UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the fiscal year ended March 31,
2008
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission
file number 0-20028
VALENCE
TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
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77-0214673
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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12201
TECHNOLOGY BOULEVARD, SUITE 150
AUSTIN, TEXAS
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78727
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(Address
of principal executive offices)
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(Zip
Code)
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Registrants telephone
number, including area code:
(512) 527-2900
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common stock, $.001 par value
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
x
Indicate by check mark if the Registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of
the Exchange Act. Yes
o
No
x
Indicate by check mark whether the Registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and (2) has
been subject to such filing requirements for the past 90 days.
Yes
x
No
o
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 the Registrants 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.
o
Indicate by check mark whether the Registrant is a
large accelerated filer, an accelerated filer or a non-accelerated filer. See
definition of accelerated filer or large accelerated filer in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer
o
Accelerated Filer
x
Non-accelerated filer
o
Smaller reporting
Company
o
(do not
check if a smaller reporting company)
Indicate by check mark whether the Registrant is a
shell company (as defined in Rule 12b-2 of the Act). Yes
o
No
x
The aggregate market value of the Registrants common
equity held by non-affiliates was $69,139,229 as of September 30, 2007,
the last business day of the registrants most recently completed second fiscal
quarter and based upon the average bid and asked price of the Registrants
common stock. This calculation excludes approximately 63,055,264 shares of
common stock held by directors, officers and holders of 5% or more of
Registrants outstanding common stock and such exclusion of shares held by any
person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the management
or policies of the Registrant, or that such person is controlled by or under
common control with the Registrant.
The number of shares outstanding of the Registrants
common stock as of June 12, 2008 was 118,118,297.
VALENCE TECHNOLOGY, INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED MARCH 31,
2008
Table of Contents
2
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K,
Form 10-K or this Report, contains statements that constitute forward-looking
statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act.
The words may, will, expect, intend, anticipate,
believe, estimate, continue, predict, and similar expressions and
variations thereof are intended to identify forward-looking statements. These
statements appear in a number of places in this Report and the documents
incorporated by reference herein and include statements regarding the intent,
belief or current expectations of Valence Technology, Inc., to which we
refer in this Report and the documents incorporated by reference herein as Valence,
we, us or the Company, our directors or officers with respect to, among
other things:
·
trends affecting our financial condition or results of operations;
·
our product development strategies;
·
trends affecting our manufacturing capabilities;
·
trends affecting the commercial acceptability of our products; and
·
our business and growth strategies.
You are cautioned not to put undue reliance on
forward-looking statements. Forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and actual results may
differ materially from those projected in this Report and the documents
incorporated herein by reference. Factors that could cause actual results to
differ materially include those discussed under Risk Factors, which include,
but are not limited to the following:
·
our ability to develop and market products that compete effectively in
targeted market segments;
·
market acceptance of our current and future products;
·
our ability to meet customer demand;
·
our ability to perform our obligations under our loan agreements;
·
a loss of one of our key customers;
·
our ability to implement our long-term business strategy that will be
profitable and/or generate sufficient cash flow;
·
the ability of our vendors to provide conforming materials for our
products on a timely basis;
·
the loss of any of our key executive officers;
·
our ability to manage our foreign manufacturing and development
operations;
·
international business risks;
·
our ability to attract skilled personnel;
·
our ability to protect and enforce our current and future intellectual
property;
·
international business risks;
·
our need for additional, dilutive financing or future acquisitions; and
·
future economic, business and regulatory conditions.
We believe that it is important to
communicate our future expectations to investors. However, there may be events
in the future that we are not able to accurately predict or control. The
factors discussed under Item 1A - Risk Factors or the documents incorporated
by reference herein, as well as any cautionary language in this Report or the
documents incorporated by reference herein, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we described in our forward-looking statements. Except as
required by law, we undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
3
PART I
ITEM 1. BUSINESS
The Company was founded in 1989 and has commercialized
the industrys first lithium phosphate technology. We develop, manufacture and
sell high-energy power systems utilizing our proprietary phosphate-based
lithium-ion technology for diverse applications, with special emphasis on
portable appliances and future generations of hybrid and electric
vehicles. Our mission is to promote the
wide adoption of high-performance, safe, long cycle life, environmentally
friendly, low-cost energy storage systems. To accomplish our mission and
address the significant market opportunity we believe is available to us we
utilize the numerous benefits of our latest energy storage technology, deep
intellectual property portfolio and extensive experience of our management team.
In November 2007, we introduced Epoch, our third
generation of Lithium Phosphate Energy Storage Systems, which are expected to
be commercially available in the second quarter of fiscal 2009. Epoch features
our safe, long-life lithium phosphate technology which utilizes a
phosphate-based cathode material. We believe that the advanced functionality
and programmability of the Epoch energy storage systems are well suited for
electric vehicle (EV), plug-in hybrid electric vehicle (PHEV) and similar applications.
Epoch lithium phosphate energy storage systems addresses the safety and
limited life weaknesses of other lithium technologies while offering a solution
that is competitive in cost and performance. We believe that Epoch energy
storage systems offer design and performance capabilities that will facilitate
adoption in automotive, industrial, UPS, telecommunications, aerospace and
military markets not traditionally served by other lithium-ion solutions.
Strategy
Our business plan and strategy focus on the generation
of revenue from product sales, while minimizing costs through partnerships with
contract manufacturers and internal manufacturing efforts through our two
wholly-owned subsidiaries in China. These subsidiaries initiated operations in
late fiscal 2005. We expect to develop target markets through the sales of
Epoch Lithium Phosphate Energy Storage Systems and custom lithium phosphate
energy storage systems based on programmable Epoch Command and Control Logic.
In addition, we expect to pursue a licensing strategy to supply the lithium
phosphate sector with advanced Valence material and components, including
lithium phosphate cathode materials to fulfill other manufacturers needs.
Key elements of our business strategy include:
·
Develop and market differentiated
battery solutions for a wide array of applications that leverage the advantages
of our technology
.
Our product development and marketing efforts are focused on large-format
battery solutions, such as our Epoch Lithium Phosphate Energy Storage Systems
and U-Charge® Power System and other custom battery solutions that feature
advanced performance and technological advantages. These products are targeted
for a broad range of applications in the motive, power and consumer appliance, telecommunication
and utility industries and as a substitute for certain applications using
lead-acid batteries.
·
Manufacturing high-quality,
cost-competitive products using a combination of Company owned and contract
manufacturing facilities
. Our products are manufactured in China, using both internal and
contract manufacturing resources. Our company-owned China facility includes two
plants; one manufactures our advanced lithium phosphate materials with our
patented thermo-carbon process while the second manufactures our advanced
standard large-format packs such as U-Charge® and Epoch and custom packs such
as Segway. We have arrangements with contract manufacturers for cell
production. We believe this manufacturing strategy will allow us to directly
control our intellectual property and operations management as well as deliver
high-quality products that meet the needs of a broad range of customers and
applications.
Our business strategy is being implemented in three
phases, each building on the previous one:
·
Initial Phase: The initial phase of our
strategy, now complete, focused on the first generation of our technology in
our patented polymer construction. During this phase, we introduced the
N-Charge® Power System which has been sold through national and regional
retailers, top-tier computer manufacturers and national resellers.
4
·
Second Phase: The second phase of our business
strategy is nearly complete. Throughout this phase our cell development has
focused on commercializing a cylindrical Lithium Phosphate cell and advanced
third generation Intelligent Energy Source Storage System (Epoch
).
This family of products is designed for motive applications such as hybrid and
electric vehicles, scooters and wheelchairs and has the same dimensions as the
most popular lead acid batteries but with significant increases in performance
related to safety, energy cycle life and weight.
·
Third Phase: The third phase of our business strategy
will entail the development and commercialization of our patented Lithium
Vanadium Phosphate (LVP) and Lithium Vanadium Phosphate Fluoride (LVPF) cathode
materials into large-format, high capacity prismatic cells. These materials
offer superior performance with additional energy storage and higher voltage
capabilities for the automotive, industrial, UPS, aerospace,
telecommunications, military and other sectors.
We believe our commercial growth strategy will allow
us to expand into emerging market applications through the sales of Valence
products based on our differentiated technology, design and application
engineering capabilities, global fulfillment services and our proven low cost
high volume manufacturing. Further we
believe Valence is uniquely positioned to license our technology to key
component and material manufacturers, such as manufacturers of lithium
phosphate cells and packs to further accelerate growth within the worldwide
lithium phosphate sector.
We believe we are
uniquely positioned for growth due to the following:
·
Leading technology
. Our phosphate-based lithium-ion technology offers
many performance advantages over competing battery technologies. The safety
advantages inherent in our technology enable the design of large-format Epoch
Lithium-Ion Energy Systems. As the first company in the battery industry to
commercialize phosphates, we believe that we have a significant advantage in
terms of time to market as well as chemistry, advanced energy storage system
development and manufacturing expertise.
·
New Market Opportunities
.
Our technology enables the production of
high energy density, large-format batteries without the safety concerns
presented by oxide-based lithium-ion batteries. Consequently, our lithium
phosphate technology energy and power systems can be designed into a wide
variety of products in markets not served by current oxide-based lithium-ion
technology. We intend to expand the market opportunity for lithium-ion by
designing our technology into a wide variety of products for the automotive,
commercial, UPS, telecommunications, aviation and military markets.
·
New Valence Market Focus.
We are transitioning from a technology
developer to a commercial provider of advanced energy storage systems. We are expanding our manufacturing capacity,
enhancing our application engineering capabilities strengthening our marketing
and sales, providing full service fulfillment services in Europe, North America
and China, developing worldwide suppliers of critical materials and components
to serve the entire lithium phosphate sector and extending our research and
development into the next generation of lithium phosphate energy storage
solutions.
·
Our Goal:
Given the extensive intellectual
property and processes expertise we have developed, our goal is to enable
emerging devices with advanced energy storage solutions and serve the entire
lithium phosphate sector with high performance critical materials and component
supply. We believe the lithium phosphate sector will rapidly expand and Valence
is uniquely positioned to lead this expansion.
Fiscal 2008 Highlights
Following are some of the key Company events and
accomplishments in pursuit of our strategy during fiscal 2008:
·
We introduced, Epoch Lithium Phosphate Energy
Storage Systems, its third generation of intelligent battery packs.
5
·
Customer application trials are underway
with approximately 100 corporations in motive, telecom, utilities, marine and
military applications.
·
We signed a multi-year manufacturing
agreement with the Smith Electric Vehicles division of The Tanfield Group, PLC
to provide lithium phosphate energy storage products that we expect to result in
up to $70 million in revenue in the first year of such contract.
·
We were awarded seven new patents in the
U.S. and 21 worldwide patents during the 2008 fiscal year end.
Continuing Development of Valence Lithium
Phosphate Technology
Our first generation Lithium Phosphate Material was
successfully commercially produced in 2002 using our proprietary Bellcore
technology and in fiscal 2004 was introduced in a cylindrical construction.
Throughout fiscal 2005 our development team focused on increasing capacity of
the energy cell, offering other constructions such as a large prismatic cell
and designing a power cell. In late fiscal 2005, our team implemented a product
change which increased the capacity of the energy cell. We continue to develop
both prismatic cells and large-format cells.
We continue to develop next-generation Lithium
Vanadium Phosphate (LVP) and Lithium Vanadium Phosphate Fluoride (LVPF) cathode
materials. These materials offer
superior performance with additional energy storage and higher voltage
capabilities for the automotive, industrial, UPS, aerospace,
telecommunications, military and other sectors.
Development of Third Generation Battery Packs
We are committed to the improvement of our
technologies, our energy storage systems, integration of our energy storage
systems into our customer applications and further development of worldwide
suppliers to serve the rapidly expanding lithium phosphate sector. We are
continuing to further our development of products including our Epoch Energy
Storage Systems that feature improved battery management, reporting capability
that is superior to other rechargeable battery packs, fail soft performance,
field serviceability and many other advanced features. Epoch Command and
Control Logic is programmable and can be quickly and easily configured to a
variety of custom applications. The development of the Epoch Command and
Control Logic is expected to dramatically reduce the level of effort and
technical risk required to develop customized hardware and software for new
product designs, thus reducing the development cycle time and expense.
Epoch Lithium Phosphate Energy Storage Systems
Lithium-ion cobalt-oxide technology was originally
developed to meet consumer demand for high-energy, small battery solutions to
power portable electronic devices. Lithium-ion cobalt-oxide technology was a
significant advancement in battery technology for the small battery market.
However, due to the safety concerns associated with producing and using
traditional lithium-ion cobalt-oxide technology in large-format applications,
many markets today such as automotive, industrial, UPS and telecommunications
markets remain served by older technologies, such as lead-acid, nickel-cadmium,
and nickel metal hydride, which offer low energy density and significant
maintenance costs.
We believe our Epoch Lithium Phosphate Energy Storage
Systems that utilize safe and environmentally friendly phosphate-based cathode
materials in place of other less stable and more costly cathode materials,
addresses the current challenges facing the rechargeable battery industry and
provides us with several competitive advantages. Key attributes of our Epoch
Lithium Phosphate Energy Storage Systems include:
·
Increased safety
. We believe that our Epoch Lithium
Phosphate Energy Storage Systems significantly reduce the safety risks
associated with oxide-based lithium-ion technologies. The unique chemical
properties of phosphates render them substantially incombustible if mishandled
during charging or discharging. As a result, we believe our technology is more
stable under overcharge or short circuit conditions than existing lithium-ion
oxide technology and has the ability to withstand higher temperatures and
electrical stress. The thermal and
6
chemical stability
inherent in our technology enables the creation of safe, large-format, high
energy density lithium-ion solutions.
·
Performance advantages
.
Epoch Lithium Phosphate Energy Storage Systems offer several
performance advantages over the competing battery chemistries of lead-acid,
nickel-cadmium, nickel metal hydride and traditional lithium-ion oxide technologies,
including higher rate capability, longer cycle life, longer shelf life, and
lower total cost of ownership
.
Other Epoch system advantages include a fail
soft mode that eliminates system failure caused by a single cell, lighter
weight, excellent float characteristics and high-energy efficiency during
charge and discharge.
·
High energy density
. In its large-format application, our
Epoch Lithium Phosphate Energy Storage Systems exhibit an energy density
which exceeds other battery chemistries such as lead-acid, nickel metal hydride
and nickel-cadmium.
·
High rate capability
. In the power cell construction, our
Lithium Phosphate Energy Storage Systems offers an exceptional rate capability
with sustained 10 to 15C discharges and low impedance of less than 20m Ohms.
These two characteristics result in a cell that provides larger bursts of power
while generating less heat than energy cells.
·
Increased exceptional cycle life
. Current testing of Lithium Phosphate
Energy Storage Systems has yielded cycle life of 2000 cycles at 23°C to 70% of
the batterys initial capacity, representing a longer life span compared to
existing solutions.
·
Maintenance-free
. Epoch Lithium Phosphate Energy Storage
Systems are maintenance-free.
·
Lower lifetime cost
. We believe that our proprietary
phosphate material used in our Lithium Phosphate Energy Storage Systems is less
expensive than the cobalt-oxide material used in competing lithium-ion
technologies. As a result, we believe that as production volume increases due
to greater demand for Lithium Phosphate Energy Storage Systems, material costs
should decrease. Finally, the lower maintenance costs, longer cycle life and
longer service life associated with Epoch Lithium Phosphate Energy Storage
Systems lead to a lower total cost of ownership in numerous applications. For example, Epoch Energy Storage Systems
can also be field repaired, should a failure occur, and placed back into
service, resulting in lower cost to the consumer in the event of failure.
·
Flexibility
. The logic of Epoch Lithium Phosphate
Energy Storage Systems is programmable and therefore can easily be applied to
custom energy storage systems of various sizes for various applications.
·
Environmental friendliness
. Rechargeable batteries that contain
nickel metal hydride, nickel-cadmium or lead-acid are toxic and harmful to the
environment. In contrast, our proprietary phosphate technologies do not contain
any heavy metals. Epoch Lithium Phosphate Energy Storage Systems incorporate
an environmentally friendly, phosphate-based cathode material that reduces the
disposal issues inherent in other types of batteries.
Products
The
Epoch Energy Storage System
Announced in November 2007 and expected to become
commercially available in the second quarter of fiscal 2009, the Epoch Energy
Storage Systems are designed to offer significant performance advantages that
include fail soft operation, common communication protocol, programmable logic,
state of health monitoring and reporting, advanced cell balancing, abuse
protection and superior fuel gauge reporting. Epoch systems can also be
field-repaired, should a failure occur, and placed back into service.
7
The U-Charge® Energy Storage
System
The U-Charge® Energy Storage System is a family of
products based on Valences proprietary Lithium Phosphate technology and is
designed to be a direct replacement for standard-sized lead-acid energy storage
systems. These 12.8 and 19.2 volt energy
storage systems offer twice the run-time and a third less weight than
lead-acid, expanded calendar life and greater cycle life with full depth of
discharge, resulting in significantly lower total costs of ownership. U-Charge®
Energy Storage System are used in a variety of applications such as hybrid and
full electric vehicles, wheelchairs, scooters, robotics, marine, remote power,
military, back-up and many other devices.
Product Milestones
In February 2008, we entered into a supply
agreement with The Tanfield Group whereby we agreed to manufacture and supply
Lithium Phosphate Energy Storage Systems to power zero emission, all-electric
commercial delivery vehicles. Our battery systems will be installed in leading
edge vans and trucks produced by Tanfields UK-based trading division, Smith
Electric Vehicles. Initial purchases which began in fiscal fourth quarter ended
March 31, 2008, were fulfilled with our current U-Charge® Energy Storage
Systems. Subsequent purchases by Tanfield will be fulfilled by U-Charge® Energy
Storage Systems and ultimately by our Epoch Energy Storage Systems.
In November 2007, we introduced our Epoch
Lithium Phosphate Energy Storage Systems.
Epoch Energy Storage Systems are equipped with advanced battery
management systems that will monitor and adjust cell performance to enable
superior performance and capacity. Epoch Energy Storage Systems present a
safer, more powerful and reliable energy storage solution designed to be low
maintenance, cost competitive, and environmentally friendly.
In January 2006, we announced availability of
eight new models of our large-format lithium phosphate U-Charge® XP Energy
Storage Systems that feature built-in battery management electronics and power
rates of 500 to 1700 continuous watts, depending on the model.
In March 2005, we announced availability of a
custom lithium phosphate energy storage system for Segway Inc.s Personal
Transporters. Our energy storage system doubled the range of Segways Personal
Transporters compared to the nickel metal hydride energy storage systems that
were previously used which enabled Segway to penetrate commercial law
enforcement, tour operators and other extended range applications.
In February 2004, we introduced the U-Charge®
Lithium Phosphate Energy Storage Systems. U-Charge® systems have been produced
in our China facilities and are designed to power a variety of motive
applications from hybrid and electric vehicles to scooters and wheelchairs, and
can also be used in stationary applications.
In February 2002, Valence launched the N-Charge®
Lithium Phosphate Energy Storage Systems into several channels for sales and
distribution, including national and regional retailers, top tier computer
manufacturers, and national resellers.
We decided to discontinue the N-Charge
®
Lithium
Phosphate Energy Storage Systems product line during calendar year 2008 in
order to focus on our Epoch
and U-Charge
®
Energy Storage Systems.
Operational Achievements
Valence energy storage systems continue to be tested
and qualified by more than 100 corporations.
Our research, development and design efforts are focused on new products
utilizing our Epoch Command and Control Logic and our patented lithium phosphate
materials. Next generation patented lithium phosphate materials are currently
being manufactured and tested for future energy storage solutions. As manufacturing volume continued to expand,
significant reductions were made in the manufacturing cost due to lower raw
material costs, reduced scrap and improved efficiency.
Significant new alliances to develop Valence energy
storage systems and customers for Valences Lithium Phosphate Energy Storage
Products include: Smith Electric Vehicles, Enova, Wright Bus, Marlin Submarine,
Kegel, Merlin Equipment, and various government and military groups. We
continue to ship Lithium Phosphate Energy Storage Systems to major customers
that include Segway, Smith Electric Vehicles, Enova and Energy CS.
8
Our battery pack, powder, and engineering operations
are conducted in our two manufacturing plants located in Suzhou, China. We
continue to improve the batch-to-batch yield of our proprietary Lithium
Phosphate cathode materials and increase output with continuous versus batch
process improvements. Pack assembly operations have been simplified and
expanded. In addition, our engineering operations have been expanded to support
continuous manufacturing processes and quality control improvements.
Development of our patented next-generation Lithium
Vanadium Phosphate (LVP) and Lithium Vanadium Phosphate Fluoride (LVPF) cathode
materials has been focused and accelerated. Recognized as the next generation
of Lithium Phosphate energy solutions, we believe LVP and LVPF will offer
higher performance solutions to a new generation of vehicular and other
demanding applications.
Competition
In the rechargeable battery market, the principal
competitive technologies currently marketed are lead-acid, nickel-cadmium,
nickel metal hydride, liquid lithium-ion and lithium-ion polymer energy storage
systems. The industry consists of major domestic and international companies
with substantial financial, technical, marketing, sales, manufacturing,
distribution and other resources available to them. We believe our principal competitors are
Sanyo, Matsushita Industrial Co., Ltd. (Panasonic), Sony, Toshiba, SAFT, E-One
Moli Energy Corp. and numerous lead-acid manufacturers around the world.
The performance characteristics of lithium-ion energy
storage systems have consistently improved over time as market leaders
continued to improve the technology. Other companies are undertaking research
in rechargeable battery technologies, including work on lithium-ion phosphate
technology. However, Valence intends to maintain competitive leadership in the
lithium phosphate sector with patented Lithium Phosphate technologies and
advanced energy storage solutions for todays and tomorrows demanding
high-energy applications.
We believe that we have several technological
advantages over competitors in terms of our ability to compete in the
rechargeable battery market. Our Lithium Phosphate energy storage solutions
including materials, cells and Epoch intelligent packs and our unique ability
to integrate our packs into customer applications enable us to serve a wide
range of markets that do not currently use lithium-ion energy storage systems.
Sales and Marketing
To respond to the rapidly expanding European electric
vehicles and plug-in hybrid market our Vice President of Sales and Marketing is
based in Mallusk, Northern Ireland and leads a global team of sales and
marketing specialists. Additional sales and marketing staff are located in
Austin, Texas; Tarzana, California; Atlanta, Georgia; Gainesville, Florida;
Shropshire, United Kingdom; and Mallusk, Northern Ireland.
Epoch and U-Charge® Energy Storage Systems are family
standard form factor systems that can be configured to meet the energy storage
needs of a wide range of customers applications. The customer evaluation and
approval process is generally between six and twenty-four months. We anticipate
sales will typically be made through separately negotiated supply agreements
rather than standard purchase orders. During early fiscal 2009 we expect to
transition to Epoch Energy Storage Systems. Both Energy Storage Systems are
expected to be sold in standard and custom configurations. In addition, we
expect to design and sell custom battery systems based on our Lithium Phosphate
technology and programmable Epoch Command and Control Logic. We also provide
pack level application engineering services to assist our customers with the
integration of our packs into their specific applications. History to date has
not shown seasonality in any of our product sales.
Sales of products are typically denominated in U.S.
dollars. Consequently, sales historically have not been subject to currency
fluctuation risk.
9
Customers
Over the last three fiscal
years, a limited number of our customers have accounted for a significant
portion of our revenues as follows:
|
|
Year ended March 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Segway, Inc.
|
|
55
|
%
|
60
|
%
|
53
|
%
|
D&H Distributing Co., Inc.
|
|
6
|
%
|
9
|
%
|
12
|
%
|
The Tanfield Group, PLC
|
|
12
|
%
|
|
%
|
|
%
|
During
fiscal 2008 approximately 76% of our sales were domestic and 24% international.
(See Note 19 in the Notes to Consolidated Financial Statements.)
Patents, Trade Secrets and Trademarks
Our ability to compete
effectively depends in part on our ability to maintain the proprietary nature
of our technology and manufacturing processes through a combination of patent,
trademark and trade secret protection, non-disclosure agreements and
cross-licensing agreements.
We rely on patent protection
for certain designs and products. We hold approximately 133 U.S. patents, which
have expiration dates through 2026 and have about 41 patent applications
pending in the U.S. We continually prepare new patent applications for filing
in the U.S. We also actively pursue patent protection in certain foreign
countries.
In addition to potential
patent protection, we rely on the laws of unfair competition and trade secrets
to protect our proprietary rights. We attempt to protect our trade secrets and
other proprietary information through agreements with customers and suppliers,
proprietary information agreements with employees and consultants and other
security measures.
We are
engaged in certain legal proceedings related to our intellectual property,
including certain legal proceedings related to our Saphion® I Technology. Please see Item 3 Legal Proceedings for
further discussion
.
We
own the registered trademarks of VALENCE, N-CHARGE, U-CHARGE and the common law
trademark EPOCH in the United States and abroad. All other trademarks, service marks or trade
names referred to in this Report are the property of their respective owners.
Manufacturing
and Raw Materials
Our base Lithium Phosphate
Cathode Material is manufactured in a plant operated by one of our wholly owned
foreign enterprises (or WOFEs) in Suzhou, China. Cylindrical cells are
manufactured for us by Tianjin Lishen Battery Joint-Stock Co., Ltd. Our Energy
Storage Systems or Packs are manufactured in a second plant of our WOFE in
Suzhou, China. We depend on a limited number of suppliers for certain key raw
materials used in manufacturing and developing our power systems. We generally
purchase raw materials pursuant to purchase orders placed from time to time and
have no long-term contracts or other guaranteed supply arrangements with our
limited source suppliers. With these relationships we believe that we will have
sufficient capacity to meet or exceed expected demands in fiscal 2009.
10
Research
and Product Development
We
conduct materials research and development at our Las Vegas, Nevada facility
and product development at our China facility. Our battery research and
development group develops and improves the existing technology, materials and
processing methods and develops the next generation of our energy storage
systems. Our areas of expertise include: chemical engineering; process control;
safety; anode, cathode, and electrolyte chemistry and physics; polymer and
radiation chemistries; thin film technologies; coating technologies; analytical
chemistry; material science and energy storage system command and control logic
development. Our research and development efforts over the past year have
focused and will continue to focus on four areas:
·
Continuing
development of our Lithium Phosphate technology in multiple constructions.
·
Development
of second generation Lithium Phosphate technology.
·
Large-format
applications for Lihium Phosphate technology.
·
Development
of next generation Epoch Custom Battery Packs.
We continuously seek to
improve our technology, and are currently focusing on improving the energy
density of our products and advancing these improvements into production. We
also are working with new materials to make further improvements to the
performance of our products. We believe the safety features of our technology
and the ongoing improvements in the performance of our batteries will allow us
to maintain our competitive advantage.
