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BALQON CORP. - 10-Q/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis should be read in conjunction with our
financial statements and the related notes to financial statements included
elsewhere in this report. This report and our financial statements and notes to
financial statements contain forward-looking statements, which generally include
the plans and objectives of management for future operations, including plans
and objectives relating to our future economic performance and our current
beliefs regarding revenues we might generate and profits we might earn if we are
successful in implementing our business strategies. Our actual results could
differ materially from those expressed in these forward-looking statements as a
result of any number of factors, including those set forth under the "Risk
Factors" section and elsewhere in this report. The forward-looking statements
and associated risks may include, relate to or be qualified by other important
factors, including, without limitation:
· the projected growth or contraction in the industries within which we operate;
· our business strategy for expanding, maintaining or contracting our presence in
these markets;
· anticipated trends in our financial condition and results of operations; and
· our ability to distinguish ourselves from our current and future competitors.
We do not undertake to update, revise or correct any forward-looking statements.
Any of the factors described above or elsewhere in this report, including in the
"Risk Factors" section of this report, or referenced from time to time in our
filings with the Securities Exchange Commission, or SEC, could cause our
financial results, including our net income or loss or growth in net income or
loss to differ materially from prior results, which in turn could, among other
things, cause the price of our common stock to fluctuate substantially.
Business Overview
We are a developer and manufacturer of electric drive systems, charging systems
and lithium battery systems for trucks, tractors, buses, industrial equipment
and renewable energy storage devices. We also design and assemble electric
powered yard tractors, short haul drayage tractors and inner city trucks
utilizing our proprietary drive systems, battery systems and charging systems.
Each of our electric drive systems is comprised of an electric motor,
transmission, our proprietary flux vector motor controller (which controls the
speed of an electric motor by varying the input frequency and voltage from a
vehicle's batteries), power electronic components and proprietary software
configured to specific application needs. Our lithium battery systems feature
our proprietary battery management system, or BMS, an electronic device
connected to each lithium battery cell to monitor and balance the state of
charge of the battery, including its temperature, voltage and current during
charge and discharge cycles. Our proprietary software allows our BMS to be used
on any battery cell chemistry. Our charging systems, introduced in the third
quarter of 2011, vary in capacity ranging from 8 kilo Watt, or kW, to 120 kW in
power and 200 Volts to 700 Volts in charge voltage.
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A key element of our marketing strategy is to provide fully integrated
propulsion and energy storage systems to vehicle manufacturer's worldwide,
allowing original equipment manufacturers, or OEMs, of commercial vehicles, such
as trucks, tractors, and buses, to rapidly integrate our proprietary
technologies into diversified vehicle platforms to address a growing global
demand for commercial electric vehicles. We also market energy storage systems
comprised of lithium batteries, battery management and chargers to renewable
energy storage system manufacturers that market completed systems to solar and
industries. We are also engaged in the research and development of battery
systems, charging systems and power inverters (which converts direct current
voltage into a alternating current voltage) for use in energy storage devices to
reduce peak loads in commercial applications such as in the telecommunications
industry and in large commercial and industrial buildings.
We sell our electric drive systems, charging systems and battery systems to
global OEMs of commercial vehicles and industrial equipment. A key element of
our sales strategy is to develop strategic partnerships with global OEM's to
jointly develop commercial electric vehicles incorporating our drive systems,
charging systems and battery systems into localized chassis platforms that meet
regional customer needs. We believe that this strategy allows us to market our
proprietary technologies to global customers while reducing product development
and integration time for our OEM partners.
We also develop, design, assemble, market and sell zero-emissions heavy-duty
electric yard tractors, heavy-duty short haul drayage tractors, and inner city
Class 7 and Class 8 trucks and medium-duty trucks that feature our proprietary
electric drive systems, charging systems and lithium battery systems. Our
heavy-duty electric tractors are suitable for use in the transportation of
containers and heavy loads in off-highway applications at facilities such as
marine terminals, rail yards, industrial warehouses, intermodal facilities
(facilities where freight is transferred from one mode of transportation to
another without actual handling of the freight itself when changing modes),
military bases and industrial plants. Our medium-duty electric trucks can be
configured by our customers for various uses in inner city on-highway
applications. For example our customers can configure our medium-duty electric
trucks as box trucks or shuttle busses for use in inner city applications.
As of the date of this report, our electric tractor product portfolio features
three products in our Nautilus product line, the Nautilus XE20, a heavy-duty
on-road electric tractor, the MX30, a heavy-duty electric short-haul tractor,
and the Nautilus XR E20, a longer-range version of the Nautilus XE20. We also
offer a heavy-duty Class 7 and Class 8 electric truck, the Mule M100, a
medium-duty electric truck. The Mule M100 is designed as zero emissions
solutions to transport loads of 4 tons, and, depending on battery selection, can
be configured to have a range of up to 150 miles on a single charge under
unloaded conditions.
Recent Developments
Overview
The Company's obligations on convertible debt and delinquent payroll taxes
raises substantial doubt about the Company's ability to continue as a going
concern The Company has been, and currently is, working towards identifying and
obtaining new sources of financing. No assurances can be given that the Company
will be successful in obtaining additional financing in the future. Any future
financing that the Company may obtain may cause significant dilution to the
existing stockholders and may require the Company to relinquish rights and/or
control of the ownership of Company's proprietary technology and other important
assets. The Company may be required to further delay, scale back or eliminate
portions of its operations and product and service development efforts.
During the year ended December 31, 2011 and through November 15, 2012, a
significant portion of our research and development efforts, have been focused
on the development of electric drive systems, charging systems, lithium battery
storage systems and the next generation of our flux vector motor controllers to
address the light and medium-duty vehicle markets. During 2011, we developed our
proprietary charging systems, high frequency fast chargers that have a capacity
of up to 160 kW that will provide our customers with the capability to charge
our vehicles in less than two hours. During 2011, we also completed the
development of our next generation flux vector motor controllers, which
incorporate the latest transistor technology that is commercially available and
provide higher efficiency and more power than our existing flux vector motor
controllers. Our next generation flux vector motor controllers are designed to
work seamlessly with induction motor or permanent magnet motor designs, allowing
us the ability to develop drive systems for light-duty vehicles such as
automobiles, pickup trucks and light-duty delivery vehicles. Our efforts during
2011 also led to the development of power inverters, charging systems and
battery systems capable of providing up to one Mega Watt, or MW, of power in
peak load sharing applications in energy storage devices. During 2011, we also
developed and sold battery systems to address applications such as forklifts and
pallet jacks in the telecommunication energy storage and material handlingmarkets.
