U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-49629
QUANTUM FUEL SYSTEMS TECHNOLOGIES
WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
33-0933072
(IRS Employer
Identification Number)
25242 Arctic Ocean Drive, Lake Forest, CA 92630
(Address of principal executive offices, including zip code)
(949) 399-4500
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.02 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Securities Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted pursuant to rule 405 of the Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such
files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company (as defined in Exchange Act Rule 12b-2).
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
No
As of June 30, 2014, the aggregate market value of the registrant's voting and non-voting common equity held by non-
affiliates was $132,264,562.
As of March 13, 2015, the registrant had outstanding 27,878,545 shares of common stock.
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Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
TABLE OF CONTENTS
PART I
Item 1 Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Properties
Legal Proceedings
Item 3
Item 4 Not Applicable
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 5
Item 6
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Financial Statements and Supplementary Data
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accounting Fees and Services
PART IV
Item 15 Exhibits and Financial Statement Schedules
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Table of Contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
All statements included in this report and the documents incorporated herein by reference, other than statements of
historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended.
Forward-looking statements can generally be identified by words such as “may,” “could,” “will,” “should,” “assume,”
“expect,” “anticipate,” “plan,” “intend,” “believe,” “predict,” “estimate,” “forecast,” “outlook,” “potential,” or “continue,” or
the negative of these terms, and other comparable terminology. Examples of forward-looking statements made herein and in the
documents incorporated by reference herein include, but are not limited to, statements regarding:
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our belief that our total revenues in 2015 will increase by 40% to 50% over total revenues for 2014;
our belief that certain start up costs will be significantly lower in the future and our gross margins will exceed
20% in future periods once our systems strategy is fully implemented;
our belief that our liquidity is sufficient to cover our existing operations and obligations through at least
December 31, 2015;
our belief that we can make dependable estimates of the revenue and costs applicable to the various stages of a
contract;
our expectations regarding 2015 financial performance and results including results from operations for our Fuel
Storage & Systems segment;
our belief that we will be able to raise additional capital, if necessary, to repay debt, fund our future operations
and to support our growth plans as required over the next twelve months and beyond;
our belief that our current operating plan and the shift in our business strategy will allow us to achieve
profitability in the future;
our estimation of the amount of capital we will need to invest in equipment and infrastructure;
our belief that the facilities in Lake Forest, California are adequate for our current and expected product
manufacturing operations and original equipment manufacturer (“OEM”) development programs;
our belief that our outstanding receivable from Advanced Green Innovations and its affiliates is fully realizable;
our expectations of the level of growth in the natural gas, hybrid, plug-in hybrid and fuel cell and alternative fuel
industries;
our belief as to the number of complete compressed natural gas (“CNG”) systems we would be able to
manufacture and deliver on an annual basis;
our expectation that shipments of our CNG fuel storage systems will grow;
our expectation that engineering services related to the plug-in electric vehicle systems software development
program with Fisker Auto Group and the new hydrogen tank development program with an automotive OEM
alliance will increase;
our belief that the new product offerings, sales, marketing and training efforts over the last twelve months will
lead to increased sales, will strengthen our market position and help in furthering the CNG adoption rate;
our expectations regarding our significant customers and customer mix for the near term;
our expectation that our overall gross profit and margins on net product sales will increase in 2015;
our expectations regarding interest expense, internally funded research and development, selling, general and
administrative, and Corporate segment expenses;
our intention to focus our product development efforts on expanding our CNG storage and fuel systems product
offering and advancing our CNG storage and fuel system solutions technologies to further improve performance,
weight, and cost;
our expectation that the U.S., state and local governments will continue to support the advancement of alternative
fuel and renewable energy technologies through loans, grants and tax credits;
our belief that the price of natural gas will stay relatively low for the foreseeable future, which we expect will
continue to drive demand for our CNG tanks and fuel systems;
our belief that we are adequately insured for any products liability claims or product recalls;
our belief that natural gas is the most cost-effective fuel available on the market today and that this trend will
continue for the foreseeable future;
our belief that as the market adjusts to the underlying economic benefits of natural gas there could be
opportunities for the use of CNG in passenger vehicles;
our expectation that the trucking industry will continue to transition a greater percentage of their fleet vehicles to
run on natural gas and that such transition will generate increased demand for our CNG products;
our belief that there is significant and immediate opportunity for us in the CNG vehicle market;
our belief that a passenger CNG vehicle platform we are working on with an OEM will be commercially available
beginning in 2016;
our belief that we will be able to sell the remaining assets of Schneider Power within our expected time frame;
our belief that our existing engineering contracts will lead to future sales of our storage products and integrated
systems;
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our belief that our business decision and strategy to supply complete CNG systems direct to the OEMs and fleets
will create greater long term value for our stockholders;
our belief that we have a competitive advantage over our competitors;
our expectation that we will face increased competition in the future as new competitors enter the CNG market
and advanced technologies become available;
the impact that new accounting pronouncements will have on our financial statements;
our expectation that we will prevail on any appeal filed by Iroquois;
our expectation that the level of gains or losses on derivative instruments will be immaterial in future periods; and
our expectation that the market price of our common stock will continue to fluctuate significantly.
Although we believe the expectations and intentions reflected in our forward-looking statements are reasonable, we
cannot assure you that these expectations and intentions will prove to be correct. Various risks and other factors, including
those identified in this report under the “Risk Factors” section and those included in our other public filings that are
incorporated herein by reference, could cause actual results, and actual events that occur, to differ materially from those
contemplated by the forward looking statements.
These forward-looking statements represent our estimates and assumptions only as of the date made. We undertake no
duty to update these forward-looking statements after the date of this report, except as required by law, even though our
situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.
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PART I
Item 1. Business.
Background
Unless the context otherwise requires, “we,” “our,” “us,” “Quantum” and similar expressions refers to Quantum Fuel
Systems Technologies Worldwide, Inc. and Subsidiaries.
We were formed as a Delaware corporation in October 2000, and became a publicly traded company on July 23, 2002.
Our common stock trades on The Nasdaq Capital Market under the symbol “QTWW.” Our principal office is located in Lake
Forest, California.
Company Overview
We are a leader in the innovation, development and production of compressed natural gas (CNG) fuel storage tanks
and packaged fuel storage systems and the integration of vehicle system technologies, including engine and vehicle control
systems and drivetrains.
We produce one of the most innovative, advanced and light-weight compressed natural gas (CNG) storage tanks in the
world, and supply these tanks, in addition to fully-integrated natural gas storage systems, to truck and automotive original
equipment manufacturers (OEM) and aftermarket and OEM truck integrators. We also provide low emission and fast-to-market
solutions to support the integration and production of natural gas and hydrogen fuel storage systems, hybrid technologies and
refueling systems and dispensers.
We classify our business operations into three reporting segments: Fuel Storage & Systems, Renewable Energy and
Corporate. The Renewable Energy business segment, consisting entirely of the operations of Schneider Power Inc. (Schneider
Power), is classified as discontinued operations as discussed further below.
Fuel Storage & Systems Segment
Our Fuel Storage & Systems segment generates revenues from two sources: product sales and contract services.
Product sales are derived primarily from the sale of Type IV high pressure compressed natural gas (CNG) storage tanks and
packaged fuel storage modules and systems for a variety of heavy, medium and light-duty trucks and passenger vehicles.
Contract services revenue is generated by providing engineering design and support to Original Equipment Manufacturers
(OEMs), entities specializing in natural gas retrofits and material science, governmental agencies and other customers, so that
our fuel storage systems and advanced propulsion systems integrate and operate with our customers’ CNG, hybrid or fuel cell
applications.
Our products and services are designed to offer our customers a clean and cost-effective alternative to gasoline and
diesel powered vehicles, which, in turn, enables our customers to benefit from significantly lower fuel prices, contribute to a
cleaner environment, meet sustainability and average fuel economy mandates, and help our country reduce its dependence on
foreign oil. The primary market for our CNG tanks and systems is currently heavy, medium and light-duty trucks. We sell our
products and services direct to vehicle level OEMs, system integrators for OEM level applications, fleets and through
aftermarket integrators.
The cost savings offered to fleets by using natural gas as a fuel compared to gasoline or diesel is significant and
compelling. Natural gas is the cheapest transportation fuel available on the market today and we expect the trucking industry to
continue to transition a greater percentage of their fleet vehicles to run on natural gas systems due to the current favorable
economics of natural gas. As the market continues to adjust to the underlying economic benefits of natural gas, we believe
there will be substantial opportunities in the passenger vehicle market.
We offer a variety of packaged fuel storage systems, including our Q-CabLITE and Q-RailLITE, both of which are pre-
assembled, quality tested and fully-validated CNG storage modules for quick integration onto a variety of vehicle platforms.
Our CNG packaged storage systems are comprised of high pressure Type IV tanks and fuel delivery regulation and control
systems designed to improve efficiency, enhance power output, and reduce harmful emissions. Our integrated and packaged
systems typically incorporate our Q-Lite® line of composite tanks and leverage our expertise in safety-critical structural design,
high strength materials and topology optimization to provide intelligent lightweight systems that maximize on-board fuel
storage and contribute to superior fuel economy, handling and low emission performance. Our CNG packaged fuel systems for
heavy duty truck applications are also designed to maximize range, with our largest systems providing on-board CNG fuel
storage for Class 8 trucks of up to 216 diesel gallon equivalents.
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Our Q-Lite tanks are capable of storage at up to 10,000 pounds per square inch (psi). Due to the lightweight nature of
our storage tanks, less structure for mounting support is required, thereby reducing the overall storage system weight and
increasing available payload. In addition, our large volume tanks maximize on-board storage capacity.
Our CNG tanks have been tested for compliance with the U.S. industry standard CSA NGV2 and in some cases to the
Canadian CSA B51 Part II standard and to the United Nations ECE Regulation No. 110. Our tanks meet the U.S. Federal Motor
Vehicles Safety Standard FMVSS 304. Our tanks are available for sale in the United States and certain tank models are
available for sale in Europe, Canada, Asia, and Australia.
In addition to our CNG and hydrogen storage systems, we design, develop and supply hybrid and plug-in electric
vehicle (PHEV) systems, which include complete powertrain systems or sub-systems and components and are designed to
improve vehicle fuel economy and performance, leverage existing gas station infrastructure, and utilize home-based battery
recharging. Our proprietary software and control systems are integrated into base vehicle components such as the engine,
generator, motor, inverters, battery system, power converters, and charger to provide customized hybrid and PHEV drive-train
technologies and systems and can be packaged utilizing different designs, technologies and subsystems.
On November 3, 2014, we announced that we had recently entered into an agreement with Fisker Automotive and
Technologies Group LLC ("Fisker Auto Group") pursuant to which we will license our plug-in hybrid control software to
Fisker Auto Group and, in return, receive an initial payment of $2.0 million in November 2014, and a second payment of $2.0
million on or before October 27, 2015. Under these terms, the software license provided to Fisker Auto Group will support
Fisker Auto Group's re-launch of the Karma vehicle and, upon our receipt of the second $2.0 million installment, the license
granted to Fisker Auto Group will be expanded to include use on Fisker Auto Group's planned Atlantic vehicle line. The
agreement also gives Fisker Auto Group the option to acquire joint-ownership of the hybrid control software for the Karma,
Atlantic and future platforms for additional consideration on or before October 27, 2016. In addition, the agreement provides
that we will be Fisker Auto Group's exclusive software development partner until at least such time that Fisker Auto Group
exercises its option to acquire joint-ownership of the hybrid control software, including two specific agreed upon projects that
comprise approximately $1.35 million of software development services to be provided to Fisker Auto Group prior to October
27, 2015.
Discontinued Operations-Renewable Energy Segment Held For Sale
Our Renewable Energy segment consists solely of the business operations of our wholly-owned subsidiary, Schneider
Power, which we acquired on April 16, 2010. Schneider Power, previously headquartered in Toronto, Ontario, Canada, and now
administered out of our Lake Forest, California facility beginning in January 2014, is an independent wind power producer and
holder of interests in certain renewable energy projects. We committed to a plan to sell the assets and operations of Schneider
Power in 2012, have completed sales of certain assets of Schneider Power through December 31, 2014 and are actively
pursuing the sale of all of the remaining Schneider Power assets, including the 10.0 megawatt (MW) Zephyr wind farm
operating asset. As a result of these actions and our expectations for a completion of a sale of the remaining assets and
operations within the next year, we report the historical activities and balances of Schneider Power as discontinued operations
held for sale.
Corporate Segment
Our Corporate segment consists of general and administrative expenses incurred at the corporate level that are not
directly attributable to the Fuel Storage & Systems or Renewable Energy business 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.
Products and Services
All of our products are designed, tested and validated in accordance with our own internal requirements, as well as tested
for compliance to national and international industry standards under third-party approval by TÜV and verified for
conformance to regulatory codes, including the U.S. Federal Motor Vehicles Safety Standard FMVSS 304.
Our products and services include:
Products:
High pressure gaseous fuel tanks. Our Q-Lite tanks are advanced composite, ultra-lightweight tanks that provide
efficient storage of compressed natural gas or hydrogen at pressures up to 10,000 psi (1000 bar). We carry in stock
several different tank sizes ranging in capacity from 234 liters to 603 liters and have the expertise and capability to
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design specific tank sizes to accommodate our customer’s needs. Our product line includes tanks that can be strap-
mounted or neck-mounted depending upon our customer’s required application.
Packaged fuel system modules. Our Q-CabLITE and Q-RailLITE modules are pre-assembled, quality tested and fully
validated packaged fuel storage modules, which incorporate up to 3 high pressure gaseous tanks with fuel delivery
regulation and control systems. These modules are designed for efficient integration onto a customer’s vehicle
platform.
Gaseous fuel electronic vehicle control systems and software. Our proprietary software is incorporated into certain
of our alternative fuel systems. Our software is OEM level and incorporates torque security features per ISO
26262 in a Spice Level 3 compliant package. These control systems monitor and optimize electrical control
strategies and/or gaseous fuel flow to drive systems to meet our customer’s and regulatory requirements.
Hybrid control & motor control software systems. Our hybrid control software systems optimize the operation of
all hybrid and PHEV subsystems including the engine, generator, motor, inverters, battery system, power
converters, and charger to maximize fuel economy while minimizing emissions.
Inverters and Motors. We provide customization of inverters and a variety of motors as an integral subsystem to
our drive systems. The inverters are very efficient and compact devices which have been specified and/or designed
by us. Our drive systems use primarily Interior Permanent Magnet motors due to their substantially higher
efficiency, especially at low speeds. For products not available off-the-shelf, we will have them contract
manufactured to meet product or customer specifications.
Engine/Generator and Fuel Cell Power. We provide power generating systems for use as a prime-mover or range
extender. We optimize engines to operate at high efficiency and with low emissions on conventional or alternative
fuels. We develop specifications and contract production of customized generators to maximize vehicle efficiency.
We also have experience integrating fuel cells and hydrogen storage and fuel delivery systems into vehicle
applications.
Services:
Fuel Storage and System Design and Validation. We design, develop, engineer and validate complete fuel storage
systems for natural gas vehicle applications ranging from passenger vehicles to heavy duty trucks. We also
integrate electric motors, inverters, generators, and electronic vehicle control components into hybrid and PHEVs.
Further, we employ rapid prototyping techniques, which accelerate the iterative design process and result in a more
accurate and high performance design.
Testing and Validation. To increase the likelihood of high success rates at the system level, we perform component,
subsystem and system testing and validation. We have test equipment including engine and chassis dynamometers
to test and validate most automotive devices. These procedures must satisfy our own internal requirements,
customer-specific requirements and industry standards. If no suitable procedures exist, we generate requirements
for the customer.
Certification and Compliance. Our regulatory and certification engineers endeavor to implement the latest
emissions and safety regulations in efforts to ensure the proper certification and ongoing compliance of our
products and our business. We certify complete vehicles in our CARB and EPA certified test lab.
Production Engineering and Manufacturing Process Development. We provide complete production engineering
and manufacturing process development for our limited volume production process as a tier-one OEM automotive
supplier and for certain military applications.
Vehicle Level Assembly. We develop and manage the assembly process for integration of our systems into end
products at our or our customer’s facility for low to high volume applications. We also build complete concept
vehicles.
Training. We develop comprehensive technical training for customers that sell and service our products as well as
for those that use our products.
Service and Warranty. We have extensive capabilities in developing service procedures, diagnostics, tools, and
complete repair/maintenance programs for OEMs. We also provide technical support over the telephone or at
customer sites to resolve technical issues.
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Business Strategy
Our strategy is to leverage our CNG storage systems, tier I automotive OEM supplier experience, our proprietary
technologies and products and our capabilities in gaseous fuel storage and fuel system integration and vehicle level assembly in
order to be an industry leader in the innovation, development, production and integration of lightweight CNG, fuel storage
systems. Our business strategy includes:
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Focusing our efforts on natural gas vehicle programs with short-term, high-volume commercialization
opportunities.
• Advancing our market position as a leader in lightweight tank technology through improved product branding and
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enhanced market profile as a “one-stop-shop” for complete CNG storage system solutions.
Pursuing existing and new opportunities for our CNG storage and fuel systems solutions in the passenger vehicle
and light, medium and heavy duty truck markets.
• Developing our existing relationships and creating new relationships with OEMs, fleets and other CNG market
participants to support the delivery of integrated solutions.
Competition
We face competition from a number of Type IV tank manufacturers and CNG storage system providers. Our largest CNG
storage system competitor is Agility Fuel Systems. In light of the worldwide growth in demand for CNG fuel systems, we
expect new competitors to enter into the market. In addition to overall pricing, the principal competitive factors in the markets
in which we operate include product features, specifically size and weight, relative price and performance, product quality and
reliability, design innovation, and service and support.
We believe that our depth of experience in gaseous fuel storage and as an automotive Tier 1 system integrator, our
industry-leading lightweight design and the optimized structural mounting and increased driving range provided by tanks
together with our systematic approach to vehicle integration, testing and validation capabilities and established engineering
processes provide us with a competitive advantage.
With respect to our hybrid and PHEV fuel systems, we believe that our competitive advantage over current and potential
future competitors is our software development, technology portfolio and integration expertise derived from many years of
experience with advanced propulsion systems combined with our belief that we can bring a new system to market faster than
our competitors.
Raw Materials
With respect to our storage tanks, carbon fiber represents the largest component cost. We currently purchase our carbon
fiber from multiple sources, including Toray Industries, Inc. There are a number of carbon fiber suppliers in the marketplace
and we do not expect shortage of this raw material in the future based on announced expansion plans and industry reports.
Customers
A large percentage of our revenue is typically derived from a small number of customers and we expect this trend to
continue for the foreseeable future. Agility Fuel Systems comprised 28% and 45%, Ryder System, Inc. and its affiliates
comprised 12% and 0%, General Motors comprised 11% and 8%, and Advanced Green Innovations, LLC and its affiliates
comprised 9% and 12%, of the total consolidated revenue for continuing operations reported for the years ended December 31,
2014 and 2013, respectively.
Backlog
At December 31, 2014, our total product backlog was $17.8 million, which is primarily associated with CNG fuel storage
tanks and systems.
Intellectual Property
We rely primarily on patent and trade secret laws to protect our intellectual property rights. Although we recognize the
importance of patent and trade secret laws and, when appropriate, seek the advantages and benefits these laws offer, we believe
that our growth and future success will be more dependent on factors such as the knowledge, experience and expertise of our
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personnel, new product introductions, continued emphasis on innovation, research and development and creation of “know-
how.” We currently have patents that have been issued or are pending in the United States, Canada, Europe and/or Asia.
Although the continued development and protection of our intellectual property is important to our future success, the loss of
any one particular patent would not have a material adverse affect on our business.
Safety, Regulation, and Product Certification
The manufacture, distribution and sale of our products are subject to governmental regulations in the United States at the
federal, state and local levels. The most extensive regulations are promulgated under the National Traffic and Motor Vehicle
Safety Act, which, among other things, empowers the National Highway Traffic Safety Administration (NHTSA) to require a
manufacturer to remedy certain “defects related to motor vehicle safety” or vehicles that fail to conform to all applicable
federal motor vehicle safety standards.
Federal Motor Vehicle Safety Standards are promulgated by the NHTSA. Many of our products are affected by these
standards. We engage various testing companies, which also perform testing for NHTSA, to test certain of our products.
NHTSA can require automotive manufacturers to recall products. We have not experienced any material recalls.
Like other automotive OEMs and manufacturers of automotive component parts, we may be subject to claims that our
products caused or contributed to damage or injury sustained in vehicle accidents or may be required to recall products deemed
to contain defects related to motor vehicle safety. We believe that we are adequately insured for any claims. However, any such
claims in excess of our insurance coverage or material product recall expenses could adversely affect our financial condition
and results of operations. Promulgation of additional safety standards in the future could require us to incur additional testing
and engineering expenses that could adversely affect our results of operations.
We must obtain emission compliance certification from the Environmental Protection Agency (EPA) to introduce
vehicles or engines into commerce in the United States, and from the California Air Resources Board to introduce vehicles or
engines into commerce in California. Certification requires that each vehicle or engine meet specific component, subsystem
and vehicle-level durability, emission, evaporative, and idle tests. Both federal and state authorities have various environmental
control standards relating to air, water and noise pollution that affect our business and operations.
Furthermore, we strive to meet stringent industry standards set by industry and standards associations, codes set by
various regulatory bodies and industry practices, including the U.S. Department of Transportation Federal Motor Vehicle Safety
Standards, the California Air Resources Board, the Environmental Protection Agency, the National Fire Protection Association,
United Nations Economic Commission for Europe (UNECE), Canadian Registration Authorities, NGV America, European
Integrated Hydrogen Project, Kouatsugasu Hoan Kyokai, Underwriters Laboratories, the International Standards Organization,
the Society of Automotive Engineers and CSA America. Compliance to standards and jurisdictional approvals enhance the
acceptability of our products in the domestic and international marketplace.
Our international sales are subject to foreign tariffs and taxes, changes in which are difficult to predict and which can
adversely affect sales. Our products must also comply with government safety standards imposed in our foreign markets.
Research and Product Development
Our targeted research and development activities in the near term are as follows:
CNG Tank Advancements-designing and engineering derivative composite pressure vessels utilizing new and lower
cost materials, processes and other advancements and economies of scope to drive costs out of the storage system,
provide alternative light-weight solutions and address extended range.
Packaged Fuel System Module Advancements-designing and engineering next generation fuel system modules that
reduce weight, enhance fuel storage packaging efficiencies, and reduce costs of the overall system.
Vehicle Control Systems, Electronic Controls and Software Systems-designing and optimizing control systems and
strategies to maximize vehicle performance and range, including engine control design and selection, engine
modeling, calibration and software design for engine and emission controls.
Advanced Emissions testing-performing emissions and certification testing on vehicles that utilize California Air
Resources Board (CARB) and U.S. Environmental Protection Agency (EPA) approved advanced technology to test
low emission vehicles.
Component and Subsystem Test Facilities-extended vibration, shock loads and accelerations, extreme temperature
exposure from -85° F to 392° F, thermal shock, cyclic corrosion, extended salt, fog, humidity and dryness cycling,
severe acid and alkali corrosion, flow simulations, and pneumatic leak checks.
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Employees
As of March 13, 2015, we had 169 full-time employees and 3 part-time employees. During peak production periods, we
may increase our work force. Historically, the available labor force has been adequate to meet such periodic requirements.
None of our employees are represented by a collective bargaining agreement.
Financial Information about Segments, Customer Concentrations and Geographic Areas
Additional information regarding our business segments, certain customer concentrations and geographic areas where we
have revenues is contained in Notes 14 and 15 to our Consolidated Financial Statements in Part IV, Item 15(a)(1) of this Annual
Report.
Reverse Stock Split
On July 30, 2013, we implemented a reverse stock split pursuant to which all classes of issued and outstanding shares of
our common stock at the close of business on such date were combined and reconstituted into a smaller number of shares of
common stock in a ratio of 1 share of common stock for every 4 shares of common stock. Concurrently, our authorized shares
of common stock were reduced proportionately from 150,000,000 to 37,500,000, of which 25,000 shares were designated as
Series B non-voting common stock. The reverse stock split did not affect our 20,000,000 shares of authorized preferred stock.
The share information contained within this report, including the accompanying consolidated financial statements and
footnotes, have been retroactively adjusted to reflect the effects of the reverse stock split.
Certificate of Incorporation
On February 26, 2014, our certificate of incorporation was amended to retire the 25,000 authorized shares of Series B
common stock and on May 16, 2014 our certificate of incorporation was further amended to increase the number of shares of
common stock $0.02 par value, we are authorized to issue to 50,000,000. We are also authorized to issue 20,000,000 shares of
preferred stock.
Available Information
We make our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and all
amendments to these reports available free of charge on our corporate website as soon as reasonably practicable after such
reports are filed with, or furnished to, the SEC. Our corporate website is located at www.qtww.com. None of the information
contained on our website is intended to be part of this report or incorporated by reference herein.
You may also read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street,
NE, Washington DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at
1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy statements and other information we file with the
SEC. The address of the SEC’s web site is www.sec.gov.
Item 1A. Risk Factors.
This Annual Report, including the Management’s Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section
21E of the Securities Exchange Act of 1934. We face a number of risks and uncertainties that could cause actual results or
events to differ materially from those contained in any forward-looking statement. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should not be placed on these forward-looking
statements, which apply only as of the date of this Annual Report. We undertake no obligation to release publicly the result of
any revisions to these forward-looking statements that may be made to reflect events or circumstances in the future or to reflect
the occurrence of unanticipated events. We discuss all known material risks to our business below. The risks and uncertainties
described are not the only ones facing us. Additional risks and uncertainties may also adversely impair our business
operations. If any of the following risks actually occur, our business, our financial condition or our results of operations could
suffer significantly.
Risks Related to Liquidity and Capital Resources
We have a history of operating losses and negative cash flows and we may need to raise additional funds to finance our
operations.
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We have a history of operating losses and negative operating cash flows. We incurred net losses from continuing
operations before income taxes of $14.5 million and $20.0 million for the fiscal years ended December 31, 2014 and 2013,
respectively.
We have significantly improved our liquidity position over the past couple of months and believe that we have sufficient
liquidity to cover existing operations and obligations through at least December 31, 2015, and a long-term strategy in place that
will allow us to operate profitably in the future. However, if we fail to execute our strategy or if there is a change in the market
conditions or any other assumptions we used in formulating our liquidity analysis and business strategy, our liquidity analysis
may not be accurate and our long-term strategy may not be successful in achieving profitability. As a result, investors could
lose confidence in our company and the value of our common stock could decline.
We have a substantial amount of indebtedness. If we are unable to repay our indebtedness or refinance or extend such
indebtedness, it would have a material adverse effect on our financial condition and ability to continue as a going concern.
As of December 31, 2014, we had approximately $16.9 million of principal and interest owing under our debt
obligations related to our continuing operations and $19.6 million in debt financing associated with the discontinued operations
of Schneider Power's 10.0 MW Zephyr wind farm that is classified as held for sale. Our debt related to our continuing
operations includes $1.6 million owed to a finance company that is secured by specific equipment assets, $4.5 million owed to
our senior secured lender, which is secured by substantially all of our assets used in continuing operations, and $10.7 million
owed to convertible note holders that have a second lien position on substantially all of our assets used in continuing
operations.
If we do not have sufficient capital to repay these obligations when they become due or if we cannot otherwise refinance
these debt obligations prior to their maturity, it would have a material adverse effect on our business, our ability to raise capital
in the future and our ability to continue as a going concern. Further, if we were to default on the secured debt, the lenders would
have the right as secured creditors to foreclose on the assets securing the debt.
Our revolving line of credit facility with our senior secured lender contains certain affirmative and negative covenants
which could restrict the manner in which we conduct business and, if we fail to comply with such covenants, it could restrict
our ability to access the full amount available under the credit facility and result in the acceleration of the debt extended, if
any, pursuant to such credit facility.