Safety; Regulatory Matters; Environmental Considerations
Before we commercially
introduce our batteries into certain markets, we may be required, or may
voluntarily determine to obtain approval of our materials and/or products from
one or more of the organizations engaged in regulating product safety. These
approvals could require significant time and resources from our technical
staff, and, if redesign were necessary, could result in a delay in the
introduction of our products in those markets.
The United States Department
of Transportation, or DOT, and the International Air Transport Association, or
IATA, regulates the shipment of hazardous materials. The United Nations
Committee of Experts for the Transportation of Dangerous Goods has adopted
amendments to the international regulations for lithium equivalency tests to
determine the aggregate lithium content of lithium-ion polymer batteries. In
addition, IATA has adopted special size limitations for applying exemptions to
these batteries. Under IATA, our N-Charge® Power System (65) is exempt from Class 9
designation for transportation. Our N-Charge® Power System (130), and U-Charge®
Power System currently fall within the level such that they are not exempt and
require a Class 9 designation for transportation. We comply with all
safety-packaging requirements worldwide and future DOT or IATA regulations or
enforcement policies could impose costly transportation requirements. In
addition, compliance with any new DOT or IATA approval process could require
significant time and resources from our technical staff and if redesign were
necessary, could delay the introduction of new products.
The Nevada Occupational
Safety and Health Administration and other regulatory agencies have
jurisdiction over the operations of our Las Vegas, Nevada facility. Because of
the risks generally associated with the use of flammable solvents and other
hazardous materials, we expect rigorous enforcement of applicable health and
safety regulations. In addition, we currently are regulated by the State Fire
Marshalls office and local Fire Departments. Frequent audits or changes in
their regulations may cause unforeseen delays and require significant time and
resources from our technical staff.
Chinas
Management Methods for Controlling Pollution Caused by Electronic Information
Products Regulation (China RoHS) provides a broad regulatory framework
including similar hazardous substance restrictions as are imposed by the
European RoHS Directive, and applies to methods for the control and reduction
of pollution and other public hazards to the environment caused during the
production, sale, and import of electronic information products in China
affecting a broad range of electronic products and parts, with an effective
implementation date of March 1, 2007. However, these methods do not apply
to the production of products destined for export. Our compliance system is
sufficient to meet such requirements. Our current estimated costs associated
with our compliance with this regulation based on our current market share are
not significant. However, we continue to evaluate the impact of this
regulation, and actual costs could differ from our current estimates.
National,
state and local regulations impose various environmental controls on the storage,
use and disposal of lithium batteries and of certain chemicals used in the
manufacture of lithium batteries. Although we believe that our operations are
in substantial compliance with current environmental regulations, there can be
no assurance that changes in such laws and regulations will not impose costly
compliance requirements on us or otherwise subject us to future liabilities.
Moreover, state and local governments may enact additional restrictions
relating to the disposal of lithium batteries used by our customers that could
adversely affect the demand for our products. There can be no assurance that
additional or modified regulations relating to the storage, use and disposal of
chemicals used to
11
manufacture
batteries, or restricting disposal of batteries will not be imposed. In 2008,
we spent approximately $145,000 on environmental controls, including costs to
properly dispose of potentially hazardous waste.
Employees
At June 2, 2008, we had
a total of 490 regular full-time employees. In the U.S., we had a total of 44
employees at our Austin, Texas headquarters and our Las Vegas, Nevada research
and development facility. We had 10 regular full-time employees in the areas of
engineering and sales located in the United Kingdom and Northern Ireland. Our
China operations, consisting of two WOFEs, had 434 regular full-time employees
and 2 ex-patriots. None of our employees are covered by a collective bargaining
agreement, and we consider our relations with our employees to be good.
Available Information
We
make available on our website (www.valence.com) under Investor Relations - SEC
Filings, free of charge, our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports, as soon as reasonably practicable after we electronically file
such material with the Securities and Exchange Commission. We will provide copies of these reports upon
written request to 12201 Technology Blvd., Suite 150, Austin, Texas
78727. Our filings with the SEC are also
available through the SEC website at www.sec.gov or at the SEC Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling
1-800-SEC-0330.
12
ITEM 1A. RISK FACTORS
Risks Related to Our Company and Our Business
There
is doubt about our ability to continue as a going concern.
We
have experienced significant operating losses in the current and prior years.
At March 31, 2008, our principal sources of liquidity were cash and cash
equivalents of $2.6 million. We do not expect that our cash on hand and cash
generated by operations will be sufficient to fund our operating and capital
needs beyond the next three months. As a result of our limited cash resources
and history of operating losses, our auditors have expressed in their report on
our consolidated financial statements that there is substantial doubt about our
ability to continue as a going concern. We presently have no further
commitments for financing by affiliates of our Chairman Carl Berg or any other
source. If we are unable to obtain financing from affiliates of Mr. Berg
or others on terms acceptable to us, or at all, we may not be able to fulfill
our customer commitments and/or be forced to cease all operations and liquidate
our assets.
Our
limited financial resources could materially affect our business, our ability
to commercially exploit our technology and our ability to respond to
unanticipated development, and could place us at a disadvantage to our
competitor.
Currently,
we do not have sufficient capital resources or cash flow from operations, to
generate the cash flows required to meet our operating and capital needs. Our
limited financial resources could materially affect our ability, and the pace
at which, we are able to commercially exploit our technologies and products.
For example, it could:
·
limit the research and development resources
we are able to commit to the further development of our technology and the
development of products that can be commercially exploited in our marketplace;
·
limit the sales and marketing resources that
we are able to commit to the marketing of our technology;
·
have an adverse impact on our ability to
attract top-tier companies as our technology and marketing partners;
·
have an adverse impact on our ability to
employ and retain qualified employees with the skills and expertise necessary
to implement our business plan;
·
make us more vulnerable to failing to achieve
our forecasted results, economic downturns, adverse industry conditions or
catastrophic external events;
·
limit our ability to withstand competitive
pressures and reduce our flexibility in planning for, or responding to,
changing business and economic conditions; and
·
place us at a disadvantage to our competitors
that have greater financial resources than we have.
We have
a history of losses and an accumulated deficit and may never achieve or sustain
significant revenues or profitability.
We
have incurred operating losses each year since our inception in 1989 and had an
accumulated deficit of $536.3 million as of March 31, 2008. We have sustained
recurring losses related primarily to the research and development and
marketing of our products combined with the lack of sufficient sales to provide
for these needs. We anticipate that we will continue to incur operating losses
and negative cash flows over the next fiscal year. We may never achieve or
sustain sufficient revenues or profitability in the future.
We
reported a net loss available to common stockholders of $19.6 million for the
fiscal year ended March 31, 2008.
We have reported a net loss available to common stockholders of $22.4
million for the fiscal year ended March 31, 2007 and a net loss available
to common stockholders of $32.9 million for the fiscal year ended March 31,
2006. If we cannot achieve a competitive cost structure, achieve profitability
and access the capital markets on acceptable
13
terms,
we will be unable to fund our obligations and sustain our operations and may be
required to liquidate our assets.
Our
working capital requirements may increase beyond those currently anticipated.
We
have planned for an increase in sales and, if we experience sales in excess of
our plan, our working capital needs and capital expenditures would likely
increase from that currently anticipated. In particular, our recently announced
contract with The Tanfield Group, PLC will require us to expend additional
amounts for inventory and capital equipment, in advance of any revenues. Our
ability to meet this additional customer demand would depend on our ability to
arrange for additional equity or debt financing since it is likely that cash
flow from sales will lag behind these increased working capital requirements.
Our
indebtedness and other obligations are substantial and could materially affect
our business and our ability to incur additional debt to fund future needs.
We
have and will continue to have a significant amount of indebtedness and other
obligations. As of March 31, 2008, we had approximately $75.1 million of
total consolidated indebtedness. Included in this amount are $34.6 million of
loans outstanding, net of discount, to an affiliate of Carl Berg, $21.5 million
of accumulated interest associated with those loans and $19.0 million of
principal and interest outstanding with a third party finance company. We also
have an upcoming obligation to redeem our outstanding shares of Series C-1
Convertible Preferred Stock and Series C-2 Convertible Preferred Stock
held by affiliates of Carl Berg for up to $8,610,000, plus accrued dividends which,
as of March 31, 2008, were $431,000. Our substantial indebtedness and
other obligations could negatively impact our current and future operations.
For example, it could:
·
|
limit
our ability to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes;
|
|
|
·
|
require
us to dedicate a substantial portion of our cash flow from operations to the
payment of principal of, and interest on, our indebtedness, thereby reducing
the funds available to us for other purposes;
|
|
|
·
|
make
us more vulnerable to failure to achieve our forecasted results, economic
downturns, adverse industry conditions or catastrophic external events, limit
our ability to withstand competitive pressures and reduce our flexibility in
planning for, or responding to, changing business and economic conditions;
|
|
|
·
|
place
us at a disadvantage to our competitors that have relatively less debt than
we have; and/or
|
|
|
·
|
cause
us to cease business and liquidate our assets and operations.
|
All
of our assets are pledged as collateral under various loan agreements with Mr. Berg
or related entities. If we fail to meet our obligations pursuant to these loan
agreements, these lenders may declare all amounts borrowed from them, together
with accrued and unpaid interest thereon, to be due and payable. If this were
to occur, we would not have the financial resources to repay our debt and these
lenders could proceed against our assets.
Our financial results may vary significantly from quarter to
quarter.
Our
product revenue, operating expenses and quarterly operating results have varied
in the past and may fluctuate significantly from quarter to quarter in the
future due to a variety of factors, many of which are outside of our control.
As a result you should not rely on our operating results during any particular
quarter as an indication of our future performance in any quarterly period or
fiscal year. These factors include, among others:
·
|
timing
of orders from our customers and the possibility that customers may change
their order requirements with little or no notice to us;
|
·
|
rate
of adoption of our energy storage systems;
|
·
|
deferral
of customer orders in anticipation of new products from us or other providers
of batteries and related technologies;
|
·
|
timing
of deferred revenue components associated with large orders;
|
14
·
|
new
product releases, licensing or pricing decisions by our competitors;
|
·
|
commodity
and raw materials component prices;
|
·
|
lack
of order backlog;
|
·
|
loss
of a significant customer or distributor;
|
·
|
impact
of changes to our product distribution strategy and pricing policies;
|
·
|
changes
in the mix of domestic and international sales;
|
·
|
rate
of growth of the markets for our products; and
|
·
|
other
risks described below.
|
The
market for our products is evolving and it is difficult to predict its
potential size or future growth rate. Many of the organizations that may purchase
our products have invested substantial resources in their existing power
systems and, as a result, have been reluctant or slow to adopt a new approach,
particularly during a period of reduced capital expenditures. Moreover, our
current products are alternatives to existing systems and may never be accepted
by our customers or may be made obsolete by other advances in related
technologies.
Significant portions of our expenses are not
variable in the short term and cannot be quickly reduced to respond to
decreases in revenue. Therefore, if our revenue is below our expectations, our
operating results are likely to be adversely and disproportionately affected.
In addition, we may change our prices, modify our distribution strategy and
policies, accelerate our investment in research and development, sales or
marketing efforts in response to competitive pressures or to pursue new market
opportunities. Any one of these activities may further limit our ability to
adjust spending in response to revenue fluctuations. We use forecasted revenue
to establish our expense budget. Because most of our expenses are fixed in the
short term or incurred in advance of anticipated revenue, any shortfall in
revenue may result in significant losses.
We have
encountered problems in our production process that have limited our ability at
times to produce sufficient batteries to meet the demands of our customers. If
these issues recur and we are unable to timely resolve these problems, our
inability to produce batteries will have a material adverse impact on our
ability to grow revenues and maintain our customer base.
Problems
in our production processes could limit our ability to produce a sufficient
number of batteries to meet the demands of our customers. Production issues likely
will have a negative impact on gross margins as manufacturing yields will
suffer. Any inability to timely produce batteries and other products would have
a material adverse impact on our ability to grow revenues and maintain our
customer base.
Our business
will be adversely affected if our Saphion technology based batteries are not
commercially accepted.
We
are researching and developing batteries based upon phosphate chemistry. Our
batteries are designed and manufactured as components for other companies and
end-user customers. Our success depends on the acceptance of our batteries and
the products using our batteries in their markets. Technical issues may arise
that may affect the acceptance of our products by our customers. Market
acceptance may also depend on a variety of other factors, including educating
the target market regarding the benefits of our products. Market acceptance and
market share are also affected by the timing of market introduction of
competitive products. If we, or our customers, are unable to gain any
significant market acceptance for Saphion technology-based batteries, our
business will be adversely affected. It is too early to determine if Saphion
technology-based batteries will achieve significant market acceptance.
If we are
unable to develop, manufacture and market products that gain wide customer
acceptance, our business will be adversely affected.
The
process of developing our products is complex and failure to anticipate our
customers changing needs and to develop products that receive widespread
customer acceptance could significantly harm our results of operations. We must
make long-term investments and commit significant resources before knowing
whether our predictions will eventually result in products that the market will
accept. After a product is developed, we must be able to manufacture sufficient
volumes quickly and at low costs. To accomplish this, we must accurately
forecast volumes, mix of products and configurations that meet customer
requirements, and we may not succeed.
For example, if we
15
are
unable to develop, manufacture and market our Epoch
TM
Energy Storage
Systems and gain wide customer acceptance of those systems, our business,
results of operations and financial condition could be harmed.
We
depend on a small number of customers for our revenues, and our results of
operations and financial condition could be harmed if we were to lose the
business of any one of them.
To
date, our existing purchase orders in commercial quantities are from a limited
number of customers. During the fiscal year ended March 31, 2008, Segway
Inc., The Tanfield Group, PLC and D&H Distributing Co., Inc.
contributed 55%, 12%, and 6%, of our revenues, respectively. We anticipate that sales of our products to a
limited number of key customers will continue to account for a significant
portion of our total revenues. We do not have long-term agreements with any of
these customers committing them to purchase any specified amount of our
products. As a result, we face the substantial risk that one or more of the
following events could occur:
·
reduction, delay or cancellation of orders
from a customer;
·
development by a customer of other sources of
supply;
·
selection by a customer of devices
manufactured by one of our competitors for inclusion in future product
generations;
·
loss of a customer or a disruption in our
sales and distribution channels; or
·
failure of a customer to make timely payment
of our invoices.
If
we were to lose one or more customers, or if we were to lose revenues due to a
customers inability or refusal to continue to purchase our batteries, our
business, results of operations and financial condition could be harmed.
If our
products fail to perform as expected, we could lose existing and future
business, and our ability to develop, market and sell our batteries could be
harmed.
The market perception of our
products and related acceptance of the products is highly dependent upon the
quality and reliability of the products that we build. Any quality problems
attributable to our product lines may substantially impair our revenue
prospects. Moreover, quality problems for our product lines could cause us to
delay or cease shipments of products or have to recall or field upgrade
products, thus adversely affecting our ability to meet revenue or cost targets.
In addition, while we seek to limit our liability as a result of product
failure or defects through warranty and other limitations, if one of our
products fails, a customer could suffer a significant loss and seek to hold us
responsible for that loss.
Our
failure to cost-effectively manufacture our technologically-complex batteries
in commercial quantities which satisfy our customers product specifications
and their expectations for product quality and delivery could damage our
customer relationships and result in significant lost business opportunities
for us.
To
be successful, we must cost-effectively manufacture commercial quantities of
our technologically-complex batteries that meet our customer specifications for
quality and timely delivery. To facilitate commercialization of our products,
we will need to further reduce our manufacturing costs, which we intend to do
through the effective utilization of manufacturing partners and continuous
improvement of our manufacturing and development operations in our wholly owned
foreign enterprises in China. We currently manufacture our batteries and
assemble our products in China. We are dependent on the performance of our
manufacturing partners, as well as our own manufacturing operations to
manufacture and deliver our products to our customers. We have experienced
production process issues, which have limited our ability to produce a
sufficient number of batteries to meet current demand. For example, during the
third quarter of fiscal 2008, our anticipated revenue was adversely affected
due to the temporary suspension of production and shipments at our China
facility in order to implement a component change on a circuit board. If we fail to correct these issues in a
manner that allows us to meet customer demand, or
16
if
any of our manufacturing partners are unable to manufacture products in
commercial quantities on a timely and cost-effective basis, we could lose our
customers and adversely impact our ability to attract future customers.
In
addition to being used in our own product lines, our battery cells are intended
to be incorporated into other products. If we do not form effective
arrangements with OEMs to commercialize these products, our profitability could
be impaired.
Our
business strategy contemplates that we will be required to rely on assistance
from OEMs to gain market acceptance for our products. We therefore will need to
identify acceptable OEMs and enter into agreements with them. Once we identify
acceptable OEMs and enter into agreements with them, we will need to meet these
companies requirements by developing and introducing new products and enhanced
or modified versions of our existing products on a timely basis. OEMs often
require unique configurations or custom designs for batteries, which must be
developed and integrated into their product well before the product is
launched. This development process not only requires substantial lead-time
between the commencement of design efforts for a customized power system and
the commencement of volume shipments of the power systems to the customer, but
also requires the cooperation and assistance of the OEMs for purposes of
determining the requirements for each specific application. We may have
technical issues that arise that may affect the acceptance of our product by OEMs. If
we are unable to design, develop, and introduce products that meet OEMs
requirements, we may lose opportunities to enter into additional purchase
orders and our reputation may be damaged. As a result, we may not receive
adequate assistance from OEMs or pack assemblers to successfully commercialize
our products, which could impair our profitability.
Failure
to implement an effective licensing business strategy will adversely affect our
revenue, cash flow and profitability.
Our
long-term business strategy anticipates achieving significant revenue from the
licensing of our intellectual property assets, such as our Saphion technology.
We have not entered into any licensing agreements for our Saphion technology.
Our future operating results could be adversely affected by a variety of
factors including:
·
our ability to secure and maintain
significant licensees of our proprietary technology;
·
the extent to which our future licensees
successfully incorporate our technology into their products;
·
the acceptance of new or enhanced versions of
our technology;
·
the rate at which our licensees manufacture
and distribute their products to OEMs; and
·
our ability to secure one-time license fees
and ongoing royalties for our technology from licensees.
Our
future success will also depend on our ability to execute our licensing
operations simultaneously with our other business activities. If we fail to
substantially expand our licensing activities while maintaining our other
business activities, our results of operations and financial condition will be
adversely affected.
The
fact that we depend on a sole supplier or a limited number of suppliers for key
raw materials may delay our production of batteries.
We
depend on a sole supplier or a limited number of suppliers for certain key raw
materials used in manufacturing and developing our power systems. We generally
purchase raw materials pursuant to purchase orders placed from time to time and
have no long-term contracts or other guaranteed supply arrangements with our
sole or limited source suppliers. As a result, our suppliers may not be able to
meet our requirements relative to specifications and volumes for key raw
materials, and we may not be able to locate alternative sources of supply at an
acceptable cost. In the past, we have experienced delays in product development
due to the delivery of nonconforming raw materials from our suppliers. If in
the future we are unable to obtain high quality raw materials in sufficient
quantities, on competitive pricing terms and on a timely basis, it may delay
battery production, impede our ability to fulfill existing or future purchase
orders and harm our reputation and profitability.
17
We have
limited experience manufacturing our products in large quantities.
Achieving
the necessary production levels presents a number of technological and
engineering challenges for us. We have
limited experience manufacturing our products in high volume. We do not know whether or when we will be
able to develop efficient, low-cost manufacturing capability and processes that
will enable us to meet the quality, price, engineering, design and product
standards or production volumes required to successfully manufacture large
quantities of our products. Even if we
are successful in developing our manufacturing capability and processes, we do
not know whether we will do so in time to meet our product commercialization
schedule or to satisfy the requirements of our customers.
We
expect to sell an increasing portion of our products to, and derive a
significant portion of our licensing income from, customers located outside the
United States. Foreign government regulations, currency fluctuations and
increased costs associated with international sales could make our products and
licenses unaffordable in foreign markets, which would reduce our future
profitability.
We
expect that international sales of our product and licenses, as well as
licensing royalties, represent a significant portion of our sales potential.
International business can be subject to many inherent risks that are difficult
or impossible for us to predict or control, including:
·
changes in foreign government regulations and
technical standards, including additional regulation of rechargeable batteries,
technology, or the transport of lithium or phosphate, which may reduce or
eliminate our ability to sell or license in certain markets;
·
foreign governments may impose tariffs,
quotas, and taxes on our batteries or our import of technology into their
countries;
·
requirements or preferences of foreign
nations for domestic products could reduce demand for our batteries and our technology;
·
fluctuations in currency exchange rates
relative to the U.S. dollar could make our batteries and our technology
unaffordable to foreign purchasers and licensees or more expensive compared to
those of foreign manufacturers and licensors;
·
longer payment cycles typically associated
with international sales and potential difficulties in collecting accounts
receivable, which may reduce the future profitability of foreign sales and
royalties;
·
import and export licensing requirements in
Europe and other regions, including China, where we intend to conduct business,
which may reduce or eliminate our ability to sell or license in certain
markets; and
·
political and economic instability in
countries, including China, where we intend to conduct business, which may
reduce the demand for our batteries and our technology or our ability to market
our batteries and our technology in those countries.
These
risks may increase our costs of doing business internationally and reduce our
sales and royalties or future profitability.
Our
business depends on certain key personnel, the loss of whom could weaken our
management team, and on attracting and retaining qualified personnel.
The growth of our business
and our success depends in large part on our ability to attract and retain
highly-skilled management, technical, research and development, manufacturing,
sales and marketing and other operating and administrative personnel,
particularly those who are familiar with and experienced in the battery
industry. If we cannot attract and retain experienced sales and marketing
executives, we may not achieve the visibility in the marketplace that we need
to obtain purchase orders, which would have the result of lowering our sales
and earnings. Our key personnel include all of our executive officers and vice
presidents, many of whom have very specialized scientific or operational
knowledge regarding one or more of our key products. Such persons are in high
demand and often receive competing employment offers from numerous other
companies, including larger, more established
18
competitors who have
significantly greater financial resources than we do. We do not maintain
key-person life insurance on any of our employees. The loss of the services of
one or more of our key personnel or the inability to attract and retain
additional personnel and develop expertise as needed could limit our ability to
develop and commercialize our existing and future products.
We may
need to expand our employee base and operations in order to effectively
distribute our products commercially, which may strain our management and
resources and could harm our business.
To
implement our growth strategy successfully, we will have to increase our staff
in China, with personnel in manufacturing, engineering, sales, marketing, and
product support capabilities, as well as third party and direct distribution
channels. However, we face the risk that we may not be able to attract new
employees to sufficiently increase our staff or product support capabilities,
or that we will not be successful in our sales and marketing efforts. Failure
in any of these areas could impair our ability to execute our plans for growth
and adversely affect our future profitability.
International
political events and the threat of ongoing terrorist activities could interrupt
manufacturing of our batteries and our products at our OEM facilities or our
own facilities and cause us to lose sales and marketing opportunities.
The
terrorist attacks that took place in the United States on September 11,
2001, along with the U.S. military campaigns against terrorism in Iraq,
Afghanistan and elsewhere, and continued violence in the Middle East have
created many economic and political uncertainties, some of which may materially
harm our business and revenues. International political instability resulting
from these events could temporarily or permanently disrupt manufacturing of our
batteries and products at our OEM facilities or our own facilities in Asia and
elsewhere, and have an immediate adverse impact on our business. Since September 11,
2001, some economic commentators have indicated that spending on capital
equipment of the type that use our batteries has been weaker than spending in
the economy as a whole, and many of our customers are in industries that also
are viewed as under-performing in the overall economy, such as the
telecommunications, industrial and utility industries. The long-term effects of
these events on our customers, the market for our common stock, the markets for
our products, and the U.S. economy as a whole are uncertain. Terrorist
activities could temporarily or permanently interrupt our manufacturing,
development, sales and marketing activities anywhere in the world. Any delays
also could cause us to lose sales and marketing opportunities, as potential
customers would find other vendors to meet their needs. The consequences of any
additional terrorist attacks, or any expanded armed conflicts are
unpredictable, and we may not be able to foresee events that could have an
adverse effect on our markets or our business.
If we
are sued on a product liability claim, our insurance policies may not be
sufficient.
Although
we maintain general liability insurance and product liability insurance, our
insurance may not cover all potential types of product liability claims to
which manufacturers are exposed or may not be adequate to indemnify us for all
liability that may be imposed. Any imposition of liability that is not covered
by insurance or is in excess of our insurance coverage could harm our business,
including our relationships with current customers and our ability to attract
and retain new customers for our products and technology.
Our
patent applications may not result in issued patents, which would have a
material adverse effect on our ability to commercially exploit our products.
Patent
applications in the United States are maintained in secrecy until the patents
are issued or are published. Since publication of discoveries in the scientific
or patent literature tends to lag behind actual discoveries by several months,
we cannot be certain that we are the first creator of inventions covered by
pending patent applications or the first to file patent applications on these inventions.
We also cannot be certain that our pending patent applications will result in
issued patents or that any of our issued patents will afford protection against
a competitor. In addition, patent applications filed in foreign countries are
subject to laws, rules and procedures that differ from those of the United
States, and thus we cannot be certain that foreign patent applications related
to issued U.S. patents will be issued. Furthermore, if these patent
applications issue, some foreign countries provide significantly less effective
patent enforcement than in the United States.
19
The status of patents
involves complex legal and factual questions and the breadth of claims allowed
is uncertain. Accordingly, we cannot be certain that the patent applications
that we file will result in patents being issued, or that our patents and any
patents that may be issued to us in the near future will afford protection
against competitors with similar technology. In addition, patents issued to us
may be infringed upon or designed around by others and others may obtain
patents that we need to license or design around, either of which would
increase costs and may adversely affect our operations.
If we cannot protect or enforce
our existing intellectual property rights or if our pending patent applications
do not result in issued patents, we may lose the advantages of our research and
manufacturing systems.
Our ability to compete
successfully will depend on whether we can protect our existing proprietary
technology and manufacturing processes. We have filed a lawsuit against a
company in Canada alleging infringement of certain Canadian patents, as
described in further detail in Item 3-Legal Proceedings. We rely on a
combination of patent and trade secret protection, non-disclosure agreements
and cross-licensing agreements. These measures may not be adequate to safeguard
the proprietary technology underlying our batteries. Employees, consultants,
and others who participate in the development of our products may breach their
non-disclosure agreements with us, and we may not have adequate remedies in the
event of their breaches. Furthermore, our competitors may be able to develop
products that are equal or superior to our products without infringing on any
of our intellectual property rights. We currently manufacture and export some
of our products from China. The legal regime protecting intellectual property
rights in China is weak. Because the Chinese legal system in general, and the
intellectual property regime in particular, are relatively weak, it is often
difficult to enforce intellectual property rights in China. Moreover, there are
other countries where effective copyright, trademark and trade secret
protection may be unavailable or limited. Accordingly, we may not be able to
effectively protect our intellectual property rights outside of the United
States.
