issued on September 29, 2011 and October 12, 2011 contain contingent exercise price reset provisions related to subsequent equity sales. Under GAAP, if an instrument’s settlement calculation incorporates variables other than those used to determine the fair value of a fixed-for-fixed forward or option on equity shares, the instrument would not be considered indexed to the entity’s own stock and therefore would not be precluded from derivative instrument consideration. As such, we consider these warrants to be derivatives that are classified as non-current liabilities, recorded at fair value and marked to market each period, with the changes in fair values being recognized in the respective period’s statement of operations.

The fair values of the derivative liabilities associated with warrant contracts on the dates of the condensed consolidated balance sheets presented and a summary of the changes in the fair values of those derivative instruments during the periods presented on the condensed consolidated statements of operations are disclosed in Note 10.

The warrants issued on October 27, 2006, August 25, 2008, September 29, 2011 and October 12, 2011 contain contractual provisions which, subject to certain exceptions, reset the exercise price of such warrants if at any time while such warrants are outstanding, we sell or issue shares of our common stock or rights, warrants, options or other securities or debt convertible, exercisable or exchangeable for shares of our common stock. Since the initial issuance of these warrants, we have completed capital raising transactions that resulted in the reset of the exercise price of the warrants issued on October 27, 2006 to $0.83, the warrants issued on August 25, 2008 to $38.60, and the warrants issued on September 29, 2011 and October 12, 2011 to $0.83 per share, respectively. The warrants issued on August 25, 2008 had been reset to the lowest price allowable under their contractual terms so the reset provision is no longer applicable.

The warrants issued on October 27, 2006 and August 25, 2008 also contain a provision that increases the number of shares of common stock subject to such warrants if and when the exercise price is reset so that the aggregate purchase price payable applicable to the exercise of the warrants after the reset of the exercise price is the same as the aggregate purchase price payable immediately prior to the reset. As a result of the exercise price resets, the remaining number of shares subject to the warrants issued on October 27, 2006 and August 25, 2008 increased to 3,408,981 and 1,398,964, respectively. Any resets to the exercise price of the warrants issued on October 27, 2006 in the future will have an additional dilutive effect on our existing shareholders.

 

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Stockholders’ Equity Roll-forward

The following table provides a condensed roll-forward of stockholders’ equity for the six months ended June 30, 2012:

 

     Common Stock
Shares
Outstanding
    Total Equity  

Balance at December 31, 2011

     26,617,369      $ 25,573,412   

Share-based compensation

     105,000        394,297   

Unvested restricted stock and stock option forfeitures

     (32,500     (232,261

Issuance of common stock to investors

     19,046,250        14,638,529   

Issuance of common stock in satisfaction of debt principal

     1,365,000        1,395,450   

Issuance of common stock in connection with warrant exercises

     670,000        569,500   

Issuance of warrants in connection with debt issuances

     —          830,797   

Foreign currency translation

     —          (329,771

Net loss

     —          (14,881,131
  

 

 

   

 

 

 

Balance at June 30, 2012

     47,771,119      $ 27,958,822   
  

 

 

   

 

 

 

12. Income Taxes

For our US-based businesses, we have a net deferred tax asset position primarily consisting of net operating loss carry forwards that are available to offset future taxable income. In accordance with GAAP, we have established a valuation allowance for our net deferred tax asset since it is unlikely that the asset will be fully realized based on our lack of earnings history and current evidence.

Our wholly-owned subsidiary, Schneider Power, based in Canada, has certain deferred tax liabilities which cannot be offset by net operating loss carry forwards from the US businesses and represents the balance of the net deferred tax liability reported as of June 30, 2012 on the accompanying condensed consolidated balance sheet.

13. Earnings (Loss) Per Share

We compute net income (loss) per share by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. We consider common equivalent shares from the exercise of stock options, warrants and convertible debt payable in the instance where the shares are dilutive to our net income. The effects of stock options, warrants and convertible debt were anti-dilutive for all periods presented.

 

 

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The following table sets forth the computation of basic and diluted loss per share:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2012     2011     2012  

Numerators for basic and diluted loss per share data:

        

Net loss attributable to stockholders

   $ (4,302,138   $ (7,066,241   $ (9,561,551   $ (14,881,131

Denominator for basic and diluted loss per share data—weighted-average shares

     11,563,797        47,311,392        10,933,738        38,407,374   

Basic and diluted per share data:

        

Net loss attributable to stockholders

   $ (0.37   $ (0.15   $ (0.87   $ (0.39

For the six months ended June 30, 2011 and 2012, shares of common stock potentially issuable upon the exercise of options, warrants and convertible notes, in addition to shares potentially issuable in satisfaction of term note obligations, were excluded in the computation of diluted per share data, as the effects would be anti-dilutive.

14. Business Segments and Geographic Information

Business Segments

We classify our business operations into three reporting segments: Electric Drive & Fuel Systems, Renewable Energy and Corporate.

The chief operating decision maker allocates resources and tracks performance by the reporting segments. We evaluate performance based on profit or loss from operations before interest, non-operating income and expenses, and income taxes.

Electric Drive & Fuel Systems Segment

Our Electric Drive & Fuel Systems segment supplies advanced propulsion and fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. We also provide our propulsion systems, compressed natural gas (CNG) and hydrogen storage products for hybrid and fuel cell applications, to major OEMs and certain governmental agencies through funded research and development contracts and on a prototype and production intent basis. This segment’s business operations primarily consist of design, integration and supply of electric drive and control system technologies and manufacture and supply of packaged fuel systems for use in CNG, hybrid, plug-in electric hybrid, hydrogen, fuel cell, and other alternative fuel vehicles.

Our Electric Drive & Fuel Systems segment generates product revenues through: (i) the sale of hybrid sub-systems and control systems included in the Q-Drive powertrain system for the Fisker Karma production vehicle, (ii) the sale of CNG and hydrogen fuel storage, fuel delivery, and electronic control systems to OEMs, (iii) the installation of our systems into OEM vehicles, (iv) the sale of transportable hydrogen refueling stations, and (v) the sale of CNG, propane, and hydrogen fuel storage, fuel delivery, and electronic control systems for internal combustion engine applications.

Our Electric Drive & Fuel Systems segment generates contract revenue by providing engineering design and support to OEMs, primarily Fisker Automotive and General Motors, so that our advanced propulsion systems integrate and operate with the OEM’s hybrid or fuel cell applications. Contract revenue is also generated from customers in the aerospace industry, military and other governmental entities and agencies.

Research and development is expensed as incurred and is primarily related to the operations of the Electric Drive & Fuel Systems business segment for each of the periods presented. Research and development expense includes both customer-funded research and development and internally-sponsored research and development. Customer-funded research and development consists primarily of expenses associated with contract revenue. These expenses include applications development costs in our Electric Drive & Fuel Systems business segment that are funded under customer contracts.

 

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Renewable Energy Segment

Our Renewable Energy segment consists solely of the business operations of Schneider Power. Schneider Power, headquartered in Toronto, Ontario, Canada, is an independent power producer, developer of renewable energy projects and provider of related development services and is a licensed electricity generator and wholesaler. Our development of renewable energy projects involves several sequential stages of completion and advancement before a project becomes operational. Feasibility studies are conducted to obtain sufficient data to validate the wind and/or solar energy capacity from a prospective project. Easements are negotiated with local landowners to allow for the development of an energy farm on their properties. Applications are submitted to local utility providers to obtain approvals for grid interconnections, and environmental assessments and feasibility studies are completed and submitted to Federal, Provincial and Municipal governments to obtain permits for construction and commissioning. Finally, Power Purchase Agreements (PPAs) are secured with a utility provider or power broker as a project approaches the construction and operational stage. Wind and solar energy project returns depend mainly on the following factors: energy prices, transmission costs, wind and solar resources, wind turbine and solar module costs, construction costs, financing cost and availability of government incentives.

On April 20, 2012, Schneider Power acquired Zephyr Farms Limited, a single purpose entity that owns a 10 megawatt wind farm in Ontario, Canada (See Note 4).

Corporate Segment

The Corporate segment consists of general and administrative expenses incurred at the corporate level that are not directly attributable to the Electric Drive & Fuel Systems or Renewable Energy reporting segments. Corporate expenses consist primarily of personnel costs, share-based compensation costs and related general and administrative costs for executive, finance, legal, human resources, investor relations and our board of directors.

During the second quarter of 2012, we recognized charges of $1.0 million associated with separation arrangements executed in connection with the resignations of our former President/Chief Executive Officer along with our former Executive Chairman of the Board on May 10, 2012. The charges, included in selling, general and administrative costs on the accompanying condensed consolidated statement of operations, primarily represent the sum of post-employment scheduled cash payments of $1.4 million to the former executives, as partially offset by the reversal of unvested stock-based awards forfeited as a result of their resignations. As of June 30, 2012, $0.9 million of the obligations remained outstanding and are scheduled to be paid in installments through November 2012.

