10-Q: QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE INC

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EDGAR Online via COMTEX) -- ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Some of the information in this report and in the documents that we incorporate by reference contains "forward-looking statements" that involve risks and uncertainties. These forward-looking statements come within the meaning of
The following risks and other factors could cause actual results, and actual events that occur, to differ materially from those contemplated by the forward-looking statements:
Risks Related to Liquidity and Capital Resources:
We have a history of operating losses and negative cash flow and anticipate continued net losses as we execute our long-term strategic plan and commercialization plan for our products.
We may not be able to maintain compliance with NASDAQ's continued listing requirements.
We anticipate that we will need to raise additional capital to take advantage of strategic business opportunities, to complete product and application development, to fund the solar initiatives of our subsidiary, Quantum Solar Energy, Inc., to fund future operating activities and contractual commitments, and/or payoff or refinance debt.
Our shareholders are subject to significant dilution upon the occurrence of certain events such as the exercise of outstanding options, warrants and convertible debt and the issuance of shares to pay debt.
Future sales of substantial amounts of our common stock could adversely affect its market price.
An increase in the principal amount due under a $10.0 million term note we issued on January 16, 2008, as amended could have a material effect on our financial statements as a result of an upward adjustment clause contained in the credit facility.
We may not be able to obtain waivers of potential defaults in the future from our lender if we do not meet future requirements associated with our amended credit facility and convertible promissory note.
We have a commitment to provide a 1.0 million euro guaranty to an affiliate's credit facility that could be called upon if the affiliate defaults on the credit facility in the future.
The market price and trading volume of our common stock may be volatile.
Our future operating results may fluctuate, which could result in a lower price for our common stock.
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Other Risks Related to our Business:
Fisker Automotive, Inc. represents a substantial portion of our anticipated revenues and will have to raise substantial additional capital for their business for us to be able to realize these potential revenue streams.
We depend on third-party suppliers for the supply of materials and components for our products, including our affiliate, Advanced Lithium Power, Inc. for our plug-in electric drive system.
Our business depends on the growth of hybrid, hydrogen and alternative fuel based vehicles and the solar industry.
Our ability to design and manufacture fuel systems and powertrains for fuel cell, hydrogen and hybrid applications that can be integrated into new vehicle platforms will be critical to our business and our ability to successfully complete existing development programs.
Our future fuel cell vehicle development and production revenue depends on our relationship with General Motors and General Motors' viability and commitment to the commercialization of fuel cell vehicles.
Our revenue is highly concentrated among a small number of customers.
Decrease in demand or price for solar cells could have an adverse effect on our financial statements.
Past acquisitions and any future acquisitions, equity investments, joint ventures, strategic alliances or other similar transactions may not be successful.
Future acquisitions could harm our operating results and share price.
We could become subject to stockholder litigation associated with our merger with and subsequent disposition of the Tecstar Automotive Group business segment.
We may never be able to introduce commercially viable hydrogen products and hybrid propulsion systems.
A mass market for hydrogen products and systems may never develop or may take longer to develop than anticipated.
Evolving customer design requirements, product specifications and testing procedures could cause order delays or cancellations.
The terms and enforceability of many of our strategic partner relationships are uncertain.
We currently face and will continue to face significant competition.
We depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success.
Our failure to obtain or maintain the right to use certain intellectual property may negatively affect our business.
We have limited experience manufacturing propulsion and fuel systems for fuel cell and hybrid applications on a commercial basis.
We may not meet our product development and commercialization milestones.
Our business could suffer if we fail to attract and maintain key personnel.
We may be subject to warranty claims, and our provision for warranty costs may not be sufficient.
Our business may be subject to product liability claims or product recalls, which could be expensive and could result in a diversion of management's attention.
Our insurance may not be sufficient.
Our business may become subject to future product certification regulations, which may impair our ability to market our products.
Failure to comply with applicable environmental and other laws and regulations could adversely affect our business and harm our results of operations.
New technologies could render our existing products obsolete.
Changes in environmental policies could hurt the market for our products.
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If we fail to maintain adequate internal controls we may not be able to produce reliable financial reports in a timely manner or prevent financial fraud.
Provisions of Delaware law and of our amended and restated certificate of incorporation and amended and restated bylaws may make a takeover or change in control more difficult.
The foregoing list of risk factors represents those material risks known to the Company but the list is not intended to be exhaustive. Reference should also be made to the factors set forth from time to time in our SEC reports, including but not limited to those set forth in the sections entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended April 30, 2008, in our Prospectus Supplement on Form 424(b)(5) filed on August 21, 2008, and in our amended Registration Statement on Form S-3/A filed on February 27, 2009. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update or revise any of these forward-looking statements even if experience or future changes show that the indicated results or events will not be realized.