Intellectual property
infringement claims brought against us could be time-consuming and expensive to
defend, and if any of our products or processes is found to be infringing, we
may not be able to procure licenses to use patents necessary to our business at
reasonable terms, if at all.
In recent years, there
has been significant litigation in the United States involving patents and
other intellectual property rights. For example, we were recently named in a
lawsuit which alleges that the Companys Saphion I cathode material infringes
two patents owned by the University of Texas that we describe in further detail
in Item 3-Legal Proceedings. An adverse decision in this litigation could
force us to do one or more of the following:
·
stop selling, incorporating, or using our products
that use the Saphion I cathode material challenged intellectual property;
·
pay damages for the use of Saphion I cathode
material;
·
obtain a license to sell or use the Saphion I cathode
material, which license may not be available on reasonable terms, or at all; or
·
redesign those products or manufacturing processes
that use the Saphion I cathode material, which may not be economically or
technologically feasible.
We may become involved in
additional litigation and proceedings in the future. Likewise, we may in the
future be subject to claims or an inquiry regarding our alleged unauthorized
use of a third partys intellectual property. An adverse outcome in such future
litigation could result in similar risks as noted above with respect to the
third partys intellectual property. Whether or not an intellectual property
litigation claim is valid, the cost of responding to it, in terms of legal fees
and expenses and the diversion of management resources, could be expensive and
harm our business.
20
Risks
Associated With Doing Business In China
Since our products are
manufactured in China and we have transferred additional operations to China,
we face risks if China loses normal trade relations status with the United
States.
We manufacture and export
our products from China. Our products sold in the United States are currently
not subject to U.S. import duties. On September 19, 2000, the United
States Senate voted to permanently normalize trade with China, which provides a
favorable category of United States import duties. In addition, on December 11,
2001, China was accepted into the World Trade Organization, or WTO, a global
international organization that regulates international trade. As a result of
opposition to certain policies of the Chinese government and Chinas growing
trade surpluses with the United States, there has been, and in the future may
be, opposition to the extension of Normal Trade Relations, or NTR, status for
China. The loss of NTR status for China, changes in current tariff structures
or adoption in the United States of other trade policies adverse to China could
have an adverse affect on our business.
Furthermore, our business
may be adversely affected by the diplomatic and political relationships between
the United States and China. These influences may adversely affect our ability
to operate in China. If the relationship between the United States and China
were to materially deteriorate, it could negatively impact our ability to
control our operations and relationships in China, enforce any agreements we
have with Chinese manufacturers or otherwise deal with any assets or
investments we may have in China.
Because the Chinese legal system
in general, and the intellectual property regime in particular, are relatively
weak, we may not be able to enforce intellectual property rights in China and
elsewhere.
We currently manufacture
and export our products from China. The legal regime protecting intellectual
property rights in China is weak. Because the Chinese legal system in general,
and the intellectual property regime in particular, are relatively weak, it is
often difficult to enforce intellectual property rights in China.
Enforcing agreements and laws in
China is difficult or may be impossible as China does not have a comprehensive
system of laws.
We are dependent on our
agreements with our Chinese manufacturing partners. Enforcement of agreements
may be sporadic and implementation and interpretation of laws may be
inconsistent. The Chinese judiciary is relatively inexperienced in interpreting
agreements and enforcing the laws, leading to a higher than usual degree of
uncertainty as to the outcome of any litigation. Even where adequate law exists
in China, it may be impossible to obtain swift and equitable enforcement of
such law, or to obtain enforcement of a judgment by a court of another
jurisdiction.
The government of China may
change or even reverse its policies of promoting private industry and foreign
investment, in which case our assets and operations may be at risk.
China is a socialist
state, which since 1949 has been, and is expected to continue to be, controlled
by the Communist Party of China. Our existing and planned operations in China
are subject to the general risks of doing business internationally and the
specific risks related to the business, economic and political conditions in
China, which include the possibility that the central government of China will change
or even reverse its policies of promoting private industry and foreign
investment in China. Many of the current reforms which support private business
in China are unprecedented or experimental. Other political, economic and
social factors, such as political changes, changes in the rates of economic
growth, unemployment or inflation, or in the disparities of per capita wealth
among citizens of China and between regions within China, could also lead to
further readjustment of the governments reform measures. It is not possible to
predict whether the Chinese government will continue to be as supportive of
private business in China, nor is it possible to predict how future reforms
will affect our business.
21
The government of China continues
to exercise substantial control over the Chinese economy which could have a
negative impact on our business.
The government of China
has exercised and continues to exercise substantial control over virtually
every section of the Chinese economy through regulation and state ownership.
Chinas continued commitment to reform and the development of a vital private
sector in that country have, to some extent, limited the practical effects of
the control currently exercised by the government over individual enterprises.
However, the economy continues to be subject to significant government
controls, which, if directed towards our business activities, could have a
significant adverse impact on us. For example, if the government were to limit
the number of foreign personnel who could work in the country, substantially
increase taxes on foreign businesses or impose any number of other possible
types of limitations on our operations, the impact would be significant.
Changes in Chinas political and
economic policies could harm our business.
The economy of China has
historically been a planned economy subject to governmental plans and quotas
and has, in certain aspects, been transitioning to a more market-oriented
economy. Although we believe that the economic reform and the macroeconomic
measures adopted by the Chinese government have had a positive effect on the
economic development of China, we cannot predict the future direction of these
economic reforms or the effects these measures may have on our business,
financial position or results of operations. In addition, the Chinese economy
differs from the economies of most countries belonging to the Organization for
Economic Cooperation and Development, or OECD. These differences include:
·
economic structure;
·
level of government involvement in the economy;
·
level of development;
·
level of capital reinvestment;
·
control of foreign exchange;
·
methods of allocating resources; and
·
balance of payments position.
As a result of these
differences, our operations, including our current manufacturing operations in
China, may not develop in the same way or at the same rate as might be expected
if the Chinese economy were similar to the OECD member countries.
Business practices in China may
entail greater risk and dependence upon the personal relationships of senior
management than is common in North America and therefore some of our agreements
with other parties in China could be difficult or impossible to enforce.
The business structure of
China is, in most respects, different from the business culture in Western
countries and may present some difficulty for Western investors reviewing
contractual relationships among companies in China and evaluating the merits of
an investment. Personal relationships among business principals of companies
and business entities in China are very significant in the business culture. In
some cases, because so much reliance is based upon personal relationships,
written contracts among businesses in China may be less detailed and specific
than is commonly accepted for similar written agreements in Western countries.
In some cases, material terms of an understanding are not contained in the
written agreement but exist as oral agreements only. In other cases, the terms
of transactions which may involve material amounts of money are not documented
at all. In addition, in contrast to Western business practices where a written
agreement specifically defines the terms, rights and obligations of the parties
in a legally-binding and enforceable manner, the parties to a written agreement
in China may view that agreement more as a starting point for an ongoing
business relationship which will evolve and require ongoing
22
modification. As a
result, written agreements in China may appear to the Western reader to look
more like outline agreements that precede a formal written agreement. While
these documents may appear incomplete or unenforceable to a Western reader, the
parties to the agreement in China may feel that they have a more complete
understanding than is apparent to someone who is only reading the written
agreement without having attended the negotiations. As a result, contractual
arrangements in China may be more difficult to review and understand. Also,
despite legal developments in China over the past 20 years, adequate laws,
comparable with Western standards, do not exist in all areas and it is unclear
how many of our business arrangements would be interpreted or enforced by a
court in China.
Our ongoing manufacturing and
development operations in China are complex and having these remote operations
may divert managements attention, lead to disruptions in operations and delay
implementation of our business strategy.
We have relocated most of
our manufacturing and development operations to China. We may not be able to
find or retain suitable employees in China and we may have to train personnel
to perform necessary functions for our manufacturing, senior management and
development operations. This may divert managements attention, lead to
disruptions in operations and delay implementation of our business strategy,
all of which could negatively impact our profitability.
Our operations could be materially
interrupted, and we may suffer significant loss, in the case of fire, casualty
or theft at one of our manufacturing or other facilities.
Firefighting and disaster
relief or assistance in China is substandard by Western standards. In the event
of any material damage to, or loss of, the manufacturing plants where our
products are or will be produced due to fire, casualty, theft, severe weather,
flood or other similar causes, we would be forced to replace any assets lost in
such disaster. Thus our financial position could be materially compromised or
we might have to cease doing business. The Company has obtained insurance in
China to minimize this risk, but we cannot be sure that such insurance will be
sufficient.
The system of taxation in China
is uncertain and subject to unpredictable change that could affect our
profitability.
Many tax rules are
not published in China and those that are published can be ambiguous and
contradictory, leaving a considerable amount of discretion to local tax
authorities. China currently offers tax and other preferential incentives to
encourage foreign investment. However, the countrys tax regime is undergoing
review and there is no assurance that such tax and other incentives will
continue to be made available. If we no
longer receive such preferential incentives, our business, prospects and
results of operations would be adversely affected.
It is uncertain whether we will
be able to recover value-added taxes imposed by the Chinese taxing authority.
Chinas turnover tax system
consists of value-added tax, or VAT, consumption tax and business tax. Export
sales are exempted under VAT rules and an exporter who incurs VAT on
purchase or manufacture of goods should be able to claim a refund from Chinese
tax authorities. However, due to a reduction in the VAT export refund rate of
some goods, exporters might bear part of the VAT they incurred in conjunction
with the exported goods. In 2003, changes to the Chinese value-added tax system
were announced affecting the recoverability of input VAT beginning January 1,
2004. Our VAT expense will depend on the reaction of both our suppliers and
customers. Continued efforts by the Chinese government to increase tax revenues
could result in revisions to tax laws or their interpretation, which could
increase our VAT and various tax liabilities.
23
Any recurrence of Severe Acute
Respiratory Syndrome (SARS), avian flu, or other widespread public health
problem, could adversely affect our business and results of operations.
A renewed outbreak of
SARS, avian flu, or another widespread public health problem in China, where we
have moved our manufacturing operations, some engineering operations and may
move additional operations, could have a negative effect on our operations. Our
operations may be impacted by a number of health-related factors, including the
following:
·
quarantines or closures of some of our
manufacturing or other facilities which would severely disrupt our operations,
or
·
the sickness or death of key officers or
employees of our manufacturing or other facilities.
Any of the foregoing
events or other unforeseen consequences of public health problems in China
could adversely affect our business and results of operations.
Risks Associated
With Our Industry
If competing technologies that
outperform our batteries were developed and successfully introduced, then our
products might not be able to compete effectively in our targeted market
segments.
Rapid and ongoing changes
in technology and product standards could quickly render our products less
competitive, or even obsolete. Other companies who are seeking to enhance
traditional battery technologies, such as lead-acid and nickel-cadmium, have
recently introduced or are developing batteries based on nickel metal-hydride,
liquid lithium-ion and other emerging and potential technologies. These
competitors are engaged in significant development work on these various
battery systems, and we believe that much of this effort is focused on
achieving higher energy densities for low power applications such as portable
electronics. One or more new, higher energy rechargeable battery technologies
could be introduced which could be directly competitive with, or superior to,
our technology. The capabilities of many of these competing technologies have
improved over the past several years. Competing technologies that outperform
our batteries could be developed and successfully introduced, and as a result,
there is a risk that our products may not be able to compete effectively in our
targeted market segments.
We have invested in
research and development of next-generation technology in energy solutions. If
we are not successful in developing and commercially exploiting new energy
solutions based on new materials, or we experience delays in the development
and exploitations of new energy solutions compared to our competitors, our
future growth and revenues will be adversely affected.
Our principal competitors have
greater financial and marketing resources than we do and they may therefore
develop batteries similar or superior to ours or otherwise compete more
successfully than we do.
Competition in the
rechargeable battery industry is intense. The industry consists of major
domestic and international companies, most of which have financial, technical,
marketing, sales, manufacturing, distribution and other resources substantially
greater than ours. There is a risk that other companies may develop batteries
similar or superior to ours. In addition, many of these companies have name
recognition, established positions in the market, and long-standing
relationships with OEMs and other customers. We believe that our primary
competitors are existing suppliers of cylindrical lithium-ion, nickel cadmium,
nickel metal-hydride and in some cases, non-SLI lead-acid batteries. These
suppliers include Sanyo, Matsushita Industrial Co., Ltd. (Panasonic), Sony,
Toshiba, SAFT, E-One Moli Energy Corp., as well as numerous lead-acid
manufacturers throughout the world. Most of these companies are very large and
have substantial resources and market presence. We expect that we will compete
against manufacturers of other types of batteries in our targeted application
segments. There is also a risk that we may not be able to compete successfully
against manufacturers of other types of batteries in any of our targeted
applications.
Laws regulating the manufacture
or transportation of batteries may be enacted which could result in a delay in
the production of our batteries or the imposition of additional costs that
could harm our ability to be profitable.
At the present time,
international, federal, state and local laws do not directly regulate the
storage, use and disposal of the component parts of our batteries. However,
laws and regulations may be enacted in the future which could impose
environmental, health and safety controls on the storage, use and disposal of
certain chemicals and metals used in the manufacture of lithium polymer
batteries. Satisfying any future laws or regulations could require significant
time and resources from our technical staff, including those related to
possible redesign which may result in substantial expenditures and delays in
the production of our product, all of which could harm our business and reduce
our future profitability.
24
The transportation of
lithium and lithium-ion batteries is regulated both domestically and
internationally. Under recently revised United Nations recommendations and as
adopted by the International Air Transport Association, our N-Charge Power
System (Model VNC-65) is exempt from a Class 9 designation for
transportation, while our N-Charge Power System (Model VNC-130), and U-Charge
Power System currently fall within the level such that they are not exempt and
require a Class 9 designation for transportation. The revised United
Nations recommendations are not U.S. law until such time as they are
incorporated into the Department of Transportation Hazardous Material Regulations.
However, DOT has proposed new regulations harmonizing with the U.N. guidelines.
At present it is not known if or when the proposed regulations would be adopted
by the United States. While we fall under the equivalency levels for the United
States and comply with all safety packaging requirements worldwide, future DOT
or IATA regulations or enforcement policies could impose costly transportation
requirements. In addition, compliance with any new DOT and IATA approval
process could require significant time and resources from our technical staff
and, if redesign were necessary, could delay the introduction of new products.
Risks
Associated With Ownership of Our Stock
Corporate insiders or their
affiliates will be able to exercise significant control over matters requiring
stockholder approval that might not be in the best interests of our
stockholders as a whole.
As of June 12, 2008,
our officers, directors and their affiliates as a group beneficially owned
approximately 55% of our outstanding common stock, of which our Chairman Carl
Berg and his affiliates beneficially owned approximately 47% of our outstanding
common stock. As a result, these stockholders will be able to exercise
significant control over all matters requiring stockholder approval, including
the election of directors and the approval of significant corporate
transactions, which could delay or prevent someone from acquiring or merging
with us. The interest of our officers and directors, when acting in their
capacity as stockholders, may lead them to:
·
vote for the election of directors who agree with the
incumbent officers or directors preferred corporate policy; or
·
oppose or support significant corporate transactions
when these transactions further their interest as incumbent officers or
directors, even if these interests diverge from their interests as stockholders
per se and thus from the interests of other stockholders.
Some provisions of our charter
documents may make takeover attempts difficult, which could depress the price of
our stock and limit the price that potential acquirers may be willing to pay
for our common stock.
Our Board of Directors
has the authority, without any action by the outside stockholders, to issue
additional shares of our preferred stock, which shares may be given superior
voting, liquidation, distribution, and other rights as compared to those of our
common stock. The rights of the holders of our capital stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of additional shares of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock. These provisions
may have the effect of delaying, deferring or preventing a change in control,
may discourage bids for our common stock at a premium over its market price,
may decrease the market price and may infringe upon the voting and other rights
of the holders of our common stock.
At any given time we might not
meet the continued listing requirements of the NASDAQ Capital Market.
Given the volatility of
our stock and trends in the stock market in general, at any given time we might
not meet the continued listing requirements of The NASDAQ Capital Market. Among
other requirements, NASDAQ requires the minimum bid price of a companys
registered shares to be $1.00. On May 16, 2007, the closing price of our
common stock was $1.00. If we are not able to maintain the requirements for
continued listing on The NASDAQ Capital Market, we could be de-listed and it
could have a materially adverse effect on the price and liquidity of our common
stock.
25
Our stock price is volatile,
which could result in a loss of your investment.
The market price of our
common stock has been and is likely to continue to be highly volatile. Factors
that may have a significant effect on the market price of our common stock
include the following:
·
fluctuation in our operating results,
·
announcements of technological innovations or new
commercial products by us or our competitors,
·
failure to achieve operating results projected by
securities analysts,
·
governmental regulation,
·
developments in our patent or other proprietary
rights or our competitors developments,
·
our relationships with current or future
collaborative partners, and
·
other factors and events beyond our control.
In addition, the stock
market in general has experienced extreme volatility that often has been
unrelated to the operating performance of particular companies. These broad
market and industry fluctuations may adversely affect the trading price of our
common stock, regardless of our actual operating performance. As a result of
this potential stock price volatility, investors may be unable to sell their
shares of our common stock at or above the cost of their purchase prices. In
addition, companies that have experienced volatility in the market price of
their stock have been the object of securities class action litigation. If we
were the subject of securities class action litigation, this could result in
substantial costs, a diversion of our managements attention and resources and
harm to our business and financial condition.
Future sales of currently
outstanding shares could adversely affect our stock price.
The market price of our
common stock could drop as a result of sales of a large number of shares in the
market or in response to the perception that these sales could occur. In addition,
these sales might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate. As of March 31, 2008, we had issued 119,242,392 shares of
common stock and have 1,803,144 shares in treasury stock. In addition, at March 31, 2008, we had
10,733,404 shares of our common stock reserved for issuance under warrants and
stock options plans. In connection with the potential conversion of the Series C-1
Convertible Preferred Stock and Series C-2 Convertible Preferred Stock,
issued on December 1, 2004, we may need to issue up to 2,174,242 and
1,454,392 shares, respectively, of our common stock (based on a conversion
price of $1.98 and $2.96, respectively) (in addition to any shares that may be
issued with respect to the conversion of accrued dividends).
Equity transactions occurring in
the future, including sales under our At Market Issuance Sales Agreement, would
result in immediate dilution to current equity holders and, as a result, our
stock price may go down.
Future equity
transactions, including the sale of shares of common stock or preferred stock,
or the exercise of options or warrants or other convertible securities, would
result in dilution and, as a result, our stock price may go down. For example,
in February 2008 we entered into an At Market Issuance Sales Agreement
with Wm. Smith & Co., which provides that, upon the terms and subject
to the conditions set forth therein, we may, through Wm. Smith & Co.
acting as sales agent, issue and sell up to 5 million shares of our common
stock. In addition, as opportunities
present themselves from time to time, we may sell restricted stock and warrants
or convertible debt to investors in private placements conducted by
broker-dealers, or in negotiated transactions. Because the securities may be
restricted, the securities may be sold at a greater discount to market prices
compared to a public securities offering, and the exercise price of the
warrants may be at or even lower than market prices. These transactions cause
dilution to existing stockholders. Also, from time to time, options may be
issued to employees and third parties, with exercise prices equal to market.
Exercise of in-the-money options, warrants and other convertible securities
will
26
result in dilution to
existing stockholders; the amount of dilution will depend on the spread between
market and exercise price, and the number of shares involved.
We do not intend to pay dividends
on our common stock, and therefore stockholders will be able to recover their
investment in our common stock, if at all, only by selling the shares of stock
that they hold.
Some investors favor
companies that pay dividends on common stock. We have never declared or paid
any cash dividends on our common stock. We currently intend to retain any
future earnings for funding growth and we do not anticipate paying cash
dividends on our common stock in the foreseeable future. Because we may not pay
dividends, a return on an investment in our stock likely depends on the ability
to sell our stock at a profit.
Our business is subject to
changing regulations relating to corporate governance and public disclosure
that has increased both our costs and the risk of noncompliance
.
Because our common stock
is publicly traded, we are subject to certain rules and regulations of
federal, state and financial market exchange entities charged with the
protection of investors and the oversight of companies whose securities are
publicly traded. These entities, including the Public Company Accounting
Oversight Board, the Commission, and NASDAQ, have recently issued new
requirements and regulations and continue to develop additional regulations and
requirements in response to recent laws enacted by Congress, most notably Section 404
of the Sarbanes-Oxley Act of 2002. Our efforts to comply with these new
regulations have resulted in, and are likely to continue to result in,
materially increased general and administrative expenses and a significant
diversion of management time and attention from revenue-generating and
cost-reduction activities to compliance activities.
In particular, our
efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and
the related regulations regarding our required assessment of our internal
controls over financial reporting and our independent registered public
accounting firms audit of that assessment has required, and continues to
require, the commitment of significant financial and managerial resources.
There is no assurance that these efforts will be completed on a timely and
successful basis. Because these laws, regulations and standards are subject to
varying interpretations, their application in practice may evolve over time as
new guidance becomes available. This evolution may result in continuing
uncertainty regarding compliance matters and additional costs necessitated by
ongoing revisions to our disclosure and governance practices.
In the event that our
Chief Executive Officer, Chief Financial Officer, or independent registered
public accounting firm determines that our internal controls over financial
reporting are not effective as defined under Section 404 of the
Sarbanes-Oxley Act of 2002, there may be a material adverse impact in investor
perceptions and a decline in the market price of our stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our corporate offices are located in a leased facility
in Austin, Texas. We also have a leased research and development facility in
Las Vegas, Nevada. Our two wholly owned foreign enterprises in China lease two
separate facilities, totaling 151,000 square meters in Suzhou, China. Our sales
and OEM manufacturing support center is located in Mallusk, Northern Ireland.
ITEM
3. LEGAL PROCEEDINGS
On January 31, 2007, Valence filed a claim
against Phostech Lithium Inc. in the Federal Court in Canada (Valence
Technology, Inc. v. Phostech Lithium Inc. Court File No. T-219-07)
alleging infringement of Valence Canadian Patent 2,395,115. Subsequently, on April 2,
2007, Valence filed an amended claim alleging infringement of its recently
granted Canadian Patents 2,483,918 and 2,466,366. The action is in the initial
pleading state. The Company
27
is seeking monetary damages and injunctive relief for
the acts of Phostech in manufacturing, using and selling phosphate cathode
material that infringes the asserted Valence Canadian Patents.
On February 14, 2006, Hydro-Quebec filed an
action against us in the United States District Court for the Western District
of Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111).
In its amended complaint filed April 13, 2006, Hydro-Quebec alleges that
Saphion® I Technology, the technology utilized in all of our commercial
products, infringes U.S. Patent Nos. 5,910,382 and 6,514,640 exclusively
licensed to Hydro-Quebec. Hydro-Quebecs complaint seeks injunctive relief and
monetary damages. The action is in the initial pleading state and we have filed
a response denying the allegations in the amended complaint. The action has
been stayed by the Court pending a final determination of the two
reexaminations by the USPTO.
We are subject, from time to time, to various claims
and litigation in the normal course of business. In our opinion, all pending
legal matters will not have a material adverse impact on our consolidated
financial statements.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
28
PART II
ITEM
5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our common stock is quoted on the NASDAQ Capital
Market under the symbol VLNC. As of June 12, 2008, we had approximately 650 holders
of record of our common stock, one of which is Cede & Co., a nominee
for Depository Trust Company, or DTC. All of the shares of our common stock
held by brokerage firms, banks and other financial institutions as nominees for
beneficial owners are deposited into participant accounts at DTC, and are
therefore considered to be held of record by Cede & Co. as one
stockholder.
The following table sets
forth the quarterly high and low closing sales prices of our common stock
during 2007 and 2008:
|
|
Closing Sales Prices
|
|
|
|
High
|
|
Low
|
|
2008:
|
|
|
|
|
|
Quarter ended June 30, 2007
|
|
$1.49
|
|
$1.00
|
|
Quarter ended September 30, 2007
|
|
1.48
|
|
1.05
|
|
Quarter ended December 31, 2007
|
|
2.75
|
|
1.39
|
|
Quarter ended March 31, 2008
|
|
4.85
|
|
1.10
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
Quarter ended June 30, 2006
|
|
$2.78
|
|
$1.68
|
|
Quarter ended September 30, 2006
|
|
2.25
|
|
1.14
|
|
Quarter ended December 31, 2006
|
|
2.27
|
|
1.57
|
|
Quarter ended March 31, 2007
|
|
1.94
|
|
1.16
|
|
The following table includes, as of March 31,
2008, information regarding common stock authorized for issuance under our
equity compensation plans:
Plan Category
|
|
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
|
|
Equity compensation plans approved by security holders
|
|
5,188,270
|
|
$2.95
|
|
1,089,491
|
|
Equity compensation plans not approved by security holders (1)
|
|
1,500,000
|
|
$1.61
|
|
|
|
Total
|
|
6,688,270
|
|
$2.15
|
|
1,089,491
|
|
(1)
Options to purchase 1,500,000 shares were
granted to Robert L. Kanode in March 2007 pursuant to his employment
agreement. The exercise price of his shares is $1.61 per share and they vest as
follows: 250,000 shares vested on September 13, 2007 and the remaining
1,250,000 shares monthly over the remaining two and a half years.
Recent
Sales of Unregistered Securities
None, except as has been previously disclosed in our
quarterly reports on Form 10-Q and current reports on Form 8-K filed
with the Securities and Exchange Commission.
Dividends
We have never declared or
paid any cash dividend on our common stock. We intend to retain earnings, if
any, to finance future operations and expansion and, therefore, do not
anticipate paying any cash dividends in the foreseeable future. Any future
payment of dividends will depend upon our financial condition, capital
requirements and earnings, as well as upon other factors that the Board of
Directors may deem relevant.
29
Performance Graph
The graph below compares the cumulative 5-year total
return of holders of Valence Technology, Inc.s common stock with the
cumulative total returns of the NASDAQ Composite index and the NASDAQ
Electronic Components index. The graph tracks the performance of a $100
investment in our common stock and in each of the indexes (with the
reinvestment of all dividends) from March 31, 2003 to March 31, 2008.
COMPARISON OF 5 YEAR CUMULATIVE
TOTAL RETURN*
Among Valence Technology,
Inc., The NASDAQ Composite Index
And The NASDAQ Electronic
Components Index
* $100 invested on 3/31/03 in stock or index-including
reinvestment of dividends.
Fiscal year ending March 31.
|
|
3/03
|
|
3/04
|
|
3/05
|
|
3/06
|
|
3/07
|
|
3/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valence Technology, Inc.
|
|
100.00
|
|
207.91
|
|
142.79
|
|
115.81
|
|
54.88
|
|
205.12
|
|
NASDAQ Composite
|
|
100.00
|
|
151.01
|
|
152.38
|
|
181.06
|
|
189.63
|
|
177.49
|
|
NASDAQ Electronic Components
|
|
100.00
|
|
172.38
|
|
143.55
|
|
159.34
|
|
147.79
|
|
144.65
|
|
The stock price
performance included in this graph is not necessarily indicative of future
stock price performance
.