Geographic Information

Our long-lived assets as of June 30, 2012 are primarily based within facilities in Irvine and Lake Forest, California and on two wind farms located in Ontario, Canada. We also own land in Nova Scotia, Canada that could be developed as a renewable energy project. Our affiliate, Asola, is based in Erfurt, Germany.

 

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Financial Information by Business Segment

Selected financial information by business segment is as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2012     2011     2012  

Total Revenue

        

Electric Drive & Fuel Systems

   $ 7,208,232      $ 5,415,879      $ 13,839,356      $ 11,321,183   

Renewable Energy

     64,787        192,021        185,035        280,573   

Corporate

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 7,273,019      $ 5,607,900      $ 14,024,391      $ 11,601,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

        

Electric Drive & Fuel Systems

   $ 433,196      $ (2,226,033   $ 73,510      $ (3,815,063

Renewable Energy

     (654,479     (416,347     (2,262,382     (712,539

Corporate

     (4,060,358     (3,677,052     (6,474,163     (6,123,357
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (4,281,641   $ (6,319,432   $ (8,663,035   $ (10,650,959
  

 

 

   

 

 

   

 

 

   

 

 

 

Product Gross Profit

        

Electric Drive & Fuel Systems:

        

Net product sales

   $ 2,969,185      $ 4,162,761      $ 4,460,246      $ 7,708,502   

Cost of product sales

     (1,949,255     (3,282,175     (3,086,179     (5,789,054
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   $ 1,019,930      $ 880,586      $ 1,374,067      $ 1,919,448   
  

 

 

   

 

 

   

 

 

   

 

 

 

Renewable Energy:

        

Net product sales

   $ 64,787      $ 192,021      $ 156,709      $ 280,573   

Cost of product sales

     (23,006     (219,294     (32,297     (248,234
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

   $ 41,781      $ (27,273   $ 124,412      $ 32,339   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital Expenditures

        

Electric Drive & Fuel Systems

   $ 373,531      $ 298,651      $ 471,384      $ 380,924   

Renewable Energy

     —          70,083        26,928        205,701   

Corporate

     —          —          —          582   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 373,531      $ 368,734      $ 498,312      $ 587,207   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

        

Electric Drive & Fuel Systems

   $ 287,960      $ 221,087      $ 571,818      $ 474,914   

Renewable Energy

     24,707        170,973        42,794        194,589   

Corporate

     4,504        10,926        9,205        16,255   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 317,171      $ 402,986      $ 623,817      $ 685,758   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amortization and impairment of long-lived assets

        

Renewable Energy

   $ 121,413      $ 47,178      $ 1,218,237      $ 84,224   

Corporate

     —          495,016        —          495,016   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 121,413      $ 542,194      $ 1,218,237      $ 579,240   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Identifiable assets by reporting segment are as follows:

 

     December 31,
2011
     June 30,
2012
 

Identifiable Assets

     

Electric Drive & Fuel Systems

   $ 26,008,797       $ 24,954,439   

Renewable Energy - all other assets

     5,846,671         32,579,222   

Corporate

     14,581,281         15,888,560   
  

 

 

    

 

 

 
   $ 46,436,749       $ 73,422,221   
  

 

 

    

 

 

 

15. Commitments and Contingencies

We and our affiliates are subject to various legal proceedings and claims which arise out of the normal course of our business. Management and our legal counsel periodically review the probable outcome of pending proceedings and the costs reasonably expected to be incurred. We accrue for these costs when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In the opinion of management, any ultimate cost to us in excess of amounts accrued will not materially affect our consolidated financial position, results of operations or cash flows.

In connection with Schneider Power’s purchase of the Zephyr Wind Farm (see Note 4), we, as parent of Schneider Power, provided a specific guaranty of payment of up to CAD 1.9 million related to Zephyr Wind Farm’s unpaid construction costs as of the date of Schneider Power’s acquisition. As of June 30, 2012, we owe CAD 0.2 million under the guaranty.

16. Subsequent Events

On July 25, 2012, we received gross proceeds of $2,475,000 from the sale of 12.0% senior subordinated bridge notes and warrants to purchase up to 2,075,825 shares of our common stock in a private placement transaction with accredited investors, of which $975,000 was paid in cash and $1,500,000 was paid by the cancellation of unsecured convertible notes (Unsecured “B” Convertible Notes) owed by us to certain investors that participated in a private placement that were scheduled to mature during October 2012. The significant terms of the July 25, 2012 notes are as follows: (i) scheduled maturity dates of October 25, 2013, (ii) interest at 12.0% per annum, (iii) quarterly interest obligations payable in cash, (iv) principal payable in cash and can be prepaid, in whole or in part, at any time without penalty, (v) no conversion rights, and (vi) notes subordinate to outstanding obligations under debt instruments held by our financial institution lender. We incurred debt issuance costs of $0.2 million in connection with transaction. The warrants have a term of five years and a fixed exercise price of $0.89.

On July 31, 2012, we announced that we had received an unsolicited, conditional offer for the purchase of all of the outstanding stock of Schneider Power from an officer of Schneider Power and that we have engaged an advisor to assist us with evaluating the management buy-out offer and identifying other potential opportunities and strategic alternatives for Schneider Power’s renewable energy portfolio.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and notes to condensed consolidated financial statements included elsewhere in this report. This discussion contains forward-looking statements, which generally include the plans and objectives of management for future operations, estimates or projections of future economic performance, and our current beliefs regarding revenues, profits and losses, capital resources and liquidity. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those set forth under the “Risk Factors” section and elsewhere in this report.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

All statements included in this report and any documents incorporated herein by reference, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Forward-looking statements can generally be identified by words such as “may,” “could,” “will,” “should,” “assume,” “expect,” “anticipate,” “plan,” “intend,” “believe,” “predict,” “estimate,” “forecast,” “outlook,” “potential,” or “continue,” or the negative of these terms, and other comparable terminology. Examples of forward-looking statements made herein and in the documents incorporated by reference herein include, but are not limited to, statements regarding: our expected liquidity needs; our belief that we will need to raise additional capital to fund our future operations and to support our existing and new customer programs; our expectation that we will be able to raise a sufficient level of debt or equity capital to repay our debt and fund our operations; our belief that our current operating plan will allow us to achieve profitability; our expectations and forecasts of future revenue, expenses, gross margin and operating profit (loss); our potential revenue under our contract awards; the level of growth in the compressed natural gas (CNG), hybrid, plug-in hybrid, fuel cell and other alternative fuel industries; our expectation that our revenues from Fisker Automotive during 2012 and the foreseeable future will continue to represent a significant portion of our total revenues; our expectation that we will devote substantial capital resources to, among other things, funding operations and expanding our CNG tank production facility; our expectation that we will be able to significantly reduce our corporate overhead costs in the near term as a result of our implementation of cost reduction initiatives; when our Q-Drive powertrain architecture and other products and technologies will be commercialized; our expectation that initial commercialization for our hydrogen and fuel cell vehicle products will begin in the 2013-2015 time frame followed by scaled market adoption in the second half of this decade; our plans to develop new lower cost technologies; if and when Fisker Automotive will go to high volume production; the number of vehicles that Fisker Automotive expects to sell; our expectation that the Fisker Karma line of vehicles will continue over the next five to six years; our belief that we will be a supplier to Fisker Automotive on a long-term basis; our plan to continue the development of our hybrid drive systems and hydrogen vehicle and refueling technologies to meet market opportunities; our belief that our fuel cell and hydrogen-based enabling products of fuel storage, fuel delivery and battery and electronic control systems along with our vehicle-level system integration experience can be effectively applied in the transportation and hydrogen refueling infrastructure markets, our plan to increase our participation in hybrid, plug-in hybrid and hydrogen vehicle programs and enhance our leadership position as a tier-one automotive supplier of advanced propulsion systems, alternative fuel systems, powertrain engineering, and system integration services; our expectation that we will realize improvement in our gross margins as we anticipate increased shipments of our CNG storage systems and increased shipments of our Q-Drive components to Fisker Automotive; our ability to launch our F-150 plug-in hybrid electric vehicle production program in 2013; our expectation that the U.S., state and local governments will continue to support the advancement of alternative fuel technologies through loans, grants and tax credits; our belief that we have a competitive advantage over our competitors; our expectation that we will face increased competition in the future as new competitors enter the market and advanced technologies become available; our belief that establishing and maintaining strong strategic relationships with valued customers and OEMs are the most significant factors protecting us from new competitors; our intentions to establish and expand joint development programs and strategic alliances with automotive OEMs, major lithium ion battery producers, commercial fleets and other leaders in the alternative energy industry and to secure outside funding to support these programs; our intention to pursue opportunities to expand our business in China and India; our belief that there are expanding opportunities to provide the initial refueling products such as mobile refueling units, compact stationary refueling units, and hydrogen storage for bulk transport trailers; our plan to leverage our storage, metering and control technologies, and integration capabilities to capitalize on the need for mobile and stationary hydrogen refueling units; our plan to utilize our full array of storage technologies, developed for automotive and refueling applications, in broader applications within the energy industry; our belief that the price of natural gas will stay relatively low for the foreseeable future, which we expect will continue to drive demand for our carbon composite high capacity CNG storage systems; our belief that our CNG storage systems are the lightest in the industry and that lightweight tanks help to lower operation and maintenance costs and improve gas mileage; our belief that lightweight tanks enable trucks and buses to carry significantly more fuel on board and operate for long distances without compromising their payload capacity or driving characteristics; our relationship with General

