| • | ·Transmission grid. We provide complete systems that enable electric utilities and renewable energy project developers to connect and transmit power with exceptional efficiency, reliability, security and affordability. We provide planning services that allow us to identify power grid congestion, poor power quality, and other risks, which help us determine how our solutions can improve network performance. These services often lead to sales of our grid interconnection solutions and power quality systems for wind farms and solar power plants.
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| • | Wind. ThroughDistribution grid. We provide a direct-connect power quality system that is installed on the primary distribution network in communities, business parks, or wherever enhanced power quality is beneficial and is designed to increase the reliability and resiliency of the distribution grid to serve the needs of modern energy consumers. Our systems save utilities time and money by avoiding costly options to strengthen the distribution grid. Our offerings also serve industrial customers looking to power the energy-intensive factories of the future without the risk of costly power interruptions. These industrial customers utilize our Windtec SolutionsTM, our voltage compensators, capacitors, harmonic filters, transformers and rectifiers.
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| • | Urban Grid Infrastructure. We design systems to increase the reliability, security and capacity of the urban grid infrastructure. Today, many urban substations are not networked and can only power a small section of a city. Our power dense technology based on proprietary smart materials allows for the inter-connection of substations, controlling the high fault currents that naturally result from such interconnections. If one substation is compromised, other substations help increase capacity and reliability. Our system allows instantaneous power outage recovery, potentially doubling to quadrupling a city’s reliability and resiliency while minimizing grid investment. We design systems that leverage existing grid assets while protecting cities against storms, outages, and cyber- and physical attacks. |
| • | Marine protection systems. We sell advanced degaussing systems to the U.S. Navy. Our degaussing system creates a magnetic signature around a ship to mask the ship against sea mines and torpedoes. Our degaussing system is comprised of much smaller, lighter and higher performing HTS cable coils eliminating an estimated 50-80% of the system weight and reducing overall energy consumption versus copper-based degaussing systems. |
| • | Solar Power. Our solutions enable the grid to handle more distributed generation in the form of rooftop solar. Our products are designed to allow the existing grid to handle more renewable capacity. |
| • | Wind business segment enablesPower. Our solutions enable manufacturers to field wind turbines with exceptional power output, reliability, and affordability. We supply advanced power electronics and control systems, license our highly engineered wind turbine designs, and provide extensive customer support services to wind turbine manufacturers. Our design portfolio includes a broad range of drive trains and power ratings of 2 megawatts (“MW”) and higher. We provide a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility. |
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| Grid. Through our Gridtec SolutionsTM, our Grid business segment enables electric utilities and renewable energy project developers to connect, transmit and distribute power with exceptional efficiency, reliability, security and affordability. We provide transmission planning services that allow us to identify power grid congestion, poor power quality, and other risks, which help us determine how our solutions can improve network performance. These services often lead to sales of our grid interconnection solutions for wind farms and solar power plants, power quality systems and transmission and distribution cable systems. We also sell ship protection products to the U.S. Navy.
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Our fiscal year begins on April 1 and ends on March 31. When we refer to a particular fiscal year, we are referring to the fiscal year beginning on April 1 of that same year. For example, fiscal 20152022 refers to the fiscal year beginningthat began on April 1, 2015.2022. Other fiscal years follow similarly. Competitive strengths We believe our competitive strengths position us well to execute on our growth plans in the markets we serve. | • | ·Differentiated technologies. Our products leverage the Company’s proprietary smart materials and smart software and controls to provide enhanced resiliency and improved performance of megawatt-scale power flow. Conventional conductors of electricity, such as aluminum and copper wire, lose energy due to resistance. Using a compound of yttrium barium copper oxide (“YBCO”), we manufacture and provide high-temperature superconductor ("HTS") wire that can conduct many times more electricity than conventional conductors with minimal power loss. Our proprietary Amperium® superconductor wire was engineered to allow us to tailor the product via laminations to meet the electrical and mechanical performance requirements of widely varying end-use applications, including power cables and fault current limiters for the Grid market. Our PowerModule™ power converters are based on proprietary software and hardware combinations and are used in a broad array of applications, including our D-VAR® grid interconnection and voltage control systems, as well as our wind turbine electrical control systems. Our unique proprietary cooler technology enables our ship protection systems ("SPS") to perform in harsh environmental conditions in a quiet and efficient manner.
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| • | Turnkey systems. We have developed full system solutions that we sell directly to customers. This business model leverages our applications expertise, drives value beyond our power electronic and our superconductor based products, and enables us to recognize revenue and take ownership over the marketing and sales of the full systems. Industrial manufacturers of these essential materials must be able to power their factories in ways that scale without adding complexity or size. |
| • | Scalable, low-cost manufacturing platform. Our manufacturing of proprietary wind turbine electrical control systems and power electronics products are primarily assembly operations with minimal fixed costs. We can increase the production of these products at costs that we believe are low relative to our competitors. Our proprietary manufacturing technique for Amperium superconductor wire is modular in nature, which allows us to expand manufacturing capacity at a relatively low incremental cost and differentiate ourselves from solutions assembled in the field. |
| • | Robust patent position and engineering expertise. We have a robust portfolio of awarded patents and patent applications worldwide and have rights through exclusive and non-exclusive licenses to additional patents and patent applications worldwide. We believe our technology and manufacturing knowledge base, customer and product expertise and patent portfolio provide a strong competitive position. |
| • | Unique Solutionssolutions for the Wind and Grid Markets.markets we serve. We believe we are the only company in the world that providesprovide wind turbine manufacturers with ana unique and integrated approach offor wind turbine design and engineering, customer support services and power electronics and control systems. We also believe we are the only company in the world that is able to provide transmission planning services, grid interconnection and voltage control systems, as well as superconductor-based transmission and distribution systems for power grid operators. This unique scope of supply provides us with greater insight into our customers’ evolving needs and greater cross-selling opportunities. |
Strategy |
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| Differentiated Technologies. Our PowerModule™ power converters are based on proprietary software and hardware combinations and are used in a broad array of applications, including our D-VAR® grid interconnection and voltage control systems, as well as our wind turbine electrical control systems. Our proprietary Amperium® superconductor wire was engineered to allow us to tailor the product via laminations to meet the electrical and mechanical performance requirements of widely varying end-use applications, including power cables and fault current limiters for the Grid market.
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| Highly Scalable, Low-Cost Manufacturing Platform. We can increase the production of our proprietary power electronics and superconductor technologies at costs that we believe are low relative to our competitors. Our proprietary manufacturing technique for Amperium wires is modular in nature, which allows us to expand manufacturing capacity at a relatively low incremental cost.
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| Robust Patent Position and Engineering Expertise. As of March 31, 2016, we owned almost 400 patents and patent applications worldwide (including international counterparts to U.S. patents), and had rights through exclusive and non-exclusive licenses to more than 200 additional patents and patent applications worldwide. We believe our technology and manufacturing knowledge base, customer and product expertise and patent portfolio provide a strong competitive position.
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Strategy
Building on these competitive strengths, we plan to focus on driving revenue growth and enhancing our operating results through the objectives defined below. | • | ·
| Provide Solutionssolutions from Power Generationpower generation to Delivery. delivery. From the generation source to the distribution system, we focus on providing best-in-class engineering, support services, technologies and solutions that make the world’s power supplies smarter, cleaner and stronger.more resilient. |
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| Focus on “Megawatt-Scale” Power Offerings. “megawatt-scale” power offerings. Our research, product development, and sales efforts focus on megawatt-scale offerings ranging from designs of power electronics for large wind turbine platforms to systems that stabilize power flows, integrate renewable power into the grid and carry power to and from transmission and distribution substations. |
| • | ·Product innovation. We have a strong record of developing unique solutions for megawatt-scale power applications and intend to continue our focus on investing in innovation. Recently, our product development efforts have included our Resilient Electric Grid ("REG") system for the transmission electricity grid, SPS for the U.S. Navy, and D-VAR Volt Var Optimization (“VVO”) for the distribution electricity grid.