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A significant portion of our production efforts in 2011 and through November 15,
2012, have been focused on developing the MX30, a heavy duty on-road short-haul
electric tractor. MX30 is currently being tested by Port of Los Angeles for use
in short-haul applications. Testing of MX30 during the past three months under
fully loaded conditions indicate 80 mile range under full load conditions
transporting 20 ton containers between a marine terminal and a local rail yard.
In addition the Company has received approval from Department of Energy for a
grant to build three more MX30 vehicles for use in Port applications.
During 2012, we have developed lithium battery storage systems for the solar,
wind and telecommunications industries. In 2012, we also developed 12-48 volt
high energy storage capacity battery packs to address telecommunications energy
storage needs. Our battery systems replace current lead acid batteries with no
maintenance required and double the cycle life of current equivalent lead acid
batteries. In 2012, we developed lithium battery solutions for ground support
equipment industry, which includes lithium batteries for airport baggage
tractors and aircraft tractors.
In 2012, we received a purchase order from Terberg Benschop, a leading
manufacturer of Yard tractors located in Europe to jointly develop an electric
yard tractor configuration for their current line of yard tractors. As of the
date of this report, we have delivered three drive systems, battery systems and
chargers to our customer and currently three units are undergoing testing and
demonstration in Europe. We currently have two manufacturers, Terberg and MOL
Industries demonstrating electric yard in Europe, we anticipate successful
demonstrations will lead to additional orders for our drive systems.
Significant Highlights
During 2012, we developed an on-road Class 8 short-haul electric tractor, our
MX30, for port applications. In June 2012 we successfully completed dynamometer
testing on the MX30 with a maximum load of 30 tons on a 10% grade. In August
2012, we began on-road testing the MX30 for short-haul applications at the Port
of Los Angeles. We anticipate that testing on the MX30 will continue for six
months to demonstrate the viability of our MX30 as a full electric zero
emissions heavy-duty on-road tractor in short haul marine applications.
In June 2012, we launched our website to market our complete line of lithium
batteries and energy storage systems. Over 10% of our revenue during second
quarter of 2012 was a result of online sales of batteries through our website.
We anticipate increased revenues from online sales during rest of the year.
During 2011, we introduced our charging systems, which vary in capacity, ranging
from 8 kW to 120 kW in power and 200 Volts to 700 Volts in charge voltage. Our
charging systems feature 8 kW modules that are connected in series to achieve a
maximum charge rate of 120 kW, and they are equipped with our proprietary
software that conforms to Society of Automotive Engineers J1772 communication
and protocol requirements.
In October 2011, we sold five units of our next generation flux vector motor
controllers to a customer engaged in the manufacturing of monorail systems. Our
new generation of motor controllers are equipped with current transistor
technology and are able to work seamlessly with induction or permanent magnet
motor designs. We expect to market these flux vector motor controllers to
automobile manufacturers worldwide for use in light-duty passenger vehicleand
cargo vehicle applications.
In November 2011, we completed the assembly of and delivered a one MW battery
storage system, featuring our battery system, charging systems and battery
management systems, to a local university for use as a peak load sharing device.
In May 2012, the system was placed in operation and delivers power around the
clock to a building at a local university. In December 2011, we completed and
delivered two additional drive and battery systems to Ashok Leyland, for use in
the development of inner city electric buses. We also received additional orders
for the development and shipment of four drive and battery systems for medium
duty electric trucks for use in inner city applications.
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During 2011, one of our electric drive systems was integrated into a heavy-duty
tow tractor jointly developed by us and Mol Industries, an OEM located in
Europe. As of the date of this report, the completed vehicle has successfully
completed testing at a customer site. During the second quarter of 2012, the
heavy-duty tow tractors that feature our electric drive systems have been
demonstrated to commercial and marine port terminals. We expect the
demonstrations of the Mol Industries tractor featuring our electric drive system
to result in additional orders for our electric drive systems from OEMs in
Europe during the remainder of 2012 and 2013.
During 2011, we sold two Nautilus XR E20 yard tractors, one to a steel
manufacturer and one to a military base. We expect these Nautilus XR E20s to be
used to transport trailers and containers at these facilities. In addition to
our Nautilus XR E20s, we also shipped our new charging systems to these
customers, enabling our customers to use the Nautilus XR E20s during threeshift
operations.
During 2011, we developed, tested and sold a Mule M100, a heavy-duty truck,
configured for use as an electric 32 passenger inner city shuttle bus. During
this period, we also delivered and sold one 40 foot passenger electric drive
chassis and a charging system to a customer engaged in the development of next
generation electric buses and passenger vehicles. The chassis incorporates our
drive system and battery system and will be configured by our customer for use
as a 40 foot passenger bus. During the second quarter of 2012, our customer
completed the 40 passenger bus and has demonstrated the bus to customers in
transit and federal government agencies. We expect demonstrations of the
electric bus by our customer will result in additional orders during 2012 and
2013.
During 2011, we also sold six battery storage systems to a customer in the
telecommunications industry to demonstrate the fuel savings that result from the
use of battery power on remote wireless towers. As of the date of this report,
the battery storage systems are operational and have demonstrated a significant
reduction in fuel costs resulting from use of battery power during off-peak
hours of operation of the wireless towers. During 2012 we have provided over 10
additional battery systems to telecommunication customers. Over 80% of the new
sales were to customers that had previously purchased and tested our battery
systems in telecommunications applications. Our telecommunications battery
systems were delivered to global customers in Australia, South Africa, Nigeria,
India and Bangladesh. We anticipate successful demonstration of our lithium
battery storage systems will result in additional sales during the remainder of
2012 and in 2013.
Significant Customers and Strategic Partnerships
In January 2011, we entered into an agreement with WGE, an affiliate of our
Chairman of the Board headquartered in Shenzhen China, under which WGE agreed to
purchase 300 of our electric drive systems at an aggregate purchase price of
approximately $15.9 million. In 2011, we delivered one drive system to be
integrate our electric drive system into a localized 16 passenger bus chassis.
As of the date of this report, our customer has been unable to successfully
integrate and test our drive system, thereby delaying our ability to ship
additional drive systems. In order to remedy the delay in product development,
we have signed a Memorandum of Understanding with a large Bus manufacturer in
China to expedite development of small to mid-size transit buses for the China
market.