 

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Motors and the impact such relationship will have on our ability to develop our products; our expectation that we will not pay any cash dividends in the foreseeable future and that we will retain our future earnings for use in the operation and expansion of our business; the impact that new accounting pronouncements will have on our financial statements; the effect that an adverse result in Asola’s dispute with its solar cell supplier would have on our financial statements; our belief that we are uniquely positioned to integrate advanced fuel systems, electric drive, software control strategies and propulsion control systems technologies; our belief that there is significant commercial opportunity for the Q-Drive system; our belief that a commercial market is developing for our Q-Drive system due to Fisker Automotive’s use of that system in its Fisker Karma vehicle platform; our anticipated increase in product shipments to Fisker Automotive during the second half of 2012; that if Fisker Automotive completes an initial public offering, it would have a positive impact on the overall value for Quantum stockholders; our belief that our contract awards demonstrate our leadership in advanced high pressure gaseous storage technologies and the automotive OEMs renewed focus on alternative fuel solutions; our expectation that long-term market conditions and the demand for alternative fuels will improve; our anticipation of increased revenues and improved profit margins, which we expect to reduce the levels of cash required for our operating activities as compared to historical levels of use; our intention to commercialize newly developed variations of our proprietary hybrid vehicle propulsion systems and subsystems into production programs with other automotive OEMs, utilities and fleets, military programs and other customer groups such as the U.S. Postal Service; our plan to commercialize certain proprietary hybrid drive subsystems including hardware and software controls, electronics and inverter systems; our intention to focus our product development efforts on advancing our hybrid propulsion systems and technologies to further improve performance, reduce cost and support broader commercialization; our plan to continue to develop and refine our hybrid drive systems and subsystems to capture new customers in a growing hybrid vehicle market; our plan to leverage our hybrid drivetrain technology and systems integration capabilities to continue to advance our hybrid control systems, motor control software and propulsion system control strategies; that we will continue to expand our customer base and commercialization partnerships in our efforts to further develop advanced and lower cost hybrid drive system component parts and secure customer funding and partnerships to make these advancements; our plan to continue to leverage our advanced fuel systems, and other alternative vehicle technologies to assist OEMs in advancing the commercialization of hydrogen, fuel cell and other alternative fuel and specialized vehicle applications; our intention to apply our expanded vehicle-level design, powertrain engineering, vehicle electronics and system integration expertise to emerging OEM and fleet vehicle programs to capture full scale production opportunities; our belief that our industry-leading hydrogen storage systems can enhance the availability of intermittent renewable resources, like wind and solar by providing cost effective storage options; our expectation that the increased demand for our CNG storage systems will continue during the second half of 2012 and during calendar 2013; our expectation that we will recognize non-cash gains or losses on our derivative instruments each reporting period and that the amount of such gains or losses could be material; our anticipation that regulatory bodies will establish certification procedures and impose regulations on fuel cell enabling technologies; our belief that the insurance we carry is adequate given the nature of the covered risks and the costs of the coverage; our expectation that the market price of our common stock will continue to fluctuate significantly; and our expectation that the Zephyr Wind Farm will become fully operational in the second half of 2012 and, as a result, Schneider Power’s operating activities will increase.

Although we believe the expectations and intentions reflected in our forward-looking statements are reasonable, we cannot assure you that these expectations and intentions will prove to be correct. Various risks and other factors, including those identified in this report under the “Risk Factors” section and those included elsewhere in this report and in our other public filings that are incorporated herein by reference, could cause actual results, and actual events that occur, to differ materially from those contemplated by the forward looking statements.

Many of the risk factors are beyond our ability to control or predict. You should not unduly rely on any of our forward-looking statements. These statements are made only as of the date of this report. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect future events or developments. All subsequent written and oral forward-looking statements attributable to us and persons acting on our behalf are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this report.

Company Overview

Unless the context otherwise requires, “we,” “our,” “us,” “Quantum” and similar expressions refers to Quantum Fuel Systems Technologies Worldwide, Inc. and Subsidiaries. We are a United States (US) public company listed on the Nasdaq Global Market with our corporate offices located in Irvine, California.

We are a fully integrated alternative energy company and a leader in the development and production of compressed natural gas (CNG) storage systems, fuel cell and other advanced clean propulsion systems and renewable energy generation systems and services. We believe that we are uniquely positioned to integrate advanced fuel and electric drive systems, software control strategies and propulsion control system technologies for alternative fuel vehicles, in particular, natural gas, plug-in hybrid electric, electric, fuel cell and hydrogen hybrid vehicles based on our years of experience in vehicle-level design, system and component software development, vehicle electronics, system control strategies and system integration. Our customer base includes automotive Original Equipment Manufacturers (OEMs), military and governmental agencies, aerospace, and other strategic alliance partners.

 

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Our condensed consolidated financial statements include the accounts of Quantum Fuel Systems Technologies Worldwide, Inc., and our wholly owned subsidiary, Schneider Power, Inc. (Schneider Power).

We classify our business operations into three reporting segments: Electric Drive & Fuel Systems, Renewable Energy and Corporate. The Corporate segment consists of general and administrative expenses incurred at the corporate level that are not directly attributable to the Electric Drive & Fuel Systems or Renewable Energy business segments. The chief operating decision maker allocates resources and tracks performance by the reporting segments. We evaluate performance based on profit or loss from operations before interest and income taxes.

Business and Business Update

Electric Drive & Fuel Systems Segment

We provide hybrid drivetrain and advanced fuel system design, powertrain engineering, electronic control and software strategies, system integration, manufacturing and assembly of CNG and hydrogen tanks, propulsion systems and sub-systems for a variety of automotive applications including hybrid electric vehicles, electric vehicles, plug-in hybrid electric vehicles (PHEV), fuel cell electric vehicles, and other alternative fuel vehicles. We also design, engineer and manufacture hybrid and fuel cell concept vehicles and hydrogen refueling systems primarily for use in the transportation, aerospace, and military industries. Our proprietary plug-in hybrid drive system technology can be packaged utilizing different designs, technologies and subsystems. Our drive systems include complete systems or sub-systems and components and are designed to improve vehicle fuel economy and performance, leverage existing gas station infrastructure, and utilize home-based battery recharging.

Our packaged fuel systems are comprised of high pressure composite tanks, injection, regulation, monitoring, and electronics and control systems designed to improve efficiency, enhance power output, and reduce pollutant emissions from hybrids, plug-in hybrids, internal combustion engines, natural gas and hydrogen fuel cell vehicles. We also have a CNG storage system technology capable of allowing Class 8 trucks to travel 500 miles before refueling. We believe the price of natural gas will stay relatively low for the foreseeable future, which we expect will continue to drive demand for our carbon-composite high-capacity CNG storage systems. We believe our CNG storage systems are the lightest in the industry and that lightweight tanks help to lower operation and maintenance costs and improve gas mileage. We also believe lightweight tanks enable trucks and buses to carry significantly more fuel on board and operate for long distances without compromising their payload capacity or driving characteristics.

We developed our Q-Drive® plug-in electric hybrid system for Fisker Automotive’s Fisker Karma vehicle platform. We also have other derivative drive systems within our family of hybrid drives, including a new advanced all-wheel-drive diesel hybrid electric powertrain that we refer to as Q-ForceTM specifically engineered for military applications and our proprietary F-DriveTM propulsion system specifically engineered for a plug-in electric hybrid version of the Ford F-150 pickup truck, one of the highest volume selling fleet vehicles in America. We are partnering with The Dow Chemical Company to launch a plug-in hybrid electric F-150 truck incorporating our proprietary F-Drive propulsion system. The F-Drive system provides a unique combination of low operating costs through substantially increased fuel efficiency, reliability, low maintenance cost, emission reduction benefits and extended range capability. Ideal for fleet vehicle driving characteristics, the F-150 PHEV is designed to have a 35 mile electric-only range, shifting to hybrid electric mode thereafter for a total designed range in excess of 400 miles.