Our credit facility with our senior secured lender, as last amended on February 10, 2015, provides us with a $7.5 million
line of credit and is secured by substantially all of the assets used in our continuing operations, contains certain financial
covenants and other restrictions applicable to us which could reduce our flexibility in conducting our operations by limiting our
ability to borrow money and may create a risk of default on our debt if we cannot continue to satisfy these covenants.
If we default in any of the affirmative or negative covenants applicable to us or otherwise default in the credit facility,
the lender could, among other things, declare a default, accelerate the maturity date of any outstanding indebtedness and, if we
are unable to repay, exercise its rights under the credit facility to, among other things, foreclose on our assets.
Risks Related to Our Business
Risks Related to our Fuel Storage and Systems Segment
We are dependent on a limited number of customers.
A large percentage of our revenue is typically derived from a small number of customers. Revenues from our largest
customer comprised 28% and 45% of our total revenues for the years ended December 31, 2014 and 2013, respectively, and
revenues from our top three customers comprised 51% and 66% of our total revenues for the year ended December 31, 2014
and 2013, respectively. We expect this trend to continue for the foreseeable future. In the event there is an unfavorable change
in our business relationship with our significant customers, it could have a material adverse effect on our business and financial
results.
Our business plan is focused on CNG and our expectations regarding revenue growth for calendar 2015 is based on a
number of assumptions, which if incorrect, would have a material effect on our actual revenues and our business.
Our business plan for calendar 2015 is highly focused and dependent on CNG and contemplates that our revenues from
CNG fuel storage tanks and fuel module systems will increase significantly from historical levels, and our business strategy
contemplates continued growth in the CNG vehicle segment. We are currently estimating that our total revenue for 2015 will
exceed our total revenue for 2014 by approximately 40% to 50%. We base our estimate for total revenue on a number of
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assumptions including, without limitation, that market growth for CNG trucks and demand for our CNG fuel storage products
will continue to increase, that our relationships with our customers will continue for the foreseeable future, that the cost of
natural gas will continue to be lower than gasoline and diesel by an amount that justifies conversion to CNG, the decision by
fleet managers to switch to CNG and whether we can maintain a competitive advantage over our competitors. In the event that
any of our assumptions are inaccurate, it could have a material effect on our business plan and projected revenues for calendar
2015.
Fuel price differentials are difficult to predict and may be less favorable in the future. If the price of natural gas does not
remain sufficiently below the prices of gasoline and diesel, potential customers will have less incentive to purchase natural
gas vehicles, which would limit our growth.
The growth of the natural gas vehicle market, CNG adoption rates, and our ability to grow the business depends in large part
on the price differential between natural gas, diesel and gasoline fuels. Natural gas vehicles cost more than comparable gasoline
or diesel powered vehicles because the components needed for a vehicle to use natural gas add to a vehicle’s base cost. If the
price of natural gas does not remain sufficiently below the prices of gasoline and diesel, operators may delay the purchase of
natural gas vehicles or decide not to convert their existing vehicles to run on natural gas because of a perceived inability to
recover the additional costs of acquiring or converting to natural gas vehicles in a timely manner. Natural gas has generally
been, and currently is, less expensive than diesel fuel in many jurisdictions; however, the price differential has decreased over
the past several months. The price differential is affected by many factors, including changes in domestic and foreign supplies
of natural gas and crude oil, availability of shale gas, domestic storage levels, pipeline transportation capacity for natural gas,
refining capacity for crude oil, weather conditions, level of consumer demand, economic conditions, and domestic and foreign
government regulations (including, without limitation, excise and fuel tax policies) and political conditions. There can be no
assurance that natural gas will remain less expensive than diesel and gasoline fuels. Any decrease in the cost savings offered by
the use of natural gas vehicles could result in fewer purchases of or conversions to natural gas vehicles, which would cause our
customer base and our sales of fuel storage systems and services to decrease and our business to suffer.
Advanced Green Innovations, LLC (“AGI”) and its affiliate ZHRO Solutions, LLC (“ZHRO”) recent default in the terms of
a Debt Repayment Agreement could materially affect our business and financial results.
AGI, and its affiliate, ZHRO owe us approximately $2.8 million for engineering, design and development services as of
December 31, 2014, of which $2.2 million was invoiced by us through October 3, 2014, and $0.6 million represented unbilled
receivables as of October 3, 2014. On December 11, 2014, we, AGI, ZHRO and their affiliate, Advanced Green Technologies,
LLC (“AGT”), entered into a Debt Repayment Agreement and Pledge Agreement with respect to the $2.2 million of billed
receivables. AGI and ZHRO are currently in default of the terms of the Debt Repayment Agreement due to their failure to
timely make the $300,000 payment due on December 25, 2014, the $200,000 payment due on January 31, 2015, and the
$200,000 payment due on February 28, 2015. To date, AGI and ZHRO have paid us $150,000 of the $700,000 due under the
Debt Repayment Agreement.
While we continue to believe that AGI will be able to raise sufficient capital to continue their operations and pay the
amounts owed to us or that we will be able to recover all or a substantial portion of the amount owed to us by AGI and ZHRO
from the collateral securing the obligation, if they are unsuccessful in raising sufficient capital or if we are unable to sell or
otherwise realize an amount on the collateral sufficient to repay the amount owed to us, we may have to specifically reserve
and/or write-off amounts owed to us if we determine in the future that the amounts may not be fully realizable and such write-
off would have a material impact on our liquidity. The collateral that we received to secure AGI’s and ZHRO’s performance of
their obligations under the Debt Repayment Agreement is comprised of all of AGI’s and AGT’s ownership interests in East
Camelback, LLC, consisting of 510 voting units (51.0%), 474 non-voting units and 47.5% of the participation rights in East
Camelback, LLC. East Camelback, LLC indirectly owns 100% of a commercial building, consisting of approximately 23,700
square feet of office space, located in Phoenix, Arizona. Given the nature of the collateral, if we foreclose on the collateral, we
cannot provide any assurance of when we would be able to sell or otherwise monetize the foreclosed collateral or how much we
would be able to realize upon the sale of such collateral. In addition, if AGI or ZHRO were to become subject to bankruptcy
proceedings, our preference in the collateral could be avoided, and we could lose the benefit of the security on the collateral.
If Iroquois Master Fund’s appeal is successful, we may have to pay them additional damages and legal fees.
On December 15, 2014, Iroquois Master Fund (“Iroquois”) filed a Notice of Appeal with the United States Court of Appeals
for the Second Circuit from the judgment entered by the United States District Court for the Southern District of New York.
Although we believe that we will prevail on appeal, we can provide no assurance that the Second Circuit will uphold District
Court’s judgment. If the Second Circuit were to reverse the District Court’s decision, then we may have to pay Iroquois
additional damages and reimburse them for their reasonable attorney fees incurred in connection with the appeal.
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We depend on third-party suppliers for the supply of materials and components used in our products and storage systems,
some of which are single sourced. An interruption in this supply or switching to an alternative material or component could
adversely affect our ability to deliver our storage systems and tanks.
We depend on third-party suppliers for the supply of materials and components. Certain of these suppliers are single
source. Any significant change in a material or component could require us to revalidate a tank or storage system which would
cause delays due to re-validation or re-certification of the storage system. In the event these delays are lengthy and that the cost
of these materials and/or components increase or our suppliers experience production delays or constraints, it could have a
material adverse affect on our business and financial results.
Our ability to design and manufacture fuel systems that can be integrated into vehicle platforms is critical to our business.
We are currently manufacturing, integrating or developing CNG fuel storage systems for production vehicles and
aftermarket programs. These CNG fuel storage systems are engineered to meet strict design, performance and packaging
requirements of our customers. Customers for these systems require that these products meet either their strict design standards
or original equipment manufacturer level standards that can vary by jurisdiction. Compliance with these requirements has
resulted in increased development, manufacturing, warranty and administrative costs. A significant increase in these costs could
adversely affect our business, results of operations and financial condition. If we fail to meet original equipment manufacturer
or customer specifications on a timely basis, our existing or future relationships with our original equipment manufacturers and
other customers may be harmed, which would have a material adverse effect on our business, results of operations and financial
condition.
A mass market for our CNG systems may never develop or may take longer to develop than anticipated.
CNG systems represent emerging technologies, and we do not know whether users will adopt these technologies on a
large scale or whether original equipment manufacturers will incorporate these technologies into their products. In particular, if
a mass market fails to develop, or develops more slowly than anticipated, for CNG and other alternative fuel propulsion
systems in vehicle applications, we may be unable to recover our expenditures to develop our fuel systems and may be unable
to achieve or maintain profitability, any of which could negatively impact our business. Many factors that are beyond our
control may have a negative effect on the development of a mass market for CNG and our fuel systems for CNG applications.
These factors include the following:
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cost competitiveness, especially with fluctuating oil and natural gas prices;
consumer acceptance of CNG fuel products;
government funding and support for the development of CNG and related fueling infrastructure;
consumer adoption levels of CNG compared to liquid natural gas (LNG) as a preferred natural gas fuel
choice;
the willingness of original equipment manufacturers and after-market integrators and customers to replace
current technology;
consumer perceptions of CNG;
regulatory requirements; and
emergence of newer, breakthrough technologies and products within the vehicle industry.
Evolving customer design requirements, product specifications and testing procedures could cause order delays or
cancellations.
We have experienced delays in shipping our products in the past as a result of changing customer specifications and
testing procedures. Due to the dynamic nature of the technologies used in our products, changes in specifications are common
and may result in delayed shipments, order cancellations or higher production costs. Evolving design requirements or product
specifications may adversely affect our business or financial results.
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We have limited experience manufacturing fuel systems on a large scale basis.
We have limited experience manufacturing CNG and other alternative fuel systems in high volumes. In order to produce
our CNG and other alternative fuel propulsion systems at affordable prices on a large scale basis, we will have to continue to
enhance and automate our manufacturing processes. We do not know whether we, or our suppliers, will be able to develop
efficient, automated, low-cost manufacturing capability and processes that will enable us to meet the quality, price, engineering,
design and production standards, or production volumes required to successfully mass market our products. Even if we, or our
suppliers, are successful in developing our high volume manufacturing capability and processes, we do not know whether we
will be able to do so in time to meet our product commercialization schedules or to satisfy the requirements of our customers.
Our failure to develop such manufacturing processes and capabilities could have a material adverse effect on our business,
results of operations and financial condition.
We may not meet our product development and commercialization milestones.
We have certain product development programs that are in the pre-commercial stage. The success of each product
development program is highly dependent on our correct interpretation of commercial market requirements, and our translation
of those requirements into applicable product specifications and appropriate development milestones. If we have misinterpreted
market requirements, or if the requirements of the market change, we may develop a product that does not meet the cost and
performance requirements for a successful commercial product. In addition, if we do not meet the required development
milestones, our commercialization schedules could be delayed, which could result in potential purchasers of these products
declining to purchase additional systems or choosing to purchase alternative technologies. Delayed commercialization
schedules may also impact our cash flow, which could require increased funding.
We may be subject to warranty claims, and our provision for warranty costs may not be sufficient.
We may be subject to increased warranty claims for our products due to increased levels of our products that are in use
and subject to existing warranty provisions and due to longer warranty periods. In response to consumer demand, vehicle
manufacturers have been providing, and may continue to provide, increasingly longer warranty periods for their products. As a
consequence, these manufacturers may require their suppliers, such as us, to provide correspondingly longer product
warranties. As a result, we could incur substantially greater warranty claims in the future.
Our 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.
The automotive industry experiences significant product liability claims. As a supplier of products and systems to
automotive original equipment manufacturers and aftermarket system integrators, we face an inherent business risk of exposure
to product liability claims in the event that our products, or the equipment into which our products are incorporated,
malfunction and result in personal injury or death. We may be named in product liability claims even if there is no evidence that
our systems or components caused the accidents. Product liability claims could result in significant losses as a result of
expenses incurred in defending claims or the award of damages. The sale of systems and components for the transportation
industry entails a high risk of these claims. In addition, we may be required to participate in recalls involving these systems if
any of our systems prove to be defective, or we may voluntarily initiate a recall or make payments related to such claims as a
result of various industry or business practices or the need to maintain good customer relationships. Our other products may
also be subject to product liability claims or recalls. We cannot assure you that our product liability insurance will be sufficient
to cover all product liability claims, that such claims will not exceed our insurance coverage limits or that such insurance will
continue to be available on commercially reasonable terms, if at all. Any product liability claim brought against us could have a
material adverse effect on our reputation and business.
Our business may become subject to stricter product certification regulations, which may impair our ability to market and
sell our products.
We must meet product certification requirements from regulated agencies such as NGV2 and other governmental
agencies, such as the U.S. Environmental Protection Agency and the California Air Resources Board, and comply with
requirements from the U.S. Department of Transportation, in order to sell certain of our products in the United States and
internationally. A significant portion of our future sales will depend upon sales of fuel system products that are certified to meet
existing on-board fuel storage safety codes and standards. We cannot assure you that our products will continue to meet these
specifications and standards. The failure to comply with these certification and safety requirements and standards could result
in the recall of our products or in civil or criminal penalties.
Any new government regulation that affects our advanced fuel technologies, whether at the foreign, federal, state or local
level, including any regulations relating to installation and servicing of these systems, may increase our costs and the price of
our systems. As a result, these regulations may have a negative impact on our business, results of operations and financial
condition.
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Changes in environmental policies could hurt the market for our products and our renewable energy projects.
The market for natural gas, plug-in electric hybrid, fuel cell, hybrid and other forms of alternative fuel vehicles and
equipment and the demand for our products are driven, to a significant degree, by local, state and federal regulations that relate
to air quality, greenhouse gases and pollutants, and that require the purchase of motor vehicles and equipment operating on
alternative fuels or fuel cells. Similarly, foreign governmental regulations also affect our international business. These laws and
regulations may change, which could result in transportation or equipment manufacturers abandoning or delaying their interest
in alternative fuel and fuel cell powered vehicles or equipment. In addition, a failure by authorities to enforce current domestic
and foreign laws or to adopt additional environmental laws could limit the demand for our products.
Although many governments have identified as a significant priority the development of alternative energy sources, and
fuel cells in particular, we cannot assure you that governments will not change their priorities or that any change they make
would not materially affect our revenue or the development of our products.
Failure to comply with applicable environmental and other laws and regulations could adversely affect our business and
harm our results of operations.
We use hazardous materials in our research and development and manufacturing processes, and as a result are subject to
federal, state, local and foreign regulations governing the use, storage, handling and disposal of these materials and hazardous
waste products that we generate. Although we believe that our procedures for using, handling, storing and disposing of
hazardous materials comply with legally prescribed standards, we cannot completely eliminate the risk of contamination or
injury resulting from hazardous materials and we may incur liability as a result of any such contamination or injury. In the
event of an accident, including a discharge of hazardous materials into the environment, we could be held liable for damages or
penalized with fines, and the liability could exceed our insurance and other resources. We have also incurred and may continue
to incur expenses related to compliance with environmental laws. Such future expenses or liability could have a significant
negative impact on our business, financial condition and results of operations. Further, we cannot assure you that the cost of
complying with these laws and regulations will not materially increase in the future.
We are also subject to various other federal, state, local and foreign laws and regulations. Failure to comply with
applicable laws and regulations, including new or revised safety or environmental standards, could give rise to significant
liability and require us to incur substantial expenses and could materially harm our results of operations.
We currently face, and will continue to face, significant competition, which could materially and adversely affect us.
We currently compete with companies that have or may have greater economic resources, name recognition, larger
customer bases, broader global reach and a wider array of product lines. We are also subject to competition from other
alternative fuels and alternative fuel technologies, including liquefied natural gas (LNG), synthetic fuel, methanol, ethanol,
hydraulic hybrid, hybrid, hybrid electric and fuel cells, and we cannot assure you that such technologies will not be favored
over gaseous fuel technologies in the future. We also cannot assure you that our competitors will not create new and improved
innovative gaseous fuel technologies. Increases in the market for alternative fuel vehicles may cause automobile or engine
manufacturers to develop and produce their own fuel conversion or fuel management equipment rather than purchasing the
equipment from suppliers such as us or to employ competing technologies. Further, greater acceptance of alternative fuel
engines may result in new competitors. Should any of these events occur, either alone or in combination, the total potential
demand for, and pricing of, our products could be negatively affected and cause us to lose business, which could materially and
adversely affect us.
New competitors and new technologies are emerging and could negatively impact our market sure and prospects for future
business.
New emerging competitors and developments in technology may negatively affect the development or sale of some or all
of our products or make our products obsolete. A range of other technologies could compete with and/or replace our CNG,
hydrogen and hybrid electric products and technologies. Our success depends upon our ability to design, develop and market
new or modified CNG and hydrogen products and systems. Our inability to enhance existing products in a timely manner or to
develop and introduce new products that incorporate new technologies, conform to increasingly stringent emission standards
and performance requirements and achieve market acceptance in a timely manner could negatively impact our competitive
position. New product development or modification is costly, involves significant research, development, time and expense and
may not necessarily result in the successful commercialization of any new products.
Risks Related to Investments and our Renewable Energy Segment
We may be unable to effectuate a sale of Schneider Power assets in a timely manner or receive consideration that exceeds
the carrying value of the assets that are currently held for sale.
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On August 9, 2012, we committed to a formal plan to sell the assets and operations of our Schneider Power business and
initiated steps to locate a buyer. We cannot provide any assurance that we will be successful in selling the assets or operations
for a price in excess of the carrying value of the assets that are currently classified as “held for sale,” if at all. For the year
ended December 31, 2014, we recognized $0.9 million of impairment charges related to Schneider Power’s assets that are held
for sale. In the event we are unable to sell Schneider Power for a price at least equal to the remaining carrying value of the
assets, then we will have to record additional charges and the amount of the charges could be material.
Our Renewable Energy business segment has a substantial amount of debt and Schneider Power has pledged all of its
ownership interests in Zephyr Farms Limited to secure project related debt.
The $19.6 million in project debt financing associated with the discontinued operations of Schneider Power that is
classified as held for sale represents term debt principal and accrued interest owed by Zephyr Farms Limited, our indirect
wholly-owned subsidiary, to Samsung Heavy Industries Ltd (The Samsung Debt). The Samsung Debt is secured by
substantially all of Zephyr Farm Limited’s assets and guaranteed by Schneider Power, the parent company of Zephyr Farms
Limited, pursuant to the terms of a limited nonrecourse guarantee. Schneider Power’s guarantee of the Samsung Debt is
secured by a pledge of all of the shares of Zephyr Farms Limited pursuant to the terms of a Pledge Agreement. If the Zephyr
Wind Farm does not generate sufficient revenue and cash flow to service the Samsung Debt, Samsung would have the rights of
a secured creditor to foreclose on the project assets and/or take ownership of the project. If Zephyr Farms Limited were to
default on the Samsung Debt and Samsung were to exercise its rights as a secured creditor, it would have a material adverse
effect on Schneider Power and our Renewable Energy business segment.
Schneider Power's 10.0 MW Zephyr Wind Farm could generate less return than anticipated.
We have experienced delays and difficulties in bringing the Zephyr Wind Farm project’s energy generation capabilities
up to full utilization. If difficulties are encountered in the future, the levels of energy generated over the expected life of the
project’s assets could be significantly less than expected, the operating results of the renewable energy segment could be
negatively impacted, our ability to meet or restructure the Samsung Debt could be impaired, and we may not be able to realize
the level of proceeds that we anticipate from a sale of the Zephyr Wind Farm.
Other Risks Related to Our Business
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 protect our existing intellectual property rights could result in the loss of our competitive advantage or the
right to use our technologies. If we do not adequately ensure our freedom to use certain technology, we may have to pay others
for rights to use their intellectual property, pay damages for infringement or misappropriation, and/or be enjoined from using
such intellectual property.
We have not conducted formal evaluations to confirm that our technology and products do not or will not infringe upon
the intellectual property rights of third parties. As a result, we cannot be certain that our technology and products do not or will
not infringe upon the intellectual property rights of third parties. If infringement were to occur, our development,
manufacturing, sales and distribution of such technology or products may be disrupted.
We rely on patent, trade secret, trademark and copyright law to protect our intellectual property. Our patent position is
subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and enforceability of a
particular patent. Accordingly, we cannot assure you that any of the patents we have filed or other patents that third parties
license to us will not be invalidated, circumvented, challenged, rendered unenforceable, or licensed to others or that any of our
pending or future patent applications will be issued with the breadth of claim coverage we seek, if issued at all.
Effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in certain
foreign countries. For instance, it may be difficult for us to enforce certain of our intellectual property rights against third
parties who may have inappropriately acquired interests in our intellectual property rights by filing unauthorized trademark
applications in foreign countries to register our marks because of their familiarity with our business in the United States.
Some of our proprietary intellectual property is not protected by any patent, copyright or patent or copyright applications,
and, despite our precautions, it may be possible for third parties to obtain and use such intellectual property without
authorization. We have generally sought to protect such proprietary intellectual property in part by confidentiality agreements
and, if applicable, inventors’ rights agreements with strategic partners and employees, although such agreements have not been
put in place in every instance. We cannot guarantee that these agreements adequately protect our trade secrets and other
intellectual property or proprietary rights. In addition, we cannot assure you that these agreements will not be breached, that we
will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property
arising out of these relationships. Furthermore, the steps we have taken and may take in the future may not prevent
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misappropriation of our solutions or technologies, particularly in respect of officers and employees who are no longer
employed by us or in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully
as in the United States.
Our business could suffer if we fail to attract and maintain key personnel.
Our future depends, in part, on our ability to attract and retain key personnel, including engineers, technicians, machinists
and management personnel. For example, our research and development efforts depend on hiring and retaining qualified
engineers. Competition for highly skilled engineers is extremely intense, and we may experience difficulty in identifying and
hiring qualified engineers in many areas of our business. Our future also depends on the continued contributions of our
executive officers and other key management and technical personnel, each of whom would be difficult to replace. The loss of
the services of one or more of our senior executive officers or key personnel, or the inability to continue to attract qualified
personnel, could delay product development cycles or otherwise materially harm our business, results of operations and
financial condition.
Our insurance may not be sufficient.
We carry insurance that we consider adequate in regard to the nature of the covered risks and the costs of coverage. We
are not fully insured against all possible risks, nor are all such risks insurable.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately
report our financial results, and current and potential stockholders may lose confidence in our financial reporting.
We are required by the SEC to establish and maintain adequate internal control over financial reporting that provides
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements in
accordance with generally accepted accounting principles. We are likewise required, on a quarterly basis, to evaluate the
effectiveness of our internal controls and to disclose any changes and material weaknesses in those internal controls.
Any failure to maintain adequate internal controls could adversely impact our ability to report our financial results on a
timely and accurate basis. If our financial statements are not accurate, investors may not have a complete understanding of our
operations. Likewise, if our financial statements are not filed on a timely basis as required by the SEC and the NASDAQ
Capital Market, we could face severe consequences from those authorities. In either case, there could result a material adverse
effect on our business. Ineffective internal controls could also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our stock.
Risks Related to our Common Stock
Kevin Douglas and his affiliates could have significant voting power and may take actions that may not be in the best
interest of our other stockholders.
As of March 13, 2015, Kevin Douglas and his affiliates (the “Douglas Family”) held convertible notes and warrants
entitling them to purchase up to 7,298,575 shares of our common stock (without taking into account any beneficial ownership
limitations provisions contained in the convertible notes and warrants held by the Douglas Family), which represents
approximately 20.7% on an "as-if converted" basis and 17.8% of our common stock on a fully diluted basis. The conversion
price for the convertible notes is $2.3824 per share and the exercise price for the warrants is $2.30 per share. If the Douglas
Family were to convert its convertible notes and/or exercise its warrants, it would have the ability to exert substantial influence
over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed
merger, consolidation or sale of all or substantially all of our assets and other corporate transactions. This concentration of
control could be disadvantageous to other stockholders with interests different from those of the Douglas Family. In addition,
this significant concentration of share ownership may adversely affect the trading price for our common stock because
investors may perceive disadvantages in owning stock in companies with stockholders that have the ability to exercise
significant control.
Our stockholders are subject to significant dilution upon the occurrence of certain events which could result in a decrease
in our stock price.
As of March 13, 2015, we had 4,396,823 shares reserved for issuance upon the conversion of convertible notes with a
conversion price of $2.3824 per share, 451,976 shares reserved for issuance upon the exercise of outstanding options with
exercise prices ranging from $2.23 to $178.40 per share and 8,327,405 shares reserved for issuance upon the exercise of
warrants with exercise prices ranging from $2.30 to $154.40 per share, respectively. The issuance of shares upon conversion of
the convertible notes exercise of the warrants and/or options will be dilutive to our stockholders, and any sales of such shares
could have a material adverse effect on the market for our common stock and the market price of our common stock.
The market price and trading volume of our common stock may be volatile.
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The market price and trading volume of our common stock has been volatile. We expect that the market price of our
common stock will continue to fluctuate significantly for many reasons, including in response to the risk factors described in
this report or for reasons unrelated to our specific performance. In recent years, the stock market has experienced extreme price
and volume fluctuations. This volatility has affected the market prices of securities issued by many companies for reasons
unrelated to their operating performance and may adversely affect the market price and trading volume of our common stock.
Prices for our common stock may also be influenced by the depth and liquidity of the market for our common stock, investor
perceptions about us and our business, our future financial results, the absence of cash dividends on our common stock and
general economic and market conditions. In the past, securities class action litigation has often been instituted against
companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and could
divert our management and other resources.
Because we do not expect to pay dividends on our common stock in the foreseeable future, you must rely on stock
appreciation for any return on your investment.
We have paid no cash dividends on our common stock to date, and we currently intend to retain our future earnings, if
any, to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends on our
common stock in the foreseeable future, and payment of cash dividends on our common stock, if any, will also depend on our
financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of
directors. Furthermore, pursuant to the terms of our credit facility, as amended, with our senior secured lender we are prohibited
from declaring or making any dividends as long as the credit facility remains in effect. Accordingly, the success of your
investment in our common stock will likely depend entirely upon any future appreciation. There is no guarantee that our
common stock will appreciate in value or even maintain the price at which you purchased your shares, and you may not realize
a return on your investment in our securities.
Provisions of Delaware law and of our Amended and Restated Certificate of Incorporation and Bylaws may make a takeover
or change in control more difficult.
Provisions in our Amended and Restated Certificate of Incorporation and Bylaws, and of Delaware corporate law, may
make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that our
management and board of directors oppose. Public stockholders that might desire to participate in one of these transactions may
not have an opportunity to do so. Our Amended and Restated Certificate of Incorporation and Bylaws provide for the
following:
•
•
•
•
•
•
a staggered board of directors, which makes it difficult for stockholders to change the composition of the
board of directors in any one year;
the exclusive right of the board of directors to change the number of directors and fill vacancies on the
board of directors, which could make it more difficult for a third party to obtain control of the board of
directors;
authorizing the issuance of preferred stock which can be created and issued by the board of directors
without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights
senior to those of our common stock, which could make it more difficult or expensive for a third party to
obtain voting control of us;
advance notice requirements for director nominations or other proposals at stockholder meetings;
prohibiting stockholder action by written consent, which could delay a third party from pursuing an
acquisition; and
requiring the affirmative vote of holders of at least two-thirds of our outstanding voting stock to amend
certain provisions in our Amended and Restated Certificate of Incorporation and Bylaws, and requiring
the affirmative vote of 80% of our outstanding voting stock to amend certain other provisions of our
Amended and Restated Certificate of Incorporation and Bylaws, which could make it more difficult for a
third party to remove the provisions we have included to prevent or delay a change of control.
Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties.
As of March 13, 2015, our corporate operations, manufacturing, assembly, design, testing, and research and development
is conducted in leased facilities with a combined square footage of approximately 156,000, which is located at our campus in
14
Lake Forest, California. The facility leases are scheduled to begin expiring on May 31, 2018; however, we have the option to
extend the lease until at least May 31, 2020 for one of the buildings and until May 31, 2025 for the remaining two buildings.