Under an agreement with the City of Los Angeles, or City of Los Angeles
Agreement, we agreed to sell 20 Nautilus E20 heavy-duty electric yard tractors
(the predecessor to our Nautilus XE20) and five Nautilus E30 short-haul tractors
(the predecessor to our Nautilus XE30) to the City of Los Angeles for use at the
Port of Los Angeles. As of the date of this report, we have delivered 14
Nautilus E20s (including four Nautilus XE20s two of which have been retrofitted
with extended range lithium batteries and are referred to as our Nautilus XR
E20s) and one Nautilus XE30 to the Port of Los Angeles under the terms of the
City of Los Angeles Agreement. Initial use of the electric vehicles at the Port
of Los Angeles evidenced that the vehicles had a range of between five and six
hours. Upon the request of the City of Los Angeles to increase the range of the
vehicles to meet two shift operations, we retrofitted two of the vehicles
already delivered under the City of Los Angeles Agreement with extended range
lithium battery systems, hydraulic systems and idle stop software in order to
extend the range of the resultant vehicle, the Nautilus XR E20. The two
retrofitted Nautilus XR E20s have completed seven months of testing at a local
marine facility. Further, as of the date of this report, two additional E20s are
being tested at a local recycling facility under heavy loads exceeding 40 tons.
We believe that the performance of the Nautilus XR E20s are meeting
expectations, and the City of Los Angeles has requested that we retrofit two
additional vehicles with extended range lithium battery systems for testing at
an alternate facility. The City of Los Angeles Agreement terminated on June 26,
2011, and, consequently, we do not have an obligation to sell, and the City of
Los Angeles does not have an obligation to buy, the remaining 10 vehicles. We
expect to negotiate a new agreement with the City of Los Angeles to upgrade six
existing units with extended range batteries to increase the range of the
vehicles delivered under the previous agreement. We are also in negotiations
with the City of Los Angeles to deliver an on-road Class 8 truck for use in
drayage applications that will allow us to deliver the remaining 6 electric yard
tractors, 4 short-haul electric tractors. While we are confident that such an
agreement with the City of Los Angeles will be reached, no assurance can be
given that we will in fact enter into such an agreement.
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During the year ended December 31, 2010, we delivered electric drive systems and
lithium battery systems to Ashok Leyland, a large manufacturer of trucks and
buses based in India, to be installed into intercity hybrid buses to be used for
demonstration purposes. The intercity hybrid buses incorporating our electric
drive systems and lithium battery systems underwent field tests for one year. As
a result of the successful demonstration and testing of these intercity hybrid
buses, in April 2011 we entered into a Joint Development Agreement with Ashok
Leyland under which we will work with Ashok Leyland to jointly develop and test
six electric vehicles (comprised of buses and trucks) using Ashok Leyland's
glider chassis and our electric drive systems and lithium battery systems. As of
the date of this report, we have sold two electric drive systems to Ashok
Leyland for integration into prototype inner city buses. In addition we have
also delivered two electric drive systems and battery systems for integration
into an inner city delivery truck. Subject to the six prototypes being delivered
and meeting established performance and cost targets and/or Ashok Leyland
obtaining firm requirements from its customers, Ashok Leyland has agreed to
purchase a minimum of 14 additional drive systems from us for sale to its
customers. As of the date of this report, we have delivered four of the six
prototypes.
In January 2012, we received a purchase order from Terberg Benschop, a leading
manufacturer of yard tractors and heavy duty trucks with facilities in
Netherlands and Malaysia. Under the terms of the purchase order, we jointly
developed an electric drive system for the current line of yard tractors
manufactured by Terberg. In the third quarter of 2012, we delivered three sets
of drive systems and jointly completed the integration of our proprietary drive
system and battery system. As of the date of this report, Terberg is
demonstrating the electric yard tractor to local customers and showcasing the
completed product at local trade shows.
In May 2011, we received a purchase order for an electric drive system and
battery system from MOL Industries, a leading manufacturer of yard tractors and
heavy duty refuse trucks with facilities in Belgium. In September 2011, MOL
began demonstration of the completed electric yard tractors to local warehouse
and marine terminals.
Distribution Agreement
In December 2010, we entered into a three year distribution agreement, or
Distribution Agreement, with Seven One Limited, or SOL, under which we were
appointed as the exclusive authorized distributor in the United States for the
promotion, marketing and sale of lithium iron phosphate batteries and high
voltage charging systems manufactured by Seven One Battery Company. On
December 31, 2011, batteries with a value of $1,915,200 were held on
consignment. As of September 30, 2012, batteries with a value of $574,900 were
held on consignment.
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Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis of
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe that the following critical accounting policies, among others, affect
our more significant judgments and estimates used in the preparation of our
financial statements:
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 financial statements and the reported amounts of revenue and expenses during
the reporting period. Material estimates relate to the recognition of contract
revenues and estimated costs to complete contracts in process, recoverability of
inventories, and recoverability of reported amounts of long-lived assets. Actual
results may differ from those estimates.
Revenues
Sales of Production Units and Parts. We recognize revenue from the sale of
completed production units and parts when there is persuasive evidence that an
arrangement exists, delivery of the product has occurred and title has passed,
the selling price is both fixed and determinable, and collectability is
reasonably assured, all of which generally occurs upon shipment of our product
or delivery of the product to the destination specified by the customer.
We determine whether delivery has occurred based on when title transfers and the
risks and rewards of ownership have transferred to the buyer, which usually
occurs when we place the products with the buyer's carrier. We regularly review
our customers' financial positions to ensure that collectability is reasonably
assured. Except for warranties, we have no post-sales obligations.
Contract Revenue and Cost Recognition on Prototype Vehicles. In accounting for
contracts, we recognize revenues using the percentage-of-completion method of
accounting by relating contract costs incurred to date to the total estimated
costs at completion. This method is used because management considers costs to
be the best available measure of progress on its contracts. Contract losses are
provided for in their entirety in the period that they become known, without
regard to the percentage-of-completion. We also recognize as revenues costs
associated with claims and unapproved change orders to the extent it is probable
that such claims and change orders will result in additional contract revenue,
and the amount of such additional revenue can be reliably estimated.
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Contract costs include all direct material and labor costs. The liability
"Billings in excess of costs and estimated earnings on uncompleted contracts"
represents billings in excess of revenues earned.
Stock-Based Compensation
We periodically issue stock instruments, including shares of our common stock,
stock options, and warrants to purchase shares of our common stock to employees
and non-employees in non-capital raising transactions for services and for
financing costs. We account for stock option awards issued and vesting to
employees in accordance with authorization guidance of the Financial Accounting
Standards Board, or FASB, where the value of stock-based compensation is
measured at the grant date, based on the fair value of the award, and is
recognized as expense over the requisite service period. Options to purchase
shares of our common stock vest and expire according to the terms established at
the grant date.