We supply our hybrid electric drive systems and packaged fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. We believe a commercial market is developing for our Q-Drive system due to Fisker Automotive’s use of that system in its Karma vehicle platform. We believe this is the first step to market introduction and will demonstrate the technical feasibility and fuel economy advantages of PHEV technology.

We are also engineering and developing a “2nd Generation” scaled version of our hybrid drive system that is specifically directed at lower-cost light duty vehicles, including mid-size cars and pickup trucks, to significantly advance PHEVs and the average fuel economy in the near term.

We also provide our hybrid electric propulsion systems, gaseous hydrogen fuel systems and refueling products for fuel cell applications to major OEMs and other customers through funded research and development contracts and on a prototype basis.

 

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During the first seven months of 2012 and the first seven months of 2011, we received approximately $16.1 million and $4.1 million in purchase orders, respectively, for our CNG storage tanks and systems. As of July 31, 2012, our backlog related to CNG storage tanks and systems was $12.4 million.

On April 10, 2012, Fisker Automotive notified us that they believe our pricing for the components for which we have the exclusive right to supply to Fisker Automotive is not competitive by more than 10% and as a result they have asserted the right to resource all or part of the components we are currently supplying beginning August 10, 2012. We notified Fisker Automotive that its assertion is without merit and if Fisker Automotive resources any of the components we are currently supplying we will take whatever actions we deem necessary to defend and enforce our contract rights. Further, we believe that our hybrid control software, and our ongoing service and maintenance of this software, is of critical importance to Fisker Automotive’s ability to manufacture and service the Fisker Karma production vehicle. The defense of our contractual rights on the components and related software would include all legal protections and may involve restrictions, or prohibition, on the use of our software in the Fisker Karma vehicle.

Renewable Energy

Our Renewable Energy segment consists solely of the business operations of Schneider Power, headquartered in Toronto, Ontario, Canada. Schneider Power is a licensed electricity generator, developer and builder of renewable electricity generation facilities. Schneider Power develops, builds, owns and operates wind electricity generation facilities and is planning similar development of solar power generating facilities. Schneider Power has a significant portfolio of wind and solar energy projects in various stages of development throughout North America and the Caribbean.

On April 20, 2012, Schneider Power completed the acquisition of Zephyr Farms Limited, the owner of a 10 megawatt wind farm project (Zephyr Wind Farm) located in Ontario, Canada, for a purchase price of approximately CAD 2.0 million, plus the assumption of all the unpaid construction liabilities of CAD 1.9 million and a long-term debt facility of approximately CAD 22.7 million. Construction of the Zephyr Wind Farm was completed near the end of April 2012 and the project is currently “on-line;” however, its energy generation capabilities are not expected to reach full utilization until testing of the wind turbines and systems are completed in the latter part of 2012.

Additionally, Schneider Power owns and operates the Providence Bay Wind Farm located in Ontario, Canada, which generates 1.6 megawatts of power.

On July 31, 2012, we announced that we had received an unsolicited, conditional offer for the purchase of all of the outstanding stock of Schneider Power from an officer of Schneider Power and that we have engaged an advisor to assist us with evaluating the management buy-out offer and identifying other potential opportunities and strategic alternatives for Schneider Power’s renewable energy portfolio.

Corporate Segment

The Corporate segment consists of general and administrative expenses incurred at the corporate level that are not directly attributable to the Electric Drive & Fuel Systems or Renewable Energy reporting segments. Corporate expenses consist primarily of personnel costs, share-based compensation costs and related general and administrative costs for executive, finance, legal, human resources, investor relations and our board of directors.

 

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Results of Operations

Three and Six Months Ended June 30, 2011 and 2012

Total revenues and operating losses for our business segments and gross profit on our product sales for the three and six months were as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2011     2012     2011     2012  

Total Revenue

        

Electric Drive & Fuel Systems

   $ 7,208,232      $ 5,415,879      $ 13,839,356      $ 11,321,183   

Renewable Energy

     64,787        192,021        185,035        280,573   

Corporate

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 7,273,019      $ 5,607,900      $ 14,024,391      $ 11,601,756   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

        

Electric Drive & Fuel Systems

   $ 433,196      $ (2,226,033   $ 73,510      $ (3,815,063

Renewable Energy

     (654,479     (416,347     (2,262,382     (712,539

Corporate

     (4,060,358     (3,677,052     (6,474,163     (6,123,357
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (4,281,641   $ (6,319,432   $ (8,663,035   $ (10,650,959
  

 

 

   

 

 

   

 

 

   

 

 

 

Product Gross Profit

        

Electric Drive & Fuel Systems:

        

Net product sales

   $ 2,969,185      $ 4,162,761      $ 4,460,246      $ 7,708,502   

Cost of product sales

     (1,949,255     (3,282,175     (3,086,179     (5,789,054
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

   $ 1,019,930      $ 880,586      $ 1,374,067      $ 1,919,448   
  

 

 

   

 

 

   

 

 

   

 

 

 

Renewable Energy:

        

Net product sales

   $ 64,787      $ 192,021      $ 156,709      $ 280,573   

Cost of product sales

     (23,006     (219,294     (32,297     (248,234
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

   $ 41,781      $ (27,273   $ 124,412      $ 32,339   
  

 

 

   

 

 

   

 

 

   

 

 

 

Electric Drive & Fuel Systems Segment

Revenue from product sales for this segment increased $1.2 million in the three month period ended June 30, 2011, or 40%, from $3.0 million in 2011 to $4.2 million in 2012, and increased $3.2 million, or 71%, from $4.5 million in the first six months of 2011 to $7.7 million in the first six months of 2012. The higher product revenues are primarily due to increased shipments of high pressure fuel storage systems for natural gas applications, which were partially offset by a decline in component shipments to Fisker Automotive. Product revenues from CNG systems increased by $3.1 million, or 178%, during the first six months in 2012 as compared to the prior year six month period. We expect that revenues from product sales will continue to increase over the remainder of 2012 due to increased sales of our CNG systems, partially offset by flat or lower sales to Fisker Automotive.

Contract revenue for this segment decreased $3.0 million, or 71%, from $4.2 million in the three month period ended June 30, 2011, to $1.2 million in the current year three month period, and decreased $5.8 million, or 62%, from $9.4 million in the first six months of 2011 to $3.6 million in the first six months of 2012. Contract revenue is derived primarily from system development, application engineering and qualification testing of our products and systems under funded contracts with OEMs and other customers. The higher amount of contract revenue recognized in the 2011 period was mainly due to the level of pre-production engineering services that we provided to Fisker Automotive during the first six months of 2011 prior to its launch of the Fisker Karma vehicle, which occurred during the second half of the 2011 calendar year.

Fisker Automotive comprised 32%, Agility Fuel Systems (a natural gas fuel system integrator) comprised 27% and General Motors comprised 12% of the total Electric Drive & Fuel Systems segment revenue reported for the six months ended June 30, 2012, respectively.

 

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Cost of product sales for the Electric Drive & Fuel Systems segment increased $1.4 million, or 74%, from $1.9 million for the three month period ended June 30, 2011, to $3.3 million for the three month period ended June 30, 2012, and increased $2.7 million, or 87%, from $3.1 million in the first six months of 2011 to $5.8 million in the first six months of 2012. The increase is primarily as a result of increased product sales related to CNG systems.

Gross profit on product sales increased $0.5 million, or 36%, from $1.4 million for the six month period in 2011, to $1.9 million for the six month period in 2012, primarily due to increased shipments of our CNG systems in the 2012 period.

Research and development expense associated with development contracts decreased $1.4 million, or 56%, from $2.5 million for the three month period ended June 30, 2011, to $1.1 million for the three month period ended June 30, 2012, and decreased $3.3 million, or 54%, from $6.1 million in the first six months of 2011, to $2.8 million in the first six months of 2012. The decline is primarily attributable to the decrease in pre-production engineering activities on the Fisker Karma platform as the program went into production late in calendar 2011.

Internally funded research and development expense increased $1.1 million, or 92%, from $1.2 million for the three month period ended June 30, 2011, to $2.3 million for the three month period ended June 30, 2012, and increased $2.0 million, or 80%, from $2.5 million in the first six months of 2011 to $4.5 million in the first six months of 2012. Our internally funded research effort includes hybrid control strategies and proprietary software designed to precisely control hybrid propulsion and vehicle performance along with hydrogen storage, injection and regulation programs. Included in our internally funded research effort in the 2012 period are engineering activities related to our F-150 PHEV program under which we are integrating our hybrid propulsion system into a Ford F-150 truck platform. We expect levels of internally funded research and development expense to be higher in the second half of 2012 compared to the first half as we continue to ramp up our engineering efforts to bring the F-150 PHEV to market over the next year.