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| • | Provide resiliency and protection capabilities. Our products provide resiliency and protection capabilities that support an evolving power grid and protect the navy fleet from rising global threats. |
| • | Pursue Emerging Overseas Markets and Serve Key Markets Locally. We focus our sales efforts on overseas markets that are investing aggressively in renewable energy and power grid projects, and we have been particularly successful in targeting key Asian markets, including India and China.projects. As part of our strategy, we serve our key target markets with local sales and field service personnel, which enables us to understand market dynamics and more effectively anticipate customer needs while also reducing response time. We currently serve target markets such as Australia, China,Canada, India, South Korea, Japan, Singapore, South Africa, the United Kingdom, Jordan, Mexico, Spain and the United States. |
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| Product Innovation. We have a strong record of developing unique solutions for megawatt-scale power applications and will continue our focus on investing in innovation. Recently, our product development efforts have included our Resilient Electric Grid (“REG”) system for the electricity grid and Ship Protection Systems for the U.S. Navy.
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Market opportunities
Our solutions address two substantial global demands:
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| the demand for renewable sources of electricity, and
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| the demand for modernized, smart power grid infrastructure that alleviates capacity constraints and improves electricity reliability, security, and efficiency.
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Wind market overview
According to GlobalData, a research firm, nearly 55 Gigawatts (GW) of wind generation capacity were added worldwide in 2015, as compared to 52 GW in 2014. GlobalData anticipates that more than 56 GW of additional capacity will be added in 2016.
Several factors are expected to drive the future growth in the wind power market, including substantial government incentives and mandates that have been established globally, technological improvements, turbine cost reductions, the development of the offshore wind market, and increasing cost competitiveness with existing power generation technologies. Technological advances, declining turbine production cost and fluctuating prices for some fossil fuels continue to increase the competitiveness of wind versus traditional power generation technologies.
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Our solutions for the wind market
We address the challenges of the wind power market by designing and engineering wind turbines, providing extensive support services to wind turbine manufacturers and manufacturing and selling critical components for wind turbines.
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| Electrical Control Systems. We provide full electrical control systems (“ECS”) or a subset of those systems (“core electrical components”) to manufacturers of wind turbines designed by us. Our ECS regulate voltage, control power flows and maximize wind turbine efficiency, among other functions. To date, we have shipped enough core electrical components and complete ECS to power nearly 16,000 Megawatts (“MW”) of wind power. We believe our ECS represent approximately 5-10% of a wind turbine’s bill of materials. We believe that the total addressable market for ECS was approximately $3.2 billion annually in 2015.
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| Wind Turbine Designs. We design and develop entire state-of-the-art onshore and offshore wind turbines with power ratings of 2 MWs and higher for manufacturers who are in the business of producing wind turbines or who plan to enter the business of manufacturing wind turbines. These customers typically pay us licensing fees, and in some cases royalties for wind turbine designs, and purchase from us the core electrical components or complete electrical control systems needed to operate the wind turbines.
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| Customer Support Services. We provide extensive customer support services to wind turbine manufacturers. These services range from providing designs for customers’ wind turbine manufacturing plants to establishing and localizing their supply chains and training their employees on proper wind turbine installation and maintenance. We believe these services enable customers to accelerate their entry into the wind turbine manufacturing market and lower the cost of their wind turbine platforms.
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Our approach to the wind energy markets allows our customers to use our world-class turbine engineering capabilities while minimizing their research and development costs. These services and our advanced electrical control systems provide our customers with the ability to produce standardized or next-generation wind turbines at scale for their local market or the global market quickly and cost-effectively. Our team of highly experienced engineers works with clients to customize turbine designs specifically tailored to local markets while providing ongoing access to field services support and future technological advances.
Grid market overview It is widely believed that the electricity grids around the world require modernization through widespread technology upgrades if they are to maintain reliability while solving rapidly evolving challenges such as more frequent severe weather, threats of physical- and cyber-attacks, expanded renewable generation (both large and small scale) and new types of customer loads such as electric vehicles. In fact, a series of reports written by the Electric Power Research Institute ("EPRI") in 2016 emphasize the need for increased resiliency, flexibility and connectivity in electric grids. According to the EPRI reports, the number of geophysical, meteorological, hydrological, and climatological events in the U.S. rose to an all-time high of 247 events in 2010 – up from approximately 200 in 2009 and less than 200 in all years combined from 1980 to 2010. Available data further indicate that the existing U.S. electrical grid has been stressed by U.S. wind power generation increasing from 6 Gigawatts ("GW") in 2003 to approximately 142.9 GW in 2022, and photovoltaics ("PV") power generation increasing from almost zero in 2003 to approximately 125.9 GW as of the end of 2022. Growth in both wind power and PV is expected to continue with the vast majority of such intermittent generation sources unsupported by energy storage, placing stress on the power grid. Finally, the Edison Electric Institute estimates that the number of electric vehicles on the road in the U.S. is projected to reach 18.7 million in need2030, up from more than 1.0 million at the end of modernization through a technology upgrade if it is to maintain reliability and adapt to the changing market needs. In fact, a recent report written by The White House and titled, “Economic Benefits of increasing Electric Grid Resilience in Weather Outages” found that economic damage from weather-related power outages averaged between $18 and $33 billion per year between 2003 and 2012 – and went as high as $75 billion in 2008 and $52 billion in 2012, as a result of damage caused by Hurricanes Ike and Sandy, respectively. Furthermore, the electric grid is also vulnerable to equipment failure, acts of terror, and threats to cyber security. Recent events2018. These facts and the reliance ofdependence on the safety, security and economy onof the electricity grid have prompted broad recognition worldwide of the need to modernize and enhance the reliability and security of power grids. The Biden Administration’s energy plan could positively impact the demand for our new energy power systems solutions. The energy plan intends to reform and extend the tax incentives that generate energy efficiency and clean energy jobs as well as to develop financing mechanisms that leverage private sector dollars to maximize investment in the clean energy revolution. We plan to seek to collaborate with top tier wind turbine manufacturers to provide new wind farm connectivity to the U.S. power grid. The Biden Administration also intends to spur the installation of millions of solar panels – including utility-scale, rooftop, and community solar systems. Our systems are primarily focused on addressing renewable energy installations for project developers and wind turbine manufacturers. Because solar power is dynamic and intermittently variable in nature, distribution grids will need to enhance their network’s capabilities to accommodate this new resource, while maintaining efficiency and power quality for their customers. Our system offers electric utilities superior power quality, environmental benefits, and significant cost-savings over traditional solutions. The Biden Administration's energy policy also focuses on the next generation of electric grid transmission and distribution, which has been the heart of our long-term growth strategy. We believe our new energy power systems products are well suited to address this enormous challenge. The Inflation Reduction Act of 2022 (the “Inflation Reduction Act”) was enacted in August 2022, in part, to address the challenges of climate change. The Inflation Reduction Act is expected to result in the investment of $369 billion in climate solutions and environmental justice. The goal of the Inflation Reduction Act is to reduce emissions by 40 percent by 2030 while restoring U.S. credibility to lead climate action on the global stage. The Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (the “CHIPS Act of 2022”), also was enacted in August 2022 and is intended to enable the re-shoring of critical manufacturing capability to the U.S., which is expected to be beneficial to our business. The CHIPS for America Fund, provides $52.7 billion of funding for the development of U.S. manufacturing, research and development (R&D), and workforce development programs. From this $52.7 billion, $39 billion is allocated to be spent on financial assistance to build, develop, or modernize domestic semiconductor facilities in order to bolster U.S. leadership in the semiconductor industry. We believe we are well positioned to seize the numerous opportunities presented by the Inflation Reduction Act and the CHIPS Act of 2022. Power grid operators worldwide face various challenges, including: | • | Resiliency. As our electricity mix changes with the proliferation of renewables and distributed generation, so does the need to strengthen the electric grid. New technologies such as the addition of electric vehicles on U.S. roads and urbanization create new challenges for power grid operators. |