We account for stock options and warrant grants issued and vesting to
non-employees in accordance with the authoritative guidance of the FASB whereas
the value of the stock compensation is based upon the measurement date as
determined at either (a) the date at which a performance commitment is reached,
or (b) at the date at which the necessary performance to earn the equity
instruments is complete.
We estimate the fair value of stock options and warrants using the Black-Scholes
Merton option-pricing model, which was developed for use in estimating the fair
value of options that have no vesting restrictions and are fully transferable.
This model requires the input of subjective assumptions, including the expected
price volatility of the underlying stock and the expected life of stock options.
Projected data related to the expected volatility of stock options is based on
the average volatility of the trading prices of comparable companies and the
expected life of stock options is based upon the average term and vesting
schedules of the options. Changes in these subjective assumptions can materially
affect the fair value of the estimate, and therefore the existing valuation
models do not provide a precise measure of the fair value of our employee stock
options.
We estimate the fair value of shares of common stock issued for services based
on the closing price of our common stock on the date shares are granted.
Derivative Financial Instruments
We evaluate all of our financial instruments to determine if such instruments
are derivatives or contain features that qualify as embedded derivatives. For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported in the
statements of operations. For stock-based derivative financial instruments,
through June 30, 2012 we used the Monte Carlo simulation model to value the
derivative instruments at inception and on subsequent valuation dates as of
September 30, 2012, the derivative liabilities were valued using a probability
weighted average Black Scholes pricing model. The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting
period. Derivative instrument liabilities are classified in the balance sheet as
current or non-current based on whether or not net-cash settlement of the
derivative instrument could be required within 12 months of the balance sheet
date.
Impairment of Long-Lived Assets
The FASB, has established guidelines regarding when impairment losses on
long-lived assets, which include property and equipment, should be recognized
and how impairment losses should be measured. Guidance of the FASB also provides
a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. We periodically review, at least annually, such assets
for possible impairment and expected losses. If any losses are determined to
exist they are recorded in the period when such impairment is determined. Based
upon management's assessment, there were no indicators of impairment of our long
lived assets at September 30, 2012 or December 31, 2011.
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Income Taxes
We recognize income taxes for the amount of taxes payable or refundable for the
current year and deferred tax liabilities and assets are recognized for the
future tax consequences of transactions that have been recognized in our
financial statements or tax returns. A valuation allowance is provided when it
is more likely than not that some portion or the entire deferred tax assetwill
not be realized.
Financial Condition and Results of Operations
Our total revenues decreased by $122,619, or 15%, to $712,324 for the three
months ended September 30, 2012 as compared to $834,943 for the three months
ended September 30, 2011. The decrease in revenues was as a result of lower
sales of electric yard tractors when compared to previous period. Gross profit
(loss) during the nine months ended September 30, 2012 was a loss of $1,280,358
as compared to a gross profit of $312,179 during the same period in 2011,
representing a decrease of $1,592,537, or 510%. The gross loss is primarily due
to a $350,000 sale of batteries to a wholesale customer at a loss and the
markdown of $1,345,111 of non-recoverable inventories. Our decision to sell a
particular configuration of batteries to a wholesale customer was prompted by
our desire to reduce inventory and generate cash for operations.
We reported a net loss of $4,191,157 for the three months ended September 30,
2012 as compared to a net loss of $1,012,383 for the three months ended
September 30, 2011. Net loss as a percentage of sales during the nine months
ended September 30, 2012 was 588%, as compared to net loss as a percentage of
sales of 121% during the three months ended September 30, 2011. The increase in
losses during the three months ended September 30, 2012, is primarily
attributable to the decrease in revenues, a negative gross margin resulting from
sales of $350,000 in batteries to wholesale customer, the markdown of $1,345,111
of non-recoverable inventories ,offset by decreases in general and
administrative expenses, research and development costs, and depreciation. These
are further offset by an increase in interest expense of $96,271. During the
three months ended September 30, 2012, a $1,458,609 loss in the fair value of
the derivative liability was realized while a $263,199 gain in the fair value of
the derivative liability was realized during the three months ended September
30, 2011.
Our product mix during the first nine months of 2012 varied from our product mix
during the first nine months of 2011. During the first nine months of 2012,
vehicle sales accounted for 34% of our revenues, sales of batteries and battery
systems were 42% of revenues, and sales of our electric drive systems accounted
for 21% of revenues. During the first nine months of 2011, sales of drive
systems represented 55% of total sales, sales battery systems accounted for 7%
of our sales, sales of vehicles accounted for 29% of our sales and consulting
revenues represented 3% of total sales and revenues.
In December 2010, we raised $5,000,000 in connection with a private placement of
common stock and warrants. On May 18, 2012, we raised $340,000 in connection
with a private placement of 10% secured subordinated convertible notes and
warrants.
Our lack of significant revenues during the first nine months of 2012 is a
direct result of a lack of capital, lack of new sales, and the length and
complexity of our product development process. Typically, we experience a
significant time lag between receiving an order for our electric drive systems
or battery systems and recognizing revenue in connection with the order due to
the development time required to integrate our technologies into new vehicle
platforms specified by our customers. For example, while our electric drive
systems and battery systems can be integrated into a multitude of product
platforms, often times a substantial amount of time is needed to make design
modifications to our product to ensure its integration into each new vehicle
platform. In most cases new designs require sourcing of raw materials
contributing further to the already lengthy production time. In the case of a
new customer or a new product platform, it is customary in our business to
complete and deliver a single unit prior to producing the entire order. Once the
initial product is delivered, installed and accepted by our customer, we begin
production on the remaining order based on production delivery dates agreedupon
with our customer.
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While 34% of our revenues during the first nine months of 2012 were derived as a
result of our production efforts that were focused on the upgrade of six trucks
previously delivered to the City of Los Angeles for use at the Port of Los
Angeles from lead acid batteries to lithium ion batteries, 34% of our revenues
during the period were derived from the delivery of battery systems and electric
drive systems to our OEM customers in the United States, Asia and Europe. The
drive systems were customized for vehicle configurations to be used in both
on-road and off-road applications. We anticipate that the delivery of these
drive systems will result in additional orders from our OEM partners in the
future. In the short term, the Company is focused on continuing to sell battery
systems to decrease the consigned inventory of batteries it holds and generate
immediate cash.
As of September 30, 2012, we had a working capital deficiency of $9,667,419; an
accumulated deficit of $9,452,061 and reported a net loss for the nine months
ended September 30, 2012 of $6,690,270. Our plans for correcting these
deficiencies include the future sales of our products and the raising of
capital, which we expect would help provide us with the liquidity necessary to
meet operating expenses. Over the longer-term, we plan to achieve profitability
through the sale of our drive systems, electric vehicles, battery systems and
other products.