All-forward looking statements contained in this quarterly report are made only as of the date hereof. We are under no obligation and we expressly disclaim any such obligation to update or alter our forward looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on forward-looking statements.
Overview
We are a fully integrated alternative energy company and a leader in the development and production of advanced propulsion systems, energy storage technologies, and alternative fuel vehicles. We believe that we are uniquely positioned to integrate advanced fuel system, electric drive and battery control system technologies for hydrogen and hybrid vehicles based on our years of experience in vehicle-level design, vehicle electronics and system integration.
Our portfolio of technologies include electronic controls, hybrid electric drive systems, hydrogen storage and metering systems, and alternative fuel technologies that enable fuel efficient, low emission hybrid, plug-in electric hybrid, fuel cell and alternative fuel vehicles. We provide powertrain engineering, system integration, manufacturing and assembly of packaged fuel systems and battery control systems for vehicles and other applications including fuel cells, hybrids, plug-in electric hybrid, alternative fuels, and hydrogen refueling. We also design, engineer and manufacture hybrid and fuel cell vehicles.
Our powertrain engineering, system integration, and assembly capabilities provide fast-to-market solutions to support the production of hybrid and plug-in hybrid, hydrogen-powered hybrid, fuel cell, and alternative fuel vehicles, as well as modular, transportable hydrogen refueling stations. Our customer base includes automotive Original Equipment Manufacturers (OEMs), military and governmental agencies, aerospace, and other strategic alliance partners.
Business Strategy
Our business strategy is to enhance our leadership position as a tier-one automotive supplier of advanced propulsion systems, alternative fuel systems, powertrain engineering, system integration, and assembly. We intend to leverage our alternative fuel, battery system, electronic control, electric and hybrid electric drive system, fuel cell, and hydrogen handling and refueling capabilities and experience to support the growing hybrid vehicle market and the early introduction of other advanced vehicle technologies. We intend to utilize our tier-one OEM design and assembly capabilities to provide fast-to-market solutions to OEMs for the early limited production business as hydrogen-powered hybrid vehicles, hybrids and plug-in hybrids move toward commercialization. We intend to leverage our advanced hydrogen and battery storage technologies into broader energy storage applications, including hybrid electric vehicles and energy storage for renewable energy, such as solar photovoltaic applications, as we establish Quantum as a fully integrated alternative energy company.
We also intend to continue to expand our investments and alliances in solar operations, including a US-based solar photovoltaic module manufacturing operation. In January 2008, we acquired an equity stake in Asola Advanced and Automotive Solar Systems GmbH (Asola), a German solar energy technology company that develops and manufactures high-efficiency photovoltaic modules for a number of innovative applications, including automotive, residential, and commercial applications. We expect Asola to continue to grow and expand in Europe, Africa and Asia. Asola has signed letters of intent for the formation of joint ventures with alliance partners in Spain, South Korea, Italy, and Morocco for the production and distribution of mono and poly-crystalline silicon solar modules with initial capacities of 30 MWp in each of the respective countries. Provided we can obtain funding at the Quantum Solar level, we plan to assemble solar photovoltaic modules in the United States beginning in fiscal 2010 and assess strategic opportunities to manufacture thin film solar photovoltaic modules as well as opportunities in solar panel distribution and integration.
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Business Segments and Other Equity Interests
We classify our business operations into two reporting segments: Quantum Fuel Systems and Corporate. The Corporate segment consists of general and administrative expenses incurred at the corporate level that are not directly attributable to the Quantum Fuel Systems segment and our anticipated future operating segments. Prior to January 16, 2008, we had a third business segment-the Tecstar Automotive Group business segment, which ceased operations on January 16, 2008 when we transferred substantially all of that segment's business operations to an affiliate of our lender. As a result of such transfer, the historical activities of the Tecstar Automotive Group business segment are now classified as discontinued operations. In addition, certain historical indirect expenses of the Corporate segment that were directly attributable to the Tecstar Automotive Group business activities and would not have been incurred had the Tecstar Automotive Group business segment not existed, have been reclassified and are reported as discontinued operations.
We have acquired or obtained ownership interests in three businesses that are not included in our current reporting segments:
On January 4, 2008, we acquired a 24.9% ownership interest in asola Advanced and Automotive Solar Systems GmbH (Asola), a solar module manufacturer located in Erfurt, Germany. We also have an option to acquire an additional 7.8% ownership interest in Asola in exchange for an additional payment of 0.1 million euro.
On August 7, 2007, we obtained a 62.0% interest in Fisker Automotive, Inc. (Fisker Automotive), a joint venture with Fisker Coachbuild, LLC. Our ownership interest in Fisker Automotive as of January 31, 2009 had declined to 21.9% as a result of financing activities completed by the joint venture. Fisker Automotive is developing a production-intent high-performance plug-in hybrid electric vehicle that it calls the "Fisker Karma" that is expected to have initial deliveries beginning in the fourth quarter of calendar year 2009.