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| Stability. Power grid operators are confronting power quality and stability issues arising from intermittent renewable energy sources and from the capacity limitations of transmission and overhead distribution lines and underground cables. |
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| Reliability. Traditional transmission lines and cables often reach their reliable voltage stability limit well below their thermal threshold. Driving more power through a power grid when some lines and cables are operating above their voltage stability limit during times of peak demand can cause either unacceptably low voltage in the power grid (a brownout) or risk of a sudden, uncontrollable voltage collapse (a blackout). |
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| Capacity. The traditional way to enable increases in power grid capacity without losing voltage stability is to install more overhead power lines and underground cables. However, permitting new transmission and distribution lines can take 10 years or more due to various public policy issues, such as environmental, aesthetic, and health concerns. In urban and metropolitan areas, installing additional conventional underground copper cables is similarly challenging, since many existing underground corridors carrying power distribution cables are already filled to their physical capacity and cannot accommodate any additional conventional cables. In addition, adding new conduits requires excavation to expand existing corridors or create new corridors, which are costly and disruptive undertakings. |
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| Efficiency. Most overhead lines and underground cables use traditional conductors such as copper and aluminum, which lose power due to electrical resistance. At transmission voltage, electrical losses average about 7% in the United States and other developed nations, but can exceed 20% in some locations due to the distance of the line, quality of the conductor, and the power grid’s architecture and characteristics, among other factors. |
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| Security. Catastrophic equipment failures caused by aging equipment, physical and cyber threats,events, and weather relatedweather-related disasters can leave entire sections of an urban environment without power for hours or days. It can be difficult to recover from extended power outages in urban load centers, worsening situations where the personal safety of residents and the economic health of businessbusinesses are threatened. |
Our solutions for the power quality and grid infrastructure market We address these challenges in the Gridgrid market by providing services and solutions designed to increase the power grid’s capacity, resiliency, reliability, security and efficiency. We also provide advanced ship protection equipment forOur solutions orchestrate the U.S Navy in this segment as each Navy ship can be thoughtrhythm of as having its own power on the grid. Our solutions include: | • | ·
| Superconductor Wire and Applications. Conventional conductors of electricity, such as aluminum and copper wire, lose energy due to resistance. Using a compound of yttrium barium copper oxide (“YBCO”), we manufacture and provide high-temperature superconductor (“HTS”) wire that can conduct many times more electricity than conventional conductors with no power loss. We have developed full system solutions that we sell and expect to continue to sell directly to customers. This business model leverages our applications expertise, drives value beyond the wire and enables us to recognize revenue and take ownership over the marketing and sales of the full systems. These systems include:
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| Resilient Electric Grid D-VAR® Systems. Our REGD-VAR system has two primary applications that increase the reliability and the capacity of the urban infrastructure. For applications focused on reliability improvement, the REG cable is best used in a “ring” or “loop” configuration to interconnect nearby urban substations. This enables urban utilities to share transmission connections and excess station capacity, while controlling the high fault currents that naturally result from such interconnections, providing protection against the adverse effects that follow the loss of critical substation facilities in urban areas. For applications focused on capacity improvement, the REG cable can be used in a “branch” configuration. In this application, the REG cable connects an existing large urban substation with a new, much smaller, and more simplified substation within the city at a lower cost. The smaller urban substation does not need large power transformers and takes up much less space, thereby significantly reducing real estate, construction, and other related costs in the urban area. The key component to the REG system is a breakthrough cable system that combines very high power handling capacity with fault current limiting characteristics, features that are attributable to our proprietary HTS wire. Assuming all urban substations in major cities in the U.S. could be connected with our REG system, we believe the total annual addressable market is approximately $5.7 billion.
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| Ship Protection Systems. The primary focus of our ship protection systems (“SPS”) has been degaussing systems. These systems reduce a Naval ship’s magnetic signature, making it much more difficult for a mine to detect and damage a ship. Traditionally made of heavy copper wire, degaussing is required on all Navy combat ships. Our HTS advanced degaussing system is lightweight, compact, and often outperforms its conventional counterpart. This HTS system is estimated to enable a 50 to 80 percent reduction in total degaussing system weight, offering significant potential for fuel savings or options to add different payloads. The core components of a degaussing system are transferable to other applications being targeted for ship implementation. We are also continuing to work on expanding HTS technology into the fleet through a variety of applications for power, propulsion, and protection equipment. We estimate that the total addressable market for HTS-based, ship protection systems for the U.S. Navy fleet to be between $70.0 million and $120.0 million per year between the years 2020 and 2025.
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| FACTS Systems. Flexible alternating current transmission system – or FACTS – is a system that consists of power electronics and other static components used for controlling power flow and voltage in the AC transmission system. FACTS products aimOur D-VAR system aims to increase controllability and power transferability of a network, which allows more effective utilization of existing assets, and reduces the need for new transmission lines and facilities to increase electricity availability. Our FACTS sales process begins with our group of experienced transmission planners working with power grid operators, renewable energy developers, and industrial system operators to identify power grid constraints and determine how our solutions might improve network performance. These services often lead to sales of grid interconnection solutions for wind farms and solar power plants, power quality systems for utilities and heavy industrial operations and transmission and distribution cable systems. Our transmission planners work with our customers on the following solutions:
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| D-VAR® Systems. The power that flows through AC networks comprises both real power, measured in watts, and reactive power, measured in Volt Amp Reactive (“VARs”). In simple terms, reactive power is required to support voltage in the power network. D-VAR systems can provide the reactive power needed to stabilize voltage on the grid. These systems also can be used to connect wind farms and solar power plants to the power grid seamlessly as well as to protect certain industrial facilities against voltage swells and sags. GlobalDataOur D-VAR sales process begins with our group of experienced transmission planners working with power grid operators, renewable energy developers, and AMSC estimate the marketindustrial system operators to identify power grid constraints and determine how our solutions might improve network performance. These services often lead to sales of grid interconnection solutions for FACTSwind farms and solar power plants, and power quality systems such as D-VAR was more than $2.0 billion in 2015. for utilities and heavy industrial operations.
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• | D-SVC Systems. actiVAR® Systems. Our D-SVC systems areactiVAR system is a cost-effectivefast-switching medium-voltage reactive compensation solution that allow large industrial loads to operate on the AC power system while minimizing the impacts ofutilizes passive, fast-switching, and transient-free switching devices. The actiVAR mitigates voltage sags and flickerreduces large inrush currents associated with starting large medium-voltage motors across-the-line. Large motors require significant amounts of reactive power to start. The flow of VARs across the power system network results in voltage sags which cause power quality issues to nearby utility customers, as well as a reduction in the motors ability to start. Traditional solutions to solve these problems utilize complex and also provides dynamic, distribution level voltage regulationcostly adjustable speed drives and synchronous transfer switchgear solutions. The actiVAR replaces these items at a fraction of the cost. The solution is prevalent in the pump and compressors stations utilized in industrial trades. Our actiVAR sales process begins with the engineering and procurement companies during feasibility studies. We identify viable projects for this solution and assist with performance and rating calculations, which eventually lead to the adaption and purchase of the actiVAR solution.