As of November 15, 2012, we had a backlog of $1,005,538. The amount of backlog
orders represents revenue that we anticipate recognizing in the future, as
evidenced by purchase orders and other purchase commitments received from
customers, but on which work has not yet been initiated or with respect to which
work is currently in progress. As of the date of this report, 28% of our backlog
consists of a battery system, 26% consists of a drive system and remainder
consists of vehicles and accessories. Our backlog does not reflect a $975,000
Department of Energy grant awarded to us, which we are awaiting contract
documents. Due to the delay in testing and approval of our drive system, we have
removed $15.9 million in drive systems from our backlog until such time we have
assurances on production timelines from our customer, WGE, an affiliate of our
Chairman of the Board. We believe that the majority of our current backlog will
be shipped within the next 12 months. However, there can be no assurance that we
will be successful in fulfilling such orders and commitments in a timely manner
or that we will ultimately recognize as revenue the amounts reflected as
backlog.
We anticipate that a majority of future sales of our electric vehicles will be
made directly to domestic and international OEMs. We are optimistic that the
demonstration of our extended range Nautilus XR E20 and MX30 to existing and
potential customers will result in additional sales of our electric vehicles.
The tables presented below, which compare our results of operations from one
period to another, present the results for each period, the change in those
results from one period to another in both dollars and percentage change, and
the results for each period as a percentage of net revenues. The columns present
the following:
· The first two data columns in each table show the absolute results for each
period presented.
· The columns entitled "Dollar Variance" and "Percentage Variance" shows the
change in results, both in dollars and percentages. These two columns show
favorable changes as a positive and unfavorable changes as negative. For
example, when our net revenues increase from one period to the next, that
change is shown as a positive number in both columns. Conversely, when expenses
increase from one period to the next, that change is shown as a negative in
both columns.
· The last two columns in each table show the results for each period as a
percentage of net revenues.
30
Third Quarter of 2012 Compared to the Third Quarter of 2011
Results as a
Percentage
of Net Revenues
for the
Three Months Ended Dollar Percentage Three Months Ended
September 30, Variance Variance September 30,
2012 2011 Favorable Favorable
(Unaudited) (Unaudited) (Unfavorable) (Unfavorable) 2012 2011
Net revenues $ 712,324 $ 834,943 $ (122,619 ) $ (15)% 100% 100%
Cost of revenues 939,026 729,430 (209,596 ) (29)% 132% 87%
Write-down of
non-recoverable
inventories 1,345,111 - (1,345,111 ) (100)% 189% -
Gross profit (loss) (1,571,813 ) 105,513 (1,677,326 ) (1,590)% (221)% 13%
General and
administrative expenses 615,460 709,827 94,367 13% 86% 85%
Research and development 46,890 130,820 83,930 64% 7% 16%
Depreciation and
amortization 8,157 146,490 138,333 94% 1% 18%
Change in derivative
liability (1,458,609 ) 263,199 (1,721,808 ) (654)% (205)% 32%
Interest expense (490,229 ) (393,958 ) (96,271 ) (24)% (69)% 47%
Net loss $ (4,191,157 ) $ (1,012,383 ) $ (3,178,774 ) $ (973)% (588)% (121)%
Net Revenues. The decrease in our revenues during the third quarter of 2012 is
due to reduced sales of electric yard tractors when compared to same period in
2011. The percentage of our revenues generated from the shipment of battery
systems was 74% during the third quarter of 2012 as compared to a 8% during the
third quarter of 2011. Our current backlog consists of drive systems and battery
systems for energy storage markets. We expect our battery sales to continue to
increase at a modest growth levels during the next six months. Due to grant
funding from Department of Energy for on-road electric trucks, we anticipate an
increase in vehicle sales in the short term.
Write-down of non-recoverable inventories. The write-down of non-recoverable
inventories of $1,345,111 during the third quarter of 2012 is attributable to
the write-down charges of $606,111 attributable to inventory and $739,000
attributable to the equipment inventory held for lease by customer under an
agreement with T&K Logistics. During the third quarter of 2012, the Company
determined these assets were non-recoverable and recorded the corresponding
write-down of non-recoverable inventories.
Gross Profit (Loss) . During the third quarter of 2012, we generated a gross
loss as a percentage of net revenues of 1,590% as compared to a gross profit as
a percentage of net revenues of 13% for the third quarter of 2011. This decrease
in gross profit margin is due to the sale of $350,000 in batteries at wholesale,
at a loss, during the third quarter of 2012 and the write-down of $1,345,111 of
non-recoverable inventories during the same period.
General and Administrative Expenses. The 13% decrease in general and
administrative expenses is comprised of an increase in unapplied overhead of
$79,435, a decrease in marketing expenses of $89,030, a decrease in legal,
consulting and professional fees of $123,869, a decrease in salaries and wages
of $16,209, and a net increase of $55,306 of other general and administrative
expenses.
Research and Development Expenses. The 64% decrease in research and development
expenses is comprised largely of decreases in salaries and wages of personnel
employed in the research and development group. We expect our research and
development expenses to remain constant for the remainder of the year as we
strive to manage expenses to achieve profitability.
Depreciation and Amortization. The decrease in depreciation and amortization is
due largely to the amortization of the battery distribution agreement that
occurred during the second quarter of 2011. Since the battery distribution
agreement was impaired during the year ended December 31, 2011, no comparable
amortization expense was incurred in 2012.
31
Change in Fair Value of Derivative Liability. At September 30, 2012, the fair
value of our derivatives increased by $1,074,272 resulting in a loss on the
change in fair value of the derivative liability. During the quarter ended
September 30, 2011, the fair value of our derivatives increased to $2,716,835.
These amounts were determined by management with the use of a probability
weighted average Black-Scholes simulation model.
Interest Expense. The $96,271 increase in interest expense is attributable to
interest on convertible notes and the amortization of the related beneficial
conversion feature of the convertible notes.
Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September
30, 2011
Results as a Percentage
of Net Revenues for the
Nine Months Ended Dollar Percentage Nine Months Ended
September 30, Variance Variance September 30,
2012 2011 Favorable Favorable
(Unaudited) (Unaudited) (Unfavorable) (Unfavorable) 2012 2011
Net revenues $ 1,860,522 $ 1,450,549 $ 409,973 28% 100% 100%
Cost of revenues 1,795,769 1,138,370 657,399 58% 97% 78%
Write-down of
non-recoverable
inventories $ 1,345,111 - 1,345,111 100% 189% -
Gross profit (loss) (1,280,358 ) 312,179 (1,592,537 ) (510)% 69% 22%
General and
administrative expenses 1,966,206 2,886,272 (920,066 ) (32)% 106% 199%
Research and development 191,159 424,544 (233,385 ) (55)% 10% 29%
Depreciation and
amortization 24,471 460,534 (436,063 ) (95)% 1% 32%
Change in derivative
liability (1,074,272 ) (164,941 ) (1,239,213 ) (751)% (58)% 11%
Cost to induce exercise
of warrants (671,809 ) - (671,809 ) (100)% (36)% 0%
Interest expense (1,481,996 ) (1,390,265 ) (91,731 ) (7)% (80)% 96%
Net loss $ (6,690,270 ) $ (4,684,495 ) $ (2,005,775 ) (973)% (360)% (323)%
Net Revenues. During the first nine months of 2012, approximately 34% of our
revenues were generated as a result of the upgrade of six electric trucks
previously delivered to the City of Los Angeles from lead acid batteries to
lithium ion batteries while sales of battery systems accounted for approximately
28% of our revenues. During the nine months ended September 30, 2011, 55% of our
revenues were generated from the shipment of drive systems for integration into
medium sized buses and a heavy-duty tractor, 29% of our sales were comprised of
sales of our electric vehicles and related battery charging equipment, 13% of
our sales were from batteries and battery systems, and 3% of our revenues were
from consulting services.
Write-down of non-recoverable inventories. The write-down of non-recoverable
inventories of $1,345,111 during the first nine months of 2012 is attributable
to the write-down charges of $606,111 attributable to inventory and $739,000
attributable to the equipment inventory held for lease by a customer under an
agreement with T&K Logistics. During the third quarter of 2012, the Company
determined these assets were non-recoverable and recorded the corresponding
write-down of non-recoverable inventories.
Gross Profit (Loss) . During the first nine months of 2012, our gross loss as a
percentage of net revenues of 69% was mainly attributable to the sale of
$350,000 of batteries to a wholesale customer at a loss and the write-down of
$1,345,111 of non-recoverable inventories. During the first nine months of 2011,
our gross profit as a percentage of net sales of 22% was attributable to the
higher margins on the sales of drive systems attributed to improved
manufacturing utilization and the lower material costs.
32
General and Administrative Expenses. The decrease in general and administrative
expenses is comprised of an decrease in unapplied overhead of $180,449, a
decrease in marketing expenses of $434,531 an decrease in legal, consulting and
professional fees of $375,589, an increase in salaries and wages of $84,132, and
a net decrease of $26,221 of other general and administrative expenses.
Research and Development Expenses. The decrease of 55% in research and
development expenses is comprised largely of decreases in salaries and wages of
personnel employed in the research and development group.
Depreciation and Amortization. The decrease in depreciation and amortization is
due largely to the amortization of the battery distribution agreement that
occurred during the quarter ended September 30, 2011. Since the battery
distribution agreement was impaired during the year ended December 31, 2011,
there is no comparable amortization expense in 2012.
Change in Fair Value of Derivative Liability. At September 30, 2012, the fair
value of our derivatives increased by $1,074,272 resulting in a loss on the
change in fair value of the derivative liability. During the quarter ended
September 30, 2011, the fair value of our derivatives increased to $2,716,835.
These amounts were determined by management with the use of a probability
weighted average Black-Scholes simulation model.
Cost to Induce Exercise of Warrants. Effective March 31, 2012, the Company's
Chairman applied $500,000 of an unsecured loan as the exercise price to exercise
a warrant to purchase 1,250,000 shares of our common stock held by Seven One
Limited. In consideration of the Chairman's agreement to use the amount loaned
to exercise the warrant held by Seven One Limited, we agreed to adjust the
exercise price of certain of the warrants held by Seven One Limited from $0.64
per share to $0.40 per share. The total value of the adjustment of the exercise
price of these warrants was $671,809.
Interest Expense. The $91,731 increase in interest expense is attributable to
interest on convertible notes and the amortization of the related beneficial
conversion feature of the convertible notes. During the first nine months of
2012, amortization of the beneficial conversion feature on the convertible notes
payable was $1,234,140 while during the nine months ended September 30, 2011,
amortization of the beneficial conversion feature on the convertible notes
payable was $822,739.
Liquidity and Capital Resources
The accompanying condensed financial statements have been prepared under the
assumption that we will continue as a going concern. This assumption
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. For the nine months ended September 30, 2012, we
recorded a net loss of $6,690,270. As of September 30, 2012, we had a working
capital deficit of $9,667,419 and a shareholders' deficiency of $9,452,061. In
addition, we are delinquent in payroll taxes of $253,738 and interest payments
on our notes of $242,989. Further, $1,330,000 of our convertible notes came due
on September 1, 2012 and unless we can renegotiate these debt obligations, we
are unable to pay the obligations and these notes are now in default. Pursuant
to the terms of the notes, the non-payment of interest by us constitutes an
event of default and, as a result, the holders of the notes may accelerate
payment of all amounts outstanding under the notes by giving written notice to
us and thereby requiring that we immediately pay up to an aggregate of
$3,361,500 in principal plus all accrued and unpaid interest. If the holders of
the notes were to declare the notes due and payable, we presently do not have
the ability to pay these notes.
33
These factors, among others, raise substantial doubt about our ability to
continue as a going concern. As a result, our independent registered public
accounting firm, in its report on our 2011 financial statements, has raised
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern. We have been, and currently
are, working towards identifying and obtaining new sources of financing. No
assurances can be given that we will be successful in obtaining additional
financing in the future. Any future financing that we may obtain may cause
significant dilution to existing stockholders. Any debt financing or other
financing of securities senior to common stock that we are able to obtain will
likely include financial and other covenants that will restrict the our
flexibility. At a minimum, we expect these covenants to include restrictions on
its ability to pay dividends on its common stock. Any failure to comply with
these covenants would have a material adverse effect on our business, prospects,
financial condition, results of operations and cash flows. In addition, our
senior secured convertible debentures issued between July and December 2010
contain covenants that include restrictions on our ability to pay dividends on
our common stock.
If adequate funds are not available, we may be required to further delay, scale
back or eliminate portions of our operations and product and service development
efforts or to obtain funds through arrangements with strategic partners or
others that may require us to relinquish rights to certain of its technologies
or potential products or other assets. Accordingly, the inability to obtain such
financing could result in a significant loss of ownership and/or control of our
proprietary technology and other important assets and could also adversely
affect its ability to fund our continued operations and its product and service
development efforts.