We design and produce our lightweight high pressure gaseous storage tanks for CNG and hydrogen applications and our
fuel storage modules for CNG applications in our Lake Forest advanced technology center. We also design and integrate
alternative fuel storage and systems into heavy- and medium-duty truck applications and passenger vehicles and conduct
research and development in the center for hybrid technologies, production of systems and technologies that enable the use of
gaseous fuels in internal combustion engines and fuel cells, including CNG and hydrogen systems integration, validation and
certification for concept, prototype and production vehicles. The center additionally conducts research and development of
advanced fuel delivery and electronic control systems for light- and medium-duty OEM alternative fuel vehicles and for fuel
cell applications, including transportation.
We believe our facilities in Lake Forest, California, are presently adequate for our current and expected product
manufacturing operations and OEM development programs at least through 2015; however, we may need to expand our
operations beyond our current facilities in the future. If we require additional facilities, we believe we will be able to obtain
suitable space on commercially reasonable terms.
Item 3. Legal Proceedings.
Management and our legal counsel periodically review the probable outcome of pending proceedings and the costs
reasonably expected to be incurred. We accrue for these costs when it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated.
On June 6, 2013, Iroquois Master Fund Ltd (Iroquois) filed suit against us in the United States District Court for the
Southern District of New York (the Complaint). In the Complaint, Iroquois asserted that the registered direct offering we
completed on May 16, 2013 triggered the full-ratchet anti dilution reset provision contained in its October 2006 Warrant
contract and, as a result, the exercise price of its October 2006 Warrant should have been adjusted downward to $0.932 and the
number of shares underlying its October 2006 Warrant proportionately increased. Although we did adjust the exercise price to
$1.5142 effective as of August 2, 2013 and increased the number of warrants pursuant to our interpretation of the applicable
provisions of the October 2006 Warrant, Iroquois claimed that we were in breach of the warrant contract due to our refusal to
honor the lower exercise price and higher number of shares claimed by Iroquois.
In connection with the Complaint, Iroquois asserted that it was entitled to either (i) monetary damages (which Iroquois
estimated to be approximately $4.1 million as of November 4, 2013) or (ii) in the alternative, either (a) specific performance in
the form of delivery by us of 810,805 October 2006 Warrants exercisable at $0.932 per share with equitable modifications to
the terms of the October 2006 Warrants to compensate Iroquois for the alleged delay in issuance, plus the return of $542,564
Iroquois claims it overpaid when it exercised its October 2006 Warrants, or (b) 852,220 shares of our common stock. Iroquois
also requested interest at 9% per annum on any monetary award and recovery of its attorney’s fees and other related expenses,
if successful.
A bench trial was held on May 20 and 21, 2014. On May 23, 2014, the Court concluded that a reset did occur on May
16, 2013, but rejected Iroquois’s position with respect to the appropriate reset price. The Court determined that the exercise
price of the October 2006 Warrant should have been reset to $1.4284 on May 16, 2013, and reset again to $1.2488 on August 2,
2013, the date the holder of the May 2013 Warrant exercised the Exchange Feature contained in the May 2013 Warrant.
On June 17, 2014, the Court issued its Decision and Order, wherein the Court denied Iroquois’ request for specific
performance damages but did grant Iroquois’ request for monetary damages, prejudgment interest and attorney’s fees. The total
amount that we have incurred in connection with the Iroquois litigation is $1,813,206, consisting of (i) $1,015,440 in monetary
damages, (ii) $704,857 in legal fees and other expenses and (iii) $92,909 in interest related expenses. We recorded these
amounts in our consolidated statements of operations and comprehensive loss during 2014 which are included in the other
expenses and interest expense classifications. On September 3, 2014, we paid the monetary damages and interest and on
January 23, 2015 we paid the legal fees and other expenses.
On December 15, 2014, Iroquois Master Fund (“Iroquois”) filed a Notice of Appeal with the United States Court of
Appeals for the Second Circuit from the judgment entered by the United States District Court for the Southern District of New
York. Although we believe that we will prevail on appeal, we can provide no assurance that the Second Circuit will uphold
District Court’s judgment. If the Second Circuit were to reverse the District Court’s decision, then we may have to pay Iroquois
additional damages and reimburse them for their reasonable attorney fees incurred in connection with the appeal.
15
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Item 4. Not Applicable.
16
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Our common stock trades on the NASDAQ Capital Market under the symbol “QTWW”. Our Series B common stock,
which was retired on December 31, 2013, was not publicly traded. The table below sets forth the high and low daily sales
prices for our common stock as reported on the NASDAQ Capital Market for the periods indicated.
2014
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2013
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
High
Low
$
$
$
$
4.45
6.13
10.09
11.25
8.36
3.39
2.92
3.20
1.75
3.41
2.99
6.85
3.20
1.85
2.00
2.40
On March 13, 2015, the last reported sale price for our common stock as reported by the Nasdaq Capital Market was
$2.55 per share and there were approximately 204 holders of record of our common stock.
Dividend Rights and Other Stockholder Matters
We have not paid any dividends in the past, and we do not anticipate paying any dividends on our common stock in the
foreseeable future because we expect to retain our future earnings for use in the operation and expansion of our business. Our
payment and amount of dividends, however, will be subject to the discretion of our board of directors and will depend, among
other things, upon our results of operations, financial condition, cash requirements, future prospects, and other factors that may
be considered relevant by our board of directors.
We did not repurchase any securities during the quarter ended December 31, 2014.
Recent Sales of Unregistered Securities Related to Cashless Exercises Include:
Warrant Issuance Date
October 27, 2006
June 22, 2012
July 25, 2012
Totals
Exercise Price Per
Share
$1.5142
$3.40
$3.56
Warrants
Exercised
(48,466)
(470,732)
(56,692)
(575,890)
Shares Issued
39,839
285,023
32,290
357,152
17
Equity Compensation Plan Information
The following table sets forth information about shares of our common stock that may be issued upon exercise or vesting
of options, warrants and other rights under all of our equity compensation plans as of December 31, 2014:
Plan Category
Equity Compensation Plans
Approved by Security
Holders
Equity Compensation Plans
Not Approved by Security
Holders
Total
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants, and Rights
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans
455,850
—
455,850
$8.60
—
$8.60
202,300 (1)
—
202,300
(1) Represents shares available for issuance under our 2011 Stock Incentive Plan as of December 31, 2014. The 2011 Stock
Incentive Plan contains an “evergreen” provision under which the number of shares available for grant under the 2011 Stock
Incentive Plan will increase annually by an amount equal to the lesser of (x) 125,000 shares, (y) 3.0% of the number of shares
outstanding as of such first day of each year or (z) a lesser number of shares determined by our Board of Directors.
Item 6. Selected Financial Data.
Information required by Item 301 of Regulation S-K relating to selected financial data is not required by a smaller
reporting company.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read
in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in
this Annual Report. This discussion contains forward-looking statements, which generally include the plans and objectives of
management for future operations, estimates or projections of future economic performance, and our current beliefs regarding
revenues, profits and losses, capital resources and liquidity. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various risks and uncertainties, including those set forth under the “Risk
Factors” section and elsewhere in this Annual Report.
BUSINESS OVERVIEW
We are a leader in the innovation, development and production of compressed natural gas (CNG) fuel storage tanks and
packaged fuel storage systems and the integration of vehicle system technologies including engine and vehicle control systems
and drivetrains.
We produce advanced light-weight CNG fuel storage tanks and supply these tanks, in addition to fully-integrated CNG
fuel storage systems, to truck and automotive fleets, OEMs, integrators and aftermarket. Our high-pressure CNG and hydrogen
storage tanks using advanced composite technology are capable of storage at up to 10,000 pounds per square inch (psi). We
also provide low emission and fast-to-market solutions to support the integration and production of natural gas and hydrogen
fuel storage systems, hybrid technologies and refueling systems and dispensers.
Our customer base includes OEMs, aftermarket and OEM truck integrators, fleets, a material science company, and other
governmental entities and agencies.
The consolidated financial statements for the calendar 2014 and 2013 periods presented include the accounts of Quantum
Fuel Systems Technologies Worldwide, Inc., and our wholly owned subsidiary, Schneider Power Inc. (Schneider Power).
18
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FINANCIAL OPERATIONS OVERVIEW
We classify our business operations into three reporting segments: Fuel Storage & Systems, Renewable Energy and
Corporate. The Renewable Energy business segment, consisting entirely of the operations of Schneider Power, is being held for
sale and as such, is classified as discontinued operations as discussed further below.
In managing our business, our management uses several financial and non-financial factors to analyze our performance.
Financial factors include forecast to actual comparisons, analysis of revenue and cost trends, manufacturing and project
analyses, backlog of customer programs, and changes in levels of working capital. Non-financial factors include assessing the
extent to which production and current development programs are progressing in terms of timing and deliverables and the
success to which our systems are interfacing with our customers' vehicle applications. We also assess the degree to which we
secure product orders, additional programs or new programs from our current or new customers and the level of government
funding we receive for gaseous storage systems and propulsion systems. We also evaluate the number of units shipped as part
of current and new programs and evaluate the operations of our subsidiary, Schneider Power.
Non-financial factors for the Renewable Energy business segment include electrical generation and wind analysis results,
land ownership agreements, interconnections to the grid, power purchase agreements and other project metrics framing the
underlying economics of a renewable energy farm.
We expense all internal research and development when incurred. We will continue to require significant research and
development expenditures over the next several years in order to increase the commercialization of our products for natural gas,
hybrid, hydrogen fuel cell and other alternative fuel applications.
The chief operating decision maker allocates resources and tracks performance by the reporting segments. We evaluate
performance based on profit or loss from operations before interest, non-operating income and expenses, and income taxes.
EXECUTIVE OVERVIEW AND OUTLOOK
We are a leader in the innovation, development and production of compressed natural gas (CNG) fuel storage tanks
and packaged fuel storage systems and the integration of vehicle system technologies, including engine and vehicle control
systems and drivetrains.
We produce innovative, advanced and light-weight compressed natural gas (CNG) storage tanks, and supply these
tanks, in addition to fully-integrated natural gas storage systems, to truck and automotive original equipment manufacturers
(OEM) and aftermarket and OEM truck integrators. We also provide low emission and fast-to-market solutions to support the
integration and production of natural gas and hydrogen fuel storage systems, hybrid technologies and refueling systems and
dispensers.
We classify our business operations into three reporting segments: Fuel Storage & Systems, Renewable Energy and
Corporate. The Renewable Energy business segment, consisting entirely of the operations of Schneider Power Inc. (Schneider
Power), is classified as discontinued operations as discussed further below.
• Fuel Storage & Systems. Our Fuel Storage & Systems segment generates revenues from two sources: product sales
and contract services. Product sales are derived primarily from the sale of storage tanks and packaged fuel storage
modules and systems for a variety of heavy, medium and light-duty trucks and passenger vehicles. This segment
produces advanced light-weight CNG storage tanks and supplies these tanks, in addition to fully-integrated natural gas
storage modules and systems, to truck and automotive Original Equipment Manufacturers (OEMs), fleets, dealerships
and aftermarket and OEM truck integrators. Our high-pressure CNG and hydrogen storage tanks use advanced
composite technology and are capable of storage at up to 10,000 pounds per square inch (psi). Contract services
revenue is generated by providing engineering design and support to OEMs and other customers specializing in
natural gas retrofits and material science, governmental agencies and other customers, so that our fuel systems and
advanced propulsion systems integrate and operate with our customers CNG, hybrid or fuel cell applications. For
hybrid and plug-in electric vehicle (PHEV) applications, we provide powertrain engineering, electronic control,
software strategies and system integration. We also design, engineer and manufacture refueling systems and
dispensers.
• Renewable Energy. Our Renewable Energy segment consists solely of the business operations of our wholly-owned
subsidiary, Schneider Power. Schneider Power is an independent wind power producer and holder of interests in
certain renewable energy projects. We committed to a plan to sell the assets and operations of Schneider Power in
2012. On May 13, 2013, we completed the sale of Schneider Power’s 1.6 megawatt (MW) Providence Bay wind
farm. On May 29, 2013, we announced that we had entered into definitive agreements for the sale of the 10.0 MW
19
Table of Contents
Trout Creek development project, which sale will occur in two phases. The closing for the first phase, which resulted
in the sale of a majority interest in the Trout Creek wind farm project, occurred on September 18, 2013. The sale of
the remaining interest in the Trout Creek wind farm project is expected to be completed near the end of 2015, subject
to the project achieving commercial operation. On December 13, 2013 we completed the sale of certain assets of three
of our pipeline projects - Dymond Solar, New Liskeard and Crystall Falls. Should any of these projects achieve
commercial operation in the future, we will be entitled to an 'earnout' for that project. We are also actively pursuing the
sale of other Schneider Power assets, including the 10.0 MW Zephyr wind farm operating asset which represents a
substantial portion of the remaining assets and liabilities of Schneider Power as of December 31, 2014. As a result of
these actions and our expectations for a completion of a sale of the business within the next year, we report the
historical activities and balances of Schneider Power as discontinued operations held for sale.
• Corporate. The Corporate segment consists solely of general and administrative expenses incurred at the corporate
level that are not directly attributable to the Fuel Storage & Systems or Renewable Energy business 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.
In May 2014, we announced a shift in our strategic direction from a CNG tank product platform to a complete CNG
fuel storage systems platform. During the second half of 2014, we spent a significant amount of human and financial resources
on production build-out, product commercialization and customer expansion - all areas that needed to be immediately
addressed in order for us to establish a solid foundation on which our systems platform strategy can thrive.
While we anticipated that the shift in our business strategy would likely have some negative short term effects on our
financial results, primarily due to damaging our relationship with our largest customer due to the competitive nature of our
systems platform and their subsequent entry into a joint venture with a competing tank supplier, the progress we made in
implementing our systems strategy during the second half of 2014 has solidified our belief that the shift in strategy was the
proper decision for our long-term sustainability and creation of stockholder value.
Examples of the progress we made in implementing this new strategy in 2014 include:
•
Since May 2014, our customer base and customer diversification has grown significantly;
During the second half of 2014, we believe that we quickly gained material market share for CNG storage
systems for the heavy duty truck market;
In the second half of 2014, we commercialized new storage system products, including our Q- CabLITE and Q-
RailLITE CNG systems;
•
•
In May, we announced that we had entered into a long-term supply agreement for complete CNG systems with Ryder
Systems, Inc., a Fortune 500 commercial transportation company;
In September, we announced that we had entered into a strategic alliance with Mainstay Fuel Technologies for 21"
back-of-cab CNG modules to support a broader array of systems for our growing customer base;
• We also entered into marketing and supply arrangements with industry participants to provide complete CNG systems;
and
• We completed the expansion of our tank production facility and a production assembly facility for our CNG systems at
our Lake Forest, CA campus.
As indicated above, we made significant progress in introducing and commercializing storage systems, growing our
customer base and gaining market share during the second half of 2014.We expect this trend to continue in 2015. Generally, our
revenues were also impacted by the adoption rate for natural gas trucks during 2014 being lower than predicted. The primary
factor contributing to the lower than anticipated adoption rate was the fact many fleets were buying limited units in order to test
CNG systems on their trucks and the order quantities per fleet were lower than expected. The recent decrease in diesel fuel
costs and the instability of the diesel to CNG fuel price spread has started to negatively impact fleet decisions on units as well
as their overall commitment to natural gas vehicles in the short-term. Despite the adoption rate in 2014 being lower than
predicted, we are encouraged by the fact that natural gas truck sales grew approximately 20 percent in 2014 and we expect that
our product offerings, sales, marketing, and training efforts will lead to increased sales and market share in 2015.
From a system cost perspective, and in an effort to provide our customers with the highest quality, most fuel efficient
CNG systems available on the market, we incurred significant costs and expenses during the second half of 2014 related to
testing, validation, production set up, supply chain management, training and servicing of our CNG modules. As a result, our
cost of goods sold and gross margins were negatively affected. We expect many of these start-up related costs will be
significantly lower in future periods and, in turn, result in higher gross margins.
20
Table of Contents
RESULTS OF OPERATIONS
Year Ended December 31, 2014 Compared with the Year Ended December 31, 2013
The following table provides operating results of continuing operations:
Revenues
Fuel Storage & Systems:
Net product sales
Contract services
Total revenues
Cost of Revenues
Fuel Storage & Systems:
Cost of product sales
Cost of contract services
Total cost of revenues
Gross Margin
Fuel Storage & Systems:
Net product sales
Contract services
Total gross margin
Operating Expenses
Fuel Storage & Systems:
2014
2013
Change
$
%
$
25,785,837 $ 22,943,639 $
8,317,157
8,960,051
$ 34,102,994 $ 31,903,690 $
2,842,198
(642,894)
2,199,304
12%
(7)%
7%
$
23,743,646 $ 16,261,662 $
5,220,844
5,296,499
$ 28,964,490 $ 21,558,161 $
7,481,984
(75,655)
7,406,329
46%
(1)%
34%
$ 2,042,191 $
3,096,313
6,681,977 $
3,663,552
$ 5,138,504 $ 10,345,529 $
(4,639,786)
(567,239)
(5,207,025)
(69)%
(15)%
(50)%
Research and development
Selling, general and administrative
Total
Corporate:
$ 7,616,018 $
3,405,513
11,021,531
5,996,414 $
4,244,781
10,241,195
1,619,604
(839,268)
780,336
27%
(20)%
8%
Selling, general and administrative
Total operating expenses
6,832,741
6,841,239
$ 17,854,272 $ 17,082,434 $
(8,498) —%
5%
771,838
Operating Income (Loss)
Fuel Storage & Systems
Corporate
Total operating loss
* Percentage not meaningful.
$ (5,883,027) $
(6,832,741)
$ (12,715,768) $
104,334 $
(5,987,361)
*
(6,841,239)
(6,736,905) $
8,498 —%
89%
(5,978,863)
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Table of Contents
Fuel Storage & Systems Segment
Product Sales and Gross Margins
In May 2014, we shifted our strategic direction from selling stand-alone CNG tank products to a focus on selling
complete CNG fuel storage modules and systems. Under this new strategy, we have experienced and are continuing to target
significant revenue streams for sales of our back-of-cab and frame-rail mounted CNG fuel storage modules. Although the shift
in business strategy was not void of challenges, we were able to quickly gain material market share for CNG storage systems
for the heavy duty truck market in the second half of 2014 which, along with the start up of production and shipments of fuel
systems for General Motors’ CNG bi-fuel Chevy Impala passenger vehicle in September 2014, provided broad-based revenues
that resulted in higher overall product sales in 2014 compared to 2013.
From a system cost perspective, we incurred significant costs and expenses during 2014 related to establishing our
manufacturing capabilities to support our change in strategic direction. Specifically, cost of goods sold and gross margins
during the current year were negatively impacted by initial start up costs and high build costs associated with setting up
expanded manufacturing processes to produce new fuel storage module products. These costs included incremental expenses
to set up new supply chains, establish new processes, acquire parts and materials at low volume pricing levels, and scrap out of
parts that did not meet our internal quality standards or that result from enhanced designs. We expect these incremental
expenses to decline in 2015 as we move past the initial stages of production and realize higher volume levels which, in turn,
will favorably impact gross margins in future periods.
Contract Services and Gross Margins
Contract services revenue decreased in 2014 primarily due to slightly lower levels of engineering services related to
aftermarket programs for CNG fuel storage system integration and a decrease in engineering activities associated with
hydrogen programs. Included in CNG development activities in 2014 were $3.2 million of engineering services provided to
Advanced Green Innovations, LLC, and its affiliate, ZHRO Solutions LLC (collectively "AGI") under development contracts
that began in the second quarter of 2013 for the design, development and validation of a complete packaged CNG fuel storage
and delivery system for aftermarket use for heavy and medium-duty trucks. The anticipated completion date of the AGI system
cannot be determined at this point due to customer initiated delays that caused us to suspend activities under the program in the
fall of 2014; however, once completed, the system would enable diesel powered trucks to be converted to run on a dedicated
CNG injection engine conversion system developed by AGI. In addition, we also recognized $2.2 million of contract services
in 2014 associated with development and certification activities for the General Motors Impala CNG bi-fuel system.
We expect engineering services and license fees related to a new PHEV software development program that we
entered into with the Fisker Auto Group in November 2014 and a new hydrogen tank development program with an automotive
OEM alliance that commenced in September 2014, to increase during 2015, which will offset anticipated declines in CNG fuel
storage development programs resulting from the customer initiated delay of the AGI program and the transition of the General
Motors' Impala development program to a production program.
Our customer funded development activities are reported as costs of contract services. Gross margins realized on
contract services revenue in 2014 decreased compared to 2013 primarily due to a significant gain recognized in the fourth
quarter of 2013 under the General Motors Impala program.
Total Revenues
Overall revenues for the Fuel Storage and Systems segment increased 7% in 2014 compared to 2013. Agility Fuel
Systems, Ryder Systems and General Motors comprised 28%, 12%, and 11%, respectively, of the total Fuel Storage & Systems
segment revenue in 2014. We anticipate that the cost of natural gas will continue to be lower than diesel by an amount that
justifies natural gas vehicle adoption and that we will continue to gain market share in the heavy-duty truck market. Further,
we estimate that our overall revenues will grow approximately 40% to 50% in 2015 compared to 2104 based on existing and
anticipated orders from our growing customer base.
Research and Development
Internally funded research and development efforts relate primarily to our efforts to advance our CNG storage
technologies by integrating and testing lighter materials, tank mounting fixtures and developing different size storage vessels to
add to our existing product families. In addition, we incurred additional expenses during the second half of 2014 for design and
validation of our CNG fuel module storage products.
Selling, General and Administrative Expenses
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Table of Contents
Selling, general and administrative expenses for the Fuel Storage & Systems segment decreased in 2014 as compared
to the prior year. The decline was primarily due to lower charges for reserves related to uncollectible accounts receivables,
facility consolidations and cost reduction initiatives that occurred in 2014.
CORPORATE
Corporate expenses reported for this segment reflect the general and administrative expenses that indirectly support
Fuel Storage & Systems and Renewable Energy. General and administrative expenses of Corporate consist primarily of
personnel costs, share-based compensation costs and related general and administrative costs for executives, finance, legal,
human resources, investor relations and our board of directors.
The amount of Corporate expenses recognized in 2014 was similar to the levels incurred in 2013 and we anticipate
that these costs will increase slightly in 2015.
Non-Reporting Segment Results
The following table provides non-reporting segment results:
Interest expense
Contractual cash interest
Non-cash imputed interest
Fair value adjustments of derivative instruments, net
Other income (expenses), net
Total
2014
2013
Change
$
(824,198) $
(1,226,962)
2,018,864
(1,736,206)
(1,768,502) $
$
(1,573,281) $
(3,303,841)
(8,421,268)
17,357
749,083
2,076,879
10,440,132
(1,753,563)
(13,281,033) $ 11,512,531
Interest expense. Interest expense represents both cash payments based on stated contractual rates and non-cash imputed
rates associated with equity-linked characteristics (e.g. warrants and debt principal conversion features), accelerated maturities
and/or other contractual provisions of our debt securities. Contractual cash interest for calendar 2014 was primarily associated
with borrowings under the bank line of credit and the equipment finance arrangement and non-cash imputed interest expense was
primarily associated with convertible notes and warrants issued in September 2013. Contractual cash interest for calendar 2013
was primarily associated with borrowings under the bank line of credit, the equipment finance arrangement, and with bridge notes
and warrants sold to investors during June and July of 2012. Non-cash interest costs for calendar 2013 included $0.9 million
associated with bridge notes and warrants sold to investors in January 2013, $1.8 million associated with bridge notes and warrants
sold to investors during June and July of 2012, and $0.2 million associated with convertible notes and warrants sold to investors
in September 2013. The January 2013 bridge notes were paid in full on July 1, 2013 and the June/July 2012 bridge notes were
paid in full on September 19, 2013.
Fair value adjustments of derivative instruments. Derivative instruments consisted of embedded features contained within
certain warrant contracts. Fair value adjustments of derivative instruments represent non-cash unrealized gains or losses. The
share price of our common stock represents the primary underlying variable that impacts the value of the derivative instruments.
The gains recognized during 2014 were primarily due to a $2.6 million gain resulting from the expiration of the October 2006
Warrants in April 2014 and a decrease in our closing share price that decreased the fair value of the derivative instrument liabilities
($7.80 at December 31, 2013 to $2.09 at December 31, 2014). The losses recognized during 2013 were primarily due to the
increase in our closing share price over the course of the year that increased the fair value of the derivative instrument liabilities
and the triggering of an anti-dilution price reset provision contained in the October 2006 Warrants which reduced the exercise
price and increased the number of shares underlying the warrants.
Other expenses. The other expenses for 2014 are substantially all related to charges recorded in the second quarter of 2014
associated with the Iroquois Litigation. See Note 16 of our consolidated financial statements and Part I "Item 3. Legal Proceedings"
for additional information.
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Discontinued Operations
The following table provides the results of discontinued operations for Schneider Power:
Schneider Power
Revenue:
Net product sales
Costs and expenses:
Cost of product sales
Research and development
Selling, general and administrative
Impairment of long-lived operating assets
Loss on sale of assets
Total costs and expenses
Operating income (loss)
Interest expense, net
Other income, net
Loss before income taxes
Income tax benefit
Net loss from discontinued operations held for sale
$
* Percentage not meaningful.
2014
2013
$
%
Change
$ 2,363,324
$
2,736,146
$
(372,822)
(14)%
580,753
—
158,970
882,297
—
674,536
16,872
998,959
2,665,503
308,482
(93,783)
(16,872)
(839,989)
(1,783,206)
(308,482)
(3,042,332)
2,669,510
1,622,020
741,304
(1,255,567)
76,529
(437,734)
—
4,664,352
(1,928,206)
(1,410,560)
227,846
(3,110,920)
85,892
154,993
(151,317)
2,673,186
(85,892)
(437,734) $ (3,025,028) $ 2,587,294
(14)%
(100)%
(84)%
*
*
(65)%
(138)%
(11)%
(66)%
(86)%
(100)%
(86)%
Discontinued Operations-Renewable Energy Segment Held For Sale
Our Renewable Energy segment consists solely of the business operations of Schneider Power.
We have committed to a formal plan to sell the business operations and/or assets of the renewable energy segment and
have been actively seeking one or more buyers. Schneider Power, a wind farm operator and holder of interests in certain
renewable energy development projects, represents the entire operations of our Renewable Energy business segment. To date,
certain of the operations and assets have been sold and we are actively looking for buyers of the remaining operations and
assets. As a result of our intent to sell the remaining assets of the business, the historical activities and balances of the
Renewable Energy business segment are reported as discontinued operations held for sale in the accompanying consolidated
financial information presented herein.
Net loss from discontinued operations, net of taxes, decreased during 2014 primarily due to lower impairment charges
recognized. In 2014, we recognized $0.9 million of impairment charges, of which $0.4 million related to goodwill impairment
and $0.5 million related to intangible assets associated with SPI's development pipeline projects compared to $2.7 million
recognized in 2013, of which $1.8 million related to goodwill associated with Zephyr, $0.8 million related to assets associated
with Schneider Power's development project pipeline and $0.1 million related to property and equipment associated with the
Providence Bay Wind Farm.
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LIQUIDITY AND CAPITAL RESOURCES
Our historical operating results, capital resources and financial position, in combination with current projections and
estimates, were considered in management's plan and intentions to fund our operations over a reasonable period of time, which
we define in this report as the twelve month period ending December 31, 2015. For purposes of liquidity disclosures, we assess
the likelihood that we have sufficient available working capital and other principal sources of liquidity to fund our operating
activities and obligations as they become due and the likelihood that we will be able to maintain compliance with the required
provisions contained within our debt instruments over the twelve month period.