30
ITEM
6. SELECTED FINANCIAL DATA
This
section presents selected historical financial data of Valence Technology, Inc.
The information should be read in conjunction with the Managements Discussion
and Analysis of Financial Condition and Results of Operations and our
consolidated financial statements and notes thereto contained elsewhere in this
document. Our financial data as of and
for the periods indicated is derived from our audited financial statements for
such periods. The following is not
necessarily indicative of future results:
|
|
Year ended March 31,
|
|
(in thousands except share data)
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Battery and systems sales
|
|
$
|
20,191
|
|
$
|
15,971
|
|
$
|
16,490
|
|
$
|
10,274
|
|
$
|
8,483
|
|
Licensing and royalty revenue
|
|
586
|
|
703
|
|
724
|
|
391
|
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
20,777
|
|
16,674
|
|
17,214
|
|
10,665
|
|
9,446
|
|
Cost of sales
|
|
18,956
|
|
16,366
|
|
25,454
|
|
16,341
|
|
15,923
|
|
Gross margin income / (loss)
|
|
1,821
|
|
308
|
|
(8,240
|
)
|
(5,676
|
)
|
(6,477
|
)
|
Operating
Expenses
:
|
|
|
|
|
|
|
|
|
|
|
|
Research and product development
|
|
3,677
|
|
3,709
|
|
5,112
|
|
7,682
|
|
8,638
|
|
Selling, general and administrative
|
|
11,709
|
|
12,013
|
|
13,957
|
|
17,225
|
|
16,296
|
|
Depreciation and amortization
|
|
616
|
|
666
|
|
722
|
|
884
|
|
2,109
|
|
(Gain)/Loss on disposal of assets
|
|
16
|
|
62
|
|
(445
|
)
|
(5,257
|
)
|
(21
|
)
|
Asset impairment charge
|
|
154
|
|
52
|
|
170
|
|
87
|
|
13,660
|
|
Other
|
|
|
|
24
|
|
(108
|
)
|
1,456
|
|
3,972
|
|
Total operating expenses
|
|
16,172
|
|
16,526
|
|
19,408
|
|
22,077
|
|
44,654
|
|
Operating income (loss)
|
|
(14,351
|
)
|
(16,218
|
)
|
(27,648
|
)
|
(27,753
|
)
|
(51,131
|
)
|
Foreign exchange gain (loss)
|
|
1,258
|
|
260
|
|
(73
|
)
|
82
|
|
|
|
Interest (expense)/income, net
|
|
(6,347
|
)
|
(6,293
|
)
|
(5,003
|
)
|
(3,759
|
)
|
(3,714
|
)
|
Minority interest in joint venture
|
|
|
|
|
|
|
|
|
|
69
|
|
Cost of warrants
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
Net Loss
|
|
(19,440
|
)
|
(22,251
|
)
|
(32,724
|
)
|
(31,430
|
)
|
(54,957
|
)
|
Dividends on preferred stock
|
|
173
|
|
172
|
|
172
|
|
171
|
|
162
|
|
Preferred stock accretion
|
|
|
|
|
|
28
|
|
578
|
|
940
|
|
Net Loss available to common stockholders
|
|
$
|
(19,613
|
)
|
$
|
(22,423
|
)
|
$
|
(32,924
|
)
|
$
|
(32,179
|
)
|
$
|
(56,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share-basic and diluted
|
|
$
|
(0.18
|
)
|
$
|
(0.22
|
)
|
$
|
(0.37
|
)
|
$
|
(0.40
|
)
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding-basic diluted
|
|
111,593
|
|
99,714
|
|
89,298
|
|
81,108
|
|
73,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
2,616
|
|
1,168
|
|
612
|
|
2,500
|
|
2,692
|
|
Working capital (deficit)
|
|
11,200
|
|
7,382
|
|
(4,250
|
)
|
(1,651
|
)
|
(4,847
|
)
|
Total assets
|
|
27,158
|
|
19,200
|
|
11,632
|
|
10,231
|
|
21,056
|
|
Long-term debt, net of discount
|
|
53,607
|
|
52,390
|
|
51,112
|
|
34,656
|
|
39,407
|
|
Redeemable convertible preferred stock
|
|
8,610
|
|
8,610
|
|
8,610
|
|
8,852
|
|
8,032
|
|
Accumulated deficit
|
|
(536,260
|
)
|
(516,647
|
)
|
(494,224
|
)
|
(461,328
|
)
|
(429,724
|
)
|
Total stockholders deficit
|
|
(67,317
|
)
|
(67,918
|
)
|
(76,212
|
)
|
(54,642
|
)
|
(56,794
|
)
|
31
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
General
We develop, manufacture
and sell high-energy power systems utilizing our proprietary phosphate-based
lithium-ion technology for diverse applications, with special emphasis on
portable appliances and future generations of hybrid and electric vehicles. Our
mission is to promote the wide adoption of high-performance, safe, long cycle
life, environmentally friendly, low-cost energy storage systems and address the
significant market opportunity we believe is available to us by drawing on the
numerous benefits of our Epoch Lithium Phosphate Energy Storage Systems
battery technology, deep intellectual property portfolio, and the extensive
experience of our management team.
Total revenue in fiscal 2008 was $20.8 million, an
increase of 25% compared to the prior fiscal year. We believe revenue will
continue to grow in fiscal year 2009 from new customer sales from the
increasing demand in the U.S. and EMEA (Europe, Middle East and Africa) markets
for alternative energy solution systems.
Our gross margin continues to increase as sales grow and the
manufacturing costs decrease from continued improvements in quality and
efficiency. We are continuing to expand
the capacity of China manufacturing and support operations in our two
wholly-owned subsidiaries.
Going Concern
As a result of our limited cash resources and history
of operating losses that there is substantial doubt about our ability to
continue as a going concern. We presently have no further commitments for
financing by our Chairman Carl Berg and/or his affiliates or any other source.
If we are unable to obtain financing from Mr. Berg or others on terms
acceptable to us, or at all, we may be forced to cease all operations and
liquidate our assets. Our cash requirements may vary materially from those now
planned because of changes in our operations, including the failure to achieve
expected revenues, greater than expected expenses, changes in OEM
relationships, market conditions, the failure to timely realize our product
development goals, and other adverse developments. These events could have a
negative impact on our available liquidity sources during fiscal 2009.
2008 Highlights
Key product introductions and milestones based on our
Epoch and Lithium Phosphate technology during the current year include:
·
In February 2008, we entered into a supply
agreement with The Tanfield Group, PLC (Tanfield) whereby we agreed to
manufacture and supply Lithium Phosphate energy storage systems to power zero
emission, all-electric commercial delivery vehicles. Our battery systems will
be installed in leading edge vans and trucks produced by Tanfields UK-based
trading division, Smith Electric Vehicles.
Initial purchases, which began in the fiscal fourth quarter ended March 31,
2008 were fulfilled with our current U-Charge® brand of energy storage systems.
Subsequent purchases by Tanfield will be fulfilled by our U-Charge® Energy
Storage Systems and ultimately by our third generation lithium phosphate Epoch
Energy Storage Systems.
·
In November 2007, we introduced the Epoch
Lithium Phosphate Energy Storage System, our new generation of phosphate-based
lithium-ion battery. The EpochLithium Phosphate Energy Storage Systems are
equipped with an advanced management system that will monitor and adjust cell
performance, so battery packs will operate at their optimum performance
capacity. Epoch Lithium Phosphate Energy Storage Systems present a safer
and more powerful and reliable energy source storage solution designed to be
low maintenance, cost competitive, and environmentally friendly.
During the third and
fourth quarter of fiscal 2008, we continued our efforts to increase production
capacity at our subsidiaries in China. We also continue to explore other ways
of expanding capacity, including partnerships with other companies. Our research and development efforts are focused
on the design of new products utilizing our lithium phosphate chemistry, the
continuous improvement of the manufacturing process of our second generation
lithium phosphate technology, the development of different cell constructions
to optimize power and size for new applications, as well as developing future
materials based on the lithium phosphate technology platform.
32
Our business headquarters is in Austin, Texas. Our
materials research and development center is in Las Vegas, Nevada. Our European
sales and OEM manufacturing support center is in Mallusk, Northern Ireland. Our
manufacturing and product development center is in Suzhou, China.
Result of Operations
Fiscal Years Ended March 31,
2008 (Fiscal 2008), March 31, 2007 (Fiscal 2007) and March 31, 2006
(Fiscal 2006)
The following
table summarizes the results of our operations for the past three fiscal years
(in thousands)
:
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
3/31/2008
|
|
Change
Increase/
(Decrease)
|
|
3/31/2007
|
|
Change
Increase/
(Decrease)
|
|
3/31/2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battery and system sales
|
|
$
|
20,191
|
|
$
|
4,220
|
|
26
|
%
|
$
|
15,971
|
|
$
|
(519
|
)
|
(3
|
)%
|
$
|
16,490
|
|
Licensing and royalty revenue
|
|
586
|
|
(117
|
)
|
(17
|
)%
|
703
|
|
(21
|
)
|
(3
|
)%
|
724
|
|
Total revenues
|
|
20,777
|
|
4,103
|
|
25
|
%
|
16,674
|
|
(540
|
)
|
(3
|
)%
|
17,214
|
|
Cost of products sold
|
|
18,956
|
|
2,590
|
|
16
|
%
|
16,366
|
|
(9,088
|
)
|
(36
|
)%
|
25,454
|
|
Gross margin
|
|
1,821
|
|
1,513
|
|
491
|
%
|
308
|
|
8,548
|
|
(104
|
)%
|
(8,240
|
)
|
Operating and other expenses
|
|
16,156
|
|
(284
|
)
|
(2
|
)%
|
16,440
|
|
(3,351
|
)
|
(17
|
)%
|
19,791
|
|
(Gain)/ loss on disposal of assets
|
|
16
|
|
(46
|
)
|
(74
|
)%
|
62
|
|
507
|
|
(114
|
)%
|
(445
|
)
|
Impairments, restructuring, contract settlement charges
|
|
|
|
(24
|
)
|
(100
|
)%
|
24
|
|
(38
|
)
|
(61
|
)%
|
62
|
|
Total operating expenses
|
|
16,172
|
|
(354
|
)
|
(2
|
)%
|
16,526
|
|
(2,882
|
)
|
(15
|
)%
|
19,408
|
|
Operating loss
|
|
(14,351
|
)
|
1,867
|
|
(12
|
)%
|
(16,218
|
)
|
11,430
|
|
(41
|
)%
|
(27,648
|
)
|
Other(expense) income, net
|
|
(5,089
|
)
|
944
|
|
(16
|
)%
|
(6,033
|
)
|
(957
|
)
|
19
|
%
|
(5,076
|
)
|
Net loss
|
|
(19,440
|
)
|
2,811
|
|
(13
|
)%
|
(22,251
|
)
|
10,473
|
|
(32
|
)%
|
(32,724
|
)
|
Dividends and accretion on preferred stock
|
|
173
|
|
1
|
|
1
|
%
|
172
|
|
(28
|
)
|
(14
|
)%
|
200
|
|
Net loss available to common stockholders
|
|
$
|
(19,613
|
)
|
$
|
2,810
|
|
(13
|
)%
|
$
|
(22,423
|
)
|
$
|
10,501
|
|
(32
|
)%
|
$
|
(32,924
|
)
|
Net loss per share available to common stockholders- basic and
diluted
|
|
$
|
(0.18
|
)
|
$
|
0.05
|
|
(22
|
)%
|
$
|
(0.22
|
)
|
$
|
(0.59
|
)
|
(161
|
)%
|
$
|
(0.37
|
)
|
Shares used in computing net loss per share available to common
stockholders, basic and diluted
|
|
111,593
|
|
11,879
|
|
12
|
%
|
99,714
|
|
10,416
|
|
12
|
%
|
89,298
|
|
Revenues and Gross Margin
Battery and system sales
: Battery and systems sales totaled $ 20.2
million for the year ended March 31, 2008, as compared to $16.0 million
for the year ended March 31, 2007, and $16.5 million for the year ended March 31,
2006. The increase in revenues in fiscal 2008 compared to fiscal 2007 was
primarily due to additional sales of the large-format batteries, which include
U-Charge® and custom batteries designed for Segway, and to new and existing
customers. The decrease in revenues in fiscal 2007 compared to fiscal 2006 was
primarily attributable to decreased sales of N-Charge® Power Systems as a
result of ceasing sales through our retail channels. We expect sales of the
N-Charge® Power System to be reduced in fiscal 2009 as we discontinue the
product. We had $756,000 and $516,000 in deferred revenue on our balance sheet
at March 31, 2008 and March 31, 2007, respectively, primarily related
to sales shipping in the end of the fourth quarter. In fiscal 2006, we launched
our long range battery pack for use in Segways human transporter as well as
further expansions of our U-Charge® family of products. Segway sales accounted
for 55%, 60% and 53% of our total product sales in 2008, 2007 and 2006. We
expect sales of the large-format battery system to increase during fiscal 2009,
due to the growing demand of the new Epoch
TM
Lithium Phosphate
Energy Storage Systems and the fulfillment of our current back orders and sales
agreements. The large-format battery
system sales represent 30%, 16%, and 4% of our total revenue for fiscal 2008, 2007
and 2006. The growth in large-format
battery systems sales are due to the increase in demand in alternative energy
solutions driven by the rising costs of fossil fuels.
33
Licensing And Royalty Revenue
:
Licensing and royalty
revenues relate to revenue from licensing agreements for our battery
construction technology. Fiscal 2008 licensing and royalty revenue was $586,000
compared to $703,000 in fiscal 2007 and $724,000 in fiscal 2006. Licensing and
royalty revenue was substantially from our license agreement with Amperex
Technology Limited, which makes on-going royalty payments as sales are made
using our technology. We expect to continue to pursue a licensing strategy as
our lithium phosphate technology receives greater market acceptance. We expect
licensing and royalty revenues to remain relatively flat.
Gross Margin/(Loss)
: Gross margin as a percentage of revenue was 9% for
the fiscal year ended March 31, 2008 as compared to 2% for the fiscal year
ended March 31, 2007 and a gross margin loss of (48%) for the fiscal year
ended March 31, 2006. Fiscal year 2006 margin improvements were offset by
inventory valuation adjustments of $5.3 million as of March 31, 2006,
related to valuation of our work in process cell inventory and lower of cost or
market tests for our early launch and U.S.-sourced large-format products.
During fiscal 2006, we had significant expenses due to issues with our powder
manufacturing. During fiscal 2008, a vendor agreed to provide a credit of
$414,000 for defective inventory that had been received and written off by the
Company in fiscal 2007. As a result,
included in fiscal 2008 is a $414,000 reduction of cost of goods which
contributes to our improved gross margin.
The gross margin increased during fiscal 2007 as we worked to reduce the
amount of scrap material in the production process. In fiscal 2008, the
improvement in our manufacturing efficiency has increased our gross margin.
During fiscal 2008, $0.1 million of share based compensation was allocated to
manufacturing overhead expenses. We expect cost of sales, as a percentage of
sales, to continue to decrease during fiscal 2009 as production volumes
increase, we continue to implement our lower-cost manufacturing strategy and our
efficiency improves.
Operating Expenses
The following table summarizes our operating expenses
during each of the past three fiscal years (in thousands):
|
|
Year Ended
|
|
|
|
|
|
Change
|
|
|
|
Change
|
|
|
|
|
|
3/31/2008
|
|
$
|
|
%
|
|
3/31/2007
|
|
$
|
|
%
|
|
3/31/2006
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and product development
|
|
$
|
3,677
|
|
$
|
(32
|
)
|
(1
|
)%
|
|
$
|
3,709
|
|
$
|
(1,403
|
)
|
(27
|
)%
|
|
$
|
5,112
|
|
Marketing
|
|
2,447
|
|
86
|
|
4
|
%
|
|
2,361
|
|
198
|
|
9
|
%
|
|
2,163
|
|
General and administrative
|
|
9,262
|
|
(390
|
)
|
(4
|
)%
|
|
9,652
|
|
(2,142
|
)
|
(18
|
)%
|
|
11,794
|
|
Depreciation and amortization
|
|
616
|
|
(50
|
)
|
(8
|
)%
|
|
666
|
|
(56
|
)
|
(8
|
)%
|
|
722
|
|
(Gain) / loss on disposal of assets
|
|
16
|
|
(46
|
)
|
(74
|
)%
|
|
62
|
|
507
|
|
(114
|
)%
|
|
(445
|
)
|
Asset impairment charge
|
|
154
|
|
102
|
|
196
|
%
|
|
52
|
|
(118
|
)
|
(69
|
)%
|
|
170
|
|
Contract settlement charge, other
|
|
|
|
(24
|
)
|
100
|
%
|
|
24
|
|
132
|
|
(122
|
)%
|
|
(108
|
)
|
Total operating expenses
|
|
$
|
16,172
|
|
$
|
(354
|
)
|
(2
|
)%
|
|
$
|
16,526
|
|
(2,882
|
)
|
(15
|
)%
|
|
$
|
19,408
|
|
Percent total revenue
|
|
78
|
%
|
|
|
|
|
99
|
%
|
|
|
|
|
113
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We continued to focus on our operating expense
management throughout fiscal 2008. Operating expenses as a percentage of
revenue decreased to 78% in fiscal 2008 versus 99% in fiscal 2007 and 113% in
fiscal 2006. The decrease is the result of increased revenues, as well as our
focus on expense reductions during fiscal 2008.
Research and Product Development:
Research and product development
expenses consist primarily of personnel, equipment and materials to support our
efforts to develop battery chemistry and products, as well as to improve our
manufacturing processes. Research and product development expenses totaled $
3.7 million in fiscal 2008, $3.7 million in fiscal 2007 and $5.1 million in
fiscal 2006. We achieved year over year decreases in research and development
in fiscal 2008 and 2007 of 1% and 30%, respectively. Decreases in research and
development expenses from 2006 to 2007 were the result of cessation of process
development work in our Northern Ireland facility and reductions in research
headcount, temporary staff, consulting expenses and material costs in our Las
Vegas, Nevada facility. During fiscal
year 2008, $0.3 million of share based compensation was allocated to research
and development expenses as compared to $0.2 million in fiscal 2007 and none in
fiscal 2006. We expect research and
development expenses to remain steady as we create and develop new products.
Marketing:
Marketing expenses consist primarily of costs related
to sales and marketing personnel, public relations and promotional materials.
Marketing expenses of $2.5 million in fiscal 2008 were $86,000 or 4% higher
34
than fiscal 2007.
During fiscal 2008, $0.3 million of share based compensation was
allocated to marketing expenses as compared to $0.2 million in fiscal 2007 and
none in fiscal 2006. We expect marketing
expenses to increase moderately as we focus on our new Epoch
TM
generation and raising our profits as an effective global supplier in fiscal
2009.
General and Administrative:
General and administrative expenses
consist primarily of salaries, share based compensation and other related costs
for finance, human resources, facilities, accounting, information technology,
legal, audit, insurance, and corporate-related expenses. General and
administrative expenses include share based compensation of $1.7 million in
fiscal year 2008, $1.1 million in fiscal year 2007 and $0.2 million in fiscal
year 2006. General and administrative expenses of $9.3 million in fiscal 2008
represented a 4% decrease over fiscal 2007. This was largely due to reductions
made in facilities, personnel, insurance, auditing related costs and
administrative expenses. Fiscal 2007 general and administrative expenses of
$9.7 million represented a decrease of $2.0 million, or 17%, over fiscal 2006 expenses.
Other Costs Related to Our
Manufacturing Transition
Impairment Charge:
There were
impairment charges of $154,000, $52,000 and $170,000 recorded during fiscal
years 2008, 2007 and 2006 respectively. The fiscal 2008 and 2007 impairment
charges relate to write-downs of machinery and equipment. In 2006, we reduced
the carrying value of certain software related to our manufacturing cost and
accounting processes.
Gain/Loss on Sale of Assets:
Loss on sales of assets amounted to
$16,000 and $62,000 in fiscal years 2008 and 2007, respectively, and resulted
primarily from consolidating our China operations into two plants in Suzhou,
China. Additionally, we determined that some equipment was not required in our
manufacturing and development operations in Suzhou, China and was sold for fair
value. Gain on sales of the facility and
production and development equipment from our former Mallusk, Northern Ireland
facility was $445,000 in fiscal year 2006. The majority of the gain is related
to the sales of our Northern Ireland facility.
Depreciation and Amortization,
Interest Expense
Depreciation and Amortization:
Depreciation and amortization expense
totaled $616,000, $666,000 and $722,000 for fiscal years ended March 31,
2008, 2007 and 2006, respectively. Our
ERP system was fully depreciated during fiscal 2008, resulting in the decrease
of $50,000 for depreciation and amortization expense for the year.
Interest Expense:
Interest expense relates to our long-term debt with a
stockholder and third party. Interest expense was $6.4 million, $6.4 million,
and $5.1 million for the fiscal years 2008, 2007 and 2006, respectively.
Interest expense fluctuations are a result of changes in the underlying
interest rate on one of the loans, which is indexed to the Libor rate.
Liquidity and Capital Resources
At March 31, 2008, our principal source of
liquidity was cash and cash equivalents of $2.6 million. We do not expect our
cash and cash equivalents will be sufficient to fund our operating and capital
needs for the next twelve months following March 31, 2008 nor do we
anticipate product sales during fiscal 2009 will be sufficient to cover our
operating expenses. Historically, we have relied upon managements ability to
periodically arrange for additional equity or debt financing to meet our
liquidity requirements. Unless our product sales are greater than management
currently forecasts or there are other changes to our business plan, we will
need to arrange for additional financing to fund operating and capital needs.
This financing could take the form of debt or equity. Given our historical
operating results and the amount of our existing debt, as well as the other
factors, we may not be able to arrange for debt or equity financing on
favorable terms or at all.
Our cash requirements may vary materially from those
now planned because of changes in our operations including the failure to
achieve expected revenues, greater than expected expenses, changes in OEM
relationships, market
35
conditions, the failure to timely realize the
Companys product development goals, and other adverse developments. These
events could have a negative impact on our available liquidity sources during
the remaining fiscal year.
The following table summarizes our statement of cash
flows for the fiscal years ended March 31, 2008, 2007 and 2006 (in
thousands):
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Net cash flows provided by (used in)
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(14,660
|
)
|
$
|
(20,307
|
)
|
$
|
(33,149
|
)
|
Investing activities
|
|
(1,628
|
)
|
(2,204
|
)
|
(1,205
|
)
|
Financing activities
|
|
17,709
|
|
23,185
|
|
32,439
|
|
Effect of foreign exchange rates
|
|
27
|
|
(118
|
)
|
27
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
1,448
|
|
$
|
556
|
|
$
|
(1,888
|
)
|
Our use of cash from operations during fiscal 2008,
fiscal 2007 and fiscal 2006 was $14.7 million, $20.3 million and $33.1 million,
respectively. The cash used for operating activities during all periods was
primarily for operating losses and working capital. Cash used for operating
activities in fiscal 2008 was lower than in fiscal 2007 and 2006 primarily from
the impact of decreases in some of the operating expenses as described above in
the section titled Operating Expenses.
In fiscal 2008, we spent net cash from investing
activities of $1.6 million primarily on property, plant, and equipment for our
China facilities.
We obtained net cash from financing activities of
$17.7 million and $23.2 million during the fiscal 2008 and 2007, respectively.
The 2008 financing includes $8.2 million in sales of common stock to private
investors and $9.0 million in sales of common stock to Carl Berg and his
affiliates. Cash from the 2007 financing includes $8.4 million in sales of
common stock to private investors, $9.5 million in sales of common stock to a
related party, and $5.0 million in short term convertible notes payable to a
stockholder. Cash from the 2006 financing included $20.0 million from Berg &
Berg Enterprises, LLC (Berg & Berg), an affiliate of Carl Berg, the Company
Chairman of the board and managing member of Berg & Berg in equity
lines, including $6.0 million in convertible notes to stockholder, and
approximately $5.9 million in common stock sales.
As a result of the above, we had a net increase in
cash and cash equivalents of $1.4 million during fiscal 2008, a net increase of
$556,000 during fiscal 2007, and a net decrease of $1.9 million during fiscal
2006.
On January 14, 2008, we filed a Form S-3
Registration Statement with the SEC utilizing a shelf registration
process. On January 22, 2008, the Form S-3
Registration was declared effective by the SEC. Pursuant to this shelf
registration statement, the Company may sell debt or equity securities
described in the accompanying prospectus in one or more offerings up to a total
public offering price of $50,000,000. We
believe that this shelf registration statement provides us additional
flexibility with regards to potential financings that we may undertake when
market conditions permit or our financial condition may require.
On February 22, 2008, we entered into an At
Market Issuance Sales Agreement with Wm. Smith & Co., as sales agent
(the Sales Agent). Concurrent with
entering into this At Market Issuance Sales Agreement, we provided notice of
termination of the Controlled Equity Offering Sales Agreement dated April 13,
2006 that we previously entered into with Cantor Fitzgerald & Co.
In accordance with terms of the At Market Issuance
Sales Agreement , we may issue and sell up to 5,000,000 shares of common stock
in a series of transactions over time as we may direct through the Sales
Agent. Sales of shares may be made in
privately negotiated transactions and/or any other method permitted by law,
including sales deemed to be an at the market offering as defined in Rule 415
under the Securities Act of 1933, which includes sales made directly on the
NASDAQ Capital Market, the existing trading market for the Companys common
stock, or sales made to or through a market maker other than on an exchange. The Sales Agent will make all sales on a best
efforts basis using commercially reasonable efforts consistent with its normal
trading and sales practices, on mutually agreed terms between the Sales Agent
and the Company. Unless the Company and the Sales Agent agree to a lesser
36
amount with respect to certain persons or classes of
persons, the compensation to the Sales Agent for sales of common stock sold
pursuant to the Agreement will be 6.0% of the gross proceeds of the sales price
per share.
Through March 31, 2008, we had sold 1,028,900
shares with proceeds net of commissions of $3.9 million under the At Market
Issuance Sales Agreement. As of the date
of this Report, we have made no further decisions as to whether or when we may
seek to make additional sales under the At Market Issuance Sales Agreement.