During the nine months ended September 30, 2012, we funded our operations from
the proceeds from the exercise of a warrant by our Chairman, issuance of
convertible debt and proceeds from sales of consigned batteries. In order to
fund our operations, we also deferred payment of our accounts payable, payroll
taxes, and interest on secured and unsecured convertible notes payable.
As of September 30, 2012, we had a working capital deficiency of $9,667,419 as
compared to working capital deficiency of $4,241,177 at December 31, 2011. At
September 30, 2012 and December 31, 2011 we had an accumulated deficiency of
$29,085,376 and $22,395,105, respectively, and cash and cash equivalents of
$5,581 and $32,663, respectively. The decrease in our cash position is a result
of a net decrease of $122,066 in cash flow from operations and $245,016 of cash
used to pay down the Bridge Bank loan and bank overdraft, offset by $340,000 of
proceeds from the issuance of our secured subordinated convertible notes inMay
of 2012.
During 2009, under the terms of the agreement with the City of Los Angeles, we
requested and were issued an advance payment in the amount of $1,159,601 from
the City of Los Angeles. Our agreement with the City of Los Angeles terminated
prior to delivery of all of the vehicles we were required to deliver under the
agreement. To the extent we cannot successfully negotiate an agreement with the
City of Los Angeles that gives us additional time to deliver the remaining 10
vehicles and associated equipment to the City of Los Angeles under the same
terms as the original agreement, we may have to return up to the entire
$1,159,601 to the City of Los Angeles. During June 2012, we billed $630,000 to
the City of Los Angeles to upgrade six of the electric trucks previously
delivered to from lead acid batteries to lithium ion batteries. This billed
amount was applied as a reduction of the advance payment leaving an unpaid
balance of $529,601 on this advance. The Company anticipates to sell additional
products and services during the next 12 months to reduce the unpaid balance,
however the Company presently does not have the funds to pay this advance if
payment is requested by the City of Los Angeles.
34
Our available capital resources at September 30, 2012 consisted primarily of
approximately $5,581 in cash and cash equivalents. We expect that our future
available capital resources will consist primarily of cash on hand, cash
generated from our business, if any, and future debt and/or equity financings,
if any.
Cash used by operating activities for the first nine months of 2012 was $122,066
as compared to $4,611,384 of cash used in operating activities for first nine
months of 2011. During the first nine months of 2012, cash used by operating
activities included a net loss of $6,690,270, depreciation and amortization of
$24,471, amortization of note discount of $1,234,140, cost to induce conversion
of warrants of $671,809, fair value of common shares transferred by a
shareholder to settle debt of $33,100, write-down of $1,345,111 of
non-recoverable inventories, change in fair value of derivative liability of
$1,074,272, and net cash flows from operating assets and liabilities of
$2,185,301. Material changes in asset and liabilities at September 30, 2012 as
compared to December 31, 2011 that affected these results include:
· a decrease in accounts receivable of $675,901;
· a decrease in inventory of $112,982;
· an increase in prepaid expenses of $437;
· an increase in payroll taxes payable of $253,738;
· an increase in accounts payable of $1,805,407; and
· a decrease in customer advances of $662,290.
Cash used in investing activities totaled none for the first nine months of 2012
as compared to $30,410 of cash used in investing activities for the first nine
months of 2011.
Cash provided by financing activities totaled $94,984 for the first nine months
of 2012 as compared to $448,606 of cash provided by financing activities for the
first nine months of 2011.
Between February 2010 and April 2010, we raised an aggregate of $1,500,000
through the issuance of convertible notes to 11 accredited investors. The
convertible notes are convertible into an aggregate of 1,999,993 shares of our
common stock. In connection with this offering, we also issued three-year
warrants to purchase an aggregate of 1,999,993 shares of common stock at an
exercise price of $0.50 per share.
Between July 2010 and December 2010, we raised an aggregate of $850,000 through
the issuance of senior secured convertible debentures to 26 accredited
investors. The senior secured convertible debentures are secured by a security
interest in all of our personal property (subject to customary exceptions) and
were initially convertible into shares of our common stock at an initial
conversion price of $0.75 per share (subject to adjustment). In connection with
this offering, we also issued five-year warrants to purchase an aggregate of
850,000 shares of our common stock at an initial exercise price of $0.75 per
share (subject to adjustment). Under the adjustment provisions of the senior
secured convertible debentures and warrants, the conversion price of the senior
secured convertible debentures and the exercise price of the warrants were
reduced to $0.56 in connection with us issuing securities to raise capital
during 2010 and 2011. The terms of the senior secured convertible debentures
include a restriction on our ability to pay dividends on our common stock.
In December 2010, we raised $5,000,000 through the issuance of 7,812,500 shares
of our common stock and a five-year warrant to purchase up to 7,812,500 shares
of our common stock at an exercise price of $0.64 per share.
During the year ended December 31, 2011, we raised $148,666 in connection with
the issuance of 283,332 shares of our common stock upon the exercise of
warrants.
35
Effective March 31, 2012, we converted $500,000 of an unsecured loan from our
Chairman into the exercise price for the exercise of 1,250,000 warrants held by
Seven One Limited at an exercise price of $0.40 per share.
Effective March 31, 2012, we entered into Amendment and Exchange Agreements with
holders of $891,500 of our $916,500 of 10% unsecured notes payable that matured
on March 31, 2012. The terms of the Amendment and Exchange Agreements provide
that the maturity date of these notes, or the Amended Notes, be extended until
March 31, 2013, that the Amended Notes be secured under the terms of a security
agreement and that the Amended Notes be convertible into shares of our common
stock at an exercise price of $0.40 per share, subject to adjustment for a full
ratchet anti-dilution. In connection with the issuance of the Amended Notes, we
also issued three-year warrants to purchase up to 975,000 shares of common stock
at an exercise price of $0.40. per share, subject to full-ratchet anti-dilution
protection.
On May 18, 2012, we raised an aggregate of $340,000 through the issuance of 10%
secured subordinated convertible notes and warrants to 3 accredited investors.
The secured subordinated convertible notes are secured by a security interest in
all of our personal property (subject to customary exceptions and subordinated
to certain senior indebtedness) and are convertible into shares of our common
stock at an initial conversion price of $0.40 per share (subject to full ratchet
anti dilution adjustment). In connection with this offering, we also issued
five-year warrants to purchase an aggregate of 340,000 shares of our common
stock at an initial exercise price of $0.40 per share (subject to full ratchet
anti dilution adjustment).