On March 24, 2006, we obtained a 35.5% ownership interest in Vancouver, British Columbia-based Advanced Lithium Power Inc. (ALP). ALP is developing state-of-the-art lithium ion battery and control systems that control state-of-charge and provide for thermal management, resulting in high-performance energy storage. Our direct ownership interest in ALP as of January 31, 2009 was 16.1% as a result of financing activities completed by ALP. On February 6, 2009, we, along with Fisker Automotive and other investors, provided additional equity capital to ALP. As a result of this financing activity, Fisker Automotive received an ownership interest of 33.3% and our direct ownership interest decreased to 12.6%. We have also invested in convertible debentures that are convertible into ALP's common stock through December 31, 2009 and have warrants to purchase shares of ALP common stock that, upon conversion and exercise, would increase our direct ownership interest to approximately 20.8% and decrease Fisker Automotive's to 25.9%.
For each of these three businesses, our ownership does not rise to the level of a controlling interest but we are considered to be able to exert significant influence over their respective operations and accordingly, we account for our equity interests in these businesses under the equity method of accounting. Our respective share of the results of their operations is discussed under Non-Reporting Segment Results.
Quantum Fuel Systems Segment
Our Quantum Fuel Systems segment supplies our advanced propulsion and fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. Since 1997, we have sold approximately 20,000 fuel systems for alternative fuel vehicles, primarily to General Motors, which in turn have sold substantially all of these vehicles to its customers. We also provide our propulsion systems 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. These hydrogen systems and products are not currently manufactured in high volumes and will require additional product development. We expect a commercial market to develop for our hydrogen and fuel cell vehicle products in the future only if OEMs produce fuel cell applications and hydrogen products on a commercial basis and use our systems. We believe our plug-in electric hybrid propulsion system, referred to as the "Q-Drive," will become a commercial product within the next year.
A number of domestic and international automotive and industrial manufacturers are developing alternative clean power systems using fuel cells, hybrid systems or clean burning gaseous fuels in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. The U.S. Military has mandated a 5% per annum reduction in its internal fuel usage and is seeking fuel-efficient applications/vehicles to meet this mandate. Our products for these markets consist primarily of fuel storage, fuel delivery, electronic vehicle control systems and battery control systems, as well as system integration of our products into fuel cell, hybrid, and alternative fuel vehicles, and hydrogen refueling products, which includes the complete design of fuel cell and hybrid vehicles to demonstrate our advanced fuel systems expertise.
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In April 2008, we completed shipments of our packaged hydrogen fuel systems to General Motors in support of their Equinox fuel cell vehicle program that consists of a fleet of approximately 100 vehicles and we continue to provide service support to General Motors under this program.
In June 2008, we announced that we were awarded a contract by EDAG Engineering + Design AG (EDAG) to develop advanced hybrid vehicle powertrains for the Future Steel Vehicle program sponsored by World Auto Steel, the automotive group of the International Iron and Steel Institute (IISI). Under this contract, we designed, analyzed, and developed hybrid vehicle powertrain architectures that included advanced plug-in hybrid electric vehicles (PHEV) and hydrogen fuel cell hybrid vehicles. We worked with our affiliate, ALP, in developing the advanced lithium-ion battery system and controls for each of the vehicle architectures.
In July 2008, we announced that we had designed, developed and shipped a new generation of ultra light-weight advanced composite hydrogen storage units for Suzuki Motor Corporation's Fuel Cell Vehicle Program. These unique systems for Suzuki were developed, analyzed, and tested to meet the Japanese Government requirements.
In October 2008, we announced that we had designed, developed and shipped a new generation of hybrid electric vehicles incorporating hydrogen internal combustion engines to the US Army Tank Automotive Research Development and Engineering Center (TARDEC) for deployment at the Selfridge Air National Guard Base (SANGB). This deployment is part of a larger test and demonstration program involving TARDEC joint service partners around the country, in support of the US Army's 21st Century Base Initiative. The hydrogen-powered vehicles will reduce emissions and provide an opportunity to verify and utilize the existing hydrogen refueling infrastructure.
In December 2008, we submitted an application to the Department of Energy (DOE) under the Advanced Technology Vehicles Manufacturer Assistance Program for a direct loan of approximately $175 million. The loan will support capital expenditures and engineering integration by Quantum to develop and manufacture second-generation versions of the "Q-Drive" plug-in hybrid propulsion system for use in economical light-duty vehicles. The proposed project aims to significantly increase the U.S. average fuel economy of vehicles and includes assembly and testing of lithium ion battery packs and traction motors in the U.S., and development and production of vehicle-integrated solar photovoltaic roof modules in the U.S. We are currently responding to comments and additional information requests from the DOE and expect to submit the data requested within the next few weeks.