At March 31, 2008, the redemption obligation for
our Series C-1 Convertible Preferred Stock and Series C-2 Convertible
Preferred Stock, all of which is currently held by Berg & Berg, is
$8.6 million, plus accrued dividends, which as of March 31, 2008 totaled
$431,000. The preferred shares are
currently subject to redemption or conversion at the holders discretion. We do not have sufficient resources to effect
this redemption; however, Berg & Berg has agreed that our failure to
redeem the Series C-1 Convertible Preferred Stock and the Series C-2
Convertible Preferred Stock does not constitute a default under the certificate
of designations for either the Series C-1 Convertible Preferred Stock or
the Series C-2 Convertible Preferred Stock and has waived the accrual of
any default interest applicable. Berg &
Berg also has agreed to defer the payment of dividends on the Series C-1
Convertible Preferred Stock and Series C-2 Convertible Preferred
Stock. According to our agreement with
Berg & Berg, dividends will continue to accrue (without interest) on
the Series C-1 Convertible Preferred Stock and the Series C-2
Convertible Preferred Stock according to the terms of the applicable
certificates of designation; and such dividends are not payable until such time
as the parties mutually agree, or upon redemption or conversion in accordance
with the terms of the applicable certificates of designation. We have no present intention to pay dividends
on this preferred stock, including the accrued dividends. The Series C-1 Convertible Preferred
Stock may be converted, at any time, into shares of our common stock at the
lower of $4.00 or the closing price of our common stock on the conversion date,
provided the conversion price can be no lower than $1.98, the closing price of
the common stock on December 13, 2005.
The Series C-2 Convertible Preferred Stock may be converted, at any
time, into shares of our common stock at the lower of $4.00 or the closing
price of our common stock on the conversion date, provided the conversion price
can be no lower than $2.96, the closing bid price of our common stock on July 13,
2005.
Related Party Transactions
On April 24, 2008, Berg & Berg, an
affiliate of our Chairman, Carl Berg, exercised a warrant to purchase 600,000
shares of the Companys common stock.
The purchase price was $ 2.74 per share as set forth in the
warrant. On July 13, 2005, we
entered into an agreement with SFT I, Inc., providing for a $20 million
loan to Valence. In exchange for entry
into the Loan Agreement and the guaranty of the loan, SFT 1, Inc. and Berg &
Berg were each issued three year warrants to purchase 600,000 shares of our
common stock, at $2.74 per share, the closing price of our common stock on July 12,
2005.
On February 21, 2008, Berg & Berg
purchased 280,112 shares of the Companys common stock for $1.0 million. The purchase price of $3.57 per share equaled
the closing bid price of the Companys common stock as of February 27,
2008.
On February 22, 2008, Berg & Berg
purchased 330,033 shares of the Companys common stock for $1.0 million. The
purchase price of $3.03 per share equaled the closing bid price of the
Companys common stock as of February 21, 2008.
On February 8, 2008, Berg & Berg
purchased 492,611 shares of the Companys common stock for $1.0 million. The
purchase price of $2.03 per share equaled the closing bid price of the
Companys common stock as of February 7, 2008.
On September 20, 2007, Berg & Berg
purchased 729,927 shares of the Companys common stock for $1.0 million. The
purchase price of $1.37 per share equaled the closing bid price of the
Companys common stock as of September 19, 2007.
On August 16, 2007, Berg & Berg purchased
884,956 shares of the Companys common stock for $1.0 million. The purchase
price of $1.13 per share equaled the closing bid price of the Companys common
stock as of August 15, 2007.
37
On July 19, 2007, Berg & Berg purchased
869,565 shares of the Companys common stock for $1.0 million. The purchase
price of $1.15 per share equaled the closing bid price of the Companys common
stock as of July 18, 2007.
On June 21, 2007, Berg & Berg purchased
869,565 shares of the Companys common stock for $1.0 million. The purchase
price of $1.15 per share equaled the closing bid price of the Companys common
stock as of June 20, 2007.
On May 17, 2007, Berg & Berg purchased
990,099 shares of the Companys common stock for $1.0 million. The purchase
price of $1.01 per share equaled the closing bid price of the Companys common
stock as of May 16, 2007.
On April 19, 2007, West Coast Venture Capital, an
affiliate of our Chairman, Carl Berg, purchased 925,926 shares of the Companys
common stock for $1.0 million. The purchase price of $1.08 per share equaled
the closing bid price of the Companys common stock as of April 18, 2007.
On April 5, 2007, West Coast Venture Capital
purchased 970,874 shares of the Companys common stock for $1.0 million. The
purchase price of $1.03 per share equaled the closing bid price of the
Companys common stock as of April 4, 2007.
On January 1, 1998, the Company granted to Mr. Lev
M. Dawson, the Companys then Chairman of the Board, Chief Executive
Officer and President, an incentive stock option to purchase 39,506 shares,
pursuant to the Companys 1990 Plan and a nonstatutory option to purchase
660,494 shares pursuant to the Companys 1990 Plan; Mr. Dawson was granted
a nonstatutory option to purchase 300,000 shares outside of any equity plan of
the Company. The exercise price of all three options was $5.0625 per share, the
fair market value on the date of the grant. The Compensation Committee of the
Company approved the early exercise of the nonstatutory options on March 5,
1998. The options permitted exercise by cash, shares, full recourse notes or
non-recourse notes secured by independent collateral. The nonstatutory options
were exercised on March 5, 1998 with non-recourse promissory notes in the
amounts of $3,343,750 and $1,518,750 secured by the shares acquired upon
exercise plus 842,650 shares previously held by Mr. Dawson. Under each of
the notes, interest from the issuance date accrued on unpaid principal at the
rate of 5.69% per annum, or at the maximum rate permissible by law, whichever
was less. Interest was due annually and paid through March 4,
2005. On April 20, 2005, the Companys Board of Directors approved a
resolution to extend the maturity dates of the notes from September 5,
2005 to September 4, 2007. As of September 5,
2007, principal and interest amounts of $4.9 million and $301,000. On September 5,
2007, Mr. Dawson defaulted on the notes and surrendered his shares to the
Company.
Capital Commitments and Debt
At March 31, 2008, we had no commitments for
capital expenditures relating to manufacturing equipment. We anticipate that we
will be required to make additional capital expenditures in order to meet
greater demand levels for our products than are currently anticipated and/or to
support our transition of operations to China.
At March 31, 2008, our cash obligations for
short-term and long-term debt (principal & interest) consisted of (in
thousands):
1998 debt payable to Berg & Berg Enterprises, LLC
|
|
$
|
14,950
|
|
2001 debt payable to Berg & Berg Enterprises, LLC
|
|
20,000
|
|
2005 long-term debt to SFT I, Inc.
|
|
20,000
|
|
Total debt obligations
|
|
$
|
54,950
|
|
At March 31, 2008, our repayment obligations of
short-term and long-term debt principal are (in thousands):
|
|
Year ended March 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Total
|
|
Principal repayments
|
|
$
|
|
|
$
|
|
|
$
|
54,950
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
54,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
The terms of the certificates of designation for the Series C-1
Convertible Preferred Stock and the Series C-2 Convertible Preferred Stock
initially provided that the deadline for redemption was December 15,
2005. Pursuant to assignment agreements
entered into between the Company and Berg & Berg, Berg & Berg
waived the requirement that the Series C-1 Convertible Preferred Stock and
Series C-2 Convertible Preferred Stock be redeemed on this date. There currently are no redemption
deadlines. As set forth above, although
dividends are not due, they are continuing to accrue (currently $431,000 as of March 31,
2008). The total below for Redemption of Convertible Preferred Stock includes
accrued dividends.
If cash flow from operations is not adequate to meet
debt obligations, additional debt or equity financing will be required. There
can be no assurance that we could obtain the additional financing.
Contractual Obligations
At March 31, 2008, our contractual obligations
and payments due by period are as follows (in thousands):
|
|
Payments Due by Period
|
|
|
|
Total
|
|
Less than
1 year
|
|
1-3
Years
|
|
3-5
Years
|
|
More
than 5
Years
|
|
Long-term debt obligations, net of discount
|
|
$
|
53,607
|
|
$
|
|
|
$
|
53,607
|
|
$
|
|
|
$
|
|
|
Current and long-term interest payable
|
|
|
21,533
|
|
|
86
|
|
|
21,447
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
842
|
|
457
|
|
371
|
|
14
|
|
|
|
Purchase obligations
|
|
24,775
|
|
24,775
|
|
|
|
|
|
|
|
Redemption of convertible preferred stock
|
|
8,610
|
|
8,610
|
|
|
|
|
|
|
|
Total
|
|
$
|
109,367
|
|
$
|
33,928
|
|
$
|
75,425
|
|
$
|
14
|
|
$
|
|
|
Lease Commitments
The Company has no
capital leases.
Off-Balance
Sheet Arrangements
The Company has no
off-balance sheet arrangements.
Basis of Presentation, Critical
Accounting Policies and Estimates
We prepare our consolidated financial statements in
conformity with generally accepted accounting principles in the U.S. The
preparation of our financial statements requires us to make estimates and
assumptions that affect reported amounts. We believe our most critical
accounting policies and estimates relate to revenue recognition, impairment of
long-lived assets, exit costs, contract settlement charges, and joint venture
dissolution. Our accounting policies are described in the Notes to Consolidated
Financial Statements, Note 3, Summary of Significant Accounting Policies. The
following further describes the methods and assumptions we use in our critical
accounting policies and estimates.
Revenue Recognition
We generate revenues from sales of products including
batteries and battery systems, and from licensing fees and royalties per
technology license agreements. Product sales are recognized when all of the
following criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred, sellers price to the buyer is fixed and determinable,
and collection is reasonably assured. Product shipments that are not recognized
as revenue during the period shipped, primarily product shipments to resellers
that are subject to right of return, are recorded as deferred revenue and
reflected as a liability on our balance sheet. Products shipped with the rights
of return are included in finished goods inventory as we retain title to the
products. For reseller shipments where
revenue recognition is deferred, we record revenue and relieve inventory based
upon the reseller-supplied reporting of sales to their end customers or their
inventory reporting. For direct customers, we estimate a return rate percentage
based upon our historical experience. From time to time we provide sales
incentives in the form of rebates or other price adjustments; these are generally
recorded as reductions to revenue on the latter of the date the related revenue
is
39
recognized or at the time the rebate or sales
incentive is offered. Licensing fees are recognized as revenue upon completion
of an executed agreement and delivery of licensed information, if there are no
significant remaining vendor obligations and collection of the related
receivable is reasonably assured. Royalty revenues are recognized upon licensee
revenue reporting and when collection is reasonably assured.
Impairment of Long-Lived Assets
We perform a review of long-lived tangible and
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of these assets is measured by comparison of their carrying
amounts to future undiscounted cash flows that the assets are expected to
generate. If long-lived assets are considered to be impaired, the impairment to
be recognized equals the amount by which the carrying value of the assets
exceeds its fair value and is recorded in the period the determination was
made. See Notes to Consolidated Financial Statements, Note 4, Impairment
Charge, regarding impairment of tangible and intangible assets.
Recent Accounting Pronouncements
In March 2008, the FASB
issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities(SFAS 161). SFAS 161 is intended
to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosu
re
s to enable investors to better understand the
effects of the
derivative instruments on an entitys financial position, financial
performance, and cash flows. The Company will adopt SFAS 161 on
April 1,
2009.
We are
currently
assessing the potential impact of SFAS 161 on
our
financial statements.
In December 2007, the
FASB issued Statement No. 141(R) Business Combinations (SFAS
141(R)). This Statement establishes principles and
requirements for how
the acquirer of a business recognizes and measures in its financial statements
the identifiable
a
ssets
acquired, the liabilities assumed, and
any
noncontrolling interest in the acquiree. The Statement also provides guidance
for recognizing and measuring goodwill acquired in the business
combination and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. The
guidance will become effective as of the beginning of a companys fiscal year
beginning after December 15, 2008. We believe that this new
pronouncement
will not have a material impact on our financial statements in future periods.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115. SFAS No. 159
permits an entity to elect fair value as the initial and subsequent measurement
attribute for many financial assets and liabilities. Entities electing the fair
value option would be required to recognize changes in fair value in earnings.
Entities electing the fair value option are required to distinguish, on the
face of the statement of financial position, the fair value of assets and liabilities
for which the fair value option has been elected and similar assets and
liabilities measured using another measurement attribute. SFAS No. 159 is
effective for the Companys current fiscal year. The adjustment to reflect the
difference between the fair value and the carrying amount would be accounted
for as a cumulative-effect adjustment to retained earnings as of the date of
initial adoption. The adoption of SFAS No. 159 did not have a material
effect on the Companys consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. Specifically, this
Statement sets forth a definition of fair value, and establishes a hierarchy
prioritizing the inputs to valuation techniques, giving the highest priority to
quoted prices in active markets for identical assets and liabilities and the
lowest priority to unobservable inputs. The provisions of SFAS No. 157 are
generally required to be applied on a prospective basis, except to certain
financial instruments accounted for under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, for which the provisions of SFAS
No. 157 should be applied retrospectively. SFAS No. 157 is required
to be adopted in the first quarter of the Companys 2009 fiscal year. The Company is still evaluating the effect,
if any, on its financial position or results of operations.
40
Risk
Factors
See Item 1A of this
Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We considered the provisions of Financial Reporting
Release No. 48, Disclosures of Accounting Policies for Derivative
Financial Instruments and Derivative Commodity Instruments, and Disclosures of
Quantitative and Qualitative Information about Market Risk Inherent in
Derivative Commodity Instruments. On July 13, 2005, in connection with a
$20.0 million loan agreement with a third party finance company with an
adjustable interest rate equal to the greater of 6.75% or the sum of the LIBOR
rate plus 4.0% (5.38% at March 31, 2008), we entered into a rate cap
agreement which caps the LIBOR rate at 5.5% (On May 10, 2008, the most
recent adjustment date, the LIBOR rate was 2.62%). In addition, we are exposed
to financial market risks, including changes in foreign currency exchange rates
and interest rates.
We are exposed to financial market risks, including
changes in foreign currency exchange rates and interest rates. The following
table presents the principal cash flows by year of maturity for our total debt
obligations held at March 31, 2008 (in thousands):
|
|
Expected Maturity Date
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Total
|
|
Fixed rate debt
|
|
$
|
|
|
$
|
|
|
$
|
20,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
20,000
|
|
Variable rate debt
|
|
$
|
|
|
$
|
|
|
$
|
34,950
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
34,950
|
|
Based on borrowing rates
currently available to use for loans with similar terms, the carrying value of
our debt obligations approximates fair value.
41
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
VALENCE
TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
Reports of Independent Registered Public Accounting
Firms
|
|
43
|
Consolidated Balance Sheets as of March 31, 2008
and 2007
|
|
45
|
Consolidated Statements of Operations and
Comprehensive Loss for the years ended March 31, 2008, 2007, and 2006
|
|
46
|
Consolidated Statements of Stockholders Deficit for
the years ended March 31, 2008, 2007, and 2006
|
|
47
|
Consolidated
Statements of Cash Flows for the years ended March 31, 2008, 2007, and
2006
|
|
48
|
Notes to
Consolidated Financial Statements
|
|
49
|
42
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Valence
Technology, Inc. and Subsidiaries Austin, Texas
We have audited the accompanying consolidated balance
sheets of Valence Technology, Inc., and subsidiaries (the Company) as of
March 31, 2008 and 2007, and the related consolidated statements of
operations and comprehensive loss, stockholders deficit, and cash flows for
the fiscal years then ended. These financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of March 31, 2008 and 2007, and the results of their operations and
comprehensive loss and their cash flows for the fiscal years then ended, in
conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 3 to the consolidated financial
statements the Company adopted SFAS 123R during the year ended March 31,
2007.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the Companys
recurring losses from operations, negative cash flows from operations and net
stockholders capital deficiency raise substantial doubt about its ability to
continue as a going concern. Managements plans concerning these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Companys internal control over financial reporting as of
March 31, 2008, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated June 16, 2008 expressed an adverse
opinion on the effectiveness of the Companys internal control over financial
reporting.
PMB HELIN DONOVAN, LLP
Austin, Texas
June 16, 2008
43
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Valence
Technology, Inc. and Subsidiaries Austin, Texas
We have audited the accompanying consolidated
statements of operations and comprehensive loss, stockholders deficit, and
cash flows of Valence Technology, Inc. and subsidiaries (the Company) for the
year ended March 31, 2006. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the results of operations, comprehensive
loss, and cash flows of the Company for the year ended March 31, 2006, in
conformity with accounting principles generally accepted in the United States
of America.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the Companys
recurring losses from operations, negative cash flows from operations and net
stockholders capital deficiency raise substantial doubt about its ability to
continue as a going concern. Managements plans concerning these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Austin, Texas
June 28, 2006
44
VALENCE
TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS
IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,616
|
|
$
|
1,168
|
|
Trade receivables, net of allowance of $123 and $169, respectively
|
|
7,208
|
|
3,955
|
|
Inventory, net
|
|
8,904
|
|
7,915
|
|
Prepaid and other current assets
|
|
3,283
|
|
1,987
|
|
Total current assets
|
|
22,011
|
|
15,025
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
5,090
|
|
3,997
|
|
Intellectual property, net
|
|
57
|
|
178
|
|
Total assets
|
|
$
|
27,158
|
|
$
|
19,200
|
|
|
|
|
|
|
|
Liabilities, Preferred Stock and Stockholders Deficit
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,214
|
|
$
|
2,904
|
|
Accrued expenses
|
|
5,841
|
|
4,223
|
|
Deferred revenue
|
|
756
|
|
516
|
|
Total current liabilities
|
|
10,811
|
|
7,643
|
|
|
|
|
|
|
|
Long-term interest payable to stockholder
|
|
21,447
|
|
18,475
|
|
Long-term debt, net of debt discount
|
|
18,964
|
|
18,484
|
|
Long-term debt to stockholder, net of debt discount
|
|
34,643
|
|
33,906
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
Redeemable convertible preferred stock, $0.001 par value, 10,000,000
shares authorized, 861 issued and outstanding at March 31, 2008 and
2007, liquidation value $8,610
|
|
8,610
|
|
8,610
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
Common stock, $0.001 par value, 200,000,000 shares authorized,
119,242,392 shares issued and 117,439,248 shares outstanding as of
March 31, 2008 and 106,199,516 shares issued and outstanding as of
March 31, 2007
|
|
117
|
|
106
|
|
Additional paid-in capital
|
|
477,657
|
|
457,611
|
|
Notes receivable from stockholder
|
|
|
|
(5,164
|
)
|
Treasury shares, 1,803,144 at cost
|
|
(5,164
|
)
|
|
|
Accumulated deficit
|
|
(536,260
|
)
|
(516,647
|
)
|
Accumulated other comprehensive loss
|
|
(3,667
|
)
|
(3,824
|
)
|
Total stockholders deficit
|
|
(67,317
|
)
|
(67,918
|
)
|
Total liabilities, preferred stock, and stockholders deficit
|
|
$
|
27,158
|
|
$
|
19,200
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
45
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
|
|
Year ended March 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
Battery and system sales
|
|
$
|
20,191
|
|
$
|
15,971
|
|
$
|
16,490
|
|
Licensing and royalty revenue
|
|
586
|
|
703
|
|
724
|
|
Total revenues
|
|
20,777
|
|
16,674
|
|
17,214
|
|
Cost of sales (1)
|
|
18,956
|
|
16,366
|
|
25,454
|
|
Gross margin/(loss)
|
|
1,821
|
|
308
|
|
(8,240
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
Research and product development (1)
|
|
3,677
|
|
3,709
|
|
5,112
|
|
Marketing (1)
|
|
2,447
|
|
2,361
|
|
2,163
|
|
General and administrative (1)
|
|
9,262
|
|
9,652
|
|
11,794
|
|
Depreciation and amortization
|
|
616
|
|
666
|
|
722
|
|
(Gain)/loss on disposal of assets
|
|
16
|
|
62
|
|
(445
|
)
|
Asset impairment charge
|
|
154
|
|
52
|
|
170
|
|
Contract settlement charge, other
|
|
|
|
24
|
|
(108
|
)
|
Total operating expenses
|
|
16,172
|
|
16,526
|
|
19,408
|
|
Operating loss
|
|
(14,351
|
)
|
(16,218
|
)
|
(27,648
|
)
|
Foreign exchange gain (loss)
|
|
1,258
|
|
260
|
|
(73
|
)
|
Interest and other income
|
|
56
|
|
89
|
|
146
|
|
Interest and other expense
|
|
(6,403
|
)
|
(6,382
|
)
|
(5,149
|
)
|
Net loss
|
|
(19,440
|
)
|
(22,251
|
)
|
(32,724
|
)
|
Dividends on preferred stock
|
|
173
|
|
172
|
|
172
|
|
Preferred stock accretion
|
|
|
|
|
|
28
|
|
Net loss available to common stockholders, basic and diluted
|
|
$
|
(19,613
|
)
|
$
|
(22,423
|
)
|
$
|
(32,924
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,440
|
)
|
$
|
(22,251
|
)
|
$
|
(32,724
|
)
|
Change in foreign currency translation adjustments
|
|
156
|
|
(165
|
)
|
234
|
|
Comprehensive loss
|
|
$
|
(19,284
|
)
|
$
|
(22,416
|
)
|
$
|
(32,490
|
)
|
Net loss per share available to common stockholders, basic and
diluted
|
|
$
|
(0.18
|
)
|
$
|
(0.22
|
)
|
(0.37
|
)
|
Shares used in computing net loss per share available to common
stockholders, basic and diluted
|
|
111,593
|
|
99,714
|
|
89,298
|
|
(1)
|
Includes stock based compensation as follows:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
109
|
|
$
|
|
|
$
|
|
|
|
Research and product development
|
|
264
|
|
231
|
|
|
|
|
Marketing
|
|
257
|
|
223
|
|
|
|
|
General and administrative
|
|
1,718
|
|
1,142
|
|
173
|
|
|
Total stock based compensation
|
|
$
|
2,348
|
|
$
|
1,596
|
|
$
|
173
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
46
VALENCE TECHNOLOGY, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS DEFICIT
(In Thousands)
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
|
|
Notes
Receivable
|
|
|
|
Accumulated
|
|
Total
|
|
|
|
Number
of Shares
|
|
Amount
|
|
Number
of Shares
|
|
Amount
|
|
Paid-In
Capital
|
|
from
Stockholder
|
|
Accumulated
Deficit
|
|
Comprehensive
Loss
|
|
Stockholders
Deficit
|
|
Balance
at March 31, 2005
|
|
87,062
|
|
$87
|
|
|
|
$
|
|
$415,656
|
|
$(5,164
|
)
|
$(461,328
|
)
|
$(3,893
|
)
|
$(54,642
|
)
|
Sale of stock to
private investors
|
|
2,260
|
|
2
|
|
|
|
|
|
5,899
|
|
|
|
|
|
|
|
5,901
|
|
Exercise of
stock options at $0.63 to $4.56 per share
|
|
562
|
|
1
|
|
|
|
|
|
789
|
|
|
|
|
|
|
|
790
|
|
Issuance of
common stock warrants
|
|
|
|
|
|
|
|
|
|
2,037
|
|
|
|
|
|
|
|
2,037
|
|
Extension of
expiring common stock warrants
|
|
|
|
|
|
|
|
|
|
2,215
|
|
|
|
|
|
|
|
2,215
|
|
Accretion of
preferred stock
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
(28
|
)
|
Stock
Compensation
|
|
|
|
|
|
|
|
|
|
287
|
|
|
|
|
|
|
|
287
|
|
Modification of
stock option
|
|
|
|
|
|
|
|
|
|
(110
|
)
|
|
|
|
|
|
|
(110
|
)
|
Interest
receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
(281
|
)
|
|
|
|
|
(281
|
)
|
Payment of
accrued interest on note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
281
|
|
|
|
|
|
281
|
|
Dividends on
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172
|
)
|
|
|
(172
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,724
|
)
|
|
|
(32,724
|
)
|
Change in
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
234
|
|
234
|
|
Balance
at March 31, 2006
|
|
89,884
|
|
$90
|
|
|
|
$
|
|
$426,745
|
|
$(5,164
|
)
|
$(494,224
|
)
|
$(3,659
|
)
|
$(76,212
|
)
|
Sale of stock to
private investors
|
|
4,780
|
|
5
|
|
|
|
|
|
8,436
|
|
|
|
|
|
|
|
8,441
|
|
Sale of stock to
related party
|
|
5,364
|
|
5
|
|
|
|
|
|
9,495
|
|
|
|
|
|
|
|
9,500
|
|
Conversion of
short-term notes payable to stockholder
|
|
6,039
|
|
6
|
|
|
|
|
|
11,095
|
|
|
|
|
|
|
|
11,101
|
|
Exercise of stock
options at $0.63 to $1.69 per share
|
|
132
|
|
|
|
|
|
|
|
244
|
|
|
|
|
|
|
|
244
|
|
Dividends on
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172
|
)
|
|
|
(172
|
)
|
Shared based
compensation
|
|
|
|
|
|
|
|
|
|
1,596
|
|
|
|
|
|
|
|
1,596
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,251
|
)
|
|
|
(22,251
|
)
|
Change in
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
(165
|
)
|
Balance
at March 31, 2007
|
|
106,199
|
|
$106
|
|
|
|
$
|
|
$457,611
|
|
$(5,164
|
)
|
$(516,647
|
)
|
$(3,824
|
)
|
$(67,918
|
)
|
Sale of stock to
private investors
|
|
4,029
|
|
4
|
|
|
|
|
|
8,243
|
|
|
|
|
|
|
|
8,247
|
|
Sale of stock to
related party
|
|
7,014
|
|
7
|
|
|
|
|
|
8,992
|
|
|
|
|
|
|
|
8,999
|
|
Cancellation of
notes payable from stockholder in exchange for common shares
|
|
|
|
|
|
1,803
|
|
(5,164
|
)
|
|
|
5,164
|
|
|
|
|
|
|
|
Exercise of
stock options at $1.32 to $2.77 per share
|
|
197
|
|
|
|
|
|
|
|
463
|
|
|
|
|
|
|
|
463
|
|
Dividends on
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(173
|
)
|
|
|
(173
|
)
|
Share based
compensation
|
|
|
|
|
|
|
|
|
|
2,348
|
|
|
|
|
|
|
|
2,348
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,440
|
)
|
|
|
(19,440
|
)
|
Change in
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157
|
|
157
|
|
Balance
at March 31, 2008
|
|
117,439
|
|
$117
|
|
1,803
|
|
$(5,164
|
)
|
$477,657
|
|
$
|
|
$(536,260
|
)
|
$(3,667
|
)
|
$(67,317
|
)
|
The accompanying notes are
an integral part of these consolidated financial statements.