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| • | armorVAR™Systems. Our armorVAR system consists of conventionally switched medium-voltage metal-enclosed capacitor banks and harmonic filters banks. These systems are installed for reactive compensation, power factor correction, loss reduction, utility bill savings, and mitigation of common power quality concerns related to power converter-based generation and load devices. They are utilized in all industries including renewables, industrial, utility, commercial, mining, and petro-chemical industries. Our armorVAR systems also support the base VAR requirements of renewable power plants and can include fully integrated D-VAR and D-VAR VVO® solutions to form more advanced hybrid solutions that are more economical and easier to install. |
| • | Transformers and DC Rectifiers. Our custom transformers and rectifiers combine to form power electronic systems which consists of heavy-duty industrial rectifier transformers and direct current (DC) rectifiers. These systems are installed to produce DC power for electrolytic, furnace, and special processes. They are utilized in all industries including renewables, industrial, chemical, mining, and petro-chemical industries. Our power electronic systems also support renewable wind/solar power plants and can include fully integrated D-VAR and D-VAR VVO actiVAR®, armorVAR™ solutions that are more economical and easier to install to form a complete power solution engineered to the client's specification. |
| • | D-VAR VVO®. Our D-VAR VVO serves the distribution power grid market. VVO is designed to be a direct-connect 15 kilovolt class power quality system for a utility's distribution network to optimally control solutions for utilities. Our D-SVC system automatically applies VARs on a cycle-by-cycle basis to maintain steady line voltages adjacent to large inductive loadsvoltage as distribution networks are increasingly impacted by distributed generation, such as motors, welders, arc furnacesroof top and pipeline pumping stations.community solar. We believe VVO has the potential to save utilities time and money by avoiding costly options to increase the reliability and resiliency of the distribution grid and to allow utilities to build a “plug 'n play” network to serve the demands of modern energy consumers. Our VVO target markets are electric distribution grids incorporating distributed generation, including where utility grid modernization attributes such as the following are applicable: mandated efficiency upgrades, mass adoption of rooftop solar, community solar, utility-owned micro-grids, variable load conditions on the distribution grid and voltage regulations alternatives. |
| • | REG Systems. Our REG system has two primary applications that increase the reliability and the capacity of the urban infrastructure. For applications focused on reliability improvement, the REG system is used in a “ring” or “loop” configuration to interconnect nearby urban substations. This enables urban utilities to share transmission connections and excess station capacity, while controlling the high fault currents that naturally result from such interconnections, providing protection against the adverse effects that follow the loss of critical substation facilities in urban areas. We believe a utility installing our REG system could double or quadruple its reliability (e.g. N-1 to N-2, or greater) by networking substations, which is a solution that utilities would generally not consider when using conventional technology in urban settings due to its disruptive nature and economic disadvantages. For applications focused on capacity improvement, the REG system can be used in a “branch” configuration. In this application, the REG system connects an existing large urban substation with a new, much smaller, and more simplified substation within the city at a lower cost. The smaller urban substation does not need large power transformers and takes up much less space, thereby significantly reducing real estate, construction, and other related costs in the urban area. The key component to the REG system is a breakthrough cable system that combines very high-power handling capacity with fault current limiting characteristics - features that are attributable to our proprietary Amperium HTS wire. |
Marine market overview Defense spending has increased over the past six years as the U.S. military moves to rebuild and retool for competition against other great powers. In April 2022, the U.S. Navy’s 2022 shipbuilding plan covering government fiscal years 2023 to 2052, calls for a larger modernized, sustainable and lethal Navy. For a description of risks related to our government contracts, see Part I, Item 1A, “Risk Factors – Our contracts with the U.S. government are subject to audit, modification or termination by the U.S. government and include certain other provisions in favor of the government. The continued funding of such contracts remains subject to annual congressional appropriation, which, if not approved, could reduce our revenue and lower or eliminate our profit. On November 1, 2022, the Navy’s fleet numbered 292 battle force ships—aircraft carriers, submarines, surface combatants, amphibious ships, combat logistics ships, and some support ships. As of April 17, 2023, the Navy included 296 battle force ships. Since WWII, the Navy fleet has protected its warfare vessels with copper-based degaussing systems. Our HTS-based degaussing system provides world class mine protection while reducing the weight of the degaussing system by an estimated 50-80%, and reducing energy consumption. We believe that our HTS systems are an enabling technology for the Navy in its mission to create an all-electric ship (Super Ship). Our HTS-based SPS degaussing system has been designed into the San Antonio-class amphibious warfare ship platform, with the first system delivered in January 2022 to be deployed on the USS Fort Lauderdale. AMSC and the U.S. Navy continue to collaborate on AMSC’s advanced HTS-based ship protection systems. The core components of the ship protection system are common and transferable to other applications being targeted for ship implementation. Navy fleets worldwide face various challenges, including: | • | ·Power Capacity. Today’s Navy continues to see increased demand for more power applied from both on and off the ship (shore power). This need is driven by many factors, including the continued development of high-power density advanced weapons systems and sensors. Many power dense applications that naval engineers are working on today are already relying on the independent development of improved power distribution systems for their implementation. Free Electron Lasers, High Power Radar, Laser Self Defense Systems, Electro Magnetic Rail Guns and Active Denial (Directed Energy) systems are just a few of the Navy applications that we believe will demand higher capacity and more efficient energy transfer before deployment to a platform in the fleet can be realized.
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| • | Space and Weight Limitations. Advances in sensors and weapons for modern ship applications are expected to drive the need for new power solutions to be light and compact, for weapons’ power draw to be more efficiently cooled and for easing installation on new ships and enabling upgrades on existing ones. |
| • | Efficiency. Increased power demands for routine (peace time) operations are straining the conventional copper-based power cable systems that are currently used. The copper cables are very heavy, cumbersome, and hard to handle. The weight of the cables requires a coordinated effort between a crew on the pier and a crew on the ship. In many instances, handling these cables requires the use of a crane or a boom truck to extend them from the pier-side power substations up to the ship’s connection point. More efficient, compact, lighter weight power transfer and distribution systems are expected to be required for tomorrow’s Navy to satisfy its future mission requirements. |
Our solutions for the marine market Each Navy ship can be thought of as having its own power grid. We provide advanced ship protection systems, power management, and power generation systems that are designed to help fleets increase system efficiencies, enhance warfare capabilities, and boost reliability, performance and security. Our systems support the Navy’s mission to “electrify the fleet”. Our systems allow for the ship to generate a large amount of electrical power and distribute the power through an in-board power system to a propulsion motor by way of a much smaller, lighter, and higher performing HTS cable system, enabling a more advanced, reliable, and secure solution with a smaller footprint. Our solutions include: | • | Ship Protection Systems. The primary focus of our SPS has been degaussing systems. These systems reduce a naval ship’s magnetic signature, making it much more difficult for a mine to detect and damage a ship. Traditionally made of heavy copper wire, degaussing is required on all U.S. Navy combat ships. Our HTS advanced degaussing system is lightweight, compact, and often outperforms its conventional counterpart. This HTS system is estimated to enable 50-80% reduction in total degaussing system weight, offering significant potential for fuel savings or options to add different payloads. The core components of a degaussing system are transferable to other applications being targeted for ship implementation. Our SPS has been designed into the San Antonio class of amphibious assault vessels, which was first delivered in January 2022 to be deployed on the USS Fort Lauderdale. We are also offering full system solutionsseeking opportunities to propagate SPS throughout the surface fleet, creating the potential for a relatively long-term revenue stream. Additionally, we are developing a deployable mine countermeasure solution to enhance U.S. Navy capability to manage the threat of minefields. |
| • | In Board Power Delivery Systems. We are working on expanding HTS technology into the fleet through a collaboration with industry leader Nexans:variety of applications, including in board power flow and management. Our HTS power cables enable high density energy transfer at unsurpassed efficiency levels in a compact, lightweight package. |
| • | oPower Generation Systems. We are also working on expanding HTS technology into the fleet through a variety of applications including power generation and electric propulsion. The same HTS technology used in SPS and in board power delivery systems when applied to rotating machines results in high power density motors and generators. This enables dramatically more power to be produced in the same machinery space used for conventional systems, which in turn affords the Navy additional power for high energy density weapons without significant structural changes to the ship.