In January 2009 our affiliate, Fisker Automotive, showcased its first production car, a plug-in hybrid sports sedan known as the Fisker KARMA, and a plug-in hybrid hardtop convertible concept vehicle known as the Fisker Karma S, at the 2009 North American International Auto Show in Detroit, Michigan. Both of these vehicles incorporated our proprietary first-generation high-performance plug-in-hybrid electric vehicle architecture that we call "Q Drive" and we anticipate that future production of these and other Fisker models will incorporate our "Q-Drive" architecture.
Our Quantum Fuel Systems segment revenues and cash flows in the future will be highly dependent on the success of our plug-in hybrid electric architecture, the incorporation of our architecture into the Fisker Karma and other Fisker Automotive PHEV's, the success of the Fisker Automotive PHEVs and future hybrid vehicle programs, further advancement of OEM fuel cell technologies and our OEM customers' internal plans, spending levels and timing for pre-production development programs and commercial production. This segment depends on the industry-wide growth of the hydrogen hybrid, plug-in electric hybrid, fuel cell, and other alternative fuel markets, which in turn is dependent on regulations, laws, hydrogen availability and refueling, technology advancements (particularly battery technologies), and consumer adoption of alternative fuel, hybrid and hydrogen technologies on a commercial scale.
Our fuel storage systems must be able to withstand rigorous testing as individual components and as part of the fuel system of the vehicles. The fuel system as a whole, including the tank, regulator and fuel lines, need to comply with OEM vehicle requirements and applicable safety standards. Our systems are generally designed, validated and certified for short-term life, approximately three years, and are produced in accordance with requirements specified by our OEM customers. We currently have programs with OEMs to design, validate and certify systems for longer durability and for vehicles designed for commercialization.
Our Quantum Fuel Systems business is generally related to hybrid, hydrogen and alternative fuel vehicle development programs and product sales, which vary directly with the program timing and production schedules of our OEM and other customers. The market for these vehicles is sensitive to general economic conditions, government agency and commercial fleet spending and consumer preferences. The rate at which our customers sell hybrid, hydrogen or alternative fuel vehicles depends on their marketing and distribution strategy, as well as company specific inventory and incentive programs. Any
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significant reduction or increase in production of these vehicles by our OEM customers may have a material effect on our business. In October 2008, we were awarded an initial purchase order to supply prototype compressed natural gas (CNG) tanks to an OEM of passenger sedans targeted for taxi fleets in the United States. This initial purchase order could lead to a production level arrangement beginning over the next 9-15 months that would increase our revenues from CNG applications significantly. We also anticipate that future programs for CNG applications can be established in international markets, specifically Europe, China and India. In April, 2007, we signed a memorandum of understanding to establish a cooperative joint venture with a major automaker in China for the development and commercialization of hybrid and alternative fuel vehicles, manufacture of gaseous fuel components, and integration of advanced propulsion systems. We also signed a memorandum of understanding in May 2007 for the marketing, sales, and distribution in India of its leading alternative fuel vehicle products and systems for CNG, blends of natural gas and hydrogen, and liquid petroleum gas (LPG). We are currently in discussions with other parties to modify existing components and systems to meet specific vehicle applications for those markets.
Our industry is also dependent upon a limited number of third party suppliers of materials and components for our products. Any quality problems or supply shortages with respect to these components could negatively impact our business.
Corporate Segment
Our Corporate reportable segment consists of general and administrative expenses incurred at the corporate level that indirectly support our ongoing Quantum Fuel Systems operating segment and our anticipated future operating 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.
On August 27, 2008, start-up activities were initiated in Quantum Solar Energy, Inc. (Quantum Solar), a new venture formed by us along with Asola's majority shareholder, ConSolTec GmbH, based Irvine, CA for the production and distribution of mono and poly-crystalline silicon solar modules with initial capacity of 45 MWp. We own 85% of Quantum Solar and ConSolTec owns the remaining 15%. All activities of the consolidated entity are included in our Corporate Segment and to date principally consist of partial payments on long lead assembly equipment under construction for solar module production capability.
On November 11, 2008, we entered into a new facility lease arrangement with Cartwright Real Estate Holdings, LLC (Cartwright LLC) and Klein Investments Family Limited Partnership for a facility that currently houses our corporate offices in Irvine, California which we plan to serve as the manufacturing facility for Quantum Solar's business activities. The lease has an effective date of November 1, 2008 and expires on October 31, 2015. Our Chief Executive Officer owns a 50% interest in Cartwright LLC and an irrevocable trust established by our Chairman of the Board owns a 36.67% interest in Cartwright LLC.