47
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
|
|
Year ended March 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,440
|
)
|
$
|
(22,251
|
)
|
$
|
(32,724
|
)
|
Adjustments to reconcile net loss to net
cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
616
|
|
983
|
|
923
|
|
Gain on disposal of assets
|
|
16
|
|
62
|
|
(445
|
)
|
Bad debt expense (recoveries)
|
|
(47
|
)
|
154
|
|
|
|
Accretion of debt discount and other
|
|
4,150
|
|
1,278
|
|
1,074
|
|
Asset impairment charge
|
|
154
|
|
52
|
|
170
|
|
Contract settlement charge, other
|
|
|
|
|
|
(108
|
)
|
Share based compensation
|
|
2,348
|
|
1,596
|
|
173
|
|
Reserve for obsolete inventory
|
|
(2,392
|
)
|
|
|
|
|
Interest on stockholder note receivable
|
|
|
|
|
|
(281
|
)
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Trade receivables
|
|
(3,206
|
)
|
(1,579
|
)
|
(912
|
)
|
Inventory
|
|
1,404
|
|
(5,177
|
)
|
(174
|
)
|
Prepaid and other current assets
|
|
(1,296
|
)
|
579
|
|
(1,647
|
)
|
Accounts payable
|
|
1,311
|
|
1,305
|
|
(1,652
|
)
|
Accrued expenses and long-term interest
|
|
1,482
|
|
2,639
|
|
3,230
|
|
Deferred revenue
|
|
240
|
|
52
|
|
(777
|
)
|
Net cash used in operating activities
|
|
(14,660
|
)
|
(20,307
|
)
|
(33,149
|
)
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Purchases of property, plant, and equipment
|
|
(1,802
|
)
|
(2,230
|
)
|
(1,871
|
)
|
Proceeds from disposal of property, plant,
and equipment
|
|
174
|
|
26
|
|
666
|
|
Net cash used in investing activities
|
|
(1,628
|
)
|
(2,204
|
)
|
(1,205
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable to
stockholder
|
|
|
|
5,000
|
|
6,000
|
|
Proceeds from long-term debt, net of
issuance costs
|
|
|
|
|
|
22,139
|
|
Payments of short term loans
|
|
|
|
|
|
(2,500
|
)
|
Dividends paid on preferred stock
|
|
|
|
|
|
(172
|
)
|
Interest received on notes from stockholder
|
|
|
|
|
|
281
|
|
Proceeds from stock option exercises
|
|
463
|
|
244
|
|
789
|
|
Proceeds from issuance of common
stock & warrants, net of issuance costs
|
|
17,246
|
|
17,941
|
|
5,902
|
|
Net cash provided by financing activities
|
|
17,709
|
|
23,185
|
|
32,439
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rates on cash
and cash equivalents
|
|
27
|
|
(118
|
)
|
27
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash
equivalents
|
|
1,448
|
|
556
|
|
(1,888
|
)
|
Cash and cash equivalents, beginning of
year
|
|
1,168
|
|
612
|
|
2,500
|
|
Cash and cash equivalents, end of year
|
|
$
|
2,616
|
|
$
|
1,168
|
|
$
|
612
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,841
|
|
$
|
1,875
|
|
$
|
1,070
|
|
Cancellation of notes payable from
stockholder in exchange for common shares
|
|
$
|
|
|
$
|
11,101
|
|
$
|
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
48
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BUSINESS
STRATEGY:
Valence
Technology, Inc. (with its subsidiaries, the Company) was founded in
1989 and has commercialized the industrys first phosphate-based lithium-ion
technology. The Companys mission is to drive the wide adoption of
high-performance, safe, long cycle life, environmentally friendly, low-cost
energy storage systems by drawing on the numerous benefits of its Lithium
Phosphate and Intelligent Pack technologies, the experience of its management
team, and the significant market opportunity available to it.
In February 2002, the
Company unveiled its Lithium Phosphate technology, which utilizes a
phosphate-based cathode material. The Company believes that their Lithium
Phosphate technology addresses the major weaknesses of existing technology
while offering a solution that is competitive in cost and performance. The
Company believes that by incorporating a phosphate-based cathode material, its
Lithium Phosphate technology is able to offer greater thermal and electrochemical
stability than traditional lithium-ion technologies, which will facilitate its
adoption in large application markets not traditionally served by lithium-ion
energy storage systems such as motive power, vehicular, portable appliances,
telecommunications, and utility back-up systems. Currently, the Company offers
its Lithium Phosphate technology in both cylindrical and polymer construction
and has initiated the design of a prismatic cell.
The Companys business plan
and strategy focuses on the generation of revenue from product sales, while
minimizing costs through a manufacturing plan that utilizes partnerships with
contract manufacturers and internal manufacturing efforts through its wholly owned
foreign enterprises (WOFEs) in China. These WOFEs initiated operations in late
fiscal 2005. The market for Valence Lithium Phosphate technology will be
developed by offering existing and new solutions that differentiate the
Companys products and its customers products in the large-format markets
through the Companys own product launches, such as the U-Charge(R) and
Epoch
TM
Energy Storage Systems, and through products designed by
others. In addition, the Company expects to continue to pursue a licensing
strategy as its Lithium Phosphate technology receives greater market
acceptance.
The Company has the
following subsidiaries
:
Valence Technology (Nevada),
Inc., Valence Technology Cayman Islands Inc., Valence Technology N.V., Valence
Technology International, Inc., Valence Technology B.V., Valence Technology (Suzhou)
Co., Ltd., and Valence Energy-Tech (Suzhou) Co., Ltd.
2. GOING CONCERN AND
LIQUIDITY AND CAPITAL RESOURCES:
GOING
CONCERN:
The accompanying
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. The Company
has incurred operating losses each year since its inception in 1989 and had an
accumulated deficit of $536.3 million as of March 31, 2008. For the years
ended March 31, 2008 and 2007, the Company sustained net losses available
to common stockholders of $19.6 and $22.4 million, respectively. These factors,
among others, indicate that the Company may be unable to continue as a going concern
for a reasonable period of time. The Companys ability to continue as a going
concern is contingent upon its ability to meet its liquidity requirements. If
the Company is unable to arrange for debt or equity financing on favorable
terms or at all the Companys ability to continue as a going concern is
uncertain. These financial statements do not give effect to any adjustments to
the amounts and classifications of assets and liabilities which might be
necessary should the Company be unable to continue as a going concern.
LIQUIDITY
AND CAPITAL RESOURCES:
At March 31, 2008, the
Companys principal sources of liquidity were cash and cash equivalents of $2.6
million. The Company does not expect that its cash and cash equivalents will be
sufficient to fund its operating and capital needs for the next 12 months
following March 31, 2008, nor does the Company anticipate product sales
during fiscal 2009 will be sufficient to cover its operating expenses.
Historically, the Company has relied upon managements ability to periodically
arrange for additional equity or debt financing to meet the Companys liquidity
requirements.
49
Unless the Companys product
sales are greater than management currently forecasts or there are other
changes to the Companys business plan, the Company will need to arrange for
additional financing within the next three to six months to fund operating and
capital needs. This financing could take the form of debt or equity. Given the
Companys historical operating results and the amount of our existing debt, as
well as the other factors, the Company may not be able to arrange for debt or
equity financing from third parties on favorable terms or at all.
The Companys cash
requirements may vary materially from those now planned because of changes in
the Companys operations including the failure to achieve expected revenues,
greater than expected expenses, changes in OEM relationships, market
conditions, the failure to timely realize the Companys product development
goals, and other adverse developments. These events could have a negative
impact on the Companys available liquidity sources during the next 12 months.
3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
USE OF
ESTIMATES:
The preparation of financial
statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
revenues and expenses for the period. The Company has made significant
estimates in determining the amount of inventory reserves and inventory
overhead absorption as discussed in Note 5, warranty liabilities as discussed
in Note 12 and share based compensation as discussed in Note 14. Actual results could differ from those
estimates.
PRINCIPLES
OF CONSOLIDATION:
The consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. The Company has the following subsidiaries
:
Valence Technology (Nevada),
Inc., Valence Technology Cayman Islands Inc., Valence Technology N.V., Valence
Technology International, Inc., Valence Technology B.V., Valence Technology
(Suzhou) Co., Ltd., and Valence Energy-Tech (Suzhou) Co., Ltd.
Intercompany balances and
transactions are eliminated upon consolidation.
RECLASSIFICATIONS:
Where appropriate, prior
years financial statements have been reclassified to conform to current year
presentation.
CASH AND
CASH EQUIVALENTS:
The Company considers all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents.
INVENTORY:
Inventory is stated at the
lower of cost (determined using the first-in, first-out method) or market.
CONCENTRATION
OF CREDIT RISK:
Financial instruments that
potentially subject the Company to concentrations of credit risk are primarily
accounts receivable and cash and cash equivalents. The Company provides an
allowance for doubtful accounts based upon the expected ability to collect
accounts receivable. Credit losses to date have been within the Companys
estimates.
Cash and cash equivalents
are invested in deposits with a major financial institution. The Company has
not experienced any losses on its deposits of cash and cash equivalents.
Management believes that the financial institution is financially sound and,
accordingly, minimal credit risk exists.
FAIR VALUE
OF FINANCIAL INSTRUMENTS:
Financial instruments that
potentially subject the Company to an interest and credit risk consist of cash
and cash equivalents, trade receivables, accounts payable and accrued expenses,
the carrying values of which are a reasonable estimate of their fair values due
to their short maturities. Based upon borrowing rates currently available to
the Company for loans with similar terms, the carrying value of its debt
obligations approximates fair value.
50
PROPERTY,
PLANT AND EQUIPMENT:
Property and equipment are
stated at cost and depreciated using the straight-line method over their
estimated useful lives, generally three to five years. Leasehold improvements
are amortized over the lesser of their estimated useful life or the remaining
lease term.
Expenditures for renewals
and betterments are capitalized; repairs and maintenance are charged to expense
as incurred. The cost and accumulated depreciation of assets sold or otherwise
disposed of are removed from the accounts and any gain or loss thereon is
reflected in operations.
INTELLECTUAL
PROPERTY:
Intellectual property
consists of acquired patents and capitalized patent costs and are recorded at
cost based on the market value of the common stock used in their acquisition.
The costs are amortized over the estimated remaining life of the patents.
IMPAIRMENT
OF LONG-LIVED ASSETS:
The Company performs a
review of long-lived tangible and intangible assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of these assets is measured by
comparison of their carrying amounts to future undiscounted cash flows that the
assets are expected to generate. If long-lived assets are considered to be
impaired, the impairment to be recognized equals the amount by which the
carrying value of the assets exceeds its fair value and is recorded in the
period the determination was made.
REVENUE
RECOGNITION:
Revenues are generated from
sales of products including batteries and battery systems, and from licensing
fees and royalties per technology license agreements. Product sales are
recognized when all of the following criteria are met: persuasive evidence of
an arrangement exists, delivery has occurred, sellers price to the buyer is
fixed and determinable, and ability to collect is reasonably assured. Product
shipments that are not recognized as revenue during the period shipped,
primarily product shipments to resellers that are subject to right of return,
are recorded as deferred revenue and reflected as a liability on the Companys
balance sheet. Products shipped to resellers with the rights of return are
included in finished goods inventory as we retain title to the products. For reseller shipments where revenue
recognition is deferred, we record revenue and relieve inventory based upon the
reseller-supplied reporting of sales to their end customers or their inventory
reporting. For direct customers, we estimate a return rate percentage based upon
our historical experience. From time to time we provide sales incentives in the
form of rebates or other price adjustments; these are generally recorded as
reductions to revenue on the latter of the date the related revenue is
recognized or at the time the rebate or sales incentive is offered. Perpetual licensing
fees are recognized as revenue upon completion of an executed agreement and
delivery of licensed information, if there are no significant remaining vendor
obligations and collection of the related receivable is reasonably assured.
Royalty revenues are recognized upon licensee revenue reporting and when
collection is reasonably assured.
RESEARCH
AND DEVELOPMENT:
Research and development
costs are expensed as incurred.
WARRANTY:
The Company records warranty
liabilities at the time of sale for the estimated costs that may be incurred
under its basic limited warranty. The warranty terms and conditions generally
provide for replacement of defective products. Factors that affect the
Companys warranty liability include the number of units currently under
warranty, historical and anticipated rates of warranty claims on those units,
and cost per claim to satisfy the Companys warranty obligation. Each quarter,
the Company re-evaluates its estimates to assess the adequacy of its recorded
warranty liabilities and adjusts the amounts as necessary. See Note 12
Commitments and Contingencies.
51
SHIPPING
AND HANDLING COSTS:
In accordance with Emerging
Issues Task Force No. 00-10, Accounting for Shipping and Handling Fees
and Costs; the Company recognizes as revenue amounts billed to customers
related to shipping and handling with related expenses recorded as a component
of cost of sales.
ADVERTISING
COSTS:
Advertising costs are
charged to expense as incurred. Advertising expenses for fiscal 2008, 2007 and
2006 were $47,000, $87,000 and $87,000, respectively.
FOREIGN
CURRENCY:
The assets and liabilities
of the Companys foreign subsidiaries have been translated to U.S. dollars
using the exchange rate in effect at the balance sheet date. Results of
operations and cash flows have been translated using the average exchange rate
during the year. Resulting translation adjustments have been recorded as a
separate component of stockholders equity (deficit) as accumulated other
comprehensive loss. Foreign currency transaction gains and losses are included
in the consolidated statement of operations as they occur.
STOCK-BASED
COMPENSATION:
Prior to April 1, 2006,
the Company accounted for stock-based compensation under the recognition and
measurement provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations, as permitted by Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation. In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS 123R), which revises SFAS 123. SFAS 123R also
supersedes APB No. 25 and amends SFAS No. 95, Statement of Cash
Flows. SFAS 123R eliminates the alternative to account for employee stock
options under APB No. 25 and requires the fair value of all share-based
payments to employees, including the fair value of grants of employee stock options
to be recognized in the statement of operations, generally over the vesting
period. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 107, which provides additional
implementation guidance for SFAS 123R. Among other things, SAB 107 provides
guidance on share-based payment valuations, income statement classification and
presentation, capitalization of costs and related income tax accounting. SFAS
123R provides for adoption using either the modified prospective or modified
retrospective transition method. The Company adopted SFAS 123R on April 1,
2006 using the modified prospective transition method in which compensation
cost is recognized beginning April 1, 2006 for all share-based payments
granted on or after that date and for awards granted to employees prior to
April 1, 2006 that remain unvested on that date. The Company uses the
Black-Scholes option pricing model to determine the fair value of stock option
awards. See Note 14 to the consolidated financial statements for disclosures
required by SFAS 123R and related pronouncements.
COMPREHENSIVE
INCOME/LOSS:
Comprehensive income/loss is
the change in stockholders equity (deficit) from foreign currency translation
gains and losses.
INCOME
TAXES:
The Company utilizes the
asset and liability method to account for income taxes where deferred tax
assets or liabilities are determined based on the differences between the
financial reporting and tax reporting bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
52
NET LOSS
PER SHARE:
Net loss per share is
computed by dividing the net loss by the weighted average shares of common
stock outstanding during the periods. The dilutive effect of the options and
warrants to purchase common stock are excluded from the computation of diluted
net loss per share, since their effect is antidilutive. The antidilutive
instruments excluded from the diluted net loss per share computation were as
follows at:
|
|
Year ended March 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Shares reserved for conversion of
Series C-1 Convertible Preferred Stock and Series C-2 Convertible
Preferred Stock
|
|
3,628,634
|
|
3,628,634
|
|
3,629,470
|
|
Common stock options
|
|
7,777,761
|
|
10,070,240
|
|
9,045,276
|
|
Warrants to purchase common stock
|
|
2,955,643
|
|
2,955,643
|
|
2,955,643
|
|
Total
|
|
14,362,038
|
|
16,654,517
|
|
15,630,389
|
|
The number of shares listed
above as reserved for conversion of Series C-1 Convertible Preferred Stock
and Series C-2 Convertible Preferred Stock do not include shares related
to accrued dividends that are convertible at the election of the Company,
subject to certain limitations. At
March 31, 2008, up to $431,000 in accrued dividends would be convertible
into up to 97,673 shares of common stock based on the closing sales price of
$4.41 on March 31, 2008.
RECENT
ACCOUNTING PRONOUNCEMENTS:
In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities(SFAS 161). SFAS 161 is
intended
to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to
enable investors to better understand the effects of the derivative instruments on an
entitys financial position, financial performance, and cash flows. The Company
will adopt SFAS 161 on April 1,
2009. The Company is currently
assessing the potential impact of SFAS 161 on its consolidated financial statements.
In
December 2007, the FASB issued Statement No. 141(R) Business
Combinations (SFAS 141(R)). This Statement establishes principles and
requirements for how
the acquirer of a business recognizes and measures in its financial statements
the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.
The Statement also provides guidance for recognizing and measuring goodwill
acquired in the business combination and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination.
The guidance will become effective as of the beginning of a companys fiscal
year beginning after December 15, 2008. the company believes that this new pronouncement will not have a material impact
on its consolidated financial
statements in future periods.
In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities - Including an Amendment of FASB Statement No. 115
(SFAS 159). SFAS No. 159 permits an entity to elect fair value as the
initial and subsequent measurement attribute for many financial assets and
liabilities. Entities electing the fair value option would be required to
recognize changes in fair value in earnings. Entities electing the fair value
option are required to distinguish, on the face of the statement of financial
position, the fair value of assets and liabilities for which the fair value
option has been elected and similar assets and liabilities measured using
another measurement attribute. SFAS No. 159 is effective for the Companys
current fiscal year. The adjustment to reflect the difference between the fair
value and the carrying amount would be accounted for as a cumulative-effect
adjustment to retained earnings as of the date of initial adoption. The
adoption of SFAS No. 159 did not have a material effect on the Companys
consolidated financial statements.
In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. Specifically, this Statement sets forth a definition
of fair value, and establishes a hierarchy prioritizing the inputs to valuation
techniques, giving the highest priority to quoted prices in active markets for
identical assets and liabilities and the lowest priority to unobservable
inputs. The provisions of SFAS No. 157 are generally required to be
applied on a prospective basis, except to certain financial instruments
accounted for under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, for which the provisions of SFAS No. 157 should be
applied retrospectively. SFAS No. 157 is required to be adopted in the
first quarter of the Companys 2009 fiscal year. The Company is still evaluating the effect,
if any, on its financial position or results of operations.
53
4. IMPAIRMENT CHARGE:
An impairment charge of
$154,000, $52,000, and $170,000 was recorded during the 2008, 2007, and 2006
fiscal years, respectively, pursuant to FASB Statement No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets. The charges in
fiscal 2008 and 2007 relate to write downs of machinery and equipment. The
charges in fiscal 2006 relate to certain portions of the Companys information
systems that are no longer in use.
5. INVENTORY:
Inventory consisted of the
following at (in thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Raw materials
|
|
$
|
1,485
|
|
$
|
2,210
|
|
Work-in-process
|
|
4,140
|
|
3,116
|
|
Finished goods
|
|
3,279
|
|
2,589
|
|
Total Inventory
|
|
$
|
8,904
|
|
$
|
7,915
|
|
Included in inventory at
March 31, 2008 and 2007 were valuation allowances of $2.0 million and $4.4
million, respectively, for scrap, obsolete inventory and to reduce their carrying
values to lower of cost or market. Management has valued certain amounts of
overhead absorption related to work-in-process based on estimates of completion
at March 31, 2008.
6. PREPAID AND OTHER CURRENT
ASSETS:
Prepaid and other current
assets consisted of the following at (in thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Other receivables
|
|
$
|
1,760
|
|
$
|
1,460
|
|
Deposits
|
|
265
|
|
297
|
|
Prepaid insurance
|
|
73
|
|
78
|
|
Other prepaids
|
|
1,185
|
|
152
|
|
Total prepaids and other current assets
|
|
$
|
3,283
|
|
$
|
1,987
|
|
7. PROPERTY, PLANT AND
EQUIPMENT:
Property, plant and
equipment, net of accumulated depreciation and amortization and impairment,
consisted of the following at (in thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Leasehold improvements
|
|
$
|
1,141
|
|
$
|
1,045
|
|
Machinery and equipment
|
|
5,319
|
|
4,400
|
|
Office and computer equipment
|
|
1,620
|
|
2,001
|
|
Construction in progress
|
|
407
|
|
462
|
|
Property, plant, and equipment, gross
|
|
8,487
|
|
7,908
|
|
Less: accumulated depreciation and
amortization
|
|
(3,387
|
)
|
(3,873
|
)
|
Less: impairment
|
|
(10
|
)
|
(38
|
)
|
Total property, plant, and equipment, net
|
|
$
|
5,090
|
|
$
|
3,997
|
|
Depreciation expense was
approximately $501,000, $925,000 and $810,000 for the fiscal years end
March 31, 2008, 2007, and 2006, respectively.
54
8. INTELLECTUAL PROPERTY
Intellectual property
consists primarily of stacked battery construction technology acquired from
Telcordia Technologies, Inc. in 2000 and amortized over eight years. Intellectual property, net of accumulated
amortization and impairment, consisted of the following at (in thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Intellectual property, gross
|
|
$
|
13,602
|
|
$
|
13,602
|
|
Less: accumulated amortization
|
|
(5,051
|
)
|
(4,930
|
)
|
Less: impairment
|
|
(8,494
|
)
|
(8,494
|
)
|
Total intellectual property, net
|
|
$
|
57
|
|
$
|
178
|
|
Amortization expense was
approximately $114,000, $110,000 and $113,000 for the fiscal years ended
March 31, 2008, 2007 and 2006, respectively. Amortization expense on
intellectual property at March 31, 2008 will be approximately $57,000 for
fiscal year 2009.
9. ACCRUED EXPENSES:
Accrued expenses consisted
of the following at (in thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Accrued compensation
|
|
$
|
486
|
|
$
|
494
|
|
Taxes payable
|
|
1,501
|
|
752
|
|
Professional services
|
|
204
|
|
189
|
|
Warranty reserve
|
|
1,174
|
|
1,139
|
|
Other accrued expenses
|
|
2,476
|
|
1,649
|
|
Total accrued expenses
|
|
$
|
5,841
|
|
$
|
4,223
|
|
10. CONVERTIBLE NOTES
PAYABLE TO STOCKHOLDER:
On July 10, 2006, the
Company issued convertible promissory notes in favor of Berg & Berg
Enterprises, LLC (Berg & Berg), an affiliate of Carl Berg, the
Companys Chairman of the Board and managing member of Berg & Berg, in
an aggregate principal amount of $2.0 million. On July 20, 2006 the
Company issued convertible promissory notes in favor of Berg & Berg in
an aggregate principal amount of $1.0 million. These convertible promissory
notes accrued interest at the annual rate of 8.0% and were convertible at any
time prior to maturity, into shares of common stock of the Company at a
conversion price equal to the closing bid price of the Companys common stock
on the trading day immediately prior to the conversion date, provided that the
conversion price cannot be lower than $1.73 and $1.33, respectively, the
closing bid price of the Companys common stock on July 9, 2006 and July 19,
2006. The notes and accrued interest were converted into a total of 1,885,302
common shares of the Company on July 25, 2006 at $1.73 and $1.38,
respectively. The issuance of these shares of common stock was exempt from
registration pursuant to Section 3(a)(9) of the Securities Act of
1933, as amended. Under Rule 144 of the Securities Act, these shares may
be traded only in compliance with the volume restrictions and other applicable
restrictions.
On June 21, 2006, the
Company issued convertible promissory notes in favor of Berg & Berg in
an aggregate principal amount of $2.0 million. These convertible promissory
notes accrued interest at the annual rate of 8.0% and were convertible at any
time prior to maturity, into shares of common stock of the Company at a
conversion price equal to the closing bid price of the Companys common stock
on the trading day immediately prior to the conversion date, provided that the
conversion price cannot be lower than $1.70, the closing bid price of the
Companys common stock on June 20, 2006. The notes and accrued interest
were converted into a total of 1,188,332 common shares of the Company on
July 25, 2006. The issuance of these shares of common stock was exempt
from registration pursuant to Section 3(a)(9) of the Securities Act.
Under Rule 144 of the Securities Act, these shares may be traded only in
compliance with the volume restrictions and other applicable restrictions.
55
In February and March 2006, the Company
issued convertible promissory notes in favor of Berg & Berg in an
aggregate principal amount of $6.0 million. The notes accrued interest at the
annual rate of 8.0% and matured on March 30 and June 30, 2006. The
principal amount of the notes, together with accrued interest, was converted
into 2,965,870 shares of common stock of the Company, in accordance with their
terms on April 3, 2006. The issuance of these shares of common stock was
exempt from registration pursuant to Section 3(a)(9) of the
Securities Act. Under Rule 144 of the Securities Act, these shares may be
traded only in compliance with the volume restrictions and other applicable
restrictions.
11. LONG-TERM DEBT:
Long-term debt consisted of the following at (in
thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
2005 Loan
|
|
$
|
20,000
|
|
$
|
20,000
|
|
Less: unaccreted debt discount
|
|
(1,036
|
)
|
(1,516
|
)
|
Long-term debt, less current portion
|
|
$
|
18,964
|
|
$
|
18,484
|
|
Long-term debt to stockholder consisted of the
following at (in thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
2001 Loan
|
|
$
|
20,000
|
|
$
|
20,000
|
|
1998 Loan
|
|
14,950
|
|
14,950
|
|
Less: unaccreted debt discount
|
|
(307
|
)
|
(1,044
|
)
|
Debt payable to stockholder
|
|
$
|
34,643
|
|
$
|
33,906
|
|
Principal payments of long-term debt are as follows
(in thousands):
|
|
Fiscal Year ended March 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Thereafter
|
|
Total
|
|
2005 Loan
|
|
$
|
|
|
$
|
|
|
$
|
20,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
20,000
|
|
2001 Loan
|
|
$
|
|
|
$
|
|
|
$
|
20,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
20,000
|
|
1998 Loan
|
|
$
|
|
|
$
|
|
|
$
|
14,950
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
14,950
|
|
Total debt to stockholder
|
|
$
|
|
|
$
|
|
|
$
|
54,950
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
54,950
|
|
In June 2005, the Company obtained a $20.0
million funding commitment from Mr. Berg. On June 30, 2005, the
Company drew down $2.5 million from this commitment in the form of a loan,
which was repaid in full by the Company on July 13, 2005, including
interest at an annual rate of 5.0%. The amount of Mr. Bergs funding
commitment was reduced in connection with the purchase of the Series C-2
Convertible Preferred Stock in July 2005 by Berg & Berg, the
purchase of the Series C-1 Convertible Preferred Stock in
December 2005 by Berg & Berg, and the convertible notes payable
to stockholder discussed in Footnote 10.
On July 13, 2005, the Company secured a $20.0
million loan (the 2005 Loan) from a third party finance company, the full
amount of which has been drawn down. The loan is guaranteed by Mr. Berg.
The loan matures in a lump sum on July 13, 2010. Interest is due monthly based
on a floating interest rate. The interest rate is calculated as the greater of
6.75% or the sum of LIBOR Rate, rounded to the nearest 1/16th of 1.0%, plus
4.0% (5.38% as of March 31, 2008). The loan could not be prepaid in whole
or in part on or prior to July 12, 2007. The loan may be prepaid during
the period beginning on July 13, 2007 through July 12, 2009, with a
1.0% prepayment premium, and on July 13, 2009 and thereafter with no
prepayment premium. In connection with the loan, the Company purchased a rate
56
cap agreement to protect against fluctuations in LIBOR
for the full amount of the loan for a period of three years. The fair value of
the LIBOR rate cap agreement is included in other assets and marked-to-market
on a quarterly basis.