Selling, general and administrative expenses for the Electric Drive & Fuel Systems segment decreased $0.2 million, or 17%, from $1.2 million for the three month period ended June 30, 2011, to $1.0 million for the three month period ended June 30, 2012, and decreased $0.2 million, or 9%, from $2.2 million in the first six months of 2011 to $2.0 million in the first six months of 2012 due to cost cutting initiatives.

We recognized an overall operating loss of $3.8 million for the first six months of 2012 as compared to an overall operating income of $0.1 million in the first six months of 2011. We expect our results from operations to improve over the remainder of calendar 2012 as we anticipate growth in product revenues, particularly, from the sale of our CNG storage systems.

Renewable Energy Segment

Through our wholly-owned subsidiary, Schneider Power, we recognized $0.3 million of revenue from energy sales in the first six months of 2012 as compared to $0.2 million for the first six months of 2011. Energy sales now include activities of the Zephyr Wind Farm which Schneider Power acquired on April 20, 2012. Zephyr began generating revenues under its power purchase agreement beginning on its official commercial operation date of May 15, 2012. We anticipate that revenue from energy sales will increase in the second half of calendar 2012 due to addition of the Zephyr Wind Farm which is expected to become fully operational in the second half of 2012.

The operating loss for this segment was $0.7 million for the six month period in 2012, compared to a loss of $2.3 million in the 2011 period. Included in operating costs in the prior year six month period was a $1.0 million impairment charge due to the abandonment of the Spring Bay Wind Farm construction project in January 2011. The operating loss in both six month periods also includes $0.1 million and $0.2 million of amortization expense in 2012 and 2011, respectively, relating to intangible assets associated with the renewable energy project portfolio identified in connection with our acquisition of Schneider Power in April 2010.

We expect Schneider Power’s operating activities to increase for the remainder of calendar 2012 as a result of Zephyr’s operating activities and its anticipated ramp up to full utilization in the latter part of 2012.

Corporate Segment

Corporate expenses decreased $0.4 million, or 10% from $4.1 million in the second quarter of 2011, to $3.7 million in the second quarter of 2012, and decreased $0.4 million, or 6% from $6.5 million in the first six months of 2011, to $6.1 million in the first six months of 2012.

Corporate expenses reported for this segment reflect the general and administrative expenses that indirectly support our Electric Drive & Fuel Systems segment and our Renewable Energy segment. General and administrative charges of the Corporate segment consist primarily of personnel costs, share-based compensation costs and related general and administrative costs for executives, finance, legal, human resources, investor relations and our board of directors. In addition, Corporate expenses include certain non-recurring charges discussed further below.

 

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On May 11, 2012, we announced that our former President/Chief Executive Officer along with our former Executive Chairman of the Board had resigned from all of their respective executive and director positions. During the second quarter of 2012, we recognized charges of $1.0 million associated with separation arrangements executed in connection with the resignations. The charges primarily represent the sum of post-employment scheduled cash payments of $1.4 million to the former executives, as partially offset by the reversal of unvested stock-based awards forfeited and cancelled benefits as a result of their resignations. As of June 30, 2012, $0.9 million of the obligations remained outstanding and are scheduled to be paid in installments through November 2012.

Also included in the three and six month periods in 2012 is a charge of $0.5 million for the impairment of assets related to solar project initiatives.

Included in the prior year periods is a charge of $1.7 million recognized as of June 30, 2011 in connection with our sublease of a facility located in Lake Forest, California.

On May 22, 2012, we announced that our board of directors and our new executive management team were committed to a renewed focus on automotive technologies and also announced that we would aggressively seek to reduce operating costs, particularly corporate expenses through a variety of cost cutting initiatives, including executive attrition and salary reductions, consolidation of facilities and reductions in board of director fees. As a result of these initiatives, we expect a reduction in corporate expenses in the second half of 2012 as compared to the first half.

Non-Reporting Segment Results

Interest Expense. Interest expense, net of interest income, amounted to $0.9 million in the three month period ended June 30, 2012, as compared to $0.6 million recognized in the three month period ended June 30, 2011, and amounted to $4.2 million for the first six months in 2012, as compared to $1.4 million in the first six months of 2011. Interest expense in the 2011 period primarily related to debt instruments payable to our former senior lender. The increase in expense during the 2012 period is primarily related to higher effective interest rates associated with issuances of subordinated debt obligations over the course of the 2011 calendar year, which by the nature of equity-linked characteristics (e.g. warrants and debt principal conversion features), accelerated maturities and/or other contractual provisions associated with the issuance of the obligations, resulted in a significant amount of non-cash interest charges to be recognized in the first six months of 2012. Included in these non-cash interest charges was the amortization of implied debt discounts of $3.4 million associated with the equity-linked characteristics under the subordinated debt obligations, of which $2.7 million related to obligations that we refer to as the “Unsecured “A” Convertible Notes.” The Unsecured “A” Convertible Notes were fully repaid on March 20, 2012 and, as a result, we expect the amount of interest expense to be lower in the second half of 2012 compared to the first half.

Fair Value Adjustments of Derivative Instruments. Derivative instruments during the first six months in 2012 consisted of embedded features contained within certain warrant contracts. Fair value adjustments of derivative instruments, which represent non-cash unrealized gains or losses, amounted to a net gain of less than $0.1 million for the three month period ended June 30, 2012, as compared to a net gain of $0.7 million for the same three month period in 2011, and amounted to a gain of $0.1 million in the first six months of 2012 as compared to a net gain of $4.1 million for the first six months in 2011. The share price of our common stock represents the primary underlying variable that impacts the value of the derivative instruments. The unrealized net gains recognized in the periods were primarily attributable to the decrease in our closing share price or the passage of time during the respective three and six month periods ended June 30, 2012 and 2011 that lowered the fair value of the derivative instrument liabilities during the respective periods ($9.00 closing share price at December 31, 2010 decreasing to $3.47 at June 30, 2011; $0.73 closing share price at December 31, 2011 and June 30, 2012).

Gain or Loss on Modification of Debt and Derivative Instruments. We recognized a gain of $0.3 million for the three and six month periods ended June 30, 2012 in connection with the exchange of a portion of the Unsecured “B” Convertible Notes with unsecured and nonconvertible notes referred to in the Notes to our Condensed Consolidated Financial Statements as the “June 2012 Bridge Notes.” In the prior year six month period, we recognized $1.5 million in losses associated with two significant debt modifications, as follows:

 

   

On January 3, 2011, we and our senior lender executed a Forbearance Agreement and restructured certain of our debt instruments. In connection with this debt restructure: (i) certain convertible notes were modified to extend the maturity dates from July 31, 2011 to August 31, 2011, (ii) the fixed conversion price in each convertible note was reduced from $14.20 to $9.80, (iii) an existing $10.0 million lender commitment was terminated, (iv) the senior lender provided us with a new $5.0 million non-revolving line of credit, and (v) we issued a warrant to the senior lender entitling it to purchase up to 277,777 shares of our common stock at a fixed exercise price of $9.00

 

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per share. We concluded that the modifications to the convertible note debt instruments were substantial and represented an implied exchange of those debt instruments for new debt instruments. We recognized a net loss of $0.5 million on the extinguishment of the convertible note debt instruments and the derivative instrument associated with the terminated $10 million lender commitment.

 

   

On January 18, 2011, we and each of the holders of certain bridge notes that we issued in October 2010 (2010 Bridge Notes) entered into an agreement pursuant to which the principal and interest repayment terms and the maturity date of the 2010 Bridge Notes were amended and we issued warrants to the holders of the 2010 Bridge Notes entitling them to purchase up to an aggregate of 131,902 shares of our common stock at a fixed exercise price of $9.20. We concluded that the modifications to the 2010 Bridge Notes were substantial and represented an implied exchange of the existing 2010 Bridge Notes for new 2010 Bridge Notes. The implied exchange resulted in the recognition of a net loss on extinguishment of $1.0 million.

Gain (Loss) on Settlement of Debt and Derivative Instruments. During the six month period ended June 30, 2012, we settled a total of $1.3 million of principal due under a promissory note we refer to as “the Consent Fee Term Note” by the issuance of shares of our common stock. As a result of the in-kind debt settlements, we recognized a net charge of $0.1 million, which represented the difference between the fair values of the shares issued and the debt settled. During the six month period in 2011, we recognized net loss on settlements of debt and derivative instruments of $1.5 million, which primarily represented a charge associated with the cancellation of principal due under a non-revolving line of credit with the former senior lender in exchange for the issuance of shares of our common stock and warrants in connection with a private placement offering that closed on February 18, 2011.

Equity in Losses of Affiliates. During the three and six month periods ended June 30, 2012, we recognized losses of $0.2 million and $0.3 million, respectively, and during the three and six month periods ended June 30, 2011, we recognized losses of $0.4 million and $0.8 million, respectively, representing the net equity in earnings or losses of our affiliates that we account for under the equity method of accounting. The activity in the periods presented is primarily associated with our equity share of the operating losses of Asola.