As a measure of liquidity for our continuing operations, we had cash and cash equivalents of $4.1 million, net working
capital of $5.5 million and the current ratio (ratio of current assets to current liabilities, excluding current derivative liabilities)
was 1.27 at December 31, 2014. There are no contractual guarantees or obligations with respect to our continuing operations to
fund potential capital needs or to service long-term debt and other liabilities of the discontinued operations of Schneider Power
that are classified as held for sale.
During 2014, we completed our planned expansion of our tank production capacity and set up manufacturing and
assembly operations for our fuel storage module systems. As of December 31, 2014, we had no material commitments for
capital expenditures and we expect that our levels of spending for equipment and infrastructure in 2015 will decrease
significantly compared to the 2014 levels.
On February 10, 2015, we amended our line of credit with Bridge Bank that, in part, increased the maximum availability
under the line from $5.0 million to $7.5 million. As of March 13, 2015, outstanding advances under the line were $4.5 million
and advances are limited by our future levels of eligible accounts receivable and inventory.
On February 18, 2015, we completed an underwritten offering and received net proceeds of $10.5 million.
We expect to fund our operations over the next year principally from our existing levels of working capital, which
includes the net cash proceeds from the offering that we closed in February 2015, and the availability under our amended line
of credit. The amount of capital that we will require over the next twelve months is dependent upon (i) our ability to meet our
current operating plan, (ii) the timing of cash collections on existing receivables from AGI and its affiliates, and (iii) the success
of our efforts to monetize the remaining assets of Schneider Power over the next year.
Based on our current operating plan and expectations, we believe we have sufficient available capital through at least
December 31, 2015 to cover our existing operations and obligations. Our long-term future cash requirements will depend on
numerous factors, including our revenue base, profit margins, product development activities, market acceptance of our
products, future expansion plans and ability to control costs. If we require additional capital in the future, we believe that we
can issue equity or debt securities to meet those capital needs; however, we cannot assure you that we will be able to secure
additional capital on terms acceptable to us, or at all.
Cash Flow Activities
Our cash flows are reported on a consolidated basis and the activity reported includes both continuing operations and
discontinued operations.
Net cash used in operating activities increased to $16.2 million in 2014 as compared to net cash used of $10.0 million in
2013. The net cash used is primarily due to operating losses of $12.7 million, net of non-cash charges of $2.2 million, and the
cumulative impact of net changes in operating assets and liabilities (referred to as a "change in working capital") of $3.4
million. The net cash used for working capital in 2014 is primarily the result of an increase in accounts receivable of $3.0
million and an increase in inventory of $3.9 million, partially offset by an increase in accounts payable of $2.2 million and an
increase in deferred revenue and other accrued liabilities of $1.4 million. The increase in deferred revenue was mainly due to a
$2.0 million payment received from Fisker Auto Group in November 2014 under a software development and license
agreement entered into during October 2014.
Net cash used in investing activities increased to $6.1 million in 2014 as compared to net cash used of $2.1 million in
2013. The increase in net cash used during 2014 is primarily due to higher capital expenditures for equipment purchases to
expand our tank manufacturing and fuel module assembly capabilities. Investing activities in 2013 included combined net cash
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proceeds of $1.1 million received in connection with Schneider Power's divestitures of the Providence Bay Wind Farm, the
Trout Creek development project and three other development projects.
Net cash provided by financing activities increased to $19.8 million in 2014 as compared to net cash provided of $17.2
million in 2013. Net cash provided by financing activities in 2014 primarily consisted of net proceeds of $15.3 million from
the sale and issuance of common stock in connection with an underwritten public offering we completed in February 2014,
$5.1 million of proceeds received from warrant exercises, and $0.7 million in additional net advances under our line of credit.
Cash used in financing activities in 2014 primarily related to payments of $0.9 million related to our equipment financing
arrangement and $0.6 million under the credit facility of our discontinued operations. Cash provided by financing activities in
2013 consisted principally of net proceeds of: (i) $10.4 million from the sale of convertible notes in September 2013, (ii) $6.0
million from warrant exercises, (iii) $4.1 million from the sale of common stock under at-the-market offerings we conducted,
(iv) $2.7 million from the sale of common stock in connection with a registered direct offering in May 2013, (v) $1.5 million
from borrowings under a capital equipment financing arrangement, (vi) $1.4 million from bridge notes issued in January 2013,
and (vii) $0.8 million from advances under a line of credit with a financial institution. Cash used in financing activities in 2013
primarily related to repayments of $7.1 million of bridge notes issued in June/July 2012, $1.6 million of bridge notes issued in
January 2013 and $0.8 million related to our equipment financing arrangement.
Capital Resources
From our inception, we have funded our operations and strategic investments primarily with proceeds from public and
private offerings of our common stock and debt securities, and borrowings with financial institutions. Since January 1, 2013,
we have completed the following capital transactions:
•
•
•
•
•
•
•
During 2013, we received net proceeds of $4,228,981 from two separate at-the-market offerings that were
terminated in May 2013 and September 2013, respectively.
In January 2013, we received gross proceeds of $1,500,000 in connection with the issuance of $1,800,000 of
unsecured 0% nonconvertible promissory notes and warrants to accredited investors in a private placement
transaction. The net amount received by us, after deducting placement agent fees and transaction expenses, was
$1,362,500.
In May 2013, we completed a registered direct offering that yielded gross proceeds of $3,000,000 from the sale of
1,229,508 shares of our common stock at a price of $2.44 per share. The investor also received a warrant (the May
2013 Warrant) in connection with the transaction. We allocated $1,604,000 of the proceeds from the transaction to
the warrant that we classified as a derivative instrument as of the transaction date. The net amount received by us,
after deducting placement agent fees and transaction expenses, was $2,695,005. In August 2013, the investor
exercised its warrant under a cashless exchange provision pursuant to which we issued 751,780 registered shares of
common stock to the investor in cancellation of the warrant.
In September 2013, we completed a private placement transaction in which we received gross proceeds of
$11,000,000 from the sale of convertible notes and warrants. The net amount received by us, after deducting
placement agent fees and transaction expenses, was $10,420,898. We used $7,286,740 of the proceeds to repay in
full the outstanding principal and accrued interest due under certain bridge notes issued in June and July 2012.
During 2013 and 2014, we received cash proceeds of $5,965,763 and $5,122,285, respectively, from the exercise of
outstanding warrants.
In February 2014, we completed an underwritten public offering and received proceeds, net of underwriter
discounts and other offering costs, of approximately $15,300,000 from the sale and issuance of 2,357,500 shares of
our common stock.
In February 2015, we completed an underwritten offering and received proceeds, net of underwriter discounts and
other estimated offering costs, of approximately $10,500,000 from the sale and issuance of 4,600,000 shares of our
common stock.
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Debt
At December 31, 2014, we had approximately $16.9 million of principal and interest owing under our debt obligations
related to our continuing operations and $19.6 million in debt financing associated with the discontinued operations of
Schneider Power's 10.0 MW Zephyr wind farm that is classified as held for sale.
In May 2012, we executed a revolving asset based line of credit with a senior secured lender that provides us with the
ability to draw up to $7.5 million in working capital advances (as last amended in February 2015). The amount of advances that
we can draw under the amended line of credit is dependent upon our levels of eligible accounts receivables and inventories and
the line is set to expire on March 14, 2016. The amount is secured by substantially all of the assets used in our continuing
operations. As of December 31, 2014, $4.5 million of principal and accrued interest was outstanding under the line.
In November 2012, we entered into an equipment sale and leaseback financing arrangement that provided for a total of
$3,250,000 to finance the acquisition of certain equipment that we have employed in our continuing operations. The obligation
is owed to a finance company and is secured by the specific equipment assets acquired under the arrangement. As of December
31, 2014, $1.6 million of principal and accrued interest was outstanding under the arrangement.
In September 2013, we completed a private placement transaction in which we received gross proceeds of $11,000,000
from the sale of convertible notes and warrants. The convertible note holders have a second lien position on substantially all of
the assets used in our continuing operations. As of December 31, 2014, $10.7 million of principal and accrued interest was
outstanding under the notes.
Our outstanding debt obligations are more fully described in Note 8 of the Notes to the Consolidated Financial Statements
of this Annual Report.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with US generally accepted accounting principles (US GAAP) and are
included elsewhere in this Annual Report. We believe that the application of certain critical accounting policies, which are
important to our financial position and results of operations, require significant judgments and estimates on the part of
management. We evaluate our estimates on an ongoing basis. 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 for 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.
Management considers an accounting estimate to be critical if:
•
•
it requires assumptions to be made that were uncertain at the time the estimate was made; and
changes in the estimate or different estimates that could have been selected could have a material impact on our
results of operations or financial condition.
Our management has discussed the development and selection of these critical accounting policies and estimates with the
audit committee of our board of directors, and the audit committee has reviewed the disclosure presented below relating to
them. We believe the critical accounting policies described below affect the more significant judgments and estimates used in
the preparation of our consolidated financial statements:
Revenue recognition for product sales. We generally manufacture products based on specific orders from
customers. Revenue is recognized on product sales upon shipment or when the earnings process is complete and
collectability is reasonably assured, which for product sales is generally upon shipment from our warehouse or
shipment from warehouses of certain component suppliers that we have contractual relationships with. We include
the costs of shipping and handling, when incurred, in cost of goods sold. In certain circumstances, customers pay
one price for multiple products and services. For arrangements with multiple deliverables, revenue is recognized
upon the delivery of the separate units based on their relative selling prices. Consideration from multiple element
arrangements is allocated among the separate elements based on their relative fair values in accordance with
Accounting Standards Update (ASU) No. 2009-13, “Revenue Recognition (Topic 605)-Multiple-Deliverable
Revenue Arrangements.”
Revenue recognition for contract services. We generally recognize revenue and profit as work progresses on long-
term, fixed price contracts for product application development using the percentage-of-completion method.
Generally, we estimate percentage complete by determining cost incurred to date as a percentage of total estimated
cost at completion. For certain other contracts, percentage complete is determined by measuring progress towards
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contract deliverables if it is determined that this methodology more closely tracks the realization of the earnings
process. For contracts measured under the estimated cost approach, we believe we can generally make dependable
estimates of the revenue and costs applicable to various stages of a contract. Recognized revenue and profit are
subject to revisions as the contract progresses to completion. Our estimates of contract costs are based on
expectations of engineering development time and materials and other support costs. These estimates can change
based on unforeseen technology and integration issues, but known risk factors and contract challenges are
generally allowed for in the initial scope and cost estimate of the program. Our historical final contract costs have
usually approximated the initial estimates and any unforeseen changes in the estimates have not normally resulted
in a material impact to financial results. Revisions in profit estimates are charged to income in the period in which
the facts that give rise to the revision become known. For energy sales, we recognize revenues based on the terms
of a power purchase agreement which outlines long-term pricing and escalation for the power produced by the
renewable energy farm.
Allowance for doubtful accounts. We conduct a major portion of our business with a limited number of customers.
Credit is extended based upon an evaluation of each customer’s financial condition, with terms consistent with
those present throughout the industry. Typically, we do not require collateral from customers. We have recorded an
allowance for uncollectible accounts receivable based on past experience and certain circumstances surrounding
the composition of total accounts receivable. To the extent we increase this allowance, we must include an expense
in the statement of operations. If commercial conditions differ from management’s estimates, an additional write-
off may be required.
Warranties. We provide for the estimated cost of product warranties at the time revenue is recognized based on past
experience and expectations of future costs to be incurred. Our Fuel Storage & Systems segment provides product
warranty on storage and fuel systems that are standard for the industry. For prototype components and systems that
are not production intent, warranties are generally not provided. While we engage in product quality programs and
processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty
obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service delivery costs differ from our
estimates, revisions to the estimated warranty liability would be required.
Inventory. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated market value based upon assumptions about future
demand and market conditions. As part of our estimate, we rely upon future planned design configurations and
projected alternative usage of certain components estimated by our engineering teams. We also consider estimated
demand for service and warranty parts based on historical information. If actual usage rates or market conditions
are less favorable than those projected by management, additional inventory write-downs may be required.
Long-lived asset impairment. We periodically evaluate our long-lived assets for impairment, including intangible
assets and goodwill relating to acquisitions. Goodwill is not amortized, but is evaluated periodically for any
impairment in the carrying value. We review our long-lived assets, which include property and equipment,
construction in process, intangible assets and goodwill, for impairment on an annual basis or whenever events or
changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors we
consider important which could trigger an impairment review include, but are not limited to, the following:
significant underperformance relative to expected historical or projected future operating results; significant
changes in the manner of our use of the acquired assets or the strategy for our overall business; significant negative
industry or economic trends; and a significant decline in our stock price for a sustained period. Goodwill and long-
lived asset impairment assessments are generally determined based on fair value techniques, including determining
the estimated future discounted and undiscounted cash flows over the remaining useful life of the asset. Those
models require estimates of future revenue, profits, capital expenditures and working capital for each reporting
unit. We estimate these amounts by evaluating historical trends, the current state of the automotive and renewable
energy industries and the economy, current budgets, and operating plans. Discounted cash flows are calculated
using a discount rate determined by management to be commensurate with the risk inherent in the current business
model. Determining the fair value of reporting units and goodwill includes significant judgment by management
and different judgments could yield different results. Any resulting impairment loss could have a material impact
on our financial condition and results of operations.
Derivatives. We account for provisions contained within certain debt obligations and warrant contracts as
derivative instrument liabilities in accordance with ASC Topic No. 815 “Derivatives and Hedging” (ASC 815). The
share price of our common stock represents the underlying variable that gives rise to the value of the derivative
instruments. Additional factors include the volatility of our stock price, our credit rating, discount rates, and stated
interest rates. In accordance with ASC 815, the derivative instrument liabilities are recorded at fair value and
marked to market each period. Changes in fair value of the derivatives each period resulting from a movement in
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the share price of our common stock or the passage of time are recognized as fair value adjustments of derivative
instruments in our consolidated statements of operations and comprehensive loss.
Debt modifications. We evaluate whether modifications to and restructuring of existing debt instruments result in
substantial changes as defined by ASC Topic No. 470, “Debt” (ASC 470). Significant management judgment is
required and we use the assistance of independent valuation consultants to estimate the fair value of the original
and amended debt instruments as part of our evaluation. Different judgments could yield different results. If we
determine that a substantial change has occurred with respect to the modifications, we treat the transaction as an
extinguishment of the original debt and recognize a gain or loss on the debt retirement. If we determine that our
lender has for economic or legal reasons related to our financial condition, granted us a concession that our lender
would not otherwise consider, we treat the modifications as a troubled debt restructuring and analyze whether a
gain should be recorded in connection with the concession.
Stock compensation. We account for stock compensation expense under ASC Topic No. 718 “Compensation-Stock
Compensation” (ASC 718). ASC 718 requires all share-based payments, including grants of stock options and
restricted stock, to be recognized in our financial statements based on their respective grant date fair values. The
fair value of each employee stock option is estimated on the date of grant using an option-pricing model that meets
certain requirements. We currently use the Black-Scholes option-pricing model to estimate the fair value of our
stock options. The Black-Scholes model meets the requirements of ASC 718 but the fair values generated by the
model may not be indicative of the actual fair values of our stock options as it does not consider certain factors
important to share-based awards, such as continued employment, periodic vesting requirements and limited
transferability. The determination of the fair value of share-based payment awards utilizing the Black-Scholes
model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-
free interest rate and expected dividends. We estimate the expected volatility and estimated life of our stock options
at grant date based on historical data trended into the future. The risk-free interest rate assumption is the Constant
Maturity Treasury rate on government securities with a remaining term equal to the expected term of the option.
The dividend yield assumption is based on our history and expectation of dividend payouts. The grant date fair
value of our restricted stock is based on the fair market value of our common stock on the date of grant. Share-
based compensation expense recognized in our financial statements is based on awards that are ultimately expected
to vest. The amount of share-based compensation expense is reduced for estimated forfeitures based on historical
experience. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. We evaluate the assumptions used to value stock-based
awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation
expense may differ significantly from what we have recorded in the past. If there are any modifications or
cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any
remaining unearned share-based compensation expense. To the extent that we grant additional equity securities to
employees or we assume unvested securities in connection with any acquisitions, our share-based compensation
expense will be increased by the additional unearned compensation resulting from those additional grants or
acquisitions.
Income taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate
our income taxes in each of the jurisdictions in which we operate. This process involves the estimation of our
actual current tax exposure together with assessing temporary differences resulting from differing treatment of
items for tax and accounting purposes. Included in this assessment is the determination of the net operating loss
carry-forward that has resulted from our cumulative net operating loss. These temporary differences result in an
overall net deferred tax asset or liability position. We must assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent that we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a
period, we generally include an expense or benefit within the tax provision in the consolidated statement of
operations. Significant management judgment is required in determining our provision for income taxes, our
deferred tax liabilities and our deferred tax assets, including any valuation allowance recorded against our deferred
tax assets. We have recorded a partial valuation allowance on our deferred tax assets due to uncertainties related to
our ability to fully utilize these assets, primarily consisting of net operating losses and credits that may be carried
forward before they expire, and that are subject to certain limitations. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to adjust the recorded valuation
allowance, which could materially impact our financial position and results of operations.
Warrant classification. We evaluate the warrants we issue in accordance with applicable accounting guidance and
we have concluded that liability classification is appropriate for the warrants issued on October 27, 2006, June 22,
2007, August 25, 2008, August 3, 2009, September 4, 2009, February 18, 2011 (Series “B”), January 24, 2013 and
May 16, 2013. Although we mark to market all the warrants classified as liabilities each period, all of these
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warrants had either expired, been fully exercised, or the fair values of the remaining warrants were nominal as of
the most recent reported balance sheet date. We have further concluded that equity classification is appropriate for
all other warrants that were outstanding during the periods presented due to the fact that these warrants are
considered to be indexed to our own stock, are required to be physically settled in shares of our common stock and
there are no provisions that could require net-cash settlement. The proceeds we received from the transactions that
gave rise to the issuance of the warrants have been allocated to the common stock or debt issued, as applicable, and
the warrants based on their relative fair values. For those transactions in which proceeds were received in
connection with the sale of common stock, we aggregate the values of those warrants that we do not classify as
liabilities with the fair value of the stock issued as both of these types of instruments have been classified as
permanent equity. The classification as equity for certain of the warrants could change as a result of either future
modifications to the existing terms of settlement or the issuance of new financial instruments by us that could be
converted into an increased or unlimited number of shares. If a change in classification of certain warrants is
required in the future, the warrants would be treated as derivatives, reclassified as liabilities on the balance sheet at
their fair value, and marked to market each period, with the changes in fair values being recognized in the
respective period’s statement of operations.
NEW ACCOUNTING STANDARD
See Note 2 of the Notes to the Consolidated Financial Statements of this Annual Report for information regarding recent
accounting pronouncements adopted and or issued.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information required by Item 305 of Regulation S-K relating to quantitative and qualitative disclosures about market
risks is not required by a smaller reporting company.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is contained in the consolidated financial statements listed in Item 15(a) of this
Annual Report under the caption “Financial Statements” and appear beginning on page F-1 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to our company,
including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of
senior management and the Board of Directors.
Based on their evaluation as of December 31, 2014, the Chief Executive Officer and Chief Financial Officer of our
company have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15
(e) under the Securities Exchange Act of 1934) were effective to ensure that the information required to be disclosed by us in
the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in SEC rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f).
Our internal control over financial reporting includes policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and
dispositions of our assets;
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•
•
•
Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles;
Provide reasonable assurances that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted
accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of
December 31, 2014, based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
The scope of our assessment of and conclusion on the effectiveness of our internal controls over financial reporting
included the internal controls of Schneider Power.
Based on our evaluation under the framework in Internal Control–Integrated Framework (2013), management concluded
that our internal control over financial reporting was effective as of December 31, 2014.
Our independent registered accounting firm, Haskell & White LLP, has issued an audit report on the effectiveness of our
internal control over financial reporting as of December 31, 2014, as stated in their report that is included in Part II, Item 8
herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter
ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
31
PART III
Items 10, 11, 12, 13 and 14
We hereby incorporate by reference information required by Part III (Items 10, 11, 12, 13 and 14) of this Annual Report
from our definitive Proxy Statement for our 2015 Annual Meeting of Stockholders, which will be filed with the Securities and
Exchange Commission, pursuant to Regulation 14A, not later than April 30, 2015.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
(1) Financial Statements. See Consolidated Financial Statements beginning on page F-1.
(2) Financial Statement Schedules. See Schedule II, Valuation and Qualifying Accounts that follow the
Consolidated Financial Statements.
All other schedules are omitted because the information is not applicable or is not material, or because the information is
included in the consolidated financial statements or the notes thereto.
(3) Exhibits. The following exhibits are filed or incorporated by reference as a part of this report:
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Restated Certificate of Incorporation of the Registrant, dated July 2, 2014 (incorporated herein by reference to
Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2014).
Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 of the
Registrant’s Transition Report on Form 10-K/T filed with the SEC on March 28, 2012).
Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 of the Registrant’s
Registration Statement on Form 10 (File No. 000-49629), which was filed with the SEC on February 13, 2002).
Form of Convertible Note (incorporated herein by reference to Exhibit 4.1of the Registrant’s Current Report on
Form 8-K filed on September 18, 2013).
Form of Warrant (incorporated herein by the reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-
K filed on September 18, 2013).
Form of Warrant issued by the Registrant to certain accredited investors on July 25, 2012 and June 28, 2012
(incorporated herein by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the
SEC on July 26, 2012).
Form of Warrant issued by the Registrant to certain accredited investors on July 25, 2012 and June 28, 2012
(incorporated herein by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the
SEC on July 26, 2012).
Form of Warrant issued by the Registrant to certain accredited investors on June 22, 2012 and June 28, 2012
(incorporated herein by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the
SEC on June 28, 2012).
Warrant, dated May 7, 2012, issued by the Registration to Advanced Equities, Inc. (incorporated herein by
reference to Exhibit 4.4 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2012).
Form of Warrant Agreement between the Registrant and Broadridge Corporate Issuer Solutions, Inc., and
accompanying form of Series B Warrant and form of Series C Warrant (incorporated herein by reference to Exhibit
4.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on March 16, 2012).
Form of Warrant Agreement, dated December 21, 2011, between the Company and Broadridge Corporate Issuer
Solutions, Inc. (incorporated herein by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K
filed with the SEC on December 16, 2011).
Form of Warrant issued by the Registrant to certain accredited investors on November 15, 2011 (incorporated
herein by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on
November 18, 2011).
Form of Warrant issued by the Registrant to certain accredited investors during the period October 17, 2011
through October 21, 2011 (incorporated herein by reference to Exhibit 10.3 of the Registrant’s Current Report on
Form 8-K filed with the SEC on October 21, 2011).
32
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
10.1
10.2
10.3
10.4†
10.5
Form of Warrant issued by the Registrant to certain accredited investors on September 29, 2011 and October 12,
2011 (incorporated herein by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with
the SEC on October 5, 2011).
Form of Warrant issued by the Registrant to certain accredited investors on August 23, 2011 (incorporated herein
by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on August 24,
2011).
Form of Warrant issued by the Registrant to certain accredited investors on July 6, 2011 (incorporated herein by
reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form S-3 filed with the SEC on August 12,
2011).
Form of Concession Warrant issued by the Registrant to its placement agent on July 6, 2011 (incorporated herein
by reference to Exhibit 4.3 of the Registrant’s Registration Statement on Form S-3 filed with the SEC on August
12, 2011).
Form of Warrant issued by the Registrant to certain accredited investors on June 15, 2011 and June 21, 2011
(incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the
SEC on June 15, 2011).
Form of Retainer Warrant issued by the Registrant to its placement agent on June 15, 2011 (incorporated herein by
reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on June 15, 2011).
Form of Concession Warrant issued by the Registrant to its placement agent on June 15, 2011 and June 21, 2011
(incorporated herein by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K filed with the
SEC on June 15, 2011).
Form of “A” Warrant issued by the Registrant to certain accredited investors on February 18, 2011 (incorporated
herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the SEC on February
17, 2011).
Form of “B” Warrant issued by the Registrant to certain accredited investors on February 18, 2011 (incorporated
herein by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the SEC on February
17, 2011).
Form of Warrant issued by the Registrant to certain accredited investors in connection with a private placement
transaction that was completed in October 2010 (incorporated herein by reference to Exhibit 10.3 of the
Registrant’s Current Report on Form 8-K filed with the SEC on October 19, 2010).
Form of Concession Warrant, dated July 22, 2010, issued by the Registrant to its placement agent in connection
with a private placement transaction that was completed in July 2010 (incorporated herein by reference to Exhibit
10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on July 26, 2010).
Form of Warrant issued by the Registrant to certain accredited investors in connection with a private placement
transaction that was completed in July 2010 (incorporated herein by reference to Exhibit 10.2 of the Registrant’s
Current Report on Form 8-K filed with the SEC on May 6, 2010).
Form of Retainer Warrant issued by the Registrant to its placement agent in connection with a private placement
transaction that was completed in July 2010 (incorporated herein by reference to Exhibit 10.3 of the Registrant’s
Current Report on Form 8-K filed with the SEC on May 6, 2010).
Warrant, dated August 19, 2008, issued by Registrant to Capital Ventures International in a registered offering
(incorporated herein by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K/A filed with the
SEC on August 21, 2008).
Quantum Fuel Systems Technologies Worldwide, Inc. Amended 2002 Stock Incentive Plan and Form of Award
Agreement (incorporated herein by reference to Exhibit 10.7 of Registrant’s Quarterly Report on Form 10-Q filed
with the SEC on September 9, 2005).
Form of Indemnification Agreement between the Registrant and each of its directors and executive officers
(incorporated herein by reference to Exhibit 10.21 of the Registrant’s Registration Statement on Form S-1 (File
No. 333-101668) filed with the SEC on December 5, 2002).
Lease Agreement, with an effective date of November 1, 2008, between the Registrant and Cartwright Real Estate
Holdings, LLC (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed
with the SEC on November 17, 2008).
Agreement in Support of Development, dated February 14, 2011, between the Registrant and General Motors
Holdings LLC (incorporated herein by reference to Exhibit 10.63 of Registrant’s Registration of Securities on
Form S-1 filed with the SEC on March 4, 2011).
Access and Security Agreement, dated February 14, 2011, between the Registrant and General Motors Holdings
LLC (incorporated herein by reference to Exhibit 10.64 of Registrant’s Registration of Securities on Form S-1
filed with the SEC on March 4, 2011).
33
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
Quantum Fuel Systems Technologies Worldwide, Inc. 2011 Stock Incentive Plan (incorporated herein by reference
to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the SEC on October 31, 2011).
Loan and Security Agreement, dated May 7, 2012, between the Registrant and Bridge Bank, National Association
(incorporated herein by reference to Exhibit 10.3 of Registrant’s Quarterly Report on Form 10-Q filed with the
SEC on May 10, 2012).
Limited Recourse Guaranty and Pledge Agreement, dated April 19, 2012, by and among Schneider Power Inc.,
Zephyr Farms Limited and Samsung Heavy Industries Co. Ltd. (incorporated herein by reference to Exhibit 10.2
of Registrant’s Current Report on Form 8-K filed with the SEC on April 25, 2012).
Credit Agreement between Zephyr Farms Limited and Samsung Heavy Industries Co. Ltd. (incorporated herein by
reference to Exhibit 10.6 of Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2012).
Letter Agreement, effective April 20, 2012, between the Registrant, Schneider Power Inc. and Samsung Heavy
Industries Co. Ltd. (incorporated herein by reference to Exhibit 10.7 of Registrant’s Quarterly Report on Form 10-
Q filed with the SEC on August 9, 2012).
Form of Stock Option Award Agreement for stock options issued under the Registrant’s 2011 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the
SEC on June 8, 2012).
Form of Restricted Stock Award Agreement for restricted stock awards granted under the Registrant’s 2011 Stock
Incentive Plan (incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K
filed with the SEC on June 8, 2012).