The Company used $2.5 million of the proceeds from the
loan to repay the June 30, 2005 draw from Mr. Bergs funding
commitment. In connection with the loan both the third party finance company
and Mr. Berg received warrants to purchase 600,000 shares of the Companys
common stock at a price of $2.74 per share. The warrants are exercisable
beginning on the date they were issued and will expire on July 13, 2008.
The fair value assigned to these warrants, totaling approximately $2.037
million, has been reflected as additional consideration for the debt financing,
recorded as a discount on the debt and will be accreted as interest expense
over the life of the loan. The warrants were valued using the Black-Scholes
valuation method using the assumptions of a life of 36 months, 96.45%
volatility, and a risk free rate of 3.88%. Also in connection with the loan,
the Company incurred a loan commitment fee and attorneys fees which has been
recorded as a discount on the debt and will be accreted as interest expense
over the life of the loan. Through March 31, 2008, a total of
approximately $1.3 million has been accreted and included as interest expense.
Interest payments on the loan are currently being paid on a monthly basis.
In October 2001, the Company entered into a loan
agreement with Berg & Berg.
Under the terms of the agreement, Berg & Berg agreed to advance the
Company funds of up to $20.0 million between the date of the agreement and
September 30, 2003. Interest on the loan accrues at 8.0% per annum,
payable from time to time. On July 13, 2005, Berg & Berg agreed
to extend the maturity date for the loan principal and interest from
September 30, 2006 to September 30, 2008. On June 12, 2008, the
Company and Berg & Berg agreed to further extend the maturity date for the
loan principal and interest from September 30, 2008 to September 30, 2010. On
November 8, 2002, the Company and Berg & Berg amended an
affirmative covenant in the agreement to acknowledge the NASDAQ Capital Market
(formerly known as the NASDAQ SmallCap Market) as an acceptable market for the
listing of the Companys common stock.
In conjunction with this loan, Berg & Berg
received a warrant to purchase 1,402,743 shares of the Companys common stock
at the price of $3.208 per share. The warrant was exercisable beginning on the
date it was issued and originally expired on August 30, 2005. In
July 2005, the warrant was extended until September 30, 2008. The
fair value assigned to this warrants, totaling approximately $5.1 million has
been reflected as additional consideration for the debt financing, recorded as
a discount on the debt and accreted as interest expense over the life of the
loan. The warrant was valued using the Black-Scholes method using the
assumptions of a life of 47 months (extended to 84 months), 100% volatility,
and a risk-free rate of 5.5%. Through March 31, 2008, a total of $4.8
million has been accreted and included as interest expense. The amounts charged
to interest expense on the outstanding balance of the loan for the fiscal years
ended March 31, 2008, 2007 and 2006 were $1.6 million in each year.
Interest payments on the loan are currently being deferred, and are recorded as
long-term interest. The accrued interest amounts for the loan were $10.0
million and $8.3 million as of March 31, 2008 and 2007, respectively.
In July 1998, the Company entered into an amended
loan agreement with Berg & Berg that allows the Company to borrow,
prepay and re-borrow up to $10.0 million principal under a promissory note on a
revolving basis. In November 2000, the amended loan agreement was amended
to increase the maximum amount to $15.0 million. As of March 31, 2008, the
Company had an outstanding balance of $15.0 million under this loan agreement.
The loan bears interest at one percent over lenders borrowing rate
(approximately 9.0% at March 31, 2008). On July 13, 2005,
Berg & Berg agreed to extend the maturity date for the loan principal
and interest from September 30, 2006 to September 30, 2008. On June 12,
2008, the Company and Berg & Berg agreed to further extend the maturity
date for the loan principal and interest from September 30, 2008 to September
30, 2010. On November 8, 2002, the Company and Berg & Berg
amended an affirmative covenant in the agreement to acknowledge the NASDAQ
Capital Market as an acceptable market for the listing of the Companys common
stock. The accrued interest amounts for this loan were $11.5 million and $10.1
million as of March 31, 2008 and 2007, respectively.
All of our assets are pledged as collateral under the
2001 Loan and the 1998 Loan to stockholder.
57
12. COMMITMENTS AND CONTINGENCIES:
LEASES:
Total rent expense for the years ended March 31,
2008, 2007 and 2006 was approximately $470,000, $674,000 and $847,000,
respectively. Future minimum payments on leases for fiscal years following
March 31, 2008 are (in thousands):
2009
|
|
$
|
457
|
|
2010
|
|
300
|
|
2011
|
|
71
|
|
2012
|
|
7
|
|
2013
|
|
7
|
|
Thereafter
|
|
|
|
Total minimum payments
|
|
$
|
842
|
|
WARRANTIES:
The Company has established a warranty reserve in
connection with the sale of N-Charge® Power Systems covering a 12-month
warranty period during which the Company would provide a replacement unit to
any customers returning a purchased product because of a product performance
issue. The Company has also established a warranty reserve in relation to the
sale of U-Charge® Power Systems, and other large-format power systems.
Product warranty liabilities are as follows at (in
thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Beginning balance
|
|
$
|
1,139
|
|
$
|
1,509
|
|
Less: claims
|
|
(244
|
)
|
(523
|
)
|
Add: accruals
|
|
279
|
|
153
|
|
Ending balance
|
|
$
|
1,174
|
|
$
|
1,139
|
|
LITIGATION:
On January 31, 2007, Valence filed a claim
against Phostech Lithium Inc. in the Federal Court in Canada (Valence
Technology, Inc. v. Phostech Lithium Inc. Court File No. T-219-07)
alleging infringement of Valence Canadian Patent 2,395,115. Subsequently, on
April 2, 2007, Valence filed an amended claim alleging infringement of its
recently granted Canadian Patents 2,483,918 and 2,466,366. The action is in the
initial pleading state. The Company is seeking monetary damages and injunctive
relief for the acts of Phostech in manufacturing, using and selling phosphate
cathode material that infringes the asserted Valence Canadian Patents.
On February 14, 2006, Hydro-Quebec filed an
action against us in the United States District Court for the Western District
of Texas (Hydro-Quebec v. Valence Technology, Civil Action No. A06CA111).
In its amended complaint filed April 13, 2006, Hydro-Quebec alleges that
Saphion ® I Technology, the technology utilized in all of our commercial
products, infringes U.S. Patent No. 5,910,382 and 6,514,640 exclusively
licensed to Hydro-Quebec. Hydro-Quebecs complaint seeks injunctive relief and
monetary damages. The action is in the initial pleading state and we have filed
a response denying the allegations in the amended complaint. The action has
been stayed by the Court pending a final determination of the two reexaminations
by the USPTO.
We are subject to, from time to time, various claims
and litigation in the normal course of business. In our opinion, all pending
legal matters will not have a material adverse impact on our consolidated
financial statements.
13. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On June 2, 2003, the Company issued 1,000 shares
of Series C Convertible Preferred Stock and warrants to purchase the
Companys common stock for $10,000 per share, raising net proceeds of $9.416
million. On January 22, 2004, the holder of the Series C Convertible
Preferred Stock converted 139 of its 1,000 shares with the principal amount of
$1.39 million, including accrued and unpaid dividends, into 327,453 shares of
the Companys common stock at the conversion price of $4.25 per share. On
November 30, 2004, the Company entered into an amendment and exchange
agreement to exchange all outstanding 861 shares of the Companys Series C
Convertible Preferred Stock, representing $8.6 million of principal. The
Series C Convertible Preferred Stock was exchanged for 431 shares of
58
Series C-1 Convertible Preferred Stock, with a
stated value of $4.3 million, and 430 shares of Series C-2 Convertible
Preferred Stock, with a stated value of $4.3 million. When issued, the
Series C-1 Convertible Preferred Stock and Series C-2 Convertible
Preferred Stock were convertible into common stock at $4.00 per share. Each
series carries a 2% annual dividend rate, payable quarterly in cash or shares
of common stock, and were redeemable on December 15, 2005. The Company has
the right to convert the preferred stock if the average of the dollar-volume
weighted average price of the Companys common stock for a ten-day trading
period is at or above $6.38 per share. If the preferred shares are not redeemed
in accordance with their terms, the holder of the preferred stock shall have
the option to require the Company to convert all or part of the redeemed shares
at a price of 95% of the lowest closing bid price of the Companys common stock
during the three days ending on and including the conversion date. The
preferred shares are currently outstanding and subject to redemption or
conversion at the holders discretion.
Pursuant to assignment agreements entered into between
the Company and Berg & Berg Enterprises, LLC on July 14, 2005 and December 14,
2005, Berg & Berg purchased all of the outstanding Series C-1
Convertible Preferred Stock and Series C-2 Convertible Preferred Stock
from its original holder. Pursuant to the terms of the assignment agreement,
Berg & Berg agreed that the failure of the Company to redeem the
preferred stock on December 15, 2005 did not constitute a default under
the certificate of designations and has waived the accrual of any default
interest applicable in such circumstance. In exchange, the Company has agreed
(i) that the Series C-1 Convertible Preferred Stock may be converted, at
any time, into the Companys common stock at the lower of $4.00 per share or
the closing bid price of the Companys common stock on December 13, 2005
($1.98) and (ii) that the Series C-2 Convertible Preferred Stock may
be converted, at any time, into the Companys common stock at the lower of
$4.00 per share or the closing bid price of the Companys common stock on
July 13, 2005 ($2.96). Berg & Berg has agreed to allow dividends
to accrue on the preferred stock. At
March 31, 2008, $431,000 in preferred stock dividends had accrued.
In connection with the issue of the original issuance
of the Series C Convertible Preferred Stock, in June 2003, the
Company issued to the Series C Convertible Preferred Stock original holder
a warrant to purchase 352,900 shares of the Companys common stock. The
warrant, which expired on June 2, 2008, had a purchase price of $5.00 per
share. The warrant was valued using the Black-Scholes valuation model. The
warrant was recorded to additional paid in capital at its relative fair value
to the Series C Convertible Preferred Stock at $933,000. Accretion to the
remaining redemption value of $8.61 million was recorded over the
eighteen-month period of the Series C Convertible Preferred Stock ending
December 2, 2004.
14. SHARE BASED COMPENSATION:
Pursuant to the Companys 1990 Stock Option Plan
options granted may be incentive stock options or supplemental stock options.
Options are to be granted at a price not less than fair market value (incentive
options) or 85% of fair market value (supplemental options) on the date of
grant. The options vest as determined by the Board of Directors and are
generally exercisable over a five-year period. Unvested options are canceled
and returned to the plan upon an employees termination. Generally, vested
options, not exercised within three months of termination, are also canceled
and returned to the plan. The plan terminated on July 17, 2000, and as
such, options may not be granted after that date. Options granted prior to
July 17, 2000 expire no later than ten years from the date of grant.
In February 1996, the Board of Directors adopted a
stock plan for outside Directors (the 1996 Non-Employee Directors Stock
Option Plan). The plan provides that new directors will receive an initial
stock option of 100,000 shares of common stock upon their election to the
Board. The exercise price for this initial option will be the fair market value
on the day it is granted. This initial option will vest one-fifth on the first
and second anniversaries of the grant of the option, and quarterly over the
next three years. A director who had not received an option upon becoming a
director will receive an initial stock option of 100,000 shares on the date of
the adoption of the plan. At March 31, 2008, the Company had 236,820
shares available for grant under the 1996 Non-Employee Directors Stock Option
Plan.
In October 1997, the Board of Directors adopted
the 1997 Non-Officer Stock Option Plan (the 1997 Plan). The Company may grant
options to non-officer employees and consultants under the 1997 Plan. Options
are to be granted at a price not less than fair market value (incentive
options) on the date of grant. The options vest as determined by the Board of
Directors, generally quarterly over a three- or four-year period. The options
expire no later than ten years from the date of grant. Unvested options are
canceled and returned to the 1997 Plan upon an employees termination. Vested
options, not exercised within three months of termination, also are canceled
and
59
returned to the 1997 Plan. During fiscal 2008, no
shares were granted under this plan. At March 31, 2008, the Company had
zero shares available for grant under the 1997 Plan.
In January 2000, the Board of Directors adopted
the 2000 Stock Option Plan (the 2000 Plan). The Company may grant incentive
stock options to employees and non-statutory stock options to non-employee
members of the Board of Directors and consultants under the 2000 Plan. Options
are to be granted at a price not less than fair market value on the date of
grant. In the case of an incentive stock option granted to an employee who owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any affiliate, the option is to be granted
at a price not less than 110% of the fair market value on the date of grant.
The options are exercisable as determined by the Board of Directors, generally
over a four-year period. The options expire no later than ten years from the
date of grant. Unvested options are canceled and returned to the 2000 Plan upon
an employees termination. Vested options, not exercised within three months of
termination, also are canceled and returned to the 2000 Plan. During fiscal
2008, 1,767,562 shares were granted under this plan. At March 31, 2008,
the Company had 852,671 shares available for grant under the 2000 Plan.
Aggregate option activity is as follows (shares and
aggregate intrinsic value in thousands):
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
Outstanding at March 31, 2005
|
|
9,264
|
|
$
|
5.94
|
|
|
|
|
|
Granted
|
|
1,978
|
|
2.74
|
|
|
|
|
|
Exercised
|
|
(542
|
)
|
1.52
|
|
|
|
|
|
Canceled
|
|
(1,655
|
)
|
4.36
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
9,045
|
|
4.97
|
|
|
|
|
|
Granted
|
|
2,776
|
|
1.66
|
|
|
|
|
|
Exercised
|
|
(174
|
)
|
1.49
|
|
|
|
|
|
Canceled
|
|
(4,894
|
)
|
4.78
|
|
|
|
|
|
Outstanding at March 31, 2007
|
|
6,753
|
|
3.84
|
|
|
|
|
|
Granted
|
|
1,761
|
|
1.51
|
|
|
|
|
|
Exercised
|
|
(197
|
)
|
2.35
|
|
|
|
|
|
Canceled
|
|
(1,629
|
)
|
5.17
|
|
|
|
|
|
Outstanding at March 31, 2008
|
|
6,688
|
|
$
|
2.95
|
|
7.26
|
|
$
|
14,696
|
|
Vested and expected to vest at March 31, 2008
|
|
6,245
|
|
$
|
3.04
|
|
6.05
|
|
$
|
5,126
|
|
Exercisable at March 31, 2008
|
|
2,257
|
|
$
|
5.52
|
|
3.91
|
|
$
|
2,400
|
|
The following table summarizes information about fixed
stock options outstanding at March 31, 2008 (shares in thousands):
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Average
Remaining
Contractual
Life
|
|
Weighted-
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
(in years)
|
|
|
|
|
|
|
|
$
|
0.70
|
-
|
$
|
1.99
|
|
|
4,573
|
|
8.6
|
|
$
|
1.54
|
|
548
|
|
$
|
1.46
|
|
$
|
2.00
|
-
|
$
|
4.62
|
|
|
1,171
|
|
6.5
|
|
3.07
|
|
765
|
|
3.38
|
|
$
|
4.63
|
-
|
$
|
10.06
|
|
|
833
|
|
1.5
|
|
6.73
|
|
833
|
|
6.73
|
|
$
|
10.07
|
-
|
$
|
20.00
|
|
|
10
|
|
2.5
|
|
13.84
|
|
10
|
|
13.84
|
|
$
|
20.01
|
-
|
$
|
34.62
|
|
|
101
|
|
1.9
|
|
32.93
|
|
101
|
|
32.93
|
|
$
|
0.70
|
-
|
$
|
34.62
|
|
|
6,688
|
|
7.3
|
|
$
|
2.95
|
|
2,257
|
|
$
|
5.52
|
|
60
Compensation expense for stock plans has been
determined based on the fair value at the grant date for options granted in the
current fiscal year. For the years ended March 31, 2008, 2007 and 2006,
$2.3 million, $1.6 million, and $173,000, respectively, of share based
compensation expense has been included in operating expenses in the condensed
consolidated statements of operations and comprehensive loss. The aggregate
intrinsic value of options exercisable at March 31, 2008 is $2.4 million
and the intrinsic value of options exercised during 2008 is $122,000. For
fiscal year 2006, compensation expense was not recorded in accordance with the
provisions of SFAS 123, as amended by SFAS 148. Had compensation expense been
recorded the pro forma net loss for the year ended March 31, 2006 would
have been reported as follows (in thousands):
Net loss available to stockholders, as reported
|
|
$
|
(32,924
|
)
|
Add: stock-based compensation expense, net of related taxes
|
|
(2,388
|
)
|
Net loss available to stockholders pro forma
|
|
$
|
(35,312
|
)
|
Net loss available to stockholders per share, basic and diluted, as
reported
|
|
$
|
(0.37
|
)
|
Net loss available to stockholders per share, basic and diluted, pro
forma
|
|
$
|
(0.40
|
)
|
As of March 31, 2008 the Company had a total of
$4.9 million in unrecognized compensation costs related to stock-based
compensation that is expected to be recognized over a weighted average
remaining service period of 2.0 years for non-vested options. The fair value of
each option grant is estimated at the date of grant using the Black-Scholes
pricing model with the following weighted average assumptions for grants in
fiscal years 2008, 2007, and 2006:
|
|
Year ended March 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Average expected life in years
|
|
5.9 years
|
|
5.0 years
|
|
5.0 years
|
|
Average expected volatility
|
|
80.49
|
%
|
82.36
|
%
|
92.73
|
%
|
Weighted average risk-free interest rate
|
|
4.27
|
%
|
4.34
|
%
|
4.17
|
%
|
Dividend yield
|
|
None
|
|
None
|
|
None
|
|
15. SIGNIFICANT CUSTOMERS
Over the last three fiscal years, a limited number of
our customers have accounted for a significant portion of our revenues as
follows (in thousands):
|
|
Year ended March 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Segway, Inc.
|
|
55
|
%
|
60
|
%
|
53
|
%
|
D&H Distributing Co., Inc.
|
|
6
|
%
|
9
|
%
|
12
|
%
|
The Tanfield Group, PLC
|
|
12
|
%
|
|
%
|
|
%
|
Percent of total revenue
|
|
73
|
%
|
69
|
%
|
65
|
%
|
Percent of total trade accounts receivable
|
|
85
|
%
|
75
|
%
|
72
|
%
|
16. INCOME TAXES
There was no recorded
income tax benefit related to the losses of fiscal years 2008, 2007 or 2006 due
to the uncertainty of Valence generating taxable income to utilize its net
operating loss carryforwards. The provision
for income taxes differs from the amount computed by applying the federal
statutory rate of 34% to the loss before income taxes as follows:
|
|
Year ended March 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Federal tax benefit at statutory rate
|
|
$
|
(6,610
|
)
|
$
|
(7,565
|
)
|
$
|
(11,126
|
)
|
Effect of foreign operations
|
|
4,923
|
|
4,765
|
|
4,874
|
|
Impact of change in Texas tax law
|
|
(1,194
|
)
|
1,292
|
|
|
|
State tax provision
|
|
(20
|
)
|
(4
|
)
|
(935
|
)
|
Permanent items and other
|
|
(20
|
)
|
383
|
|
(157
|
)
|
Stock compensation
|
|
756
|
|
|
|
|
|
Research and experimentation credit
|
|
(45
|
)
|
(277
|
)
|
(146
|
)
|
Expired net operating losses
|
|
1,472
|
|
|
|
|
|
Change in valuation allowance
|
|
1,738
|
|
1,406
|
|
7,490
|
|
Tax provision (benefit)
|
|
$
|
|
|
$
|
|
|
$
|
|
|
61
The components of the net
deferred tax asset were as follows at (in thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
Deferred tax assets:
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
Accrued liabilities and other
|
|
$
|
688
|
|
$
|
827
|
|
Valuation allowance for current deferred tax assets
|
|
(687
|
)
|
(827
|
)
|
Net current deferred tax assets
|
|
1
|
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
Stock compensation
|
|
194
|
|
195
|
|
Research and experimentation credit carryforwards
|
|
2.220
|
|
2,175
|
|
Net operating loss carryforwards federal and state
|
|
68,961
|
|
70,151
|
|
Net operating loss carryforwards foreign
|
|
48,061
|
|
49,203
|
|
Impairment reserve
|
|
731
|
|
740
|
|
Imputed interest
|
|
|
|
1,122
|
|
State tax credits
|
|
1,194
|
|
|
|
Accrued interest
|
|
2,044
|
|
|
|
Valuation allowance for non-current deferred tax assets
|
|
(123,222
|
)
|
(123,457
|
)
|
Net non-current deferred tax assets
|
|
183
|
|
129
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Non-current deferred tax liabilities:
|
|
|
|
|
|
Depreciation and amortization
|
|
(184
|
)
|
(129
|
)
|
Total non-current deferred tax liability
|
|
(184
|
)
|
(129
|
)
|
Net current deferred tax asset (liability)
|
|
$
|
1
|
|
$
|
|
|
Net non-current deferred tax asset (liability)
|
|
$
|
(1
|
)
|
$
|
|
|
At March 31, 2008,
the Company had federal net operating loss carryforwards available to reduce
future taxable income of approximately $202 million. The valuation allowance decreased by
approximately $375,000 during the year ended March 31, 2008. The net
decrease resulted from a gross decrease of $1.1 million related to the an
adjustment to the gross deferred tax assets, a gross decrease of $475,000 due
to operating losses not benefitted and a gross increase to tax credits of $1.2
million. A portion of the valuation allowance relates to tax benefits for stock
option deductions included in the net operating loss carryforward, which when
realized, will be allocated directly to contributed capital.
The carryforwards expire
from 2009 to 2028, if not used before such time to offset future taxable
income.
For federal tax purposes,
the Companys net operating loss carryforwards are subject to certain
limitations on annual utilization because of changes in ownership, as defined
by federal tax law. The Company also has
foreign operating loss carryforwards available to reduce future foreign income
of approximately $161.9 million.
The Company adopted the
provisions of Financial Standards Accounting Board Interpretation No. 48
Accounting for Uncertainty in Income Taxes (FIN 48) an interpretation of FASB
Statement No. 109 (SFAS 109) on April 1, 2007. As a
result of the implementation of FIN 48, the Company recognized no material
adjustment in the liability for unrecognized income tax benefits. At
the adoption date of April 1, 2007 and also at March 31, 2008, the
Company had no material unrecognized tax benefits.
The Company recognizes
interest and penalties related to uncertain tax positions in income tax
expense. As of March 31, 2008, the Company had no accrued
interest or penalties related to uncertain tax positions.
The tax years 2003
through 2007 remain open to examination by the major taxing jurisdictions to
which the Company is subject.
62
17. EMPLOYEE BENEFIT PLAN
Valence has a 401(k) plan as allowed under
Section 401(k) of the Internal Revenue Code. The 401(k) Plan
provides for the tax deferral of compensation by all eligible employees. All
U.S. employees meeting certain minimum age and service requirements are
eligible to participate under the 401(k) Plan.
Under the 401(k) Plan, participants may
voluntarily defer up to 25% of their paid compensation, subject to specified
annual limitations. The 401(k) Plan does not provide for contributions by
the Company.
18. RELATED PARTY TRANSACTIONS
On April 24, 2008, Berg & Berg, an
affiliate of the Chairman of the Companys Board of Directors, exercised a
warrant to purchase 600,000 shares of the Companys common stock. The purchase price was $2.74 per share as set
forth in the warrant. On July 13,
2005, Valence Technology, Inc., entered into an agreement with SFT
I, Inc., providing for a $20 million loan to Valence. In exchange for entry into the loan agreement
and the guaranty of the loan, SFT 1, Inc. and Berg & Berg were
each issued three year warrants to purchase 600,000 shares of the Companys
common stock, at $2.74 per share, the closing price of the Companys common
stock on July 12, 2005.
On February 21, 2008, Berg & Berg
advanced to the Company $1.0 million. On February 27, 2008, this $1.0
million was credited in full against the purchase of 280,112 shares of the
Companys common stock with a purchase price of $3.57 per share, the closing
bid price of the Companys common stock as of February 27, 2008.
On February 22, 2008, Berg & Berg
purchased 330,033 shares of the Companys common stock for $1.0 million. The
purchase price of $3.03 per share equaled the closing bid price of the
Companys common stock as of February 21, 2008.
On February 8, 2008, Berg & Berg
purchased 492,611 shares of the Companys common stock for $1.0 million. The
purchase price of $2.03 per share equaled the closing bid price of the
Companys common stock as of February 7, 2008.
On September 20, 2007, Berg & Berg
purchased 729,927 shares of the Companys common stock for $1.0 million. The
purchase price of $1.37 per share equaled the closing bid price of the
Companys common stock as of September 19, 2007.
On August 16, 2007, Berg & Berg
purchased 884,956 shares of the Companys common stock for $1.0 million. The
purchase price of $1.13 per share equaled the closing bid price of the
Companys common stock as of August 15, 2007.
On July 19, 2007, Berg & Berg purchased
869,565 shares of the Companys common stock for $1.0 million. The purchase
price of $1.15 per share equaled the closing bid price of the Companys common
stock as of July 18, 2007.
On June 21, 2007, Berg & Berg purchased
869,565 shares of the Companys common stock for $1.0 million. The purchase
price of $1.15 per share equaled the closing bid price of the Companys common
stock as of June 20, 2007.
On May 17, 2007, Berg & Berg purchased
990,099 shares of the Companys common stock for $1.0 million. The purchase
price of $1.01 per share equaled the closing bid price of the Companys common
stock as of May 16, 2007.
On April 19, 2007, West Coast Venture Capital, an
affiliate of Carl Berg, purchased 925,926 shares of the Companys common stock
for $1.0 million. The purchase price of $1.08 per share equaled the closing bid
price of the Companys common stock as of April 18, 2007.
On April 5, 2007, West Coast Venture Capital
purchased 970,874 shares of the Companys common stock for $1.0 million. The
purchase price of $1.03 per share equaled the closing bid price of the
Companys common stock as of April 4, 2007.
On January 1, 1998, the Company granted to Mr. Lev Dawson, the Companys
then Chairman of the Board, Chief Executive Officer and President, an incentive
stock option to purchase 39,506 shares pursuant to the Companys
63
1990 Plan and a nonstatutory option to purchase
660,494 shares pursuant to the Companys
1990 Plan; Mr. Dawson was granted a nonstatutory option to purchase
300,000 shares outside of any equity plan of the Company. The exercise price of
all three options was $5.0625 per share, the fair market value on the date of
the grant. The Compensation Committee of the Company approved the early
exercise of the nonstatutory options on March 5, 1998. The options
permitted exercise by cash, shares, full recourse notes or non-recourse notes
secured by independent collateral. The nonstatutory options were exercised on
March 5, 1998 with non-recourse promissory notes in the amounts of
$3,343,750 and $1,518,750 secured by the shares acquired upon exercise
plus 842,650 shares previously held by Mr. Dawson. Under each of the
notes, interest from the issuance date accrued on unpaid principal at the rate
of 5.69% per annum, or at the maximum rate permissible by law, whichever was
less. Interest was due annually and was
paid through March 4, 2005. On April 20, 2005, the Companys
Board of Directors approved a resolution to extend the maturity dates of the
notes from September 5, 2005 to September 5, 2007. As of September 5, 2007, principal and
interest amounts of $4.9 million and $301,000 were outstanding under the notes. On September 5, 2007, Mr. Dawson
defaulted on the notes and surrendered his shares to the Company.