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| • | Stand-alone Fault Current Limiters. UsedPropulsion systems. Our development work in substations, superconductor fault current limiters (“SFCLs”) act as surge protectorspower generation systems for the Navy extends to HTS-based electric power grid. SFCLs can help protectpropulsion. In board power delivery systems and power generation systems, when applied to high power density motors, enable the grid by reducingtransition to electric propulsion. This is expected to make new ships more fuel-efficient. Our technology and systems allow the destructive nature of faults, extending the life of existing substation equipment and allowing utilitiesNavy to defer or eliminate equipment replacements or upgrades. Together with Nexans, we offer SFCLsfree up space for medium voltage alternating current (“AC”) networks.additional war-fighting capability.
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Core Technologies
SuperconductorsWind market overview
Our second
The global energy mix is transitioning towards an increasing amount of renewable energy, including wind power. Wind power is unlimited in supply and its generation (“2G”) HTS wire technology helps us addressis a zero-emission process. Wind power has become a major pillar of power supply throughout the smart grid infrastructureworld. Wind power is expected to play a key role in the achievement of the objectives of the Paris Climate Change agreement and the Sustainable Development Goals. According to GlobalData, a research firm, approximately 85 GW of wind generation capacity were added worldwide in calendar 2022, as compared to 91 GW in calendar 2021. GlobalData anticipates that more than 88 GW of additional capacity will be added in 2023. According to GlobalData, annual wind installations in India for calendar 2022 were 2.5 GW and for calendar 2023 are estimated to be 2.9 GW. Several factors are expected to drive the future growth in the wind power market, opportunity by providing componentsincluding substantial government incentives and solutions designedmandates that have been established globally, technological improvements, turbine cost reductions, the development of the offshore wind market, and increasing cost competitiveness with existing power generation technologies. Technological advances, declining turbine production cost and fluctuating prices for some fossil fuels continue to increase the competitiveness of wind versus traditional power grid’s capacity, reliability, securitygeneration technologies. Our solutions for the wind market We address the challenges of the wind power market by designing and efficiency. engineering wind turbines, providing extensive support services to wind turbine manufacturers, and manufacturing and selling critical components for wind turbines. | • | Electrical Control Systems. We provide full electrical control systems (“ECS”) to manufacturers of wind turbines designed by us. Our ECS regulate voltage, control power flows and maximize wind turbine efficiency, among other functions. To date, we have shipped core electrical components and complete ECS sufficient to power over 17,000 Megawatts (“MW”) of wind power. We believe our ECS represent approximately 5-10% of a wind turbine’s bill of materials. |
| • | Wind Turbine Designs. We design and develop entire state-of-the-art onshore and offshore wind turbines with power ratings of 2 MWs and higher for manufacturers who are in the business of producing wind turbines or who plan to enter the business of manufacturing wind turbines. These customers typically pay us licensing fees, and in some cases royalties, for wind turbine designs, and purchase from us the ECS needed to operate the wind turbines. |
| • | Customer Support Services. We provide extensive customer support services to wind turbine manufacturers. These services range from providing designs for customers’ wind turbine manufacturing plants to establishing and localizing their supply chains and training their employees on proper wind turbine installation and maintenance. We believe these services enable customers to accelerate their entry into the wind turbine manufacturing market and lower the cost of their wind turbine platforms. |
Our wire, known as Amperium wire, conducts electricityapproach to the wind energy markets allows our customers to use our world-class turbine engineering capabilities while minimizing their research and development costs. These services and our advanced ECS provide our customers with zero resistance below about -297 degrees Fahrenheit. Additionally, our 2G wire has the ability to switchproduce standardized or next-generation wind turbines at scale for their local market or the global market quickly and cost-effectively. Our team of highly experienced engineers works with clients to a resistive state whenever a fault current exceeds a predetermined value. This characteristic is a key enablercustomize turbine designs specifically tailored to our REG system. The technology can be used in many applications including electricity transmission cables, superconducting generators, voltage regulatorslocal markets while providing ongoing access to field services support and degaussing systems for naval vessels. Superconductor power cables, which are a class of high-capacity, environmentally-benign, and easy-to-install transmission and distribution cables, address power grid capacity issues by increasing the thermal limit of existing or new corridors. Superconductor power cables are cylindrically shaped systems consisting of HTS wires (which conduct electricity) surrounded by electrical insulation encased in a metal or polymeric jacket. Currently, power cables are made primarily using copper wires. Power cables incorporating our Amperium wire are able to carry up to 10 times the electrical current of copper cables of the same diameter. These cable systems also bring efficiency advantages. Traditional cable systems heat up due to the electrical resistance of copper, causing electrical losses. Electrical losses at transmission voltage average about 7% in the United States and other developed nations, but can exceed 20% in some locations due to the distance of the line and the power grid’s architecture and characteristics, among other factors. Conversely, HTS materials can carry direct current (“DC”) with 100% efficiency and AC with nearly 100% efficiency when they are cooled below a critical temperature. As a result, AC HTS power cables lose significantly less power to resistive heating than copper cables, and DC HTS power cables have no energy losses due to resistive heating.
PowerModule Power Converters
Our family of PowerModule power electronic converters incorporates power semiconductor devices that switch, control and move large amounts of power faster and with far less disruption than the electromechanical switches historically used. While today our PowerModule systems are used primarily in our ECS and D-VAR systems, they also have been incorporated into electric motor drives, distributed and dispersed generation devices (micro-turbines, fuel cells, and photovoltaics), power quality solutions, batteries, and flywheel-based uninterruptible power supplies.future technological advances.
Research and Development
Our research and development expenses were $12.3 million, $11.9 million and $12.2 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
Customers We have designed wind turbines for or licensed wind turbine designs to more than 10 wind turbine manufacturing customers including Inox in India. We have also served over 100 customers in the grid market since our inception, including American Electric Power, Long Island Power Authority and Keys Energy Services in the United States, EDF Group in France, Korean Electric Power Corporation in Korea, Scottish & Southern Energy in the United Kingdom, Consolidated Power Projects (Pty) Ltd in South Africa, and Ergon Energy in Australia.