Income Taxes. We recorded a net tax benefit of $0.3 million for the six month period ended June 30, 2011 that primarily resulted from undistributed earnings of our investment in Asola associated with foreign currency translation effects. For the six month period ended June 30, 2012, our income taxes were nominal. Our income taxes are generally nominal in amount, primarily as a result of our lack of earnings history. As a result of our historical losses, we have generated significant net operating losses that we may be able to carry forward to offset taxable earnings that we generate in the future. We expect that income taxes will continue to be nominal for the remainder of 2012.

Liquidity and Capital Resources

Cash Flow Activities

Net cash used in operating activities during the first six months of 2012 was $7.5 million, as compared to net cash used of $8.9 million during the first six months of 2011. The cumulative impact of net changes in operating assets and liabilities during the first six months of 2012 was net cash provided of $1.1 million. Our use of cash in operations over the first six months of 2012 includes the payment of $0.5 million of severance payments made to certain of our former executives.

Net cash used in investing activities during the first six months of 2012 was $4.1 million, as compared to net cash provided of $0.5 million during the first six months of 2011. On April 20, 2012, Schneider Power used $3.5 million to acquire the Zephyr Wind Farm and satisfy capitalized construction obligations assumed in connection with the transaction. The remaining use of cash was associated with costs to acquire and develop property and equipment, as compared to $0.5 million used in the 2011 period for these costs. The 2011 period also included cash proceeds of $1.6 million from the sale of a renewable energy project, of which $0.7 million was distributed to non-controlling interests.

Net cash provided by financing activities during the first six months of 2012 was $13.4 million, as compared to $11.3 million during the first six months of 2011. Cash provided during the 2012 period consisted principally of net proceeds of (i) $14.5 million from an underwritten public offering transaction that closed in March 2012, (ii) $3.0 million from borrowings under a new secured line of credit with a financial institution, (iii) $2.0 million of net proceeds from bridge notes issued in June 2012, and (iv) $0.6 million upon the exercise of warrants. Cash used during the 2012 period mainly related to repayments of debt obligations totaling $6.1 million, of which $1.2 million related to obligations referred to as the August 2011 Bridge Term Notes, and $3.8 million related to obligations referred to as the Unsecured “A” Convertible Notes, and $1.1 million related to a term note with our former senior lender that we refer to as the “Consent Fee Note.”

 

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Capital Resources

From our inception we have funded our operations and strategic investments primarily with proceeds from public and private offerings of our common stock, offerings of debt securities, and borrowings with financial institutions including our current senior lender. Since January 1, 2012, we have completed the following capital transactions:

 

   

On January 19, 2012, we received proceeds, net of underwriter discounts and commissions, of $0.2 million and issued 221,250 shares of common stock in connection with the exercise of an over-allotment option held by our underwriter arising from a public offering of common stock and warrants that we completed on December 21, 2011 (December 2011 Offering).

 

   

On February 10, 2012 and March 7, 2012, we issued 735,000 and 630,000 shares of our common stock, respectively, to our senior lender in satisfaction of $1.3 million of principal demands made on the former Consent Fee Note.

 

   

On March 23, 2012, we completed an underwritten public offering and received proceeds, net of underwriter discounts and commissions, of approximately $14.5 million from the sale and issuance of 18,825,000 shares of common stock (March 2012 Offering). The investors also received Series “B” Warrants and Series “C” Warrants in connection with the transaction. On May 3, 2012 and June 14, 2012, investors exercised 235,000 and 435,000 of the Series “C” Warrants, respectively, which provided us with a combined total of $0.6 million in proceeds.

 

   

On May 7, 2012, we executed a two year revolving asset based line of credit (Line of Credit) that provides us with the ability to draw up to $10.0 million in working capital advances at a variable interest rate represented by the greater of (i) 5.25% or (ii) the bank’s prime rate, plus 2.00%. The amount of advances that we can draw under the line of credit is dependent upon our future levels of eligible accounts receivables and inventories.

 

   

On June 22, 2012, June 28, 2012 and July 25, 2012, we sold a combined total of $7.1 million of 12.0% unsecured subordinated nonconvertible promissory notes (2012 Bridge Notes) and warrants to accredited investors in a private placement transaction in exchange for combined gross cash proceeds of $3.35 million and cancellation of a total of $3.75 million of convertible debt that we refer to as the “Unsecured “B” Convertible Notes” that was scheduled to mature on various dates in October 2012 and November 2012. The net amount received by us, after deducting placement agent fees and transaction expenses, was $2.78 million.

Liquidity

Our historical operating results, capital resources and financial position, in combination with current projections and estimates, were considered in management’s plan and intentions to fund our operations over a reasonable period of time, which we define as the twelve month period ending June 30, 2013. For purposes of liquidity disclosures, we assess the likelihood that we have sufficient available working capital and other principal sources of liquidity to fund our operating activities and obligations as they become due and the likelihood that we will be able to maintain compliance with the required provisions contained within our debt instruments over the twelve month period. We have historically incurred operating losses and negative cash flows from operating activities and we expect to use a significant amount of cash over the next year. Specifically, our business plan anticipates that over the next twelve months that we will increase investments in equipment and facility infrastructure to accelerate expansion of our CNG tank production capacity and we will utilize a significant amount of capital and internal engineering resources to complete the development of and to initiate the production launch of our F-150 PHEV platform.

Our principal sources of liquidity as of July 31, 2012 consisted of: (i) cash and cash equivalents of approximately $4.0 million and (ii) up to $7.0 million of potential availability under the Line of Credit. We anticipate that our debt service cash requirements for the period from July 31, 2012 through June 30, 2013 will be approximately $2.6 million, of which $1.6 million relates to Schneider Power’s renewable energy operations.

Based on current projections and estimates, we do not believe our principal sources of liquidity will be sufficient to fund our planned growth initiatives, operating activities and obligations as they become due over the next twelve months. In order for us to have sufficient capital to execute our business plan, fund our operations and meet our debt obligations over this twelve month period, we will need to raise additional capital. Although we have been successful in the past in raising debt and equity capital, we cannot provide any assurance that we will be successful in doing so in the future to the extent necessary to be able to fund all of our growth initiatives, operating activities and obligations through June 30, 2013, which raises substantial doubt about our ability to continue as a going concern.

The condensed consolidated financial statements that are included in this report have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. These condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and

 

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classification of liabilities that may result from uncertainty related to our ability to continue as a going concern. An inability by us to raise additional capital to sufficiently fund our working capital needs would have a material adverse affect on our business and our ability to continue as a going concern.

In addition to our need to raise sufficient capital to cover our existing operations and debt service obligations, we will also need to raise additional capital in order to further develop future generations of our hybrid electric propulsion systems. Further, we will need to increase revenues and improve profit margins for our business to be sustainable over the long term.

Quantitative and Qualitative Disclosures About Market Risk

As of June 30, 2012, we are exposed to market risk from changes in our common stock pursuant to the terms of our derivative instrument liabilities associated with embedded features contained within certain of our warrant contracts. The share price of our common stock represents the underlying variable that primarily gives rise to the value of our derivative instruments. In accordance with US GAAP, the derivative instrument liabilities are recorded at fair value and marked to market each period. Changes in fair value of the derivatives each period resulting from a movement in the share price of our common stock or the passage of time are recognized as fair value adjustments of derivative instruments on our consolidated statements of operations as other income or expense. The change in fair values of our derivatives can have a material impact on our earnings or loss each period. For example, if our share price immediately increased 10% above the closing price of $0.73 per share on June 30, 2012, the fair value of our derivative instruments would increase and a charge in the amount of $0.2 million related to the increase in fair value of the derivatives would be recognized as follows:

 

Derivative Financial Instrument:

   Fair Value
Reported  at
June 30, 2012
     Effect of 10%
Pro  forma Share
Price Increase
     Pro forma
Fair  Value
 

Warrant contracts issued in October 2006

   $ 822,000       $ 115,000       $ 937,000   

Warrant “B” contracts issued in February 2011

     30,000         6,000         36,000   

Warrant contracts issued on September 29, 2011

     254,000         30,000         284,000   

Warrant contracts issued on October 12, 2011

     264,000         29,000         293,000   
  

 

 

    

 

 

    

 

 

 
   $ 1,370,000       $ 180,000       $ 1,550,000   
  

 

 

    

 

 

    

 

 

 

We are also exposed to risk from fluctuating currency exchange rates, primarily the US Dollar against the Euro Dollar and against the Canadian Dollar. On June 30, 2012, one euro was equal to 1.27 US Dollars and one Canadian dollar was equal to 0.98 US Dollars. Specifically, we are at risk that a future decline in the US Dollar against the euro will increase the amount that we potentially have to pay to satisfy requirements of our long-term supply agreement with Asola and other obligations that we enter into with European-based suppliers. We have scheduled commitments to purchase solar cells with a cumulative power of 77.5 MW and make prepayments through December 31, 2017 at a fixed price of 113.3 million euro, or US$143.4 million, based on the currency exchange rate at June 30, 2012; a 10% decline in the US Dollar against the euro could require us to pay an additional US$14.3 million over the course of the remaining agreement. We face transactional currency exposures that arise when our foreign subsidiaries and affiliates enter into transactions denominated in currencies other than their own local currency. We also face currency exposure that arises from translating the results of our Canadian and German operations to the US Dollar.