Effective February 18, 2009, we entered into a Business Financing Agreement with
Bridge Bank, National Association, or Bridge Bank Agreement. The Bridge Bank
Agreement, as amended to date, provides us with an accounts receivable based
credit facility in the aggregate amount of up to $2,000,000.The credit facility
is formula-based and generally provides that the outstanding borrowings under
the credit facility may not exceed an aggregate of 80% of eligible accounts
receivable. We must immediately pay any advance made under the credit facility
within 90 days of the earlier of (i) the invoice date of the receivable that
substantiated the advance and (ii) the date on which the advance was made.
Interest on the credit facility is payable monthly. As of September 30, 2012,
there was no outstanding balance under the credit facility and $38,385 was
available. The interest rate is variable and is adjusted monthly based on the
per annum prime rate as published by Bridge Bank plus two percentage points,
subject to a minimum rate of 6.0% per annum. In the event of a default and
continuation of a default, Bridge Bank may accelerate the payment of the
principal balance requiring us to pay the entire indebtedness outstanding on
that date. Upon the occurrence and during the continuation of an event of
default, the interest rate applicable to the outstanding balance borrowed under
the credit facility will be increased by five percentage points above the per
annum interest rate that would otherwise be applicable. The credit facility is
secured by a continuing first priority security interest in all of our personal
property (subject to customary exceptions). The credit facility may be
terminated at any time by either party.
During 2012, we expect to incur approximately $200,000 in research and
development expenses. We believe that we presently have sufficient plant and
production equipment to meet our current operational plan and we do not intend
to dispose of any plant and equipment
We presently have 18 employees and expect to hire additional personnel to meet
production demands of increased product sales. Our present staff is sufficient
to meet our current operational plan for the remainder of 2012.
We believe that we will need additional liquidity and capital resources through
debt and/or equity financing to complete our entire existing and anticipated
future product backlog. As discussed in this report and in notes to our
financial statements included in this report, we have suffered recurring losses
from operations and at September 30, 2012, we had an accumulated deficit of
$9,452,061, and a working capital deficiency of $9,667,419.
36
During the three months ended March 31, 2012, we negotiated Amendment and
Exchange Agreements with holders of $891,500 of our 10% unsecured convertible
notes that matured on March 31, 2012. In connection with these Amendment and
Exchange Agreements, we issued new warrants that enable the warrant holders to
purchase up to 975,000 shares of our common stock at an exercise price per share
of $0.40. These warrants will have a contractual life of three years and expire
on March 31, 2015.
As of September 30, 2012, we are delinquent on $253,738 of payroll taxes which
may cause the Internal Revenue Service and California State employment tax
agencies to assess penalties or institute collection actions against us. We are
also in default on secured and unsecured convertible notes which have an
aggregate outstanding principal amount of $3,361,500 as a result of our
inability to pay $242,988 of accrued interest on these notes. As a result, the
holders of the convertible notes have the right to accelerate up to $3,529,350
of the outstanding principal and accrued and unpaid interest on these notes. We
are also in default on a unsecured convertible note in the principal amount of
$25,000 that matured on March 31, 2012. In addition, we have an aggregate of
$1,330,000 of 10% unsecured convertible notes payable that matured on September
1, 2012 and are in default. While we are attempting to renegotiate these debt
obligations we cannot assure you that we will be successful at renegotiating
some or all of these obligations. We are presently unable to pay our outstanding
obligations due to our limited cash resources and cannot assure you that will
have sufficient cash resources to pay our past due obligations.
Backlog
As of November 15, 2012, we had a backlog of $1,005,538. The amount of backlog
orders represents revenue that we anticipate recognizing in the future, as
evidenced by purchase orders and other purchase commitments received from
customers, but on which work has not yet been initiated or with respect to which
work is currently in progress. As of the date of this report 28% of our backlog
consists of a battery system, 26% consists of a drive system and the remainder
consists of vehicles and accessories. Our backlog does not reflect a $975,000
Department of Energy grant awarded to us, which we are awaiting contract
documents. Due to the delay in testing and approval of our drive system, we have
removed $15.9 million in drive systems from our backlog, until such time we have
assurances on production timelines from our customer, WGE, an affiliate of our
Chairman of the Board. We believe that the majority of our current backlog will
be shipped within the next 12 months. However, there can be no assurance that we
will be successful in fulfilling such orders and commitments in a timely manner
or that we will ultimately recognize as revenue the amounts reflected as
backlog.
37
Effects of Inflation
The impact of inflation and changing prices has not been significant on the
financial condition or results of operations of our company.
Impacts of New Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update, or ASU, No. 2011-04,
"Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRSs". ASU No. 2011-4 does not require additional fair value
measurements and is not intended to establish valuation standards or affect
valuation practices outside of financial reporting. The ASU is effective for
interim and annual periods beginning after December 15, 2011. We adopted ASU No.
2011-04 effective January 1, 2012. The updated guidance affects our fair value
disclosures, but will not affect our results of operations, financial condition
or liquidity.
In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive
Income". The ASU eliminates the option to present the components of other
comprehensive income as part of the statement of changes in shareholders'
equity, and instead requires consecutive presentation of the statement of net
income and other comprehensive income either in a continuous statement of
comprehensive income or in two separate but consecutive statements. ASU
No. 2011-5 is effective for interim and annual periods beginning after
December 15, 2011. We adopted ASU 2011-05 effective January 1, 2012 and it did
not affect our results of operations, financial condition or liquidity.
In September 2011, the FASB issued ASU 2011-08, "Testing Goodwill for
Impairment", an update to existing guidance on the assessment of goodwill
impairment. This update simplifies the assessment of goodwill for impairment by
allowing companies to consider qualitative factors to determine whether it is
more likely than not that the fair value of a reporting unit is less than its
carrying amount before performing the two step impairment review process. It
also amends the examples of events or circumstances that would be considered in
a goodwill impairment evaluation. The amendments are effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011. We adopted ASU 2011-08 effective January 1, 2012. The
adoption of this new accounting guidance will not have a significant effect on
our goodwill impairment assessments in the future.
In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities." This ASU requires an
entity to disclose information about offsetting and related arrangements to
enable users of its financial statements to understand the effect of those
arrangements on its financial position. ASU No. 2011-11 will be applied
retrospectively and is effective for annual and interim reporting periods
beginning on or after January 1, 2013. We do not expect adoption of this
standard to have a material impact on our results of operations, financial
condition, or liquidity.
We do not believe that the adoption of the above recent pronouncements will have
a material effect on our results of operations, financial position or cash flow.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the SEC did not or are not believed by management to have a
material impact on our present or future financial statements.
38
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