Sale and Purchase Agreement, dated November 6, 2012, between the Registrant and Amur Finance I, LLC
(incorporated herein by reference to Exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q filed with the
SEC on November 9, 2012).
Lease Agreement, dated November 6, 2012, between the Registrant and Amur Finance I, LLC (incorporated herein
by reference to Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on November
9, 2012).
Master Amending Agreement, dated March 19, 2013, between Schneider Power Inc., its wholly-owned subsidiary,
Zephyr Farms Limited, and Samsung Heavy Industries Co. Ltd. (incorporated herein by reference to Exhibit 10.1
of the Registrant's Current Report on Form 8-K filed with the SEC on March 25, 2013).
Amended and Restated Credit Agreement, dated March 19, 2013, between Zephyr Farms Limited and Samsung
Heavy Industries Co. (incorporated herein by reference to Exhibit 10.2 of the Registrant's Current Report on Form
8-K filed with the SEC on March 25, 2013).
Debenture Delivery Agreement, dated March 19, 2013, between Zephyr Farms Limited and Samsung Heavy
Industries Co. (incorporated herein by reference to the Exhibit 10.3 of the Registrant's Current Report on Form 8-
K filed with the SEC on March 25, 2013).
Agreement of Purchase and Sale dated March 20, 2013, between Schneider Power Inc., 1604718 Ontario Ltd. and
Leader Resources Services Corp. (incorporated herein by reference to Exhibit 10.1 of the Registrant's Current Report
on Form 8-K filed with the SEC on March 26, 2013).
Asset Purchase Agreement, dated March 20, 2013, between the Registrant, Schneider Power Providence Bay Inc.
and Leader Resources Services Corp. (incorporated herein by reference to Exhibit 10.2 of the Registrant's Current
Report on Form 8-K filed with the SEC on March 26, 2013).
Form of Securities Purchase Agreement, dated May 16, 2013, between the Registrant and an accredited investor
(incorporated herein by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on May 16,
2013).
Loan and Security Modification Agreement, dated May 20, 2013, between the Registrant and Bridge Bank,
National Association (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form
8-K filed with the SEC on May 24, 2013).
Purchase Agreement, dated May 24, 2013, between Trout Creek Wind Power Inc., Quantum Fuel Systems
Technologies Worldwide, Inc., Schneider Power Inc., Schneider Power Generation Inc., and Sierra Nevada Power
(Ontario) LTD. (incorporated herein by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed
with the SEC on May 31, 2013).
Agreement and First Amendment to Standard Industrial/Commercial Single - Tenant Lease Agreement, dated May
30, 2013 (incorporated herein by reference to Exhibit 10. 1 of Registrant’s Current Report on Form 8-K filed with
the SEC on June 5, 2013).
Employment Agreement, dated June 24, 2013, between the Registrant and Brian Olson (incorporated herein by
reference to Exhibit 10.1of Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2013).
34
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Employment Agreement, dated June 24, 2013, between the Registrant and Bradley J. Timon (incorporated herein
by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed with the SEC on June 28, 2013).
Employment Agreement, dated June 24, 2013, between the Registrant and Kenneth R. Lombardo (incorporated
herein by reference to Exhibit 10.3 of Registrant’s Current Report on Form 8-K filed with the SEC on June 28,
2013).
Quantum Fuel Systems Technologies Worldwide, Inc. Executive Cash Bonus Plan (incorporated herein by
reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K Filed with the SEC on July 19, 2013).
At The Market Offering Agreement, dated August 19, 2013, between Registrant and Ascendiant Capital Markets,
LLC (incorporated herein by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed with the
SEC on August 19, 2013).
Form of Convertible Note and Warrant Purchase Agreement dated September 15, 2013 (incorporated herein by
reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on September 18, 2013).
Form of Subordinated Security Agreement, dated September of 2013, between the Registrant and Kevin Douglas,
as collateral agent (incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form
File 8-K filed with the SEC on September 18, 2013).
Employment Agreement, dated September 2, 2013, between the Registration and Mark Arold (incorporated herein
by reference to Exhibit 10.60 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 14,
2014).
Third Amendment to Agreement in Support of Development Program and Access and Security Agreement, dated
December 20, 2013, between the Registrant and General Motors Holdings, LLC (incorporated herein by reference
to Exhibit 10.61 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 14, 2014).
Schedule of Non-Employee Director Compensation for 2015
10.32
10.33*
10.34
10.35
10.36
10.37
10.38
10.39
21.1*
23.1*
24.1
Second Amendment to Loan and Security Agreement (incorporated herein by reference to Exhibit 10.63 of the
Registrant’s Annual Report on Form 10-K filed with the SEC on March 14, 2014).
Amended and Restated Lease Agreement between the Registrant and Braden Courts Associated (incorporated
herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on
September 12, 2014).
Debt Repayment Agreement, dated December 10, 2014, by and among the Registrant, Advanced Green
Innovations, LLC, ZHRO Solutions, LLC and Advanced Green Technologies, LLC (incorporated herein by
reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the SEC on December 16,
2014.)
Pledge Agreement, dated December 101, 2014, by and among the Registrant, Advanced Green Innovations, LLC
and Advanced Green Technologies, LLC (incorporated herein by reference to Exhibit 10.2 of the Registrant’s
Current Report on Form 8-K filed with the SEC on December 16, 2014.)
First Amendment to Master Amendment Agreement, dated January 26, 2015, by and among Schneider Power Inc.,
Zephyr Farms Limited and Samsung Heavy Industries Co. Ltd. (incorporated herein by reference to Exhibit 10.1
of the Registrant’s Current Report on Form 8-K filed with the SEC on January 30, 2015).
Third Loan and Security Modification Agreement, dated February 10, 2015, between the Registrant and Bridge
Bank, National Association (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on
Form 8-K filed with the SEC on February 10, 2015.)
Subsidiaries of the Registrant
Consent of Haskell & White LLP
Power of Attorney (included in signature page of this registration statement)
31.1*
Certification of the Chief Executive Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a).
31.2*
32.1*
32.2*
Certification of the Chief Financial Officer of the Registrant pursuant to Exchange Act Rule 13a-14(a).
Certification of the Chief Executive Officer of the Registrant furnished pursuant to Exchange Act Rule 13a-14(b)
and 18 U.S.C. 1350.
Certification of the Chief Financial Officer of the Registrant furnished pursuant to Exchange Act Rule 13a-14(b)
and 18 U.S.C. 1350.
35
The following Quantum Fuel Systems Technologies Worldwide, Inc. financial information for the year ended
December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance
Sheets), (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Equity , (iv) Consolidated
Statements of Cash Flows and (v) Notes to Consolidated Financial Statements, tagged as blocks of text. The
information in Exhibit 101 is “furnished” and not “filed,” as provided in Rule 402 of Regulation S-T.
101*
* - Filed herewith
† - Certain portions of this Exhibit have been omitted and separately filed with the Securities and Exchange Commission
pursuant to a request for confidential treatment.
36
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2014 and
2013
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
Notes to the Consolidated Financial Statements
Financial Statement Schedule:
Schedule II—Valuation and Qualifying Accounts
Page
F-1
F-2
F-3
F-4
F-5
F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Quantum Fuel Systems Technologies Worldwide, Inc.
We have audited the accompanying consolidated balance sheets of Quantum Fuel Systems Technologies Worldwide, Inc. (the
“Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive loss,
changes in stockholders' equity, and cash flows for each of the years ended December 31, 2014 and 2013. In connection with our
audits of the consolidated financial statements, we have also audited the financial statement schedule for the years ended December
31, 2014 and 2013. We have also audited the Company’s internal control over financial reporting as of December 31, 2014, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of
the years ended December 31, 2014 and 2013, in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, the financial statement schedule for each of the years ended December 31, 2014 and 2013, when
considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ HASKELL & WHITE LLP
Irvine, California
March 16, 2015
F-1
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid and other current assets
Assets of discontinued operations held for sale
Total current assets
Property and equipment, net
Goodwill
Deposits and other assets
Assets of discontinued operations held for sale
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued payroll obligations
Deferred revenue
Accrued warranties
Derivative instruments
Other accrued liabilities
Debt obligations, current portion
Liabilities of discontinued operations held for sale
Total current liabilities
Debt obligations, net of current portion
Liabilities of discontinued operations held for sale
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, $.001 par value; 20,000,000 shares authorized; none issued
Common stock, $.02 par value; 50,000,000 shares authorized, 23,310,721 shares
issued, of which 23,276,264 are outstanding and 34,457 are held in treasury at
December 31, 2014; 37,475,000 shares authorized,18,885,878 shares issued, of
which 18,875,253 are outstanding and 10,625 are held in treasury at December 31,
2013
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive loss in discontinued operations
Total stockholders’ equity
Total liabilities and stockholders' equity
See accompanying notes.
$
$
$
December 31,
2014
2013
$
$
$
4,103,841
11,626,467
8,872,704
1,261,953
1,049,603
26,914,568
9,762,341
12,400,000
487,209
22,112,396
71,676,514
9,313,192
1,263,257
2,990,908
611,999
7,000
1,010,340
5,177,207
1,550,164
21,924,067
7,053,195
19,094,320
6,254,359
8,418,559
5,011,780
1,629,668
1,324,945
22,639,311
5,091,959
12,400,000
839,475
25,033,797
66,004,542
7,179,463
1,154,346
2,223,903
399,171
2,415,000
496,726
3,946,582
1,894,476
19,709,667
7,794,289
21,520,634
—
—
465,525
514,065,280
(490,426,307)
(499,566)
23,604,932
71,676,514
377,505
492,360,165
(475,502,703)
(255,015)
16,979,952
66,004,542
$
$
F-2
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years Ended December 31,
2014
2013
$
34,102,994
$
31,903,690
28,964,490
5,138,504
21,558,161
10,345,529
7,616,018
10,238,254
17,854,272
(12,715,768)
(2,051,160)
2,018,864
(1,736,206)
(14,484,270)
(1,600)
(14,485,870)
(437,734)
(14,923,604) $
5,996,414
11,086,020
17,082,434
(6,736,905)
(4,877,122)
(8,421,268)
17,357
(20,017,938)
(1,600)
(20,019,538)
(3,025,028)
(23,044,566)
(0.65) $
(0.02)
(0.67) $
(1.37)
(0.20)
(1.57)
22,407,818
14,642,320
(14,923,604) $
(244,551)
(23,044,566)
(340,996)
—
(244,551)
(15,168,155) $
8,127
(332,869)
(23,377,435)
$
$
$
$
$
Revenues
Cost of revenues
Gross margin
Operating expenses:
Research and development
Selling, general and administrative
Total operating expenses
Operating loss
Interest expense, net
Fair value adjustments of derivative instruments, net
Other income (expense), net
Loss from continuing operations before income taxes
Income tax expense
Loss from continuing operations
Loss from discontinued operations, net of taxes
Net loss
Per share data - Basic and diluted:
Loss from continuing operations
Loss from discontinued operations
Net loss
Weighted average shares outstanding:
Basic and diluted
Comprehensive loss:
Net loss
Foreign currency translation adjustments, net of tax
Reclassification of accumulated foreign currency translation in connection with
asset disposals, net of tax
Other comprehensive loss
Comprehensive loss
See accompanying notes.
F-3
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Series B
Common Stock
Common Stock
Additional
Paid-In-
Accumulated
Accumulated
Other
Comprehensive
Shares
Amount
Shares
Amount
Capital
Deficit
Income (loss)
Total
Equity
Balance at January 1, 2013
12,499
$
250
11,940,183
$
238,804
$ 466,363,910
$(452,458,137) $
77,854
$ 14,222,681
Share-based compensation on stock option and restricted stock
awards
Issuance of common stock and warrants to investors
—
—
—
—
Exchange of shares in connection with conversion provision
(12,499)
(250)
Issuance of common stock in connection with option and
warrant exercises
Issuance of warrants in connection with debt issuances
Reclassification from debt to equity upon exercise and
settlement of derivative warrant exchange
Recognition of beneficial conversion feature in connection with
debt issuances
Foreign currency translation adjustments
Reclassification of accumulated foreign currency translation in
connection with asset impairments
Net loss
Balance at December 31, 2013
Share-based compensation on stock options and restricted stock
awards
Issuance of common stock to investors
Reclassification of debt to equity upon exercise and settlement
of derivative warrants
Issuance of common stock in connection with option and
warrant exercises
Issuance of common stock in satisfaction of debt principal
Foreign currency translation
Net loss
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2014
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
126,250
2,525
437,368
3,185,846
63,717
5,198,594
12,499
2,858,695
250
—
57,174
13,030,721
—
—
2,946,876
751,780
15,035
1,781,042
—
—
—
—
—
—
—
—
2,601,654
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
439,893
5,262,311
—
13,087,895
2,946,876
1,796,077
2,601,654
(340,996)
8,127
(340,996)
8,127
(23,044,566)
—
(23,044,566)
18,875,253
377,505
492,360,165
(475,502,703)
(255,015)
16,979,952
221,768
4,434
498,541
2,357,500
47,150
15,212,470
39,839
797
388,340
1,561,540
220,364
31,232
4,407
5,085,171
520,593
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
502,975
15,259,620
389,137
5,116,403
525,000
(244,551)
(244,551)
(14,923,604)
—
(14,923,604)
23,276,264
$
465,525
$ 514,065,280
$(490,426,307) $
(499,566) $ 23,604,932
See accompanying notes.
F-4
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2014
2013
$ (14,923,604) $ (23,044,566)
1,475,298
882,298
565,990
(2,018,864)
1,301,781
—
(99,947)
68,584
—
1,082,347
2,665,503
439,893
8,421,268
3,115,202
308,482
535,957
517,397
9,728
(3,017,541)
(3,929,508)
(20,320)
2,179,305
1,373,291
(16,163,237)
(5,335,060)
(3,142,590)
683,735
2,700,877
992,371
(10,049,456)
(6,145,680)
—
—
(6,145,680)
16,620,375
(1,360,755)
4,500,000
—
—
(3,831,917)
(552,966)
316,038
(872,929)
5,140,534
(63,015)
(85,152)
19,810,213
(37,391)
(2,536,095)
7,031,981
4,495,886
4,103,841
392,045
4,495,886
$
$
$
(3,194,554)
1,108,499
1,300
(2,084,755)
7,506,907
(694,170)
831,917
12,500,000
(867,165)
—
(8,741,060)
1,462,014
(696,947)
5,965,692
—
(27,289)
17,239,899
(87,445)
5,018,243
2,013,738
7,031,981
6,254,359
777,622
7,031,981
$
$
$
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss from operations to cash used in operating activities:
Depreciation on property and equipment
Impairment of assets of discontinued operations held for sale
Share-based compensation charges
Fair value adjustments of derivative instruments
Interest on debt obligations
Loss on sale of assets of discontinued operations
Provisions for bad debt (recovery)
Inventory obsolescence
Other non-cash items
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other assets
Accounts payable
Deferred revenue and other accrued liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases and development of property and equipment
Proceeds from sale of discontinued operations, net of selling costs
Other
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants
Common stock and warrant issuance costs
Proceeds from borrowings under line of credit
Proceeds from issuance of long-term debt and warrants
Debt and warrant issuance costs
Repayments under line of credit
Repayments of long-term obligations
Borrowings on capital leases
Repayments on capital leases
Proceeds from exercise of options and warrants
Taxes paid in lieu of shares issued for share based compensation
Other
Net cash provided by financing activities
Net effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash and cash equivalents at end of period:
Continuing operations
Discontinued operations
Total
F-5
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Cash Flow Information:
Cash paid for interest
Cash paid for income taxes
Supplemental Schedule of Non-cash Investing and Financing activities:
Exercise of warrants classified as derivative instruments:
Decrease in derivative instruments associated with warrants
Increase in common stock and additional paid-in-capital
Conversion of debt to equity:
Decrease in debt principal and interest
Increase in common stock and additional paid-in-capital
Recognition of debt discount in connection with long-term debt and warrants:
Decrease in debt obligations
Increase in additional paid-in-capital
Recognition of derivative liability in connection with issuance of common stock and
warrants:
Decrease in additional paid-in-capital
Increase in derivative liabilities
Recognition of derivative liabilities in connection with debt issuance:
Decrease in debt obligations
Increase in derivative liabilities
See accompanying notes.
Years Ended December 31,
2014
2013
$1,987,472
$1,600
$3,072,930
$1,600
$389,137
(389,137)
525,000
(525,000)
—
—
—
—
—
—
$8,915,268
(8,915,268)
—
—
5,875,000
(5,875,000)
1,604,000
(1,604,000)
705,000
(705,000)
F-6
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014
Note 1: Background and Basis of Presentation
We are a leader in the innovation, development and production of compressed natural gas (CNG) fuel storage tanks
and packaged fuel storage systems and the integration of vehicle system technologies, including engine and vehicle control
systems and drivetrains.
We produce innovative, advanced and light-weight CNG storage tanks, and supply these tanks, in addition to fully-
integrated natural gas storage systems, to truck and automotive original equipment manufacturers (OEM) and aftermarket and
OEM truck integrators. We also provide low emission and fast-to-market solutions to support the integration and production of
natural gas fuel and storage systems, hydrogen fuel and storage systems, hybrid technologies and specialty vehicles, as well as
hydrogen refueling systems and dispensers.
Unless the context otherwise requires, “we,” “our,” “us,” “Quantum” and similar expressions refers to Quantum Fuel
Systems Technologies Worldwide, Inc. and Subsidiaries.
We were formed as a Delaware corporation in October 2000, and became a publicly traded company on July 23, 2002.
Our common stock trades on The Nasdaq Capital Market under the symbol “QTWW.” Our principal office is located in Lake
Forest, California.
We classify our business operations into three reporting segments: Fuel Storage & Systems, Renewable Energy and
Corporate. The Renewable Energy business segment, consisting entirely of the operations of Schneider Power Inc. (Schneider
Power), is now classified as discontinued operations as discussed further below.
Fuel Storage & Systems Segment
This segment generates revenue from two sources: product sales and contract services. Product sales are derived
primarily from the sale of storage tanks and packaged fuel system modules for CNG applications. Contract services revenue is
generated by providing engineering design and support to OEMs and other customers, so that our fuel systems and advanced
propulsion systems integrate and operate with our customer's CNG, hybrid or fuel cell applications. Contract services revenue
is also generated from customers in the aerospace industry, material science, and other governmental entities and agencies.
We primarily manufacture and supply CNG storage and fuel systems for a variety of heavy, medium and light-duty
trucks and passenger vehicles. We also provide design, engineering development and packaging, production validation and
system integration for transportation applications, including hydrogen fuel storage and hybrid technologies. For hybrid and
plug-in electric vehicle (PHEV) applications, we provide powertrain engineering, electronic control, software strategies and
system integration. We also design, engineer and manufacture refueling systems and dispensers.
Renewable Energy Segment
Our Renewable Energy segment consists solely of the business operations of our wholly-owned subsidiary, Schneider
Power, which we acquired on April 16, 2010. Schneider Power, previously headquartered in Toronto, Ontario, Canada, and now
administered out of our Lake Forest, California facility beginning in January 2014, is an independent wind power producer and
holder of interests in certain renewable energy projects.
Since August 2012, we have been actively looking for buyers for the assets and operations of Schneider Power. On
May 13, 2013, we completed the sale of Schneider Power’s 1.6 megawatt (MW) Providence Bay wind farm. On May 29,
2013, we announced that we had entered into definitive agreements for the sale of the 10.0 MW Trout Creek development
project, which sale will occur in two phases. The closing for the first phase, which resulted in the sale of a majority interest in
the Trout Creek wind farm project, occurred on September 18, 2013. The sale of the remaining interest in the Trout Creek wind
farm project is expected to be completed near the end of 2015, subject to the project achieving commercial operation. We are
also actively pursuing the sale of other Schneider Power assets, including the 10.0 MW Zephyr wind farm operating asset
which represents a substantial portion of the remaining assets and liabilities of Schneider Power as of December 31, 2014.
As a result of these actions and our expectations for a completion of a sale of the business within the next year, we
report the historical activities and balances of Schneider Power as discontinued operations held for sale.
F-7
Table of Contents
Corporate Segment
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Corporate segment consists of general and administrative expenses incurred at the corporate level that are not
directly attributable to the Fuel Storage & Systems or Renewable Energy business 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.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. These adjustments consist of normal and recurring accruals, as well as
non-recurring charges.
The consolidated financial statements for the periods presented include the accounts of Quantum Fuel Systems
Technologies Worldwide, Inc., and our wholly owned subsidiary, Schneider Power Inc. (Schneider Power).
Schneider Power is an independent power producer and holder of interests in certain renewable energy projects.
Schneider Power's portfolio includes the 10.0 megawatt Zephyr operating wind farm located in Ontario, Canada. In August
2012, we committed to a plan to sell the Schneider Power business and initiated steps to locate buyers. To date, we have
completed the sale of certain assets as further discussed in Note 3. We continue to actively seek one or more buyers for
Schneider Power's remaining operations and assets. As a result of these actions and our expectations for a completion of a sale
of the business within the next year, the historical activities and balances of Schneider Power are reported as discontinued
operations in the accompanying consolidated financial statements for all periods presented.
All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications
have been made to the historical amounts to conform to the presentation of the current period.
In preparing the consolidated financial statements, we have evaluated subsequent events. For purposes of these
consolidated financial statements, subsequent events are those events that occurred after the most recent balance sheet date
presented but before the consolidated financial statements are issued or available to be issued.
Reverse Stock Split
On July 30, 2013, we implemented a reverse stock split pursuant to which all classes of our issued and outstanding shares
of our common stock at the close of business on such date were combined and reconstituted into a smaller number of shares of
common stock in a ratio of 1 share of common stock for every 4 shares of common stock. Concurrently, our authorized shares
of common stock were reduced proportionately from 150,000,000 to 37,500,000, of which 25,000 shares were designated as
Series B non-voting common stock. The reverse stock split did not affect our 20,000,000 shares of authorized preferred stock.
The accompanying consolidated financial statements and footnotes have been retroactively adjusted to reflect the effects of the
reverse stock split.
Authorized Shares
Effective December 31, 2013, General Motors Holdings, LLC (“GM Holdings”), the only holder of our issued and
outstanding Series B Stock, exchanged all 12,499 of its shares of Series B Common Stock for 12,499 shares of our common
stock, $0.02 par value per share. As a result of such exchange, there are no longer any issued and outstanding shares of our
Series B Stock. On February 26, 2014, our certificate of incorporation was amended to retire the 25,000 authorized shares of
Series B common stock. On May 6, 2014, our certificate of incorporation was further amended to increase the number of
authorized shares of common stock from 37,475,000 to 50,000,000.
Liquidity
Our historical operating results, capital resources and financial position, in combination with current projections and
estimates, were considered in management's plan and intentions to fund our operations over a reasonable period of time, which
we define in this report as the twelve month period ending December 31, 2015. For purposes of liquidity disclosures, we assess
the likelihood that we have sufficient available working capital and other principal sources of liquidity to fund our operating
activities and obligations as they become due and the likelihood that we will be able to maintain compliance with the required
provisions contained within our debt instruments over the twelve month period.
F-8
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For purposes of our assessment, we consider the $4.1 million of cash and cash equivalents as of December 31, 2014, the
$3.0 million of potential availability under our expanded $7.5 million line of credit (as last amended on February 10, 2015),
and the $10.5 million in net proceeds received from our February 18, 2015 underwritten public offering subsequent to the
balance sheet date, as principal sources of capital.
Based on our current operating plan and expectations, we believe we have sufficient available capital through at least
December 31, 2015 to cover our existing operations and obligations. Our long-term future cash requirements will depend on
numerous factors, including our revenue base, profit margins, product development activities, market acceptance of our
products, future expansion plans and ability to control costs.
Note 2: Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
These estimates include assessing our levels of liquidity needs through December 31, 2015, collectability of accounts
receivable, estimates of contract costs and percentage of completion, the use and recoverability of inventory, the carrying
amounts and fair value of assets held for sale, long-lived assets and goodwill, including estimates of future cash flows and
market valuations associated with asset impairment evaluations, the fair value of derivatives associated with debt instruments
and warrants, the realization of deferred taxes, useful lives for depreciation/ amortization periods of assets and provisions for
warranty claims, among others. The markets for our products are characterized by competition, technological development and
new product introduction, all of which could impact the future realizability of our assets. Actual results could differ materially
from those estimates.
Foreign Currency
The books and records of our wholly-owned subsidiary held for sale, Schneider Power, are maintained in a functional
currency, the Canadian dollar, that differs from the United States (U.S.) dollar functional currency that is reported in the
accompanying consolidated financial statements.
Schneider Power's assets and liabilities are translated at rates of exchange in effect at the end of the reporting periods.
Schneider Power's revenues and expenses are translated at the average rates of exchange for the applicable period. Foreign
currency translation gains or losses are accumulated within other comprehensive income or loss as a separate component of
stockholders' equity.
Revenue Recognition
We generally manufacture products based on specific orders from customers. Revenue is recognized when the earnings
process is complete and collectability is reasonably assured, which for product sales is generally upon shipment from our
warehouse or shipment from warehouses of certain component suppliers that we have contractual relationships with. We
include the costs of shipping and handling, when incurred, in cost of goods sold.
Contract services revenue is derived primarily from services related to system development and application engineering
and qualification testing of our products and systems under funded contracts with OEMs and other customers. Contract services
revenue is recognized principally by the percentage of completion method. For applicable contracts, we generally estimate
percentage complete by determining cost incurred to date as a percentage of total estimated cost at completion. For certain other
contracts, percentage complete is determined by measuring progress towards contract deliverables if it is determined that this
methodology more closely tracks the realization of the earnings process. For contracts measured under the estimated cost
approach, we believe we can generally make dependable estimates of the revenue and costs applicable to various stages of a
contract. Recognized revenue and profit are subject to revisions as the contract progresses to completion. Our estimates of
contract costs are based on expectations of engineering development time and materials and other support costs. These
estimates can change based on unforeseen technology and integration issues, but known risk factors and contract challenges are
generally allowed for in the initial scope and cost estimate of the program. Revisions in profit estimates are charged to income
in the period in which the facts that give rise to the revision become known. We also recognize contract services revenue under
certain other arrangements on a time and material basis.
In certain circumstances, customers pay one price for multiple products and services. Consideration from multiple
element arrangements is allocated among the separate units of accounting based on the relative selling price method.
F-9
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenues of our discontinued operations held for sale principally include energy generation sales associated with wind
farm operations which are recognized at the time of generation and delivery to the purchasing utility providers as metered at the
point of interconnection with the transmission systems. The rates paid by the respective purchasing utility providers are
established in Power Purchase Agreements (PPA) executed between us and the utility providers.
Research and Development Costs
Research and development costs are charged to expense as incurred. Equipment used in research and development with
alternative future uses is capitalized and only the current period depreciation is charged to research and development.
Cash and Cash Equivalents
All unrestricted highly liquid investments with original maturities of three months or less when purchased are considered
to be cash equivalents.
Cash Flow Presentation
We report cash flows under the indirect method.
Accounts Receivable
We sell to customers using credit terms customary in our industry. Credit is extended to customers based on an evaluation
of the customer’s financial condition, and when credit is extended, collateral is generally not required. Interest is not normally
charged on receivables. We establish an allowance for potential losses on our accounts receivable based on historical loss
experience and current economic conditions. Accounts receivable are charged off to the allowance when we determine that the
account is uncollectible.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method for all
inventories. Market is determined by replacement cost for raw materials and parts and net realizable value for work-in-process
and finished goods. Our business is subject to the risk of technological and design changes. We provide for obsolete or slow-
moving inventory based on our analysis of inventory levels and future sales forecasts at the end of each accounting period.