Further, we are exposed to market risk from changes in interest rates due to the variable nature of our $10.0 million Line of Credit. A 100 basis point increase in the Line of Credit interest rate could result in an annual increase in interest expense of up to $0.1 million, assuming the full $10.0 million was outstanding on the credit facility during an entire year.

To date, we have not used any derivative financial instruments for the purpose of reducing our exposure to adverse fluctuations in interest rates but we have entered into currency exchange arrangements for the purpose of reducing our exposure to adverse changes in currency exchange rates. As of June 30, 2012, we had no outstanding contractual commitments to purchase foreign currency. Net foreign currency transaction gains or losses were not significant during the six months ended June 30, 2012.

 

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Off Balance Sheet Disclosures

Warrants with Exercise Price Resets

The warrants issued on October 27, 2006, August 25, 2008, September 29, 2011 and October 12, 2011 contain contractual provisions which, subject to certain exceptions, reset the exercise price of such warrants if at any time while such warrants are outstanding, we sell or issue shares of our common stock or rights, warrants, options or other securities or debt convertible, exercisable or exchangeable for shares of our common stock. Since the initial issuance of these warrants, we have completed capital raising transactions through June 30, 2012 that resulted in the reset of the exercise price of the warrants issued on October 27, 2006 to $0.83, the warrants issued on August 25, 2008 to $38.60, and the warrants issued on September 29, 2011 and October 12, 2011 to $0.83 per share, respectively. As of June 30, 2012, the warrants issued on August 25, 2008 had been reset to the lowest price allowable under their contractual terms so the reset provision is no longer applicable.

The warrants issued on October 27, 2006 and August 25, 2008 also contain a provision that increases the number of shares of common stock subject to such warrants if and when the exercise price is reset so that the aggregate purchase price payable applicable to the exercise of the warrants after the reset of the exercise price is the same as the aggregate purchase price payable immediately prior to the reset. As a result of the exercise price resets, the remaining number of shares subject to the warrants issued on October 27, 2006 and August 25, 2008 increased to 3,408,981 and 1,398,964, respectively, as of June 30, 2012. Any resets to the exercise price of the warrants issued on October 27, 2006 in the future will have an additional dilutive effect on our existing shareholders.

Warrant Classifications

We evaluate the warrants we issue in accordance with applicable accounting guidance and we have concluded that liability classification is appropriate for the warrants issued on October 27, 2006, June 22, 2007, August 25, 2008, August 3, 2009, September 4, 2009, February 18, 2011, September 29, 2011, and October 12, 2011. We have further concluded that equity classification is appropriate for all other warrants that were outstanding during the periods presented due to the fact that these warrants are considered to be indexed to our own stock, are required to be physically settled in shares of our common stock and there are no provisions that could require net-cash settlement.

The proceeds we received from the transactions that gave rise to the issuance of the warrants have been allocated to the common stock or debt issued, as applicable, and the warrants based on their relative fair values. For those transactions in which proceeds were received in connection with the sale of common stock, we aggregate the values of those warrants that we do not classify as liabilities with the fair value of the stock issued as both of these types of instruments have been classified as permanent equity.

The classification as equity for certain of the warrants could change as a result of either future modifications to the existing terms of settlement or the issuance of new financial instruments by us that could be converted into an increased or unlimited number of shares. If a change in classification of certain warrants is required in the future, the warrants would be treated as derivatives, reclassified as liabilities on the balance sheet at their fair value, and marked to market each period, with the changes in fair values being recognized in the respective period’s statement of operations.

New Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements for information regarding recent accounting pronouncements adopted and issued.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Information required by Item 305 of Regulation S-K relating to quantitative and qualitative disclosures about market risks appear under the heading “Quantitative and Qualitative Disclosures About Market Risk” in Item 2 hereof, and is incorporated herein by this reference.

Item 4. Controls and Procedures.

(a) Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report.

 

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(b) Design of Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.

Our internal control over financial reporting includes policies and procedures that:

 

   

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets;

 

   

Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with US generally accepted accounting principles;

 

   

Provide reasonable assurances that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

   

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

(c) Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1A. Risk Factors.

For a complete description of our risk factors, please refer to the Risk Factors section contained within our Transition Report on Form 10-KT, as initially filed with the Securities and Exchange Commission on March 28, 2012 and as amended on April 27, 2012, all of which are incorporated herein by reference. Material changes to such risk factors are:

Risks Related to Liquidity and Capital Resources

Currently we are not in compliance with Nasdaq’s minimum bid continued listing requirement and there are other continued listing requirements that we must satisfy in order to maintain our listing with Nasdaq.

On April 30, 2012, we received notification from The Nasdaq Stock Market that we were not in compliance with Nasdaq’s continued listing rule 5450(a)(1) because the closing bid price for a share of our common stock was below $1.00 for 30 consecutive trading days. In order to regain compliance with the minimum bid price rule, the closing stock price of a share of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days prior to October 29, 2012.

If we are unable to regain compliance with the $1.00 minimum bid requirement prior to October 29, 2012, Nasdaq will provide us with written notification that our common stock will be delisted from the Nasdaq Global Market. At that time, we may appeal the delisting determination, or, alternatively, we may apply to transfer our common stock to the Nasdaq Capital Market provided that we satisfy the Nasdaq Capital Market’s listing requirements, other than its minimum bid price requirement. In the event of such a transfer, we will be afforded an additional 180 calendar days to comply with the $1.00 minimum bid price requirement while listed on the NASDAQ Capital Market. No assurance can be given that we will be eligible for the additional 180-day compliance period or, even if eligible, that we will regain compliance during any additional compliance period.

We intend to monitor the closing bid price of our common stock between now and October 29, 2012, and to consider available options if our common stock does not trade at a price likely to result in us regaining compliance with the minimum bid price requirement.

 

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In addition to Nasdaq’s $1.00 minimum bid price rule, there are a number of other continued listing requirements that we must satisfy in order to maintain our listing on Nasdaq. We can provide no assurance that we will be able to continue to meet such continued listing requirements.

The delisting of our common stock from trading on Nasdaq may have a material adverse effect on the market for, and liquidity and price of, our common stock and impair our ability to raise capital. Delisting from Nasdaq could also have other negative results, including, without limitation, the potential loss of confidence by customers and employees, the loss of institutional investor interest and fewer business development opportunities. If our common stock is delisted from trading on Nasdaq and if our common stock is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of or obtain accurate quotations for the price of our common stock, and there may also be a reduction in our coverage by security analysts and the news media, which may cause the price of our common stock to decline further.

We have a substantial amount of indebtedness. If we are unable to repay our indebtedness or refinance or extend such indebtedness, it would have a material adverse effect on our financial condition and ability to continue as a going concern.

As of June 30, 2012, we had approximately $33.3 million of principal and interest outstanding under our debt obligations of which $23.8 million relates to project debt financing associated with our Renewable Energy segment. If we are unable to generate sufficient cash flow to service these debt obligations or are unable to raise sufficient capital to repay these obligations or otherwise refinance these debt obligations prior to their maturity, it would have a material adverse effect on our business, our ability to raise capital in the future and our ability to continue as a going concern.

Our Loan Agreement with our senior secured lender contains a number of affirmative and negative covenants which could restrict the manner in which we conduct business and, if we fail to comply with such covenants, it could restrict our ability to access the full amount available under the Loan Agreement and result in the acceleration of the debt extended pursuant to such Loan Agreement.

Our loan agreement with our senior secured lender, which is secured by substantially all of our assets, contains various financial covenants and other restrictions applicable to us which could reduce our flexibility in conducting our operations by limiting our ability to borrow money and may create a risk of default on our debt if we cannot continue to satisfy these covenants, including provisions that:

 

   

require us to satisfy financial statement delivery requirements;

 

   

require us to meet certain financial tests. For example, our loan agreement requires us to maintain at an asset coverage ratio of at least 1.25 to 1, measure on a monthly basis, and requires our quarterly revenue and operating loss not to deviate more than 20% from our projections for that particular time period (Performance to Plan Covenant);

 

   

restrict our ability and our subsidiaries’ ability to borrow additional funds, dispose of all or substantially all assets, or engage in mergers or other business combinations in which we are not the surviving entity without lender consent;

 

   

require consent for a change in control; and

 

   

restrict our ability to pay dividends or repurchase our common stock.