We serve customers globally through a localized sales and field service presence in our core target markets. We have served over 100 customers in the grid market since our inception, including Commonwealth Edison, YMC Incorporated, the U.S. Navy, SSE plc in the United Kingdom, Consolidated Power Projects (Pty) Ltd in South Africa, Fuji Bridex in Singapore, Vestas Wind Systems A/S in Denmark, and Ergon Energy in Australia. Additionally, our sales personnel in the United States are supported by manufacturers' sales representatives. We have designed wind turbines for and licensed wind turbine designs to wind turbine manufacturing customers including Inox Wind Limited ("Inox") in India and Doosan Heavy Industries (“Doosan”) in South Korea. 8
In fiscal 2022, Fuji Bridex Pte Ltd accounted for 15% of our total revenues. In fiscal 2021, Fuji Bridex Pte Ltd accounted for 14% of our total revenues. No other customer accounted for more than 10% of our total revenues in each of fiscal 2022 and 2021. Facilities and manufacturingManufacturing Our primary facilities and their primary functions are as follows: | • | ·
| Devens,Ayer, Massachusetts — Corporate headquarters, superconductorsheadquarters; Grid segment manufacturing, and research development and manufacturing, FACTS product engineering and manufacturingdevelopment
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| • | ·Westminster, Massachusetts — Grid segment manufacturing
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| • | New Berlin,Pewaukee, Wisconsin — Power electronicsGrid segment research and controls research and development
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| • | ·Richland, Washington — Grid segment research and development
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| • | Klagenfurt, Austria — Wind turbine—Wind segment engineering, research and development, and customer support |
| • | ·Queensbury, New York — Grid segment manufacturing
| Suzhou, China — Electrical Control System and PowerModule power converter manufacturing for the Chinese market
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• | Timisoara, Romania – Electrical Control System and PowerModule power converterNew Milford, Connecticut — Grid segment manufacturing for all other markets
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Our global footprint also includes sales andand/or field service offices in Australia, Germany, India, South Korea, and the United Kingdom.Kingdom and McLean, VA. The principal raw materials used in the manufacture of the Company’s products are nickel, silver, yttruim, copper, brass, and stainless steel. Major components are insulated gate bi-polar transistors, heatsinks, inductors, enclosures, transformers, and printed circuit boards. Most of these raw materials are available from multiple sources in the United States and world markets. Generally, the Company believes that adequate alternative sources are available for the majority of its key raw material and purchased component needs, however, the Company is dependent on a single or limited number of suppliers for certain materials and components. Sales and marketingMarketing Our strategy is to serve customers locally in our core target markets through a direct sales force operating out of sales offices worldwide. In addition, we utilize manufacturers’ sales representatives in the United States and Canada to market our products to utilities in North America. The sales force also leverages business development staff for our various offerings as well as our team of wind turbine engineers and power grid transmission planners, all of whom help to ensure that we have an in-depth understanding of customer needs and provide cost-effective solutions for those needs. In fiscal 2015, Inox accounted for 62% of our total revenues, and no other customer accounted for more than 10% of our total revenues. In fiscal 2014, Inox accounted for 56% of our total revenues, and no other customer accounted for more than 10% of our total revenues. In fiscal 2013, Inox and Beijing JINGCHENG New Energy accounted for 31% and 18%, respectively, of our total revenues.
The portion of total revenue recognized from customers located outside the United States was 85%, 86% and 87% for fiscal 2015, 2014 and 2013, respectively. Of the revenue recognized from customers outside the United States, we recognized 73%, 65% and 36% from customers in India for fiscal 2015, 2014 and 2013, respectively, and we recognized 10%, 17% and 34% from customers in China in fiscal 2015, 2014 and 2013, respectively. For additional financial information, see the notes to consolidated financial statements included herein, including Note 17, “Business Segments”.Segments
Our foreign operations, particularly
We segment our operations in China, Indiainto two market-facing business units: Grid and other emerging markets, exposeWind. We believe this market-centric structure enables us to a varietymore effectively anticipate and meet the needs of risks. For a discussion of additional risks associated with our foreign operations, see Item 1A, “Risk Factors – We have operations inpower generation project developers, the Navy's ship protection systems, electric utilities and that depend on sales in emerging markets, including China and India, and global conditions could negatively affect our operating results or limit our ability to expand our operations outside of these countries. Changes in China’s or India’s political, social, regulatory and economic environment may affect our financial performance.”wind turbine manufacturers. Backlog
We had backlog at March 31, 2016 of approximately $88.9 million from government and commercial customers, compared to $40.7 million at March 31, 2015. Current backlog represents the value of contracts and purchase orders received for which delivery is expected during the next twelve months based on contractually agreed-upon terms. The year over year increase in backlog is driven primarily by the larger orders received from Inox in fiscal 2015, as well as stronger orders recently for our D-VAR products. Of our reported twelve month backlog at March 31, 2016, $58.0 million pertains to the supply contract with Inox entered into in December 2015, shipments under which are expected to commence once Inox makes the required $2.0 advance payment under the supply contract. See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operation”, for further discussion of the strategic agreements entered into with Inox.
Competition We face competition in various aspects of our technology and product development. We believe that competitive performance in the marketplace depends upon several factors, including technical innovation, range of products and services, product quality and reliability, customer service and technical support. 9
Wind
We face competition from companies offering power electronic converters for use in applications for which we expect to sell our PowerModule products. These companies include ABB, Hopewind, Semikron, Shinergy, Vacon, and Xantrex (a subsidiary of Schneider Electric).
We face competition from companies offering various types of wind turbine electrical system components, which include ABB, Ingeteam, Mita-Teknik and Woodward. We also face indirect competition in the wind energy market from global manufacturers of wind turbines, such as Gamesa, General Electric, Suzlon, and Vestas.
We face competition for the supply of wind turbine engineering design services from design engineering firms such as GL Garrad Hassan, and from licensors of wind turbine systems such as Aerodyn.
Grid
We face competition from other companies offering FACTS systems similar to our D-VAR products. These include static var compensators (“SVCs”) from ABB, General Electric, AREVA, Mitsubishi Electric, and Siemens; adaptive VAR compensators, Dynamic voltage restorers (“DVRs”), and STATCOMs produced by ABB, Siemens, Mitsubishi, and S&C Electric; Dynamic voltage restorers (“DVRs”) produced by companies such as ABB and S&C Electric; and flywheelsIngeteam, and battery-based uninterruptable power supply (“UPS”) systems offered by various companies around the world. We face competition both from suppliers of traditional utility solutionsother companies offering medium-voltage metal-enclosed power capacitor banks and from companies who are developing HTS wires. harmonic filter banks for use on electric power systems similar to our NEPSITM products. These include Controllix PowerSide, Elgin Power Solutions, Scott Engineering and QVARx. We also face competition forfrom other companies offering DC power supply systems similar to our Amperium wire from a number of companies in the United States and abroad.NeeltranTM products. These include Superconductor TechnologiesSCR Controlled Rectifiers, IGBT-controlled choppers produced by ABB, Siemens, Friem Dynapower, and Superpower (a subsidiary of Furukawa) inNidec offering systems around the United States; Fujikura and Sumitomo in Japan; SuNAM in South Korea; BASF Corporation in Europe (“BASF”), Innova and Shanghai Creative Superconductor in China; and SuperOx in Russia. world. With our HTS-based REG product, we are offering a new approach that provides alternatives to utilities for power system design. Therefore, we believe that we compete with traditional approaches such as new full sizedfull-sized substations, overhead and underground transmission, and urban power transformers. We believe we are currently the only company that can offer HTS-based SPS products that have been fully qualified for use aboard U.S. Navy surface combatants. Therefore, the primary competition for our SPS products is currently coming from defense contractors that provide the copper-based systems that our lighter, more efficient HTS versions have been developed to replace. Companies such as Ultra EMS, L3 Excelis,Harris, and Raytheon and Textron have the bulk of the copper-based business today. However, over time, as Our power module conversion equipment and our electrical control systems are designed and integrated into our wind turbine designs in a way to achieve maximum performance of the HTS-based SPS proliferate toturbine. Typically, we are the fleet,exclusive provider of the power module conversion equipment and electrical control systems for our wind turbine designs. As a result, our power conversion equipment and electrical control systems see limited competition. Other companies that haveserve the capability to manufacture and/or package HTS wire into robust, turn-key systems will likely attempt to duplicate our products,wind turbine components industry include ABB and thus additionalEmerson. We also face indirect competition is expectedin the wind energy market from more traditional HTS competitorsglobal manufacturers of wind turbines, such as those listed above.Siemens Gamesa, General Electric, Vestas and Suzlon. We face competition for the supply of wind turbine engineering design services from design engineering firms such as Aerovide and W2E. Many of our competitors have substantially greater financial resources, research and development, manufacturing and marketing capabilities than we do. In addition, as our target markets develop, other large industrial companies may enter these fields and compete with us.