19. SEGMENT AND GEOGRAPHIC INFORMATION:
The Companys chief operating decision makers are its
Chairman and Chief Executive Officers, who review operating results to make
decisions about resource allocation and to assess performance. The Companys
chief operating decision makers view results of operations as a single
operating segment and the development and marketing of the Companys
battery technology. The Companys
Chairman and Chief Executive Officer have organized the Company functionally to
develop, market, and manufacture battery systems. The Company conducts its
business in two geographic regions.
Long-lived asset information by geographic area is as
follows (in thousands):
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
United States
|
|
$
|
340
|
|
$
|
657
|
|
International
|
|
4,807
|
|
3,518
|
|
Total
|
|
$
|
5,147
|
|
$
|
4,175
|
|
Revenues by geographic area are as follows (in
thousands):
|
|
Year Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
United States
|
|
$
|
15,782
|
|
$
|
14,579
|
|
$
|
15,796
|
|
International
|
|
4,995
|
|
2,095
|
|
1,418
|
|
Total
|
|
$
|
20,777
|
|
$
|
16,674
|
|
$
|
17,214
|
|
20. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following tables
present selected unaudited consolidated statement of operation and balance
sheet information for each of the quarters in the years ended March 31,
2008 and 2007 (in thousands, except per share data):
|
|
For the Year Ended March 31, 2008,
|
|
|
|
1
st
Quarter
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
Fiscal Year
|
|
Revenue
|
|
$
|
4,052
|
|
$
|
5,552
|
|
$
|
3,378
|
|
$
|
7,795
|
|
$
|
20,777
|
|
Gross margin (loss)
|
|
525
|
|
663
|
|
(35
|
)
|
668
|
|
1,821
|
|
Operating loss
|
|
(2,976
|
)
|
(3,438
|
)
|
(4,326
|
)
|
(3,611
|
)
|
(14,351
|
)
|
Net loss available to common stockholders
|
|
(4,380
|
)
|
(4,872
|
)
|
(5,746
|
)
|
(4,615
|
)
|
(19,613
|
)
|
Basic and diluted EPS (1)
|
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
$
|
(0.05
|
)
|
$
|
(0.18
|
)
|
64
|
|
For the Year Ended March 31, 2007,
|
|
|
|
1
st
Quarter
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
Fiscal Year
|
|
Revenue
|
|
$
|
3,168
|
|
$
|
6,376
|
|
$
|
2,318
|
|
$
|
4,812
|
|
$
|
16,674
|
|
Gross margin (loss)
|
|
22
|
|
1,079
|
|
(464
|
)
|
(329
|
)
|
308
|
|
Operating loss
|
|
(4,160
|
)
|
(3,142
|
)
|
(4,458
|
)
|
(4,458
|
)
|
(16,218
|
)
|
Net loss available to common stockholders
|
|
(5,657
|
)
|
(4,768
|
)
|
(5,962
|
)
|
(6,036
|
)
|
(22,423
|
)
|
Basic and diluted EPS (1)
|
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.06
|
)
|
$
|
(0.05
|
)
|
$
|
(0.22
|
)
|
(1) The sum of Basic
and Diluted EPS for the four quarters may differ from the annual EPS due to the
required method of computing weighted average number of shares in the
respective periods.
21. SUBSEQUENT EVENTS:
The Company has decided to discontinue the N-Charge
®
Lithium
Phosphate Energy Storage Systems product line during calendar year 2008 and to
focus on its Epoch
TM
and U-Charge
®
Energy Storage
Systems.
65
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On August 21, 2006 the
Company dismissed Deloitte & Touche, LLP as the Companys independent
registered public accounting firm. Effective the same day the Company appointed
Helin, Donovan, Trubee & Wilkinson, LLP to serve as its principal
independent registered public accounting firm for the fiscal year ending March 31,
2007.
On January 22, 2007,
the Company was informed that its principal independent registered public
accounting firm, Helin, Donovan, Trubee & Wilkinson, LLP, or
HDT&W, had consummated a merger with Pohl, McNabola, Berg & Co.,
LLP located in San Francisco, California. The name of the post-merger firm is
PMB Helin Donovan, LLP and the post-merger firm has succeeded HDT&W as our
principal independent registered public accounting firm.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation and
Conclusion of Disclosure Controls and Procedures
The Company conducted an
evaluation, under the supervision and with the participation of the Companys
principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e), as amended) as of March 31, 2008.
Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures as of the end of the period
covered by this Report were not effective as a result of a material weakness in
internal control over financial reporting as of March 31, 2008 as
discussed below.
Managements
Report on Internal Control
Management is responsible
for establishing and maintaining adequate internal control over financial
reporting (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and
15d-15(f), as amended) of the Company. 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 accounting principles generally accepted in the
United States of America.
The Companys internal
control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, and that receipts and
expenditures of the Company are being made only in accordance with authorizations
of management and directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Companys assets that could have a material effect on
the financial statements.
Management conducted an
evaluation of the effectiveness of internal control over financial reporting
based on the framework in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management concluded that the Companys internal control over
financial reporting was not effective as of March 31, 2008. Managements
assessment identified the following material weakness in internal control over
financial reporting:
Management determined there
was an insufficient number of personnel with appropriate technical accounting
and SEC reporting expertise to adhere to certain control disciplines, and to
evaluate and properly record certain non-routine and complex transactions. While this did not result in any audit
adjustments to the financial statements of our company and subsidiaries, this
condition did result in changes to our foreign currency translation and
consolidation procedures, which are material in the aggregate and necessary to
present the annual audited consolidated financial statements in accordance with
generally accepted accounting principles.
Based on this evaluation,
management concluded that the Companys internal control over financial
reporting was not effective as of March 31, 2008 because of the material
weakness described in the preceding paragraph. A material weakness in internal
control over financial reporting is a deficiency, or combination of
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the annual or interim financial
statements would not be prevented or detected on a timely basis.
The effectiveness of the Companys internal control over financial reporting
as of March 31, 2008 has been audited by PMB Helin Donovan, LLP, an
independent registered public accounting firm, as stated in their report, which
is included herein.
Remediation
Plans
In order to address and correct
the deficiencies identified above, management has taken and will continue to
take corrective actions including, where appropriate: (i) strengthening the
expertise and minimum competency requirements for critical accounting and
financial reporting positions, (ii) replacing and/or adding personnel with the
appropriate expertise to our accounting and financial reporting functions in
the Companys operating and corporate segments to review and monitor
transactions, accounting processes and control activities more effectively, and
(iii) implementing new controls and procedures to assure the effectiveness of
the Companys internal control over financial reporting.
Changes in
Internal Control over Financial Reporting
During the fourth quarter of
fiscal 2008, we amended our consolidation procedures to include a more thorough
review and analysis of the foreign currency effects on reported cash flows and
engaged a consulting firm to assist with consolidation and financial reporting
requirements. The above-described
changes in the Companys internal control over financial reporting that
occurred during the quarter ended March 31, 2008 represent changes that have
materially affected, or are reasonably likely to materially affect, such
internal control over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act).
66
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Shareholders of Valence Technology, Inc.
and subsidiaries Austin, Texas
We have audited Valence Technology, Inc. and its subsidiaries
(the Company) internal control over financial reporting as of March 31,
2008, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal
Control. Our responsibility is to
express an opinion on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. 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 audit also included performing such other procedures as we
considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A companys 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 companys 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
companys 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 the controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Companys annual or interim
financial statements will not be prevented or detected on a timely basis. The following material weakness has been
identified and included in managements assessment:
Management determined there were an insufficient number of personnel
with appropriate technical accounting and SEC reporting expertise to adhere to
certain control disciplines, and to evaluate and properly record certain
non-routine and complex transactions.
While this did not result in any audit adjustments to the financial
statements of the Company, this condition did result in significant adjustments
to the foreign currency translation and consolidation processes, which are
material in the aggregate and necessary to present the annual audited
consolidated financial statements in accordance with generally accepted
accounting principles. In light of the
actual adjustments to procedures required and the effect on the financial
statement presentation and related disclosures in the financial statements,
management determined there is a reasonable possibility that a material
misstatement of the Companys annual or interim financial statements will not
be prevented or detected on a timely basis.
This material weakness was considered in determining the nature, timing,
and extent of audit tests applied in our audit of the consolidated financial
statements as of and for the year ended March 31, 2008, of the Company and
this report does not affect our report on such financial statements.
In our opinion, managements assessment that the Company did not
maintain effective internal control over financial reporting as of March 31,
2008, is fairly stated, in all material respects, based on the criteria
established in Internal Control - Integrated Framework issued by COSO. Also in
our opinion, because of the effect of the material weakness described above on
the achievement of the objectives of the control criteria, the Company has not
maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2008, based on the criteria established in
Internal Control - Integrated Framework issued by COSO.
We have also
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of
and for the year ended March 31, 2008, of the Company and our report dated
June 16, 2008 expressed an unqualified opinion on those consolidated
financial statements and included an explanatory paragraph concerning
substantial doubt about the Companys ability to continue as a going concern on
those consolidated financial statements.
Pmb
Helin Donovan,
Llp
Austin, Texas
June 16,
2008
ITEM 9B.
OTHER INFORMATION
None.
67
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
information required by this item is incorporated by reference to our
definitive proxy statement, which will be filed no later than July 29,
2008.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by
this item is incorporated by reference to our definitive proxy statement, which
will be filed no later than July 29, 2008.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information required by
this item is incorporated by reference to our definitive proxy statement, which
will be filed no later than July 29, 2008.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information
regarding related party transactions may be found in Managements Discussion
and Analysis of Financial Condition and Results of Operations Related Party
Transactions pursuant to Financial Reporting Release No. 61, Commission
Statement about Managements Discussion and Analysis of Financial Condition and
Results of Operations.
In addition, the information
required by this item is incorporated by reference to our definitive proxy
statement, which will be filed no later than July 29, 2008.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by
this item is incorporated by reference to our definitive proxy statement, which
will be filed no later than July 29, 2008.
68
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following
documents are filed as part of this report:
(1) Financial Statements:
The following consolidated
financial statements of Valence Technology, Inc. and Subsidiaries
contained under Item 8 of this Annual Report on Form 10-K are incorporated
herein by reference:
Consolidated Balance Sheets
as of March 31, 2008 and 2007 Consolidated Statements of Operations and
Comprehensive Loss for the years ended March 31, 2008, 2007 and 2006
Consolidated Statements of Stockholders Deficit for the years ended March 31,
2008, 2007 and 2006 Consolidated Statements of Cash Flows for the years ended March 31,
2008, 2007 and 2006.
(2) Financial Statement
Schedules:
All financial statement
schedules have been omitted because they are not applicable or are not
required, or because the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
(3) Exhibits:
EXHIBIT INDEX
The following
exhibits are included as part of this filing and incorporated herein by this
reference:
Number
|
|
Description of Exhibit
|
|
Method of Filing
|
3.1
|
|
Second
Restated Certificate of Incorporation of the Company
|
|
Incorporated
by reference to the exhibit so described in the Companys Registration
Statement on Form S-1 (File No. 33-46765), as amended, filed with
the Securities and Exchange Commission on March 27, 1992.
|
3.2
|
|
Amendment
to the Second Restated Certificate of Incorporation of the Company
|
|
Incorporated
by reference to the exhibit so described in the Companys Schedule 14A filed
with the Securities and Exchange Commission on January 28, 2000.
|
3.3
|
|
Certificate
of Designations, Preferences and Rights of Series C-1 Convertible
Preferred Stock
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K
dated November 30, 2004, filed with the Securities and Exchange Commission
on December 1, 2004.
|
3.4
|
|
Certificate
of Designations, Preferences and Rights of Series C-2 Convertible
Preferred Stock
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K
dated November 30, 2004, filed with the Securities and Exchange
Commission on December 1, 2004.
|
3.5
|
|
Fourth
Amended and Restated Bylaws of the Company
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated January 18, 2008, filed with the Securities and Exchange
Commission on January 22, 2008.
|
69
4.1
|
|
Warrant
dated January 4, 2002 to Berg & Berg Enterprises, LLC
|
|
Incorporated
by reference to the exhibit so described in the Companys Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 2001, filed
with the Securities and Exchange Commission on February 19, 2002.
|
4.2
|
|
Warrant
to Purchase Common Stock, issued June 2, 2003 to Riverview Group LLC
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K
dated June 2, 2003, and filed with the Securities and Exchange
Commission on June 3, 2003.
|
4.3
|
|
Loan
Agreement between the Company and Baccarat Electronics, Inc., dated July 17,
1990
|
|
Incorporated
by reference to the exhibit so described in the Companys Registration
Statement on Form S-1 (File No. 33-46765), as amended, filed with
the Securities and Exchange Commission on March 27, 1992.
|
4.4
|
|
Amendment No. 1 to Loan Agreement
between the Company and Baccarat
Electronics, Inc., dated March 15, 1991 (subsequently
transferred to Berg & Berg Enterprises, LLC)
|
|
Incorporated
by reference to the exhibit so described in the Companys Registration
Statement on Form S-1 (File No. 33-46765), as amended, filed with
the Securities and Exchange Commission on March 27, 1992.
|
4.5
|
|
Amendment No. 2 to Loan Agreement
between the Company and Baccarat
Electronics, Inc., dated March 24, 1992 (subsequently
transferred to Berg & Berg Enterprises, LLC)
|
|
Incorporated
by reference to the exhibit so described in the Companys Registration
Statement on Form S-1 (File No. 33-46765), as amended, filed with
the Securities and Exchange Commission on March 27, 1992.
|
4.6
|
|
Amendment No. 3 to Loan Agreement
between the Company and Baccarat
Electronics, Inc., dated August 17, 1992 (subsequently
transferred to Berg & Berg Enterprises, LLC)
|
|
Incorporated
by reference to the exhibit so described in the Companys Registration
Statement on Form S-1 (File No. 33-46765), as amended, filed with
the Securities and Exchange Commission on March 27, 1992.
|
4.7
|
|
Amendment No. 4 to Loan Agreement
between the Company and Baccarat
Electronics, Inc., dated September 1, 1997 (subsequently
transferred to Berg & Berg Enterprises, LLC)
|
|
Incorporated
by reference to the exhibit so described in the Companys Annual Report on Form 10-K
for the fiscal year ended March 31, 2003, filed with the Securities and
Exchange Commission on June 30, 2003.
|
4.8
|
|
Amendment
No. 5 to Loan Agreement between the Company and Baccarat Electronics, Inc., dated July 17,
1998 (subsequently transferred to Berg & Berg Enterprises, LLC)
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K
dated July 27, 1998, and filed with the Securities and Exchange
Commission on August 4, 1998.
|
4.9
|
|
Amendment No. 6 to Loan Agreement
between the Company and Baccarat
Electronics, Inc., dated November 27, 2000 (subsequently
transferred to Berg & Berg Enterprises LLC)
|
|
Incorporated
by reference to the exhibit so described in the Companys Annual Report on Form 10-K
for the fiscal year ended March 31, 2003, filed with the Securities and
Exchange Commission on June 30, 2003.
|
70
4.10
|
|
Second
Amended Promissory Note dated November 27, 2000 issued by the Company to
Baccarat Electronics, Inc. (subsequently transferred to Berg &
Berg Enterprises, LLC)
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K
dated December 11, 1998, and filed with the Securities and Exchange
Commission on December 21, 1998.
|
4.11
|
|
Amendment
No. 7 to Original Loan Agreement between the Company and Berg &
Berg Enterprises, LLC (previously with Baccarat Electronics, Inc.),
dated October 10, 2001
|
|
Incorporated by reference to the exhibit so described in the
Companys Quarterly Report on Form 10-Q for the fiscal quarter ended December
31, 2001, and filed with the Securities and Exchange Commission on February
19, 2002.
|
4.12
|
|
Amendment
No. 8 to Original Loan Agreement and Amendment to Second Amended Promissory Note between the Company
and Berg & Berg Enterprises,
LLC (previously with Baccarat
Electronics, Inc.), dated February 11, 2002
|
|
Incorporated
by reference to the exhibit so described in the Companys Annual Report on Form 10-K
for the fiscal year ended March 31, 2002, filed with the Securities and
Exchange Commission on July 1, 2002.
|
4.13
|
|
Loan
Agreement dated October 5, 2001 between the Company and Berg &
Berg Enterprises, LLC
|
|
Incorporated by reference to the exhibit so described in the
Companys Quarterly Report on Form 10-Q for the fiscal quarter ended December
31, 2001, and filed with the Securities and Exchange Commission on February
19, 2002.
|
4.14
|
|
Security
Agreement dated October 5, 2001 between the Company and Berg &
Berg Enterprises, LLC
|
|
Incorporated by reference to the exhibit so described in the
Companys Quarterly Report on Form 10-Q for the fiscal quarter ended December
31, 2001, and filed with the Securities and Exchange Commission on February
19, 2002.
|
4.15
|
|
Promissory
Note dated October 5, 2001 issued by the Company to Berg & Berg
Enterprises, LLC
|
|
Incorporated by reference to the exhibit so described in the
Companys Quarterly Report on Form 10-Q for the fiscal quarter ended December
31, 2001, and filed with the Securities and Exchange Commission on February
19, 2002.
|
4.16
|
|
Amendment to Loan
Agreements with Berg & Berg dated November 8, 2002
(Amendment No. 1 to October 5,
2001 Loan Agreement and Amendment No. 9 to 1990 Baccarat Loan Agreement)
|
|
Incorporated
by reference to the exhibit so described in the Companys Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 2002, filed
with the Securities and Exchange Commission on November 14, 2002.
|
4.17
|
|
Amendment
to Loan Agreements with Berg & Berg dated October 21, 2004
(Amendment No. 2 to October 5, 2001 Loan Agreement and Amendment No. 10
to 1990 Baccarat Loan Agreement)
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated November 3, 2004, filed with the Securities and Exchange
Commission on November 5, 2004.
|
4.18
|
|
Warrant
to Purchase Common Stock, issued July 13, 2005 (SFT I, Inc.)
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated July 13, 2005, filed with the Securities and Exchange Commission
on July 15, 2005.
|
71
4.19
|
|
Warrant
to Purchase Common Stock, issued July 13, 2005 (Berg & Berg
Enterprises, LLC)
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated July 13, 2005, filed with the Securities and Exchange Commission
on July 15, 2005.
|
4.20
|
|
Option
Agreement, dated as of July 8, 2005, by and between Valence Technology, Inc.
and James R. Akridge
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated July 15, 2005, filed with the Securities and Exchange Commission on July
18, 2005.
|
4.21
|
|
Amendment
No. 11 and Amendment No. 3 to Loan Agreements, dated as of July 1, 2005
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on
Form 8-K, dated July 1, 2005, filed with the Securities and Exchange
Commission on July 6, 2005.
|
4.22
|
|
Amendment
No. 12 and Amendment No. 4 to Loan Agreements, dated as of July 13,
2005
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated July 13, 2005, filed with the Securities and Exchange Commission
on July 15, 2005.
|
4.23
|
|
Amendment
No. 13 and Amendment No. 5 to Loan Agreements, dated as of June 12,
2008
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated June 12, 2008, filed with the Securities and Exchange Commission
on June 16, 2008.
|
10.1
|
|
1990
Stock Option Plan as amended on October 3, 1997
|
|
Incorporated
by reference to the exhibit so described in the Companys Registration Statement
on Form S-8 (File No 333-43203) filed with the Securities and Exchange
Commission on December 24, 1997.
|
10.2
|
|
1996
Non-Employee Directors Stock Option Plan as amended on October 3, 1997
|
|
Incorporated
by reference to the exhibit so described in the Companys Registration
Statement on Form S-8 (File No. 333-74595) filed with the
Securities and Exchange Commission on March 17, 1999.
|
10.3
|
|
Valence
Technology, Inc. Amended and Restated 2000 Stock Option Plan
|
|
Incorporated
by reference to the exhibit so described in the Companys Registration
Statement on Form S-8 (File No. 333-101708) filed with the
Securities and Exchange Commission on December 6, 2002.
|
10.4
|
|
Form of
Indemnification Agreement entered into between the Company and its Directors
and Officers
|
|
Incorporated
by reference to the exhibit so described in the Companys Annual Report on Form 10-K
for the fiscal year ended March 31, 2000, filed with the Securities and
Exchange Commission on June 29, 2000.
|
10.5
|
|
Registration Rights
Agreement with West Coast Venture
Capital, Inc. (the 1981 Kara
Ann Berg Trust) dated January 13, 2001
|
|
Incorporated
by reference to the exhibit so described in the Companys Annual Report on Form 10-K
for the fiscal year ended March 31, 2001, filed with the Securities and
Exchange Commission on July 2, 2001.
|
10.6
|
|
Securities
Purchase Agreement, dated November 30, 2004
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K
dated November 30, 2004, filed with the Securities and Exchange
Commission on December 1, 2004.
|
10.7
|
|
Amendment
and Exchange Agreement, dated November 30, 2004
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K
dated November 30, 2004, filed with the Securities and Exchange
Commission on December 1, 2004.
|
72
10.8
|
|
Loan
Agreement dated July 13, 2005, by and between Valence Technology, Inc.
and SFT I, Inc.
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated July 13, 2005, filed with the Securities and Exchange Commission
on July 15, 2005.
|
10.9
|
|
Registration
Rights Agreement dated July 13, 2005 by and between Valence Technology, Inc.
and SFT I, Inc.
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated July 13, 2005, filed with the Securities and Exchange Commission
on July 15, 2005.
|
10.10
|
|
Assignment Agreement, dated July 14, 2005, by and
between Valence Technology, Inc. and Berg & Berg Enterprises,
LLC
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated July 13, 2005, filed with the Securities and Exchange Commission
on July 15, 2005.
|
10.11
|
|
Letter
Agreement, effective March 13, 2007, by and between Valence Technology, Inc.
and Robert L. Kanode
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated March 13, 2007, filed with the Securities and Exchange Commission
on March 14, 2007.
|
10.12
|
|
Letter
Agreement, effective September 9, 2005, by and between Valence
Technology, Inc. and Thomas F. Mezger
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated September 9, 2005, filed with the Securities and Exchange
Commission on September 14, 2005.
|
10.13
|
|
Assignment
Agreement, dated December 14, 2005, by and between Valence Technology, Inc.
and Berg & Berg Enterprises, LLC
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated December 14, 2005, filed with the Securities and Exchange
Commission on December 16, 2005.
|
10.14
|
|
Controlled
Equity Offering Sales Agreement, dated
April 13, 2006, by and between Valence Technology, Inc. and Cantor
Fitzgerald & Co.
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated April 13, 2006, filed with the Securities and Exchange Commission
on April 13, 2006.
|
10.15
|
|
Supply Agreement dated February 6, 2008 by and between The
Tanfield Group PLC and Valence Technology, Inc (portions of this contract
have been omitted pursuant to a request for confidential treatment)
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated February 6, 2008, filed with the Securities and Exchange
Commission on February 12, 2008.
|
73
10.16
|
|
Employment
Letter Agreement by and between Valence Technology, Inc. and Galen H.
Fischer
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated February 13, 2008, filed with the Securities and Exchange
Commission on February 19, 2008.
|
10.17
|
|
At
Market Issuance Sales Agreement, dated February 22, 2008, by and between
Valence Technology, Inc. and Wm Smith & Co.
|
|
Incorporated
by reference to the exhibit so described in the Companys Current Report on Form 8-K,
dated February 22, 2008, filed with the Securities and Exchange
Commission on February 22, 2008.
|
10.18
|
|
Severance
Agreement and Release, dated February 15, 2008, by and between Thomas Mezger
and Valence Technology, Inc.
|
|
Filed
herewith.
|
|
|
|
|
|
21.1
|
|
List
of subsidiaries of the Company
|
|
Filed herewith.
|
23.1
|
|
Consent
of Deloitte & Touch, LLP, an Independent Registered Public
Accounting Firm
|
|
Filed herewith.
|
23.2
|
|
Consent
of PMB Helin Donovan, LLP, an Independent Registered Public Accounting Firm
|
|
Filed herewith.
|
24.1
|
|
Power
of Attorney
|
|
Included
in signature page.
|
31.1
|
|
Certification
of Robert L. Kanode, Principal Executive Officer, pursuant to Rule 13a-14
and 15d-14 of the Securities Exchange Act of 1934
|
|
Filed herewith.
|
31.2
|
|
Certification
of Galen Fischer, Principal Financial Officer, pursuant to Rule 13a-14
and 15d-14 of the Securities Exchange Act of 1934
|
|
Filed herewith.
|
32.1
|
|
Certification
of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith.
|
32.2
|
|
Certification
of Galen Fischer, Principal Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Filed herewith.
|
74
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
VALENCE TECHNOLOGY, INC.
Dated: June 16, 2008
|
|
|
|
|
|
|
|
/s/ Robert L.
Kanode
|
|
|
|
|
|
Robert
L. Kanode
|
|
|
President
and Chief Executive Officer
|
|
|
|
POWER OF ATTORNEY
Each person whose signature
appears below constitutes and appoints Robert L. Kanode and Galen Fischer, and
each of them, as his true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and his name, place and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements
of the Securities Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of Registrant and in the capacities
and on the dates indicated.
Name
|
|
Position
|
|
Date
|
|
|
President and Chief
Executive Officer
|
|
|
/s/ Robert L. Kanode
|
|
(Principal Executive
Officer) and Director
|
|
June 16,
2008
|
Robert L. Kanode
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
(Principal Financial
|
|
|
/s/ Galen Fischer
|
|
and Accounting Officer)
|
|
June 16,
2008
|
Galen Fischer
|
|
|
|
|
|
|
|
|
|
/s/ Carl E. Berg
|
|
Director and Chairman of
the Board
|
|
June 16,
2008
|
Carl E. Berg
|
|
|
|
|
|
|
|
|
|
/s/ Vassilis G. Keramidas
|
|
Director
|
|
June 16,
2008
|
Vassilis G. Keramidas
|
|
|
|
|
|
|
|
|
|
/s/ John J. Locy
|
|
Director
|
|
June 16,
2008
|
John J. Locy
|
|
|
|
|
|
|
|
|
|
/s/ Bert C.
Roberts, Jr.
|
|
Director
|
|
June 16,
2008
|
Bert C. Roberts, Jr.
|
|
|
|
|
75
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