Long-Lived Assets, Including Goodwill and Other Intangible Assets
Property and equipment, which includes amounts recorded under capital leases, are stated at cost less accumulated
depreciation. Depreciation on property and equipment (other than land which is not depreciated) is computed by the straight-
line method over the estimated useful lives of the assets. We are depreciating tooling, dies and molds over 5 years; plant
machinery and equipment between 7 years and 15 years; information systems and office equipment over periods of 3 to 7 years;
and automobiles and trucks over 5 years. Amortization of leasehold improvements is provided using the straight-line method
over the assets’ estimated useful lives. We amortize acquired intangible assets using the straight-line method over their
estimated useful lives of 20 years.
Major renewals and improvements are capitalized and minor replacements, maintenance and repairs are charged to
current operations as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed
from the balance sheets and any gain or loss is reflected in the statements of operations.
Goodwill represents the excess of purchase price over the fair value of net assets acquired in acquisitions and is allocated
to our business segments. Goodwill is not amortized and is assessed at least annually for impairment or whenever events or
changes in circumstances indicate that the carrying value of such assets may not be recoverable.
We evaluate the recoverability of property and equipment and amortizable intangible assets for impairment when events
or circumstances occur such as, a significant decrease in market value of an asset, an adverse change in business climate, a
current expectation to dispose before end of estimated useful life, a significant change in extent or manner in which the asset is
used or a significant physical change to the asset, that indicate that the carrying amount of such assets may not be recoverable.
Impairment losses are recorded on long-lived assets used in operations when an indicator of impairment is present and the
undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount.
F-10
Table of Contents
Warranty Costs
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We offer a warranty for production level storage systems, tanks, component parts and other alternative fuel products
shipped to our customers in trucking applications. The specific terms and conditions of those warranties vary depending on the
customer requirements; however, CNG systems are generally sold with a warranty of two years or 200,000 miles, whichever
occurs first. We estimate the costs that may be incurred under our warranty provisions and record a liability in the amount of
such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of units sold,
historical and anticipated rates of warranty claims, and cost per claim.
We generally disclaim all warranties on our prototype component parts and systems. At our discretion or under certain
programs, we may provide for the replacement cost or perform additional tests of prototype component parts subsequent to
product delivery. We include an estimate of these types of arrangements as part of our warranty liability. We periodically assess
the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Derivative Financial Instruments
We account for conversion features contained within certain of our debt instruments and exercise features of certain of
our warrant contracts as derivative financial instruments as further discussed in Notes 9 and 10.
The derivative financial instruments, which are classified as liabilities, are recorded at fair value and marked to market
each period. Changes in fair value of the derivatives each period resulting from a movement in the share price of our common
stock or the passage of time are recognized as fair value adjustments of derivative instruments in the consolidated statements of
operations and comprehensive loss. Changes in fair value resulting from the modification to the terms of the derivative are
recognized as a gain or loss on modification of derivative instruments in the consolidated statements of operations and
comprehensive loss. We also use a two step approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to our own stock, including evaluating the instrument’s contingent exercise and settlement provisions.
Derivative instruments are presented as current liabilities on the consolidated balance sheet if (i): the terms allow the
holder to convert debt principal or demand principal repayments associated with derivative instruments within twelve months
of the balance sheet date or (ii) in the case of warrants, certain contractual provisions under the warrant contracts could require
immediate cash payment due to events that are outside of our control. These types of derivative instruments are similar in
nature to demand obligations because the settlement of the obligations could require cash payment within the current operating
cycle.
Income Taxes
The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax
assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date (see Note 12).
We account for uncertainties in income tax law under a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. We
recognize the tax effects of a position if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting
date. If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits of the position are recognized.
Share-Based Compensation
We account for share-based compensation expense by recognizing the estimated fair value of stock options and restricted
stock issued to our employees on a straight-line basis over the requisite vesting period as an expense, reduced for estimated
forfeitures.
Segment Information
We classify our continuing business operations into two segments: Fuel Storage & Vehicles Systems and Corporate which
are discussed further in Note 14. Our Renewable Energy business segment is classified as discontinued operations held for sale
which is discussed further in Note 3.
F-11
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under GAAP are included in
comprehensive income (loss) but are excluded from net income or loss attributable to stockholders, as these amounts are
recorded directly as an adjustment to stockholders' equity. The change in our accumulated other comprehensive income (loss)
for the periods presented is associated with activity resulting from the effects of currency translation.
Interest Expense
We recognize the amortization of deferred loan origination costs and debt discounts as interest expense under the
effective interest method over the life of the applicable arrangements.
Financial Instruments, Hedging Derivatives, and Concentration of Credit Risk
Financial instruments that we enter into consist principally of cash equivalents, trade receivables and payables, stock
options and warrants, and debt obligations.
We conduct a major portion of our business with a limited number of customers and suppliers. See further discussion of
revenue and purchase concentrations of our continuing operations in Note 15.
Fair Values Measurements
We determine fair values of our assets and liabilities based on the three level valuation hierarchy established in
accordance with accounting guidance for measuring fair value. The valuation hierarchy maximizes the use of observable inputs
and minimizes the use of unobservable inputs when measuring fair value. GAAP describes three different valuation techniques
to be used in determining fair value for financial assets and liabilities: the market, income or cost approaches. The three
valuation techniques are consistent with generally accepted valuation methodologies. The three level hierarchy which
prioritizes the inputs used to measure fair value from market based assumptions to entity specific assumptions are as follows:
Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.
Level 3: Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability
at the measurement date. The inputs are unobservable in the market and significant to the instrument's valuation.
We have adopted Accounting Standards Codification (ASC) Topic No. 825 “Financial Instruments” (ASC 825), which
allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial
assets and liabilities on a contract-by-contract basis. We did not elect to adopt the fair value option for any of our financial
assets or liabilities that were not already measured on a recurring basis. Based on certain qualifying events, we may elect to
adopt the fair value option in the future for certain financial assets and liabilities.
The carrying value of cash and cash equivalents, accounts receivable, investments and other assets, accounts payable and
amounts included in accrued liabilities and other meeting the definition of a financial instrument approximated their fair values
at December 31, 2014 and 2013. See further discussion of fair value measurements in Note 9.
New Accounting Pronouncement
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 Revenue
from Contracts with Customers (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU
2014-09 outlines principles that govern revenue recognition at an amount an entity expects to be entitled when products are
transferred to customers. ASU 2014-09 will be effective for us in the first quarter of 2017. ASU 2014-09 may be applied
retrospectively for each period presented or retrospectively with the cumulative effect recognized in the opening retained
earnings balance in 2017. We are in the process of evaluating the impact of adopting the new standard on our consolidated
financial statements.
F-12
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 3: Discontinued Operations Held for Sale —Schneider Power
Our Renewable Energy segment consists solely of the business operations of Schneider Power.
Since August 2012, we have been actively looking for buyers for the assets and operations of Schneider Power. During
the periods presented, we completed the sale of certain assets as discussed below.
As a result of these actions and our expectations for a completion of a sale of the business within the next year, we report
the historical activities and balances of Schneider Power as discontinued operations.
The conversion rate of one CAD to one US Dollar was 0.86 to 1.0 as of December 31, 2014 and 0.94 to 1.0 as of
December 31, 2013.
Divestitures
In May 2013, we completed the sale of Schneider Power's 1.6 MW Providence Bay wind farm (Providence Bay) in
exchange for Canadian Dollar (CAD) $403,373 in cash and the assumption of CAD $1,111,977 of bank debt and certain other
project related liabilities. The sale of Providence Bay resulted in the recognition of a loss of CAD $55,012 related to the
disposal.
In May 2013, we announced that we had entered into definitive agreements for the sale of the 10.0 MW Trout Creek
development project (Trout Creek), which sale will occur in two phases. The closing for the first phase, which resulted in the
sale of a majority interest in Trout Creek, was completed in September 2013 for CAD $971,250 in cash and the assumption of
CAD $236,709 of project related liabilities. The closing of the first phase of the sale of Trout Creek resulted in the recognition
of a loss of CAD $165,297 related to the disposal. In connection with the closing of the first phase, we recorded an asset of
CAD $907,558, representing the fair value of contingent consideration of CAD $1,143,750 that will be payable to Schneider
Power if the Trout Creek project achieves commercial operation. The sale of the remaining interest in the Trout Creek wind
farm project is expected to be completed near the end of 2015, subject to the project achieving commercial operation.
In December 2013, we completed the sale of three development projects for CAD $75,000 in cash and an asset of CAD
$125,904, representing the fair value of the contingent consideration that will be payable if any one or more of the three
development projects reach commercial operation. The sale of the three development projects resulted in the recognition of a
loss of CAD $105,220.
The following table provides the results of Schneider Power, classified as discontinued operations, for the years ended
December 31:
Revenue:
Net product sales
Costs and expenses:
Cost of product sales
Research and development
Selling, general and administrative
Impairments of long-lived operating assets (1)
Loss on sale of assets (2)
Total costs and expenses
Operating income (loss)
Interest expense, net
Other income, net (3)
Loss from discontinued operations before income taxes
Income tax benefit
2014
2013
$
2,363,324
$
2,736,146
580,753
—
158,970
882,297
—
1,622,020
741,304
(1,255,567)
76,529
(437,734)
—
674,536
16,872
998,959
2,665,503
308,482
4,664,352
(1,928,206)
(1,410,560)
227,846
(3,110,920)
85,892
(3,025,028)
Net loss from discontinued operations held for sale
$
(437,734) $
F-13
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) We measure each disposal group of Schneider Power at the lower of its carrying amount or fair value less costs to
sell. The fair value measurements are based on available Level 3 inputs such as market conditions and pending
agreements to sell the assets. Based on assessments that we updated during 2014 and 2013, we determined that the
carrying values of goodwill and intangible assets of certain disposal groups were above their fair values, net of
selling costs. In 2014, we recognized $0.9 million of impairment charges, of which $0.4 million related to goodwill
impairment and $0.5 million related to intangible assets associated with SPI's development pipeline projects
compared to $2.7 million recognized in 2013, of which $1.8 million related to goodwill associated with Zephyr, $0.8
million related to assets associated with Schneider Power's development project pipeline and $0.1 million related to
property and equipment associated with the Providence Bay Wind Farm.
(2) Represents the loss recognized upon the sale of the Providence Bay wind farm and certain wind farm development
projects.
(3) For 2014, represents an approved insurance claim associated with turbine downtime during 2012. For 2013,
represents return of a development deposit associated with a wind farm development project that was abandoned in
2011.
The balance sheets of Schneider Power, classified as discontinued operations held for sale, are as follows for the year
ended December 31:
Current Assets:
Cash and cash equivalents
Accounts receivable, net
Prepaids and other current assets
Total current assets
Non-Current Assets:
Property and equipment, net (1)
Intangible asset, net (2)
Goodwill (3)
Deposits and other assets (4)
Total non-current assets
Current Liabilities:
Accounts payable
Other accrued liabilities
Current portion of debt obligations (5)
Total current liabilities
Non-Current Liabilities:
Debt obligations, net of current portion (5)
Total non-current liabilities
F-14
2014
2013
392,045
$
221,943
435,615
777,622
328,730
218,593
1,049,603
$
1,324,945
20,190,824
$
1,014,185
2,191
905,196
22,016,644
1,577,672
452,682
986,799
22,112,396
$
25,033,797
275,628
$
101,015
1,173,521
1,550,164
$
291,730
344,919
1,257,827
1,894,476
19,094,320
19,094,320
$
$
21,520,634
21,520,634
$
$
$
$
$
$
$
$
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(1) Consists mainly of wind turbine assets of the 10 megawatt Zephyr Wind Farm acquired in April 2012. Depreciation was
ceased in 2012 upon the classification of the operations as held for sale. Accumulated depreciation of property and
equipment at December 31, 2014 was $193,284.
(2) Consists of project assets associated with Schneider Power's renewable energy portfolio and power purchase agreements
associated with the Zephyr Wind Farm.The estimated useful lives for the intangible assets associated with Zephyr Wind
Farm are 20 years; however, amortization was ceased in 2012 upon the classification of the operations as held for sale.
(3) Represents goodwill ascribed to the Zephyr Wind Farm acquisition in April 2012.
(4) Consists mainly of the fair value of contingent consideration associated with the sale of the Trout Creek wind farm
project and three development projects.
(5) Consists of a credit facility due to a secured project lender in connection with the acquisition of the Zephyr Wind Farm as
discussed below.
Zephyr Wind Farm - Samsung Debt
In connection with Schneider Power's acquisition of Zephyr Farms Limited (Zephyr) and its 10 MW wind farm
(Zephyr Wind Farm) on April 20, 2012, Schneider Power assumed a credit facility owed to Samsung Heavy Industries Co. Ltd
(Samsung) related to the project (the Samsung Debt). The Samsung Debt had a total principal and interest amount of CAD
$23.2 million as of the date of the acquisition. Pursuant to the original terms of the Samsung Debt, Zephyr was required to
make regularly scheduled semi-annual principal and interest payments, accruing at a rate of 6.5% per annum, for a period of ten
years, as follows: (1) eighteen semi-annual payments of principal and interest in the approximate amount of CAD $1.05 million
commencing six months following the date that the Zephyr wind farm achieved commercial operations (which event occurred
in May 2012), (ii) a principal balloon payment in year five in the approximate amount of CAD $5.3 million and (iii) a final
payment in year ten in the approximate amount of CAD $9.6 million.
On March 19, 2013, Schneider Power and Zephyr entered into a Master Amendment Agreement with Samsung to
resolve certain issues with respect to the performance of the wind turbines purchased by Zephyr from Samsung for use by the
Zephyr Wind Farm pursuant to which the parties agreed to, among other things, (i) revise the turbine delivery date to February
1, 2013, thus, extending the grace period (and Zephyr's right to claim performance related liquidated damages) to January 31,
2013, (ii) waive all of Zephyr's fee obligations under an operations and maintenance agreement between Zephyr and Samsung
applicable to the turbines owned and operated by Zephyr that would have been payable to Samsung through January 31, 2013,
(iii) waive a portion of the interest component that would have been payable to Samsung through January 31, 2013, and (iv)
restructure the repayment terms of the principal obligations owed by Zephyr to Samsung under the Samsung Debt. In
connection with the execution of the Master Amendment Agreement, Zephyr and Samsung also executed an Amended and
Restated Credit Agreement. Except for the modifications to the repayment terms of the principal and interest obligations owed
under the Credit Agreement, no other material amendments were made to the Credit Agreement.
Based on the present value of the cash flows of the amended Samsung Debt, we determined that the March 2013
modified terms were not substantially different from the original payment terms.
Upon execution of the Master Amendment Agreement, Zephyr was obligated to repay the Samsung Debt, together with
interest at a rate of 6.5% per year, over a ten year period, as follows: (i) an interest payment of CAD $100,000 that was made
before March 31, 2013, (ii) an interest only payment in the approximate amount of CAD $1.3 million that was made on August
12, 2013 (the scheduled payment date was on July 31, 2013 but was subsequently extended to August 15, 2013), (iii) nineteen
semi-annual payments of principal and interest in the approximate amount of CAD $1.1 million commencing on January 31,
2014, (iv) a principal balloon payment in the approximate amount of CAD $2.6 million on each of January 31, 2018 and July
31, 2018, (v) a principal balloon payment in the approximate amount of CAD $5.6 million on July 31, 2022 and (vi) a final
payment in the approximate amount of CAD $5.1 million on January 31, 2023.
As of December 31, 2014, the total amount of the Samsung Debt was CAD $23.5 million, which consisted of CAD $22.1
million of principal, CAD $0.8 million of unamortized premium and CAD $0.6 million of accrued interest.
F-15
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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On January 8, 2015, Schneider Power and Zephyr notified Samsung of their assertion that Samsung is in default of its
obligations under the Turbine Supply Agreement dated June 30, 2010, as amended, and the Operations and Maintenance
Agreement dated May 22, 2012. Under the terms of the Operations and Maintenance Agreement, Samsung is contractually
required to maintain an average availability at or above 96% for the wind turbines purchased by Zephyr from Samsung. As a
result of specifically identified operating and maintenance issues during the past six month period that Samsung has
acknowledged, the average availability is materially below the minimum contractual levels and therefore Zephyr will be
entitled to certain compensatory payments under the terms of the contract. The parties have entered into discussions to address
the performance issues. The execution of the First Amendment to Master Amendment Agreement (discussed below) followed
the notification to Samsung and initial discussions. Senior executives of Schneider Power and Zephyr intend to continue
discussing the issues with Samsung executives in an attempt to find a broader resolution related to the matter.
On January 26, 2015, Schneider Power and Zephyr entered into a First Amendment to Master Amendment Agreement
pursuant to which the parties agreed to defer until January 31, 2016 approximately CAD $462,167 of interest owed to Samsung
under the Master Amendment Agreement that was originally scheduled to be paid on January 31, 2015.
The debt amounts due under the Samsung Debt are secured by substantially all of Zephyr’s assets and a pledge of all of
the shares of Zephyr held by Schneider Power. Quantum has no obligation to service the debt payments and has not provided
any guarantees associated with the Samsung Debt.
Bank Term Loan - Providence Bay Wind Farm
The significant terms of the Bank Term Loan as last amended in April 2012 were as follows: (i) scheduled maturity
date of April 10, 2017, (ii) interest at 6.0% per annum, and (iii) required fixed cash payments of CAD $12,899 per month
through April 10, 2017, with the remaining principal amount of CAD $667,422 due on the maturity date.
Upon our sale of substantially all of the SPI Providence Bay wind farm assets in May 2013, the purchaser also
assumed substantially all of the SPI Providence Bay wind farm liabilities including the remaining CAD $1.1 million balance of
the Bank Term Loan.
Commitments of Discontinued Operations
At December 31, 2014, minimum future commitments under a noncancelable operating land lease for Zephyr
aggregated $1,635,912, payable as follows: $86,777 in 2015, $87,065 in 2016, $87,065 in 2017, $87,652 in 2018, $87,945 in
2019, and $1,199,408 thereafter. The lease contains renewal options, which we have not considered in the amounts disclosed.
Rental expense under the operating lease was $93,971 in 2014 and $99,906 in 2013.
At December 31, 2014, minimum payments under an operational and maintenance agreement for Zephyr Wind Farm
aggregated $893,354, payable as follows: $291,908 in 2015, $297,746 in 2016 and $303,700 in 2017.
Note 4: Accounts Receivable
Net accounts receivable of continuing operations consist of the following as of December 31:
Customer accounts billed
Customer accounts unbilled
Allowance for doubtful accounts
Accounts receivable, net
2014
11,120,593
797,518
(291,644)
11,626,467
$
$
2013
8,268,171
549,072
(398,684)
8,418,559
$
$
We assess the collectability of receivables associated with our customers on an ongoing basis and historically any
losses have been within management’s expectations.
F-16
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Debt Repayment Agreement
Advanced Green Innovations, LLC (AGI) and its subsidiary, ZHRO Solutions, LLC (ZHRO) are customers and revenues
from services we provided to them comprised 9% and 12% of our total revenues from continuing operations in 2014 and 2013,
respectively. AGI and ZHRO owed approximately $2.2 million (the “Outstanding Balance”) for engineering, design and
development services invoiced by us through October 3, 2014 that were beyond the contractual payment dates. AGI has
informed us that they are experiencing liquidity constraints that have caused delays in payments to us in connection with the
services provided.
On December 11, 2014, we entered into a Debt Repayment Agreement (the “Debt Repayment Agreement”), effective as
of December 10, 2014, with AGI, ZHRO and Advanced Green Technologies, LLC (an affiliate of AGI and ZHRO that is
referred to as “AGT”). Under the terms of the Debt Repayment Agreement, AGI and ZHRO jointly and severally agreed to pay
the Outstanding Balance, plus interest at 5% per annum, over a ten month period with the first payment in the amount of
$300,000 due on or before December 25, 2014. In the event that AGI and ZHRO fail to make any payment prior to the
expiration of any applicable cure period, then the remaining Outstanding Balance is immediately due and payable and the
interest rate is increased to 18% per annum. AGT provided us with a limited non-recourse guaranty of AGI’s and ZHRO’s
payment of the Outstanding Balance and interest.
To secure AGI’s and ZHRO’s performance of its obligations under the Debt Repayment Agreement and AGT's
performance under its limited non-recourse guaranty, AGI and AGT pledged all of their ownership interests in East Camelback,
LLC (“East Camelback”), consisting in the aggregate of 510 voting units (51.0%), 474 non-voting units and 47.5% of the
participation rights in East Camelback, pursuant to the terms of a Pledge Agreement between us, AGI and AGT. East
Camelback indirectly owns 100% of a commercial building, consisting of approximately 23,700 square feet of office space,
located in Phoenix, Arizona.
As of December 31, 2014, the total amount due from AGI and its affiliates amounted to $2.8 million, of which $2.2
million is associated with the Outstanding Balance under the Debt Repayment Agreement and $0.6 million is associated with
other receivables. Only $150,000 in cash has been received by us subsequent to the balance sheet date under the Debt
Repayment Agreement and as a result, AGI and its affiliates are in default of the Debt Repayment Agreement. Based on
communications and feedback we continue to have with executives of AGI, we believe the amounts outstanding are fully
realizable. As such, we have not recorded a specific allowance against the AGI receivable; however, we will continue to assess
the collectability on an ongoing basis.
Note 5: Inventories
Inventories of continuing operations consist of the following as of December 31:
Materials and parts
Work-in-process
Finished goods
Less: Provision for obsolescence
Inventories, net
2014
10,383,269
389,155
2,046,025
12,818,449
(3,945,745)
8,872,704
$
$
2013
6,495,599
1,146,589
1,246,753
8,888,941
(3,877,161)
5,011,780
$
$
F-17
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 6: Long-lived Assets
Property and equipment
Property and equipment of continuing operations consists of the following as of December 31:
Plant machinery and equipment
Information systems and office equipment
Leasehold improvements
Tooling, dies and molds
Automobiles and trucks
Property and equipment in service, gross
Less: Accumulated depreciation
Property and equipment in service, net
Construction in progress:
Plant equipment and other
Property and equipment, net
2014
2013
$
15,850,432
$
13,232,440
11,027,393
10,236,625
8,254,022
3,765,969
392,679
39,290,495
(31,270,855)
8,019,640
5,396,408
3,531,460
392,679
32,789,612
(29,795,556)
2,994,056
1,742,701
2,097,903
$
9,762,341
$
5,091,959
Total depreciation expense on property and equipment, including amortization of equipment held under capital leases,
was $1,475,298 and $1,082,347 for the years ended December 31, 2014 and 2013, respectively.
Property and equipment at December 31, 2014 and December 31, 2013 includes $3,250,000 and $2,933,963 acquired
under capital leases, respectively, of which the majority is included in plant machinery and equipment, information systems and
construction in progress. Accumulated depreciation of property and equipment acquired under these capital leases was
$765,150 at December 31, 2014 and $399,709 at December 31, 2013.
Goodwill
The carrying amount of goodwill of continuing operations, reported in our Fuel Storage & Systems business segment,
was $12,400,000 at both December 31, 2014 and 2013, and there was no goodwill activity associated with continuing
operations during the years ended December 31, 2014 and 2013.
We believe that no event or circumstance currently exists that would indicate a potential impairment of the carrying
values of property and equipment, goodwill, or any other significant long-lived operating asset as of December 31, 2014.
Note 7: Warranties
Changes in our product warranty liability for continuing operations are as follows:
Period
Twelve months ended December 31,
2014
Twelve months ended December 31,
2013
Balance at
Beginning
of Year
Warranties
Issued
Settlements
Made (1)
Changes in
Liability for
Pre-Existing
Warranties
Balance at
End of Year
$
$
399,171
364,749
$
$
435,453
101,399
$
$
(222,625) $
— $
611,999
(66,977) $
— $
399,171
(1) Consists of material and labor costs incurred to analyze, repair or replace products under warranty contracts.
F-18
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 8: Debt Obligations
Our debt obligations for continuing operations consist of the following as of December 31:
Obligations to Secured Lenders
Convertible Notes: $10,475,000 principal, $269,441 accrued interest, net of
unamortized discount of $4,628,439 at December 31, 2014; $11,000,000 principal,
$62,944 accrued interest, net of unamortized discount of $5,671,145 at December 31,
2013
Line of Credit: $4,500,000 principal and $9,218 accrued interest at December 31,
2014; $3,831,917 principal and $11,735 accrued interest at December 31, 2013
Capital lease obligation: $1,576,234 principal and $15,703 accrued interest at
December 31, 2014; $2,449,163 principal and $23,724 accrued interest at December
31, 2013
Obligations to Other Creditors:
Other obligations
Debt obligations of continuing operations, current and non-current
Less: Current portion of long-term debt, net of unamortized discount
Debt obligations of continuing operations, non-current
2014
2013
$
6,116,002
$
5,391,799
4,509,218
3,843,652
1,591,937
2,472,887
13,245
12,230,402
(5,177,207)
7,053,195
$
$
32,533
11,740,871
(3,946,582)
7,794,289
Convertible Notes
On September 18, 2013, we received gross proceeds of $11,000,000 in connection with the closing of a private
placement of 2.0% secured convertible promissory notes (the Convertible Notes) and warrants (the September 2013 Warrants)
to purchase up to 3,411,235 shares of our common stock (see Note 10). Net proceeds from the transaction, after placement
agent fees and other transaction costs, were $10,420,898.
The lead investor, who indirectly purchased $10,000,000 of the Convertible Notes, has the right to appoint one member
to our board of directors for as long as the lead investor beneficially owns at least 5.0% of our common stock. Effective
October 24, 2013, Mr. Timothy McGaw was appointed by the lead investor and currently serves on our board of directors.
Certain of our executives and board of directors (Related Parties) also participated in the offering including W. Brian Olson, our
Chief Executive Officer and Bradley Timon, our Chief Financial Officer.
The significant terms of the Convertible Notes are as follows: (i) scheduled maturity date of September 17, 2018,
provided, however, during the 30-day period beginning on September 18, 2016, and upon notice provided by the holders of a
majority of the outstanding principal amount of the Notes, the holders have the option to require us to redeem the principal and
interest then outstanding under the Convertible Notes within 90 days thereafter, (ii) accrues interest at 2.0% per annum, payable
upon the earlier of conversion or maturity, (iii) outstanding principal under the Convertible Notes convertible into shares of our
common stock at a fixed conversion price of $2.3824 per share at any time until maturity at the option of the Convertible Note
holders, subject to customary anti-dilution provisions, (iv) we have the right to pay the accrued interest in cash or stock (if we
elect to pay in stock, then the number of shares to be issued in payment of the interest will be based on the conversion price),
and (v) the Convertible Notes are subject to redemption in connection with a change in control transaction.
Our obligations under the Convertible Notes are secured by a second lien on substantially all of the operating assets used
in our continuing operations and provide for an event of default if our common stock is not listed on NASDAQ or another
national securities exchange as well as other customary events of default.
In connection with the private placement, we filed a resale registration statement covering the shares of common stock
issuable upon conversion of the Convertible Notes and exercise of the September 2013 Warrants which became effective on
December 23, 2013. We agreed to pay the holders of the Convertible Notes liquidated damages not to exceed 12% of the gross
proceeds received by us if, under certain circumstances, the registration statement is suspended or is no longer effective.
The transaction documents contain a provision that prohibits any investor from converting or exercising any portion of
the Convertible Notes or September 2013 Warrants, as applicable, if after giving effect to such conversion or exercise, the
investor would beneficially own more than 19.99% of our issued and outstanding shares on a post-conversion/exercise basis
unless and until such time that our stockholders approve the transaction. On May 15, 2014, our stockholders approved the
transaction at our 2014 annual meeting of stockholders, thus, the 19.99% beneficial ownership limitation no longer applies.