For the quarter ended June 30, 2012, we were not in compliance with the Performance to Plan Covenant. We are currently in discussions with our senior lender regarding a waiver but have not yet received such waiver.

In the event we are unable to obtain a waiver of the Performance to Plan Covenant for the quarter ended June 30, 2012 or if we are unable to comply with the covenants and other obligations under the Loan Agreement in the future, we may need to seek additional amendments and waivers from our senior secured lender. However, no assurance can be given that the lender would agree to any further amendments or waivers. If we default in any of the affirmative or negative covenants applicable to us or otherwise default in the Loan Agreement, the lender could, among other things, declare a default, accelerate the maturity date of indebtedness and, if we are unable to repay, exercise its rights under the Loan Agreement to, among other things, foreclose on our assets.

Risks Related to Our Business

Risks Related to our Electric Drive and Fuel Systems Segment

Fisker Automotive represents a substantial portion of our existing revenues and our future revenues will depend on Fisker Automotive’s success and our Continued Supplier Relationship with Fisker Automotive.

A large percentage of our revenue is typically derived from a small number of customers, in particular, Fisker Automotive, and we expect this trend to continue. During the years ended April 30, 2009, April 30, 2010 and April 30, 2011 and for the eight months ended December 31, 2011, our revenues from Fisker Automotive comprised 59%, 46%, 56%, and 61%, respectively, of our total revenues. Although we expect our anticipated growth in sales of our compressed natural gas storage systems will reduce the future levels of revenue concentration derived from Fisker Automotive, we expect that our revenues for the second half of 2012 and for the foreseeable future from Fisker Automotive will continue to represent a substantial or significant portion of our total revenues. Our business operations, financial results and liquidity would be materially adversely affected if: (i) there are unfavorable changes in our agreements with Fisker Automotive, (ii) there are significant delays in the production schedule of the Fisker Karma vehicle platform, (iii) the number of Fisker Karma vehicles produced and/or sold does not meet expectations, or (iv) there are significant delays in payments to us for product shipments to Fisker Automotive.

On April 10, 2012, Fisker Automotive notified us that they believe our pricing for the components for which we have the exclusive right to supply to them is not competitive by more than 10% and as a result they have asserted the right to resource all or part of the components we are currently supplying beginning August 10, 2012. We notified Fisker Automotive that its assertion that our pricing is not competitive by more than 10% is without merit and if Fisker Automotive resources any of the components we are currently supplying we will take whatever actions we deem necessary to defend and enforce our contract rights. At this time, we cannot provide any assurances on the outcome of this matter. If Fisker Automotive resources the components we are currently supplying, it would have a material adverse affect on our business.

Risks Related to our Renewable Energy Segment

Our Renewable Energy business segment has a substantial amount of debt.

Our Condensed Consolidated Balance Sheet includes approximately CAD 22.7 million of term debt incurred by Zephyr Farms Limited, our wholly-owned tier II subsidiary, pursuant to the terms of a Credit Agreement between Zephyr Farms Limited and Samsung Heavy Industries Ltd. (Samsung Credit Agreement or Samsung Debt). Pursuant to the terms of the Samsung Credit Agreement, as amended, Zephyr Farms is obligated to make regularly scheduled semi-annual principal and interest payments for a period of nine years commencing nine months following the Zephyr wind farm’s commercial operation date (first semi-annual payment expected to be in February 2013). The aggregate amount of such principal and interest payments will be approximately CAD 2.1 million per year. Additionally, the Samsung Credit Agreement, as amended, calls for a principal balloon payment in year five of CAD 5.3 million and a final balloon payment in year ten of CAD 9.6 million. Schneider Power has guaranteed the Samsung Debt and pledged all of the shares of Zephyr Farms Limited as security. If the Zephyr Wind Farm does not generate sufficient revenue and cash flow to service the Samsung Debt, it will have a material adverse effect on Schneider Power and our Renewable Energy business segment.

 

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Our recent wind farm investment could generate less energy than anticipated

There could be delays or difficulties in bringing the Zephyr Wind Farm project’s energy generation capabilities up to full utilization and if the levels of energy generated over the expected life of the project’s assets are significantly less than expected, the operating results of the renewable energy segment would be negatively impacted, our ability to meet or restructure the Samsung Debt would be impaired, and we may not be able to realize the benefits we anticipate from the acquisition of the Zephyr Wind Farm.

Item 6. Exhibits.

The Exhibits included as part of this report are listed in the attached Exhibit Index, which is incorporated herein by this reference.

 

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SIGNATURES

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

Date: August 9, 2012

 

QUANTUM FUEL SYSTEMS

TECHNOLOGIES WORLDWIDE, INC.

By:   /s/ BRADLEY J. TIMON
 

Bradley J. Timon,

Chief Financial Officer and Treasurer

Authorized Signatory and Principal Financial Officer

 

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EXHIBIT INDEX

Form 10-Q For Period Ended June 30, 2012.

 

  3.1    Amended and Restated Certificate of Incorporation of the Registrant, dated March 3, 2005, together with all amendments thereto (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Annual Report on Form 10-K filed with the SEC on July 5, 2011).
  3.2    Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 of the Registrant’s Annual Report on Form 10-K filed with the SEC on July 29, 2002).
  4.1    One year warrant, dated May 7, 2012, issued by the Registrant to Bridge Bank, National Association (incorporated herein by reference to Exhibit 4.2 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2012)
  4.2    Seven year warrant, dated May 7, 2012, issued by the Registrant to Bridge Bank, National Association (incorporated herein by reference to Exhibit 4.3 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2012)
  4.3    Warrant, dated May 8, 2012, issued by the Registrant to Advanced Equities, Inc. (incorporated herein by reference to Exhibit 4.4 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2012)
  4.4    Form of Warrant issued by the Registrant to certain accredited investors in private placement transactions that closed on June 22, 2012 and June 28, 2012 (incorporated herein by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2012).
10.1    Loan and Security Agreement, dated May 7, 2012, between the Registrant and Bridge Bank, National Association (incorporated herein by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2012).
10.2    Letter Agreement, dated May 8, 2012, between the Registrant and Advanced Equities, Inc. (incorporated herein by reference to Exhibit 10.4 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2012).
10.3    Second Amending Agreement, dated April 19, 2012, between Schneider Power Inc., a wholly-owned subsidiary of the Registrant, and Green Breeze Energy Inc. (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 25, 2012).
10.4    Limited Recourse Guaranty and Pledge Agreement, dated April 19, 2012, among Schneider Power Inc., Samsung Heavy Industries Co., Ltd., and Zephyr Farms Limited (incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 25, 2012).
10.5    Guaranty, dated April 19, 2012, in favor of Samsung Heavy Industries Co., Ltd. (incorporated herein by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on April 25, 2012).
10.6*    Credit Agreement, between Zephyr Farms Limited and Samsung Heavy Industries Co., Ltd.
10.7*    Letter Agreement, effective April 20, 2012, between the Registrant, Schneider Power Inc. and Samsung Heavy Industries Co., Ltd.
10.8    Separation Agreement, dated May 10, 2012, between the Registrant and Alan P. Niedzwiecki (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on May 16, 2012.)
10.9    Separation Agreement, dated May 10, 2012, between the Registrant and Dale L. Rasmussen (incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on May 16, 2012.)
10.10    Form of Subscription Agreement, dated June 22, 2012 and June 28, 2012, between the Registrant and certain accredited investors (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2012).

 

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10.11    Form of Bridge Note issued by the Registrant to certain accredited investors on June 22, 2012 and June 28, 2012 (incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2012).
10.12    Form of Stock Option Award Agreement for stock options issued under the Registrant’s 2011 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K/A filed with the SEC on June 8, 2012).
10.13    Form of Restricted Stock Award Agreement for restricted stock awards granted under the Registrant’s 2011 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K/A filed with the SEC on June 8, 2012).
31.1*    Certification of the Chief Executive Officer of the Company pursuant to Exchange Act Rule 13a-14(a).
31.2*    Certification of the Chief Financial Officer of the Company pursuant to Exchange Act Rule 13a-14(a).
32.1*    Certification of the Chief Executive Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and U.S.C. 1350.
32.2*    Certification of the Chief Financial Officer of the Company furnished pursuant to Exchange Act Rule 13a-14(b) and U.S.C. 1350.
101*    The following Quantum Fuel Systems Technologies Worldwide, Inc. financial information for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (unaudited), (ii) Condensed Consolidated Statements of Operations (unaudited), (iii) Condensed Consolidated Statements of Cash Flows (unaudited) and (iv) Notes to Condensed Consolidated Financial Statements (unaudited).

 

* Filed herewith

 

47

XNAS:QTWW Quantum Fuel Systems Technologies Worldwide Quarterly Report 10-Q Filling

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