Patents, licenses and trade secrets Patent Background An important part of our business strategy is to develop a strong worldwide patent position in all of our technology areas. Our intellectual property (“IP”) portfolio includes both patents we own and patents we license from others. We devote substantial resources to building a strong patent position. As of March 31, 2016, we owned (either solely or jointly) 100 U.S. patents and 8 U.S. patent applications on file. We also hold licenses from third parties covering more than 75 issued U.S. patents and patent applications. Together with the international counterparts of each of theseour patents and patent applications, we own almost 400a robust portfolio of patents and patent applications worldwide and have rights through exclusive and non-exclusive licenses to more than 200 additional patents and patent applications.licenses. We believe that our current patent position, together with our ability to obtain licenses from other parties to the extent necessary, will provide us with sufficient proprietary rights to develop and sell our products. However, for the reasons described below, we cannot assure you that this will be the case. 10
Despite the strength of our patent position, a number of U.S. and foreign patents and patent applications of third parties relate to our current products, to products we are developing, or to technology we are now using in the development or production of our products. We may need to acquire licenses to those patents, contest the scope or validity of those patents, or design around patented processes or applicationsproducts as necessary. If companies holding patents or patent applications that we need to license are competitors, we believe the strength of our patent portfolio will significantly improve our ability to enter into license or cross-license arrangements with these companies. We have already successfully negotiated cross-licenses with several competitors. We may be required to obtain licenses to some patents and patent applications held by companies or other institutions, such as national laboratories or universities, not directly competing with us. Those organizations may not be interested in cross-licensing or, if willing to grant licenses, may charge unreasonable royalties. We have successfully obtained licenses related to HTS wire from a number of such organizations with royalties we consider reasonable. Based on historical experience, we expect that we will be able to obtain other necessary licenses on commercially reasonable terms. However, we cannot provide any assurance that we will be able to obtain all necessary licenses from competitors on commercially reasonable terms, or at all. Failure to obtain all necessary patents, licenses and other IP rights upon reasonable terms could significantly reduce the scope of our business and have a material adverse effect on our results of operations. We do not now know the likelihood of successfully contesting the scope or validity of patents held by others. In any event, we could incur substantial costs in challenging the patents of other companies. Moreover, third parties could challenge some of our patents or patent applications, and we could incur substantial costs in defending the scope and validity of our own patents or patent applications whether or not a challenge is ultimately successful. There are multiple foreign counter-part patents that continue to be exclusively licensed to AMSC that expire in fiscal year 2016.
Wind and Grid Patents
We have received patents and filed a significant number ofnumerous additional patent applications on power quality and reliability systems, including our D-VAR products. Our products are covered by 60 patents and patents pending worldwide on both our systems and power converter products. The patents and applications focus on inventions that significantly improve product performance and reduce product costs, thereby providing a competitive advantage. One invention of note allows for a reduction in the number of power inverters required in the system by optimally running the inverters in overload mode, thereby significantly reducing overall system costs. Another important invention uses inverters to offset transients due to capacitor bank switching, which provides improved system performance. Under our Windtec SolutionsTM brand, we design a variety of wind turbine systems and license these designs, including expertise and patent rights, to third parties for an upfront fee, plus in some cases, future royalties. Our wind turbine designs are covered by more than 30 patents and patents pending worldwide on wind turbine technology. We have patent coverage on the unique design features of our blade pitch control system, which ensures optimal aerodynamic flow conditions on the turbine blades and improves system efficiency and performance. The pitch system includes a patented SafetyLOCK™ feature that causes the blades to rotate to a feathered position to prevent the rotor blades from spinning during a fault.
We recognize the importance of IP protection in China and believe that China is steadily moving toward recognizing and acting in accordance with international norms for IP. As such, we have incorporated China in our patent strategy for all of our various products. Nevertheless, we recognize that the risk of IP piracy is still higher in China than in most other industrialized countries, and so we are careful to limit the technology we provide through our product sales and other expansion plans in China. While we take the steps necessary to ensure the safety of our IP, we cannot provide any assurance that these measures will be fully successful. For example, see Part I, Item 3, “Legal Proceedings,” for more information regarding legal proceedings that we have undertaken against Sinovel Wind Group Co., Ltd (“Sinovel”) alleging the illegal use of our intellectual property.
HTS Patents Since the discovery of high temperature superconductors in 1986, rapid technical advances have characterized the HTS industry, which in turn have resulted in a large number of patents, including overlapping patents, relating to superconductivity. As a result, the patent situation in the field of HTS technology and products is unusually complex. We have obtained licenses to patents and patent applications covering some HTS materials. We currently have acquired exclusivenon-exclusive rights (through 2017) to a fundamental U.S. patent (U.S. 8,060,169 B1) covering 2G and similar HTS wire and applications.applications and may elect in the future to allow our rights under this license to lapse. However, we may have to obtain additional licenses to HTS materials and, upon expiration of U.S. 8,060,169, to the materials covered by such patent.materials. 11
We are focusing on the production of our Amperium wire, and we intend to continue to maintain a leadership position in 2G HTS wire through a combination of patents, licenses and proprietary expertise. In addition to our owned patents and patent applications in 2G HTS wire, we have obtained licenses from (i) MIT for the MOD process we use to deposit the YBCO layer, and (ii) Alcatel-Lucent on the YBCO material, and (iii) the University of Tennessee/Battelle for the RABiTS® process we use for the substrate and buffer layers for this technology. During fiscal 2015, we entered into a Joint Development Agreement (“JDA”) and licensed certain of our HTS manufacturing process technology to BASF. Under the JDA, we agreed with BASF to develop a new solutions-based deposition technology for the interface layers of our Amperium wire. Should this development effort be successful, any newly developed intellectual property as a result of the JDA will be owned by BASF, but we will have the right to incorporate this new technology into our manufacturing process on a royalty-free basis. Alternatively, we could purchase HTS wire directly from BASF should they decide to manufacture and sell HTS wire. If alternative processes become more promising in the future, we also expect to seek to develop a proprietary position in these alternative processes.material. We have a significant number ofextensive patents and patents pending covering applications of HTS wire, such as HTS fault current limiting technology including our fault current limiting cable, HTS rotating machines and ship protection systems. Since the superconductor rotating machine and the fault current limiting cable applications are relatively new, we are buildingbelieve that we have a particularly strong patent position in these areas. At present, we believe we have the world’s broadest and most fundamental patent position in superconductor rotating machines technology. We have also filed a series of patents on our concept for our proprietary fault current limiting technology. However, there can be no assurance that that these patents will be sufficient to assure our freedom of action in these fields without further licensing from others. See Part I, Item 1A, “Risk Factors,” for more information regarding the status of the commercialization of our Amperium wire products. Wind Patents Under our Windtec™ Solutions brand, we design a variety of wind turbine systems and license these designs, including expertise and patent rights, to third parties for an upfront fee, plus in some cases, future royalties. Our wind turbine designs are covered by patents and patents pending worldwide on wind turbine technology. We have patent coverage on the unique design features of our blade pitch control system, which ensures optimal aerodynamic flow conditions on the turbine blades and improves system efficiency and performance. The pitch system includes a patented SafetyLOCK™ feature that causes the blades to rotate to a feathered position to prevent the rotor blades from spinning during a fault. Trade Secrets Some of the important technology used in our operations and products is not covered by any patent or patent application owned by or licensed to us. However, we take steps to maintain the confidentiality of this technology by requiring all employees and all consultants to sign confidentiality agreements and by limiting access to confidential information. We cannot provide any assurance that these measures will prevent the unauthorized disclosure or use of that information. For example, see Part I, Item 3, “Legal Proceedings,” for more information regarding legal proceedings that we have filed against Sinovel alleging the illegal use of our intellectual property. In addition, we cannot provide any assurance that others, including our competitors, will not independently develop the same or comparable technology that is one of our trade secrets. Employees
Human Capital We aim to provide a safe and positive work environment for our employees that emphasizes respect for individuals and high standards of integrity. The health and safety of our employees is of utmost importance to us. Recognizing and respecting our global presence, we strive to maintain a diverse and inclusive workforce everywhere we operate. As of March 31, 2016,2023, we employed 369328 persons. None of our employees areis represented by a labor union. Retaining We believe our employees are the foundation of our success and that our future growth depends, in part, on our ability to continue to attract and retain the best and brightest talent, including key management professionals, scientists, engineers, researchers, manufacturing personnel, and marketing and sales professionals. In order for us to attract the best talent, we provide a collaborative, inclusive and innovative work environment, competitive compensation, and opportunities for our employees is important for achievingto grow. We are focused on continuing to build an inclusive culture that inspires leadership, encourages innovative thinking, and supports the development and advancement of all. Our human capital management objectives include attracting, incentivizing, and integrating our goals,existing and wefuture employees. We strive to attract and retain talented employees by offering competitive compensation and benefits that support their health and financial well-being. We use a combination of fixed and variable pay including base salary, bonuses, performance awards and stock-based compensation. The principal purposes of our equity incentive plans are committed to developing a working environmentattract, retain and motivate employees through the granting of stock-based compensation awards. We offer employees benefits that motivatesvary by country and rewards our employees.are designed to address local laws and cultures and to be competitive in the marketplace. Available information We file reports, proxy statements and other documents with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file at the SEC Headquarters at Office of Investor Education and Assistance, 100 F Street, NE, Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on the public reference room. Our SEC filings are also available to you on the SEC’s Internet site at www.sec.gov.