F-19
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We incurred transaction costs of $579,103 in connection with the private placement transaction of which we allocated
$268,252 to the Convertible Notes which is being amortized to interest expense over the scheduled life of the notes and
$310,851 is allocated to the September 2013 Warrants issued to the investors of the Convertible Notes (see Note 10). In
addition, we recorded a debt discount on the origination date of the Convertible Notes equal to the relative fair value of the
warrants and beneficial conversion feature issued with the Convertible Notes of $5,875,000 that is being amortized to interest
expense through the scheduled maturity date on September 17, 2018.
During 2014, certain of the holders of the Convertible Notes converted $525,000 of outstanding principal. As a result,
these holders received a combined total of 220,364 shares of our common stock in satisfaction of the principal portion
converted. We elected to pay the $3,361 of accrued interest related to the converted principal in cash. In connection with the
conversions in 2014, $12,765 of the deferred debt issuance costs and $269,493 of the debt discount were immediately
recognized as non-cash interest expense, respectively.
At December 31, 2014, the total amount of principal and interest due to Related Parties, including Mr. McGaw, under the
Convertible Notes was $487,218, which consisted of $475,000 of principal and $12,218 of accrued interest
Line of Credit
On May 7, 2012, we obtained a revolving line of credit with Bridge Bank, National Association (Bank) that initially
provided us with the ability to draw up to $10,000,000 in working capital advances at a variable interest rate represented by the
greater of (i) 5.25% or (ii) the bank’s prime rate, plus 2.00% (the "Line of Credit"). The amount of advances that we can draw
down under the facility is dependent upon our future levels of eligible accounts receivables and inventories and our compliance
with certain financial covenants. Under the original credit facility, there were two significant financial covenants that we were
required to meet in order to continue to have the ability to draw down under the Line of Credit. These covenants consisted of a
“Performance to Plan” covenant and a minimum asset coverage ratio of 1.25 to 1.00 of unrestricted cash balances maintained at
the bank plus eligible accounts receivables above the level of advances outstanding under the line.
During 2012 and through the first quarter of 2013, we were not in compliance with the quarterly Performance to Plan
covenant and as of March 31, 2013, we were also not in compliance with the asset coverage ratio covenant. On May 20, 2013,
we and our senior secured lender entered into a Loan and Security Modification Agreement with the bank pursuant to which (i)
the bank agreed to waive all covenant defaults through that date, (ii) the Performance to Plan financial covenant was deleted in
its entirety, (iii) the definition of Borrowing Base was revised to allow for up to 50% of eligible inventory (subject to a cap of
40% of all outstanding advances) regardless of the asset coverage ratio, (iv) the facility fee due on the first anniversary date
was reduced from $100,000 to $50,000, (v) the interest rate was subject to adjustment to the bank's prime rate, plus 2.5%, in the
event our asset coverage ratio fell below 1.35 to 1.00 at the end of a month until the asset coverage ratio again achieved a ratio
of at least 1.35 to 1.00, and (vi) the amount available to us under the revolving line of credit was reduced from $10,000,000 to
$5,000,000. In connection with the Loan and Security Modification Agreement, we paid the bank cash fees totaling $70,075
and issued warrants to purchase shares of our common stock to the bank with a fair value of $39,000 (see Note 10). The loan
fees and fair value of the warrants have been deferred and are being amortized to interest expense over the remaining life of the
credit facility. We determined that the modified terms were not substantially different from the original terms.
On March 14, 2014, we and the Bank amended the Line of Credit pursuant to which, among other things, (i) the maturity
date was extended to March 14, 2016, (ii) the asset coverage ratio financial covenant was deleted in its entirety, (iii) the interest
rate was reduced to the Bank's prime rate, plus 0.5%, and (iv) a covenant requiring us to maintain at least $1,500,000 million of
cash and cash equivalents at all times through maturity was added. We incurred $25,000 of debt issuance costs in connection
with this amendment.
As of December 31, 2014, the maximum borrowing capacity was $5,000,000, of which we had advances of $4,500,000
and $180,000 was reserved for letters of credit and credit card services.
On February 10, 2015, we and the Bank further amended the Line of Credit pursuant to which, among other things, (i) the
line of credit was increased from $5,000,000 to $7,500,000, (ii) the amount of inventory eligible to be included in the
borrowing base is limited to $2,000,000, (iii) a fee of 0.15% per annum, payable quarterly in arrears, is charged on the average
unused portion of the line of credit, and (iv) for any period that the outstanding advances on the line of credit exceeds
$5,000,000, then the amount of unrestricted cash that the Registrant is required to maintain at Bridge Bank increases from
$1,500,000 to $2,000,000 (Note 17).
The Bank has a senior secured first position on substantially all of the assets used in our continuing operations, other than
certain equipment acquired under the capital lease arrangement described below.
F-20
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capital Lease Obligation
On November 6, 2012, we entered into an equipment sale and leaseback financing arrangement that provided us with
access to a total of $3,250,000 to finance the acquisition of certain equipment to be employed in our continuing operations. The
arrangement calls for payments of $111,846 on or before the fifteenth of each month through October 15, 2015 and a final
payment of $691,846 on November 6, 2015. In 2014, we made total payments of $1,342,146 of which $469,217 represented
the implied interest cost.
We have the option to prepay the present value of the remaining scheduled lease obligations at any time in a lump sum.
The discount rate used to calculate the lump sum is 23.0% for any prepayments that are made after November 7, 2014.
The lease obligation is secured by the equipment that is acquired under the arrangement.
The following table sets forth the total minimum lease payments under the capital lease arrangement for equipment along
with the present value of the net minimum lease payments as of December 31, 2014:
Total minimum lease payments due in 2015
Less: Amount representing interest
Capital lease obligation
June / July 2012 Bridge Notes
$
$
1,810,300
(234,066)
1,576,234
On September 19, 2013, we used the net proceeds of the Convertible Notes to retire the $7,100,000 outstanding principal
balance and $186,740 of accrued interest due under the June/July 2012 Bridge Notes. In connection with the repayment, the
remaining unamortized balances of the deferred debt issuance costs of $34,686 and debt discount of $199,476 were
immediately recognized as non-cash interest expense.
January 2013 Bridge Notes
On January 24, 2013, we entered into agreements with certain accredited investors for the sale and purchase of
$1,800,000 of unsecured 0% nonconvertible promissory notes (the “January 2013 Bridge Notes”) and warrants to purchase
shares of our common stock. The January 2013 Bridge Notes included a $300,000 original issue discount; provided, however,
if the January 2013 Bridge Notes were repaid in full on or before July 1, 2013, then the total principal amount due under the
January 2013 Bridge Notes would be reduced to $1,625,000, which, as a result, would lower the original issue discount to
$125,000. At closing, we received gross proceeds of $1,500,000. Because of certain provisions contained in the warrants, we
determined that the warrant contracts represent freestanding derivative instruments (see Notes 10 and 11) and allocated
$705,000 of the proceeds to the derivative instruments, representing the fair value of the warrants on the transaction date. The
remaining proceeds of $795,000 were allocated to the debt instruments on a residual basis. The difference between the face
amount of the debt instruments of $1,800,000 and the proceeds allocated to the debt instruments resulted in an implied debt
discount of $1,005,000 that was being amortized to interest expense on the effective interest rate method over the expected
remaining life of the debt instruments until the notes were repaid in full on July 1, 2013.
In addition, we allocated total costs of $137,500 incurred in connection with the transaction between the derivative
warrants for $64,625 and debt instruments for $72,875 on a relative fair value basis. The portion allocated to the derivative
warrants was recognized immediately as interest expense and the portion allocated to the debt instruments was deferred and
was being amortized to interest expense on the effective interest rate method over the expected life of the debt instruments.
The January 2013 Bridge Notes were originally set to mature on December 31, 2013; however, we had the right to
prepay the notes, in whole or in part, at any time without penalty. On July 1, 2013, we repaid in full the remaining outstanding
balance under the January 2013 Bridge Notes. The early repayment of the outstanding balance under the January 2013 Bridge
Notes resulted in a savings of $175,000 as a result of the provision that decreased the original debt discount if an early
repayment was received on or before July 1, 2013.
Debt Covenants
We were in compliance with all existing covenants and other requirements of our debt instruments as of December 31,
2014.
F-21
Table of Contents
Debt Maturities
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table below shows scheduled maturities of our debt obligations of our continuing operations for each of the
following years until maturity:
Debt Maturities
Amortization of Discount
Net Maturities of Debt
Obligations
2015 (1)
2016 (2)
$
$
6,114,400
10,744,441
16,858,841
$
$
(937,193) $
(3,691,246)
(4,628,439) $
5,177,207
7,053,195
12,230,402
(1) Includes debt obligation under the Line of Credit that is not scheduled to expire until February 2017; however, the
terms could potentially require partial repayment within one year if levels of eligible receivables and inventories were
to decline significantly.
(2) Includes debt obligations under the Convertible Notes that are not scheduled to mature until September 2018;
however, holders have an option over a 30 day period beginning on September 18, 2016 that, if exercised, would
require us to redeem the obligations in cash within 90 days upon notice.
Note 9: Derivative Instruments and Fair Value Measurements
We measure our financial assets and liabilities in accordance with Fair Value Measurements and Disclosures under
GAAP, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair
value. GAAP describes three different valuation techniques to be used in determining fair value for financial assets and
liabilities: the market, income or cost approaches. The three valuation techniques are consistent with generally accepted
valuation methodologies. The hierarchy which prioritizes the inputs used to measure fair value from market based assumptions
to entity specific assumptions are as follows:
Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and
liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data.
Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability
at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
Our derivative instruments are measured on their respective origination dates, at the end of each reporting period and at
other points in time when necessary, such as modifications, using Level 3 inputs under accounting guidance for measuring fair
value. We do not report any financial assets or liabilities that we measure using Level 1 or Level 2 inputs and there were no
transfers in or out of Level 3 inputs for all periods reported.
F-22
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the changes in the fair value for the derivative instrument liabilities (classified as
current) using Level 3 inputs:
Balance at December 31, 2012
Origination of derivative instruments
Fair value adjustments resulting from change in value of
underlying asset and passage of time recognized in
earnings
Settlements associated with warrant exercises
Balance at December 31, 2013
Fair value adjustments resulting from change in value of
underlying asset and passage of time recognized in
earnings
Settlements associated with warrant exercises
October
2006
Warrants
(1)
February
2011
Warrants
(Series B)
January
2013
Warrants
May
2013
Warrants
Total
$
597,000
$
3,000
$
— $
— $
600,000
—
—
705,000
1,604,000
2,309,000
7,144,514
(5,397,514)
2,344,000
6,000
1,078,000
192,754
8,421,268
— (1,721,000)
(1,796,754)
(8,915,268)
9,000
62,000
(1,954,863)
(9,000)
(55,000)
(389,137)
—
—
—
—
—
2,415,000
(2,018,863)
(389,137)
Balance at December 31, 2014
$
— $
— $
7,000
$
— $
7,000
(1) Warrant contracts expired on April 27, 2014.
We determined the fair values of the derivative instrument liabilities associated with certain warrant contracts
primarily based on option-pricing mathematical models generally referred to as “Black-Scholes” and “Monte Carlo” option-
pricing models. These models determine the value of the derivative instruments based on complex mathematical formulas that
assume that returns on our underlying stock are normally-distributed and that risk-free interest rates and stock volatilities will
remain constant over the term of the contract. We use the Black-Scholes model to calculate the value of the derivative
instrument liabilities associated with warrant contracts in which the contractual terms are fixed. For derivative warrant
contracts that incorporate contingent terms, including exercise price reset provisions for the warrant contracts issued on
October 27, 2006, we utilized the Monte Carlo model through its expiration which is similar to the Black-Scholes model;
however, the Monte Carlo model simulates several thousand possible (but random) price paths for the underlying value of the
derivative instruments. These random price paths were then averaged to determine the value of the derivative instruments as of
the reporting date.
On August 2, 2013, the holder of the May 2013 Warrant exercised its cashless exchange right (see Note 10) and we settled
the cashless exchange by issuing to the investor 751,780 registered shares of common stock. We determined the fair value of
the cashless exchange based on the underlying shares issued in connection with the exchange and the closing price of our stock
on the exercise date of the cashless exercise.
F-23
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value of derivative instrument liabilities measured with Level 3 inputs are revalued quarterly. The assumptions
used in the calculations under our binomial and/or option pricing models for the following periods were as follows:
December 31, 2014
Annual volatility (1)
Risk-free rate
Dividend rate
Closing price of Quantum stock
Exercise price
December 31, 2013
Annual volatility (1)
Risk-free rate
Dividend rate
Closing price of Quantum stock
Exercise price
October
2006
Warrants (2)
February
2011
Warrants
January
2013
Warrants
*
*
*
*
*
33.6%
0.09%
—%
$
$
7.80
1.5142
54.7%
0.25%
—%
2.09
24.00
40.6%
0.38%
—%
7.80
24.00
$
$
$
$
$
$
$
$
52.8%
1.38%
—%
2.09
2.84
51.2%
1.75%
—%
7.80
2.84
(1) Annual volatility is based on the historical average of our identified peer group for a period consistent with the
remaining term of the contract.
(2) Warrant contracts expired on April 27, 2014. The Level 3 inputs in 2014 were used to measure the change in fair value
and marked to market just prior to expiration.
* Not applicable
Note 10: Stockholders’ Equity
Authorized Shares
At December 31, 2014, our authorized shares of capital stock consisted of the following: (i) 50,000,000 shares of
common stock, $0.02 par value, and (ii) 20,000,000 shares of preferred stock, $0.001 par value.
Common Stock
Holders of our common stock are entitled to one vote for each share on all matters voted on by stockholders. Holders of
common stock do not have cumulative voting rights in the election of directors and have no subscription, redemption or
conversion privileges. Subject to the preferences or other rights of any preferred stock that may be issued from time to time,
holders of common stock will be entitled to participate ratably in dividends of our common stock as declared by the board of
directors. Holders of common stock will be entitled to share ratably in all assets available for distribution to stockholders in the
event of our liquidation or dissolution, subject to distribution of the preferential amount, if any, to be distributed to holders of
preferred stock. No holder of our capital stock authorized at any such distribution date will have any preemptive right to
subscribe for or purchase any of our securities of any class or kind.
Preferred Stock
Our charter authorizes the board of directors, without any vote or action by the holders of our common stock, to issue up
to 20,000,000 shares of preferred stock from time to time in one or more series. Our board of directors are authorized to
determine the number of shares and designation of any series of preferred stock and the dividend rights, dividend rate,
conversion rights and terms, voting rights (full or limited, if any), redemption rights and terms, liquidation preferences and
sinking fund terms of any series of preferred stock. Issuances of preferred stock would be subject to the applicable rules of the
NASDAQ Capital Market or other organizations on whose systems our stock may then be quoted or listed. Depending upon the
terms of preferred stock established by our board of directors, any or all series of preferred stock could have preference over
our common stock with respect to dividends and other distribution upon our potential liquidation. Issuance of any such shares
with voting powers, or issuance of additional shares of our common stock, would dilute the voting power of our outstanding
common stock. We have no present plans to issue any preferred stock.
F-24
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Common Stock Issuances and Additional Paid-in Capital
In December 2012 and August 2013, we entered into two separate At The Market Offering Agreements (ATM) with a
sales agent. Under the ATMs, we had the right to offer and sell, from time to time, shares of our common stock through the
sales agent. During the period from the inception of the ATMs to the termination of the arrangements in May and September
2013, respectively, total proceeds from the sale of 1,959,078 shares common stock under the ATMs, net of sales agent
commissions and other transaction costs, were $4,228,981. Sales agent commissions of 3.0% and other transaction costs during
2013 amounted to $277,926 in connection with the transactions.
In May 2013, we completed a registered direct offering that yielded gross proceeds of $3,000,000 from the sale of
1,229,508 shares of our common stock at a price of $2.44 per share. The investor also received a warrant (the May 2013
Warrant) in connection with the transaction. As required by GAAP, we allocated $1,604,000 of the proceeds from the
transaction to the May 2013 Warrant that we classified as a derivative instrument as of the transaction date. The net amount
received by us, after deducting placement agent fees and transaction expenses, was $2,695,005. In August 2013, the investor
exercised the May 2013 Warrant under a cashless exchange provision pursuant to which we issued 751,780 registered shares of
common stock to the investor with a fair value of $1,796,754 in full settlement of the May 2013 warrant, which was reclassified
from a derivative liability to equity on the exercise date (Note 9).
In September 2013, we completed a private placement transaction in which we received gross proceeds of $11,000,000
from the sale of convertible notes and warrants. We recorded the fair value of the warrants and beneficial conversion feature,
net of transaction costs, as equity in the amount of $2,946,876 and $2,601,654,respectively, with an equal combined amount
recognized as a debt discount on the Convertible Notes.
During 2014 and 2013, we received cash proceeds of $5,122,285 and $5,965,762, respectively, from the exercise of
outstanding warrants.
On February 20, 2014, we completed an underwritten public offering and received proceeds, net of underwriter discounts
and other offering costs, of $15,259,620 from the sale and issuance of 2,357,500 shares of common stock.
On February 18, 2015, we completed an underwritten offering and received proceeds, net of underwriter discounts and
other estimated offering costs, of approximately $10,500,000 from the sale and issuance of 4,600,000 shares of common stock
(Note 17).
Warrants
Warrant activity and warrants outstanding, reportable in the equivalent number of shares of our common stock that can be
purchased upon exercise of the warrants, is as follows:
Warrants outstanding at January 1, 2013
Issued - original number
Issued - additional number (1)
Exercised (2)
Expired
Warrants outstanding at December 31, 2013
Exercised (2)
Expired
Warrants outstanding at December 31, 2014
(1) Associated with reset provisions contained within the October 27, 2006 warrant contracts.
(2)
Includes cash and cashless warrant exercises.
F-25
9,583,097
4,560,189
1,016,366
(4,053,005)
(253,900)
10,852,747
(1,828,232)
(697,110)
8,327,405
Table of Contents
January 2013 Warrants
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On January 24, 2013, in connection with the issuance of the January 2013 Bridge Notes (see Note 10), each investor
received a warrant entitling the investor to purchase shares of our common stock equal in number to 100% of the purchase price
for such investor's bridge note divided by $4.00. The aggregate number of shares underlying the warrants is 375,000. Each
warrant has a term of 5.5 years, cannot be exercised for a period of six months following the date of issuance and entitled the
investor to purchase one share of our common stock at an exercise price of $4.00 per share (the Initial Exercise Price), subject
to customary anti-dilution adjustments.
If the January 2013 Bridge Notes had not been repaid in full by July 2, 2013, then a full-ratchet anti-dilution provision
(price only) applied for the remaining term of the warrants, subject, however, to a floor price of $2.84 (the Floor Price). If the
January 2013 Bridge Notes were repaid in full before July 2, 2013 and on the date of such repayment the closing price for a
share of our common stock was less than the Initial Exercise Price, then the exercise price was to be adjusted to the greater of
(i) the Floor Price and (ii) $0.01 above the consolidated closing bid price on the date the January 2013 Bridge Notes were
repaid in full. The warrants permit a cashless exercise if at the time of exercise the underlying shares are not covered by an
effective registration statement.
On July 1, 2013, we repaid in full the remaining outstanding balance under the January 2013 Bridge Notes. The early
repayment allowed us to avoid issuing an additional 125,000 warrants that would have been contractually required if the notes
were not repaid in full on or before July 1, 2013. As a result of the repayment, the exercise price of such Warrants was adjusted
from $4.00 per share to $2.84 per share. No further adjustments to the exercise price of the Warrants are required to be made in
the future other than adjustments pursuant to customary anti-dilution provisions. The 375,000 warrants held by the investors
were exercised in full during the second half of 2013.
We also issued our placement agent a warrant to purchase 11,250 shares of our common stock, with terms substantially
the same as the investor warrants described above, in partial consideration for the placement agent's services in connection with
the transaction.
The investors and the placement agent had piggyback registration rights and accordingly, a resale registration statement
was filed in June 2013 that was declared effective on July 5, 2013.
As a result of the contractual provisions that could potentially require us to net-cash settle the value of the remaining
outstanding warrants in the event of a change in control or other fundamental change, we account for the remaining January
2013 warrant contracts as derivative instruments (see Note 9).
May 2013 Registered Direct Offering Warrants
In connection with the registered direct offering we completed on May 16, 2013, the investor received a five-year warrant
entitling the investor to initially purchase up to 737,704 shares of our common stock at an exercise price of $2.684 per share,
subject to customary anti-dilution adjustments.
As an alternative to exercising the warrant in whole or in part, the investor had the right, subject to certain conditions
being satisfied, to exchange all or part of the warrant for an amount equal to a prescribed Black-Scholes value of the warrant at
any time after 30 days following the date of issuance if our share price was trading below the current exercise price of the
warrant. The prescribed Black-Scholes value was determined at closing to be approximately $1.56 million.
We, at our option, had the right to settle an exchange in cash, shares of our common stock (provided certain conditions
were satisfied), or any combination thereof. If the investor exercised its exchange right and we elected to settle the exchange
using shares of our common stock, the number of shares we would be obligated to issue was to be determined by dividing the
prescribed Black-Scholes value of the warrant (or portion thereof so exchanged) by the closing bid price for a share of our
common stock as of two business days prior to the date of the exchange. In the event that the aggregate number of shares
originally issued to the investor plus the number of shares of common stock required to settle the exchange would have
exceeded 19.99% of the issued and outstanding shares immediately preceding the closing of the offering, then, with respect to
the portion of the prescribed Black-Scholes value that we could not have settled using shares of common stock we could have,
at our option, settled in cash or by delivery of a one-year 10% unsecured promissory note.
The warrant also provided that, under certain circumstances, we would have had the ability to cause the holder to exercise
the warrant for cash. The warrant also provided that if our common stock was delisted from the NASDAQ Capital Market, then
the number of shares underlying the warrant at the time of such delisting would have automatically been adjusted upward by
multiplying the number of warrant shares at the time of the delisting by 116.667%.
F-26
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On August 2, 2013, the investor exercised its exchange right under the warrant provisions. We settled the cashless
exchange by issuing to the investor 751,780 registered shares of common stock. As a result of the investor's warrant exchange,
we have no further obligation to issue additional shares to the investor under any circumstances, including (i) any shares
associated with contingent additional warrants that would have been applicable if we were unable to remain listed on the
NASDAQ Capital Market and (ii) any additional shares that could have been required to satisfy the Exchange Right if our share
price declined in the future.
Based on the aforementioned contractual provisions, we considered the May 2013 Warrants to be a derivative instrument
classified as a current liability, recorded at fair value and marked to market, with the changes in fair values being recognized in
the respective period's statement of operations. On August 2, 2013, the fair value of the May 2013 Warrants was reclassified to
additional paid-in-capital upon the exercise and settlement of the cashless exchange (Note 9).
May 2013 Line of Credit Warrants
In connection with the Loan and Security Modification Agreement on the Line of Credit executed on May 20, 2013, we
issued warrants to our lender to purchase up to 25,000 shares of our common stock at a fixed exercise price of $2.48 per share,
which were fully exercised in December 2013.
September 2013 Warrants
On September 18, 2013, in connection with the private placement of the Convertible Notes (see Note 8), the independent
investors and Related Parties received warrants to purchase 3,279,440 and 131,795 shares, respectively. The warrants were not
exercisable for six months following the date of issuance, have a term of 5.5 years and a fixed exercise price of $2.30 per share,
subject to customary anti-dilution provisions.
Warrant Classification
We evaluate the warrants we issue in accordance with applicable accounting guidance and we have concluded that
liability classification is appropriate for the warrants issued on October 27, 2006, June 22, 2007, August 25, 2008, August 3,
2009, September 4, 2009, February 18, 2011 (Series “B”) and January 24, 2013 as further discussed below. Although we mark
to market all the warrants classified as liabilities each period (see Note 9), all of these warrants had either expired, been fully
exercised, or the fair values of the warrants of the remaining warrants were nominal as of the most recent reported balance sheet
date. We have further concluded that equity classification is appropriate for all other warrants that were outstanding during the
periods presented due to the fact that these warrants are considered to be indexed to our own stock, are required to be physically
settled in shares of our common stock and there are no provisions that could require net-cash settlement.
The proceeds we received from the transactions that gave rise to the issuance of the warrants have been allocated to the
common stock or debt issued, as applicable, and the warrants based on their relative fair values. For those transactions in which
proceeds were received in connection with the sale of common stock, we aggregate the values of those warrants that we do not
classify as liabilities with the fair value of the stock issued as both of these types of instruments have been classified as
permanent equity.
The classification as equity for certain of the warrants could change as a result of either future modifications to the
existing terms of settlement or the issuance of new financial instruments by us that could be converted into an increased or
unlimited number of shares. If a change in classification of certain warrants is required in the future, the warrants would be
treated as derivatives, reclassified as liabilities on the balance sheet at their fair value, and marked to market each period, with
the changes in fair values being recognized in the respective period’s statement of operations.
F-27
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of our outstanding warrants as of December 31, 2014 is as follows:
Issue Date
Expiration Date
Shares Subject
to Outstanding
Warrants
Exercise Price
at End of
Period
August 25, 2008
April 30, 2010 through July 1, 2010
October 13, 2010 and October 19, 2010
February 18, 2011
February 18, 2011; Series "B"
June 15, 2011
June 15, 2011
June 15, 2011
June 20, 2011
June 20, 2011
July 6, 2011
August 23, 2011
September 29, 2011
October 12, 2011
October 17, 2011 through October 21,
2011
December 21, 2011
January 19, 2012
March 20, 2012; Series "B"
March 21, 2012; Series "B"
May 3, 2012; Series "B"
May 7, 2012
June 14, 2012; Series "B"
June 22, 2012
June 28, 2012
July 25, 2012
January 24, 2013
September 18, 2013
August 25, 2015
April 30, 2015 through July 1, 2015
October 13, 2015 and October 19,
2015
February 18, 2016
February 18, 2016
June 15, 2016
June 15, 2018
June 15, 2018
June 20, 2016
June 20, 2018
July 6, 2016
August 23, 2016
September 29, 2016
October 12, 2016
October 17, 2016 through October 21,
2016
December 21, 2016
January 19, 2017
March 20, 2017
March 21, 2017
May 3, 2017
May 7, 2019
June 14, 2017
June 22, 2017
June 28, 2017
July 25, 2017
July 25, 2018
March 18, 2019
349,741
55,473
9,037
189,836
98,481
361,458
11,250
30,064
14,269
31
104,929
28,750
4,782
115,314
19,138
819,851
33,187
1,311,000
735,900
27,612
50,000
51,112
516,178
56,682
34,888
11,250
3,287,192
8,327,405
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
154.40
72.80
53.60
26.28
24.00
15.40
12.48
15.40
15.60
15.60
15.40
15.40
3.32
3.32
10.56
4.88
4.88
4.08
4.08
4.08
3.60
4.08
3.40
3.40
3.56
2.84
2.30
Reference
(a)
(a)
(a)
None of the outstanding warrant contracts contain exercise price reset provisions.
(a) These warrants contain contractual provisions that could potentially require us to net-cash settle the value of the
remaining outstanding warrants in the event of a change in control or other fundamental change. Since the contractual
provisions that could require us to net-cash settle the warrants are deemed not to be within our control under applicable
accounting guidance, equity classification is precluded. As such, we consider these warrants to be derivative instruments
that are classified as current derivative liabilities at fair value on the dates of the consolidated balance sheets presented.
A summary of the changes in the fair values marked to market during the periods presented on the condensed
consolidated statements of operations are disclosed in Note 9.
F-28
Table of Contents
Shares Available
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The number of undesignated shares available as of December 31, 2014 is as follows:
Shares Authorized
Less shares issued and outstanding at December 31, 2014
Less shares designated as of December 31, 2014 for issuance under:
Stock options (1)
Warrants outstanding
Conversion of principal under convertible notes (2)
Undesignated shares available
Common Stock
Preferred Stock
50,000,000
(23,276,264)
(658,152)
(8,327,405)
(4,396,823)
13,341,356
20,000,000
—
—
—
—
20,000,000
(1) Includes all of the options outstanding plus 202,300 shares remaining that are available for issuance under the 2011 Plan.
(2) Represents the number of shares issuable upon conversion of $10,475,000 of principal maturing on September 18, 2018
under the Convertible Notes at a fixed conversion price of $2.3824 per share.
Note 11: Share-Based Compensation
On October 27, 2011, our stockholders approved our 2011 Stock Incentive Plan (2011 Plan). The 2011 Plan replaced our
2002 Stock Incentive Plan (2002 Plan) and awards can no longer be issued under the 2002 Plan; however, awards issued under
the 2002 Plan prior to its termination remain outstanding in accordance with their terms.
Both stock incentive plans provide that awards of stock options and shares of restricted stock may be granted to directors,
employees and consultants. The terms of the award are established by the administrator of the plans, our Compensation
Committee. Historically, options expire ten years after the date of grant or 30 days after termination of employment, vest
ratably at the rate of 25% on each of the first four anniversaries of the grant date and have an exercise price at least equal to the
market price of our stock at the date of grant. Outstanding restricted stock awards either vest at a rate of 33.33% on each of the
first three anniversaries of the grant date or cliff vest on the third anniversary of the grant date.
The 2011 Plan initially provided for an aggregate of 775,000 shares available for grant, subject to adjustment in the event
of a stock split, stock dividend, or other similar change in our common stock or our capital structure. The 2011 Plan contains an
“evergreen” provision under which beginning on January 1, 2013, the number of shares available for grant under the 2011 Plan
increases annually by an amount equal to the lesser of (x) 125,000 shares, (y) 3.0% of the number of shares outstanding as of
such first day of each year or (z) a lesser number of shares determined by our Board of Directors.
During the years ended December 31, 2014 and 2013, a total of 245,600 and 126,250 shares of restricted stock and
214,100 and 142,375 stock options, respectively, were issued under our 2011 plan to our directors, executive officers and
employees. As of January 1, 2015, after including the effects of grants, forfeitures and the evergreen provision, we had 327,300
shares available for issuance under the 2011 Plan.
F-29
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The share-based compensation expense related to stock options and restricted stock of continuing operations included in
the accompanying consolidated statements of operations and in the financial information by reportable business segment in
Note 14 is:
Year Ended December 31, 2014:
Cost of product sales
Research and development
Selling, general and administrative
Total share-based compensation
Year Ended December 31, 2013:
Cost of product sales
Research and development
Selling, general and administrative
Total share-based compensation
Fuel Storage &
Systems
Corporate
Total
$
$
$
$
21,588
$
160,853
29,661
212,102
24,603
80,139
15,999
$
$
— $
—
353,888
353,888
$
— $
—
269,049
120,741
$
269,049
$
21,588
160,853
383,549
565,990
24,603
80,139
285,048
389,790
As of December 31, 2014, there was $1,586,839 of unrecognized share-based compensation expense for stock options
and restricted stock of which we expect to recognize $671,733 in 2015, $550,862 in 2016, $302,671 in 2017 and $61,573 in
2018.
Stock Options
Below is a summary of the options activity:
Options outstanding at January 1, 2013
Granted
Forfeited
Expired
Exercised
Options outstanding at December 31, 2013
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Life (In Years)
Aggregate
Intrinsic
Value
173,418
$
142,375
$
(22,910) $
(12,739) $
(1,499) $
$
278,645
24.96
2.30
11.47
57.61
2.46
13.37
8.40
$1,195,735
Options outstanding at January 1, 2014
278,645
$
13.37
Granted
Forfeited
Expired
Exercised
Options outstanding at December 31, 2014
Vested and expected to vest at December 31, 2014
Options exercisable at December 31, 2014
214,100
$
(13,170) $
(16,040) $
(7,685) $
$
455,850
425,420
122,353
$
$
4.35
8.83
43.86
2.37
8.60
9.04
24.69
8.74
8.78
9.93
$
$
$
—
—
—
The aggregate intrinsic value, if any, in the table above is based on our closing stock price of $2.09 and $7.80 per share as
of the last business day of the year ended December 31, 2014 and 2013, respectively and represents the amount that would have
been received by the options had all options been exercised on that date.
Below is a summary of the estimated weighted average grant-date fair value along with a summary of the assumptions
used in the fair value calculations for the 214,100 and 142,375 stock options granted under the 2011 Plan during the years
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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
ended December 31, 2014 and 2013, respectively. The fair value of each stock option award is estimated on the grant date using
the Black-Scholes option-pricing formula. Expected volatilities are based on the historical volatility of our stock price. The
expected life of options granted is derived based on the historical life of our options. The risk-free rate for periods within the
expected life of the option is based on the U.S. Treasury interest rates in effect at the time of grant.
Estimated grant-date fair value per option granted
Number of options
Exercise price per option granted
Dividend yield
Expected life - years
Risk-free interest rate
Expected volatility of common stock
May 15,
2014
October 24,
2013
August 19,
2013
May 29,
2014
$3.72
201,600
$4.37
—%
5.8
$2.95
12,500
$3.46
—%
5.8
2.65%
2.65%
116.6%
116.6%
A summary of the options activity of our non-vested options and changes are as follows:
Nonvested outstanding at January 1, 2013
Granted
Vested
Forfeited
Nonvested outstanding at December 31, 2013
Nonvested outstanding at January 1, 2014
Granted
Vested
Forfeited
Nonvested outstanding at December 31, 2014
We received cash for exercises of stock options during the years ended December 31, 2014 and 2013 of $18,249 and
$3,688 respectively.
The total fair value of options vested was $0 and $44,156 for the years ended December 31, 2014 and 2013, respectively.
Restricted Stock
We periodically issue restricted stock to our directors and executives as a form of equity-based compensation. The value
of the shares, measured on the date of award based upon the closing price of our common stock, is recognized as stock
compensation expense ratably over the vesting period, typically three years.
F-31
$3.89
2,500
$6.10
—%
5.8
2.63%
71.1%
$1.45
139,875
$2.23
—%
5.8
2.79%
73.1%
Number of
Shares
Weighted-
Average Exercise
Price
123,688
$
142,375
$
(36,650) $
(24,472) $
$
204,941
204,941
$
214,100
$
(72,374) $
(13,170) $
$
333,497
6.76
2.30
42.50
11.47
2.89
2.89
4.35
24.75
8.83
2.64
Table of Contents
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Changes in outstanding restricted stock were as follows:
Nonvested at January 1, 2013
Granted
Vested
Nonvested at December 31, 2013
Vested and expected to vest at December 31, 2013
Nonvested at January 1, 2014
Granted
Vested
Forfeited
Nonvested at December 31, 2014
Vested and expected to vest at December 31, 2014
Restricted Stock
Weighted Average
Grant Date Fair
Value
38,747
$
126,250
$
(14,997) $
$
150,000
150,000
150,000
$
$
$
245,600
(42,083) $
(11,667) $
$
341,850
$
341,850
47.24
2.23
47.20
2.27
2.27
2.27
4.35
4.35
2.41
3.77
3.77
The weighted average grant-date fair value of restricted stock granted during the year ended December 31, 2014 and
2013 was $4.35 and $2.23 respectively.
The total fair value of restricted stock vested during the years ended December 31, 2014 and 2013 was $217,992 and
$35,843, respectively.
Note 12: Income Taxes
The following table presents the principal reasons for the difference between the effective tax rate and the federal
statutory income tax rate for continuing operations for the year ended December 31:
Income tax benefit at U.S. statutory rates
Derivative instruments and fair value measurements
Share-based compensation
Other
Valuation allowance
Original issue discount
Effective tax rate
2014
2013
34.0 %
4.7 %
(0.5)%
(0.1)%
(39.7)%
1.6 %
— %
34.0 %
(14.3)%
(0.4)%
— %
(19.6)%
0.3 %
— %
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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents the provision for income taxes for continuing operations on a separate tax return basis as of
the year ended December 31:
Current:
Federal
State and local
Deferred:
Federal
State and local
Less: Change in valuation allowance
Subtotal
Income tax expense
2014
2013
— $
1,600
1,600
$
(5,752,360) $
(986,967)
(6,739,327) $
6,739,327
—
1,600
$
—
1,600
1,600
68,981,592
5,758,375
74,739,967
(74,739,967)
—
1,600
$
$
$
$
$
The components of deferred tax assets and liabilities at December 31 were as follows:
Deferred income tax assets:
Accrued compensation
Accrued warranty
Inventory
Share-based compensation
Other comprehensive income
Tax credits
Other
Net operating loss carry-forwards
Less: Valuation allowance
Total deferred income tax assets
Deferred income tax liabilities:
Equipment and leasehold improvements
Net deferred tax liability
2014
2013
$
$
363,684
243,786
1,575,527
2,768,688
295,793
764,575
677,611
17,920,468
24,610,132
(24,294,275)
315,857
358,742
103,816
1,524,902
2,622,451
295,793
764,575
335,286
11,753,569
17,759,134
(17,554,948)
204,186
(315,857)
$
— $
(204,186)
—
For our U.S. based businesses, we have a net deferred tax asset position primarily consisting of net operating loss carry
forwards, a portion of which, are available to offset future taxable income. In accordance with GAAP, we have established a
valuation allowance for our net deferred tax asset since it is unlikely that the asset will be fully realized based on our lack of
earnings history and current evidence.
As of December 31, 2014, Schneider Power had a tax liability of $48,300 related to the sale of a wind farm operation in
May 2013.
Undistributed earnings of Schneider Power at December 31, 2014, which are nominal, are considered to be indefinitely
reinvested and, accordingly, no provisions for federal and state income taxes have been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment
for foreign tax credits) and withholding taxes payable to various foreign countries. Determination of the amount of
unrecognized deferred income tax liability related to these earnings is not practicable.
Loss from operations before income taxes for the years ended December 31, 2014 and 2013 attributable to domestic
operations was $14.5 million and $20.0 million, respectively, and loss attributable to foreign operations was $0.4 million and
$3.0 million, respectively.
F-33
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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The U.S. tax laws contain provisions (Section 382 limitations) that limit the annual utilization of net operating loss and
credit carry forwards upon the occurrence of certain events including a significant change in ownership interest. Generally, such
limitations arise when the ownership of certain shareholders of public groups in the stock of a corporation change by more than
50 percentage points over a three-year period. A study was completed during 2013 to determine if an ownership change had
occurred at any time between April 30, 2004 and December 31, 2012. Such an event had occurred which limits the future use
of our losses and resulted in the expiration of pre-2013 Federal and State net operating losses of $218 million and $123 million
before utilization. We may also have incurred such an event or events since 2012; however, we have not completed a study to
determine the extent of the limitations, if any. Until a study is completed and the extent of the limitations is able to be
determined, no additional amounts have been written off or are being presented as an uncertain tax position.
At December 31, 2014, after taking into consideration the expiration of net operating losses noted above, we had federal
net operating loss carryforwards of approximately $45 million available to offset future federal taxable income that expire
between the years 2031 and 2034 and we had state net operating loss carryforwards of approximately $45 million available to
offset future state taxable income that expire between the years 2031 and 2034.
We have no unrecognized tax benefits for uncertain tax positions as defined under GAAP for any of the periods
presented. To the extent applicable in the future, interest and penalties related to income tax liabilities will be included in pre-
tax income as interest expense and tax penalties.
At December 31, 2014, our U.S. federal tax returns related to the years ended April 30, 2010 and April 30, 2011, the eight
months ended December 31, 2011 and the years ended December 31, 2012 through December 31, 2014 remain open to
examination by the tax authorities. However, we have consolidated or acquired net operating losses beginning in the tax year
ended September 27, 1998 that would cause the statute of limitations to remain open for the year in which the net operating loss
was incurred only to the extent that the net operating losses may be adjusted.
Note 13: Earnings (Loss) Per Share
We compute net income (loss) per share by dividing the net income (loss) for the period by the weighted average number
of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income
(loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period.
We consider common equivalent shares from the exercise of stock options, warrants and convertible debt payable in the
instance where the shares are dilutive to our net loss. The effects of stock options, warrants and convertible debt were anti-
dilutive for all periods presented.
The following table sets forth the computation of basic and diluted loss per share as of the year ended December 31:
Numerators for basic and diluted loss per share data:
Net loss from continuing operations
Net loss from discontinued operations
Net loss
Denominator for basic and diluted loss per share data - weighted-average
shares
Basic and diluted loss per share data:
Net loss from continuing operations
Net loss from discontinued operations
Net loss
2014
2013
(14,485,870) $
(437,734)
(14,923,604) $
(20,019,538)
(3,025,028)
(23,044,566)
22,407,818
14,642,320
(0.65) $
(0.02)
(0.67) $
(1.37)
(0.20)
(1.57)
$
$
$
$
For the periods presented above, shares of common stock potentially issuable upon the exercise of options, warrants and
convertible notes were excluded in the computation of diluted per share data, as the effects would be anti-dilutive.
The following table sets forth the amount of shares excluded from the computation of diluted earnings per share, as to do
so would have been anti-dilutive as of the years ended December 31:
F-34
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Stock Options
Warrants
Convertible Notes
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2014
2013
455,850
8,327,405
4,396,823
13,180,078
278,645
10,852,747
4,617,187
15,748,579
Note 14: Business Segments and Geographic Information
Business Segments
We classify our business into three reporting segments: Fuel Storage & Systems, Renewable Energy and Corporate.
Due to our plan to dispose of Schneider Power within the next 12 months, the Renewable Energy business segment, consisting
entirely of the operations of Schneider Power, is classified as discontinued operations (see Note 3).
The chief operating decision maker allocates resources and tracks performance by the reporting segments. We evaluate
performance based on profit or loss from operations before interest, non-operating income and expenses, and income taxes.
Fuel Storage & Systems Segment
Our Fuel Storage & Systems segment is a leader in the development and production of CNG fuel storage systems and
the integration of alternative fuel vehicle system technologies including engine and vehicle control systems and drivetrains.
This segment designs and manufactures advanced light-weight CNG storage tanks and supplies these tanks, in addition
to fully-integrated natural gas storage systems, to truck and automotive OEMs and aftermarket OEM truck integrators. These
high-pressure CNG and hydrogen storage tanks use advanced composite technology and are capable of storage at up to 10,000
psi. This segment's powertrain engineering, system integration, vehicle manufacturing, and assembly capabilities provides fast-
to-market solutions to support the integration and production of natural gas and hydrogen fuel storage systems, hybrid
technologies and transportable refueling stations.
This segment generates revenue from two sources: product sales and contract services. Product sales are derived
primarily from the sale of storage tanks and packaged fuel system modules for CNG applications. Contract services revenue is
generated by providing engineering design and support to OEMs and other customers, so that our fuel systems and advanced
propulsion systems integrate and operate with our customer's CNG, hybrid or fuel cell applications. Contract services revenue
is also generated from customers in the aerospace industry, material science, and other governmental entities and agencies.
We expense all research and development when incurred. We will continue to require significant research and
development expenditures over the next several years in order to increase the commercialization of our products for natural gas,
hybrid, hydrogen fuel cell and other alternative fuel applications.
Corporate Segment
The Corporate segment consists of general and administrative expenses incurred at the corporate level that are not
directly attributable to the Fuel Storage & Systems or Renewable Energy reporting segments. Corporate expenses consist
primarily of personnel costs, share-based compensation costs and related general and administrative costs for executive,
finance, legal, human resources, investor relations and our board of directors.
Geographic Information
Our long-lived assets as of December 31, 2014 related to our continuing operations are primarily based within our
Lake Forest, CA facilities and long-lived assets related to our discontinued operations are primarily located in Ontario, Canada.
F-35
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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue for continuing operations by country is as follows:
United States
Canada
Germany
Australia
India
United Kingdom
Spain
Taiwan
Total
Year Ended December 31,
2014
2013
$
32,400,794
$
30,369,607
916,517
355,350
344,813
76,350
9,170
—
—
226,134
1,148,114
—
140,726
—
9,619
9,490
$
34,102,994
$
31,903,690
F-36
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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Financial Information by Business Segment
Selected financial information of continuing operations by business segment is as follows:
Years Ended December 31,
2014
2013
Revenues
Fuel Storage & Systems:
Net product sales
Contract services (1)
Total revenues
Cost of Revenues
Fuel Storage & Systems:
Cost of product sales
Cost of contract services
Total cost of revenues
Gross Margin
Fuel Storage & Systems:
Net product sales
Contract services
Total gross margin
Operating Expenses
Fuel Storage & Systems:
Research and development
Selling, general, and administrative
Total
Corporate
Selling, general, and administrative
Total
Operating Income (Loss)
Fuel Storage & Systems
Corporate
Total operating loss
Capital Expenditures
Fuel Storage & Systems
Corporate
Total capital expenditures
Depreciation
Fuel Storage & Systems
Corporate
Total depreciation
$
$
$
$
$
$
$
$
$
$
$
$
$
$
25,785,837
8,317,157
34,102,994
23,743,646
5,220,844
28,964,490
2,042,191
3,096,313
5,138,504
7,616,018
3,405,513
11,021,531
6,832,741
17,854,272
$
$
$
$
$
$
$
$
(5,883,027) $
(6,832,741)
(12,715,768) $
6,081,290
64,390
6,145,680
1,429,064
46,234
1,475,298
$
$
$
$
22,943,639
8,960,051
31,903,690
16,261,662
5,296,499
21,558,161
6,681,977
3,663,552
10,345,529
5,996,414
4,244,781
10,241,195
6,841,239
17,082,434
104,334
(6,841,239)
(6,736,905)
2,963,301
4,554
2,967,855
1,040,791
41,556
1,082,347
(1)
In December 2013, we and General Motors amended certain contractual arrangements under a development program
that, in part, removed certain gain contingencies and, consequently, positively impacted revenue recognition by $1.7
million for services provided through the date of the amendment under the program. In connection with the contractual
amendments, we also immediately recognized $0.8 million of deferred engineering costs associated with the program.
F-37
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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Identifiable assets by reporting segment are as follows as of December 31:
Identifiable Assets
Fuel Storage & Systems
Renewable Energy - Held for Sale
Corporate
2014
2013
$
$
42,108,373
23,161,999
6,406,142
71,676,514
$
$
31,727,999
26,358,742
7,917,801
66,004,542
Note 15: Revenue and Purchase Concentrations
Agility Fuel Systems comprised 28%, and 45%, Ryder Vehicle Purchasing LLC comprised 12%, and 0%, General Motors
comprised 11% and 8%, and AGI and it's affiliates comprised 9% and 12% of the total consolidated revenue for continuing
operations reported for the years ended December 31, 2014 and 2013, respectively.
As of December 31, 2014 and December 31, 2013, AGI and its affiliates comprised of 25% and 4% Agility Fuel Systems
comprised 10% and 38% and General Motors comprised 9% and 24% of our total outstanding accounts receivable for
continuing operations, respectively.
For the years ended December 31, 2014 and 2013, purchases from one supplier constituted approximately 37%, and 39%,
respectively, of net raw materials purchases of our continuing operations. For the years ended December 31, 2014 and 2013, the
top suppliers accounted for approximately 65% and 77%, respectively, of net raw materials purchases of our continuing
operations.
Note 16: Commitments and Contingencies
Commitments
We lease our corporate operations, manufacturing, assembly, design, testing and research and development facilities,
which is located at our campus in Lake Forest, California. The operating leases are scheduled to expire beginning on May 31,
2018; however, we have the option to extend the lease until May 31, 2020 for one facility and May 31, 2025 for the remaining
two facilities. As of December 31, 2014, the monthly lease payment was $163,472. We incurred rent expense of $1,775,323 in
2014 and $2,308,537 in 2013.
At December 31, 2014, minimum future lease commitments for our continuing operations under non-cancelable
operating leases for facilities and equipment having lease terms in excess of one year are payable as follows:
2015
2016
2017
2018
2019
Thereafter
Total minimum lease payments
Litigation
Lease
Commitments
1,695,293
$
1,531,362
1,577,325
1,624,662
1,673,400
4,568,271
12,670,313
$
Management and our legal counsel periodically review the probable outcome of pending proceedings and the costs
reasonably expected to be incurred. We accrue for these costs when it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated.
On June 6, 2013, Iroquois Master Fund Ltd (Iroquois) filed suit against us in the United States District Court for the
Southern District of New York (the Complaint). In the Complaint, Iroquois asserted that the registered direct offering we
completed on May 16, 2013 triggered the full-ratchet anti dilution reset provision contained in its October 2006 Warrant
contract and, as a result, the exercise price of its October 2006 Warrant should have been adjusted downward to $0.932 and the
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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
number of shares underlying its October 2006 Warrant proportionately increased. Although we did adjust the exercise price to
$1.5142 effective as of August 2, 2013 and increased the number of warrants pursuant to our interpretation of the applicable
provisions of the October 2006 Warrant, Iroquois claimed that we were in breach of the warrant contract due to our refusal to
honor the lower exercise price and higher number of shares claimed by Iroquois.
In connection with the Complaint, Iroquois asserted that it was entitled to either (i) monetary damages (which Iroquois
estimated to be approximately $4.1 million as of November 4, 2013) or (ii) in the alternative, either (a) specific performance in
the form of delivery by us of 810,805 October 2006 Warrants exercisable at $0.932 per share with equitable modifications to
the terms of the October 2006 Warrants to compensate Iroquois for the alleged delay in issuance, plus the return of $542,564
Iroquois claims it overpaid when it exercised its October 2006 Warrants, or (b) 852,220 shares of our common stock. Iroquois
also requested interest at 9% per annum on any monetary award and recovery of its attorney’s fees and other related expenses,
if successful.
A bench trial was held on May 20 and 21, 2014. On May 23, 2014, the Court concluded that a reset did occur on May
16, 2013, but rejected Iroquois’s position with respect to the appropriate reset price. The Court determined that the exercise
price of the October 2006 Warrant should have been reset to $1.4284 on May 16, 2013, and reset again to $1.2488 on August 2,
2013, the date the holder of the May 2013 Warrant exercised the Exchange Feature contained in the May 2013 Warrant.
On June 17, 2014, the Court issued its Decision and Order, wherein the Court denied Iroquois’ request for specific
performance damages but did grant Iroquois’ request for monetary damages, prejudgment interest and attorney’s fees. The total
amount that we have incurred in connection with the Iroquois litigation is $1,813,206, consisting of (i) $1,015,440 in monetary
damages, (ii) $704,857 in legal fees and other expenses and (iii) $92,909 in interest related expenses. We recorded these
amounts in our consolidated statements of operations and comprehensive loss during 2014 which are included in the other
expenses and interest expense classifications. On September 3, 2014, we paid the monetary damages and interest and on
January 23, 2015 we paid the legal fees and other expenses.
On December 15, 2014, Iroquois Master Fund (“Iroquois”) filed a Notice of Appeal with the United States Court of
Appeals for the Second Circuit from the judgment entered by the United States District Court for the Southern District of New
York. Although we believe that we will prevail on appeal, we can provide no assurance that the Second Circuit will uphold
District Court’s judgment. If the Second Circuit were to reverse the District Court’s decision, then we may have to pay Iroquois
additional damages and reimburse them for their reasonable attorney fees incurred in connection with the appeal.
Compensation Plan
We sponsor a defined contribution plan (the “401K Plan”) for our continuing operations that is qualified under Internal
Revenue Service Code Section 401(k). The 401K Plan is subject to the provisions of the Employee Retirement Income Security
Act of 1974 (ERISA).
Under the 401K Plan, all applicable employees who are at least age twenty-one or older are eligible to participate in
the 401K Plan at the beginning of the next month after their first day of employment with us. Employee contributions to the
401K Plan are based on funding standards established by ERISA. Our matching contributions under the 401K Plan are
discretionary and match elective salary deferrals up to 3% of compensation.
We made contributions of $329,997 and $268,690 for each of the years ended December 31, 2014 and 2013,
respectively.
Note 17: Subsequent Events
Samsung Debt
On January 8, 2015, Schneider Power and Zephyr notified Samsung of their assertion that Samsung is in default of its
obligations under a Turbine Supply Agreement and an Operations and Maintenance Agreement. Following this notification and
initial discussions, Schneider Power and Zephyr entered into a First Amendment to Master Amendment Agreement on January
26, 2015 pursuant to which the parties agreed to defer until January 31, 2016 approximately CAD $462,167 of interest owed to
Samsung under the Master Amendment Agreement that was originally scheduled to be paid on January 31, 2015 (see Note 3).
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QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amended Line of Credit
On February 10, 2015, we and Bridge Bank, National Association, entered into a Third Loan and Security Modification
Agreement pursuant to which, among other things, (i) the line of credit was increased from $5.0 million to $7.5 million, (ii) the
amount of inventory eligible to be included in the borrowing base is limited to $2.0 million, (iii) a fee of 0.15% per annum,
payable quarterly in arrears, is charged on the average unused portion of the line of credit, and (iv) for any period that the
outstanding advances on the line of credit exceeds $5.0 million, then the amount of unrestricted cash that we are required to
maintain at Bridge Bank increases from $1.5 million to $2.0 million.
The interest rate on the credit facility, which is a variable rate at the greater of 3.75% or Bridge Bank's prime rate plus
0.5%, did not change as a result of the Third Amendment (see Note 8).
February 2015 Public Offering
On February 18, 2015, we completed an underwritten public offering of 4,600,000 shares of common stock, $0.02 par
value per share. The number of shares sold in the offering includes the underwriter’s full exercise of the over-allotment option
to purchase an additional 600,000 shares of common stock. The net proceeds we received, net of underwriting discounts and
other estimated offering expenses, were approximately $10.5 million.
F-40
Table of Contents
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Valuation and qualifying accounts are as follows:
Account Description
Allowance for doubtful accounts:
Balance at
beginning of year
Additions charged
to costs and expenses
Deductions
Balance at
end of year
Year ended December 31, 2014
$
Year ended December 31, 2013
398,684
$
429,686
(99,947) $
535,957
(7,093) (a) $
291,644
(566,959) (a)
398,684
Provision for obsolescence reserve:
Year ended December 31, 2014
Year ended December 31, 2013
Warranty reserve:
Year ended December 31, 2014
Year ended December 31, 2013
3,877,161
3,359,764
68,584
517,397
—
—
3,945,745
3,877,161
399,171
364,749
435,453
101,399
(222,625) (b)
(66,977) (b)
611,999
399,171
(a) Primarily relates to gross accounts receivable and specific allowances against those gross receivables being written-off
during the period, net of recoveries.
(b) Consists of material and labor costs incurred to analyze, repair or replace products under warranty contracts.
F-41
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Date: March 16, 2015
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
By:
/S/ BRADLEY J. TIMON
Bradley J. Timon, Chief Financial Officer and Treasurer
[Authorized Signatory and Principal Financial Officer]
Power of Attorney
Each director and officer of the Company whose signature appears below hereby appoints W. Brian Olson and Bradley J.
Timon, and each of them individually, as his or her true and lawful attorney-in-fact and agent to sign in his name and behalf, in
any and all capacities stated below, and to file this Annual Report on Form 10-K, and any and all amendments thereto, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the
following persons on behalf of the Company in the capacities and on the dates indicated.
Signature
/S/ W. BRIAN OLSON
W. Brian Olson
/S/ BRADLEY J. TIMON
Bradley J. Timon
/S/ CHANDRU SHAROFF
Chandru Sharoff
President, Chief Executive Officer and Director (Principal Executive Officer) March 16, 2015
Title
Date
Chief Financial Officer and Treasurer (Principal Financial Officer)
March 16, 2015
Controller (Principal Accounting Officer)
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
March 16, 2015
/S/ JONATHAN LUNDY
Chairman of the Board of Directors
Jonathan Lundy
/S/ G. SCOTT SAMUELSEN Director
G. Scott Samuelsen
/S/ CARL E. SHEFFER
Director
Carl E. Sheffer
/S/ PAUL GRUTZNER
Director
Paul Grutzner
/S/ TIMOTHY A. MCGAW Director
Timothy A. McGaw
F-42