Our internet address is www.amsc.com. We are not including the information contained in our website as part of, or incorporating it by reference into, this document. We make available, free of charge, through our web sitewebsite our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the SEC. We intend to disclose on our website any amendments to, or waivers of, our Code of Business Conduct and Ethics that are required to be disclosed pursuant to the SEC or Nasdaq rules. Executive officersthe rules of the registrantNasdaq Stock Market, LLC.
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Information about our Executive Officers The table and biographical summaries set forth below contain information with respect to our executive officers as of the date of this filing: Name | | Age | | Position | Daniel P. McGahn | | | 4451
| | President, Chief Executive Officer and DirectorChairman | David A. HenryJohn W. Kosiba, Jr.
| | | 5450
| | ExecutiveSenior Vice President, Chief Financial Officer and Treasurer
| James F. Maguire
| | | 60
| | Executive Vice President, Operations
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Daniel P. McGahnjoined us in December 2006 and has been chief executive officer and a member of our board of directors since June 2011.2011 and chairman of the board since July 2018. He previously served as president and chief operating officer from December 2009 to June 2011, as senior vice president and general manager of our AMSC Superconductors business unit from April 2008 until December 2009, as vice president of our AMSC Superconductors business unit from March 2007 to April 2008 and as vice president of strategic planning and development from December 2006 to March 2007. From 2003 to 2006, Mr. McGahn served as executive vice president and chief marketing officer of Konarka Technologies. We believe Mr. McGahn’s qualifications to sit on our board of directors include his extensive experience with our company, including serving as our president since 2009, experience in the power electronics industry and strategic planning expertise gained while working in senior management as a consultant for other public and private companies. David A. Henry joined us in July 2007 and
John W. Kosiba, Jr. has been executive vice president, chief financial officer, and treasurer since May 2014, and previously served as senior vice president, chief financial officer and treasurer from July 2007 to May 2014.since April 4, 2017. Mr. Kosiba joined us as managing director, finance operations, in June 2010. He previouslythen served as chief financial officer of AMIS Holdings, Inc., the parent company of AMI Semiconductor, from April 2004 to July 2007. For the previous seven years, Mr. Henry worked at Fairchild Semiconductor International as vice president, finance worldwide operations, from November 2002 to April 2004 and as corporate controller from March 1997 to November 2002. He was appointed vice president, corporate controller at Fairchild Semiconductor International in August 1999. James F. Maguire joined us in 1997 and has been executive vice president, operations since May 2013 and is responsible for overseeing AMSC’s Wind and Grid business units as well as AMSC’s global supply chain. He previously served as executive vice president, Gridtec Solutions from AugustSeptember 2011 to May 2013,2013. Prior to his appointment as senior vice president projects and engineering, from April 2010 to August 2011 andchief financial officer, Mr. Kosiba served most recently as senior vice president, superconductor projects, from March 2007 to April 2010. Prior to joining AMSC,Gridtec solutions and finance operations, where he was responsible for (i) overseeing finance and accounting operations, budgeting, strategic planning and financial planning and analysis for the company, and (ii) managing the day-to-day business operations of our Gridtec solutions’ business segment. From January 2008 until June 2010, Mr. MaguireKosiba served as division director and controller of Amphenol Aerospace, a division of Amphenol Corporation and a manufacturer of interconnect products for the military, commercial aerospace and industrial markets. In this role, Mr. Kosiba was founderresponsible for overseeing finance, accounting, budgeting, audit and presidentall aspects of Applied Engineering Technologies, Ltd., a cryogenics product-based company.financial planning and analysis for the division.
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Risks Related to Our Financial Performance We have a history of operating losses, which may continue in the future. Our operating results may fluctuate significantly from quarter to quarter and may fall below expectations in any particular fiscal quarter. We were not profitable in fiscal 2022 and have recorded net losses in each offor the last three fiscal years, including a net loss of $23.1 million for the fiscal year ended March 31, 2016, and it is unlikely that we willyears. We may not be profitable in fiscal 2016. We cannot be certain that we will regain profitability in the future.2023 or future years. There is currently substantial uncertainty in our business, which makes it difficult to evaluate our business and future prospects. In addition, our operating results historically have been difficult to predict and have at times fluctuated from quarter to quarter due to a variety of factors, many of which are outside of our control. As a result of all of these factors, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. In addition, we have in the past provided, and may continue to, provide public guidance on our expected operating and financial results for future periods. Such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this Annual Report on Form 10-K and in our other public filings and statements. Our actual results may not always be in line with or exceed the guidance we have provided. If our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company in any period or we do not meet our guidance, the trading price of our common stock would likely decline. Our operating expenses do not always vary directly with revenue and may be difficult to adjust in the short term. As a result, if revenue for a particular quarter is below our expectations, we may not be able to proportionately reduce operating expenses for that quarter, and therefore such a revenue shortfall would have a disproportionate effect on our operating results for that quarter. We have a history of negative operating cash flows, and we may require additional financing in the future, which may not be available to us. As of
At March 31, 2016,2023, we had approximately $40.7$25.7 million of cash, cash equivalents and restricted cash, and during the fiscal year ended March 31, 2016,2023, we used $4.6 million$22.5 million in cash for our operating activities. We have historically experienced substantial net losses, including a net loss of $23.1 million for the fiscal year ended March 31, 2016. From April 1, 2011 through March 31, 2016, our various restructuring activities resulted in a substantial reduction of our global workforce.losses. We plan to continue to closely monitor our expenses and, if required, will further reduce operating costs and capital spending to enhance liquidity. Our liquidity is highly dependent on our ability to profitably grow our revenues, control our operating costs, fund monthly obligations under our term loans (collectively, the “Term Loans”) with Hercules Technology Growth Capital, Inc. (“Hercules”), and secure additional financing, if required. We may require additional capital to conduct our business and adequately respond to future business challenges or opportunities, including, but not limited to, the need to develop new products or enhance existing products, maintainingmaintain or expandingexpand research and development projects, collateralize performance bonds or letters of credit, acquire new businesses or assets, and the need to build inventory or to invest other cash to support business growth. In order to raise additional capital, we may offer shares of our common stock or other securities convertible into or exchangeable for our common stock. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of each of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. In the event that additional liquidity is required, there can be no assurance that such financing would be available or, if available, that such financing could be obtained upon terms acceptable to us.us, which would have a material adverse effect on our business, financial condition and prospects. In addition, the Company maintains the majority of its cash and cash equivalents in accounts with major U.S. and multi-national financial institutions, and our deposits at certain of these institutions exceed insured limits. Market conditions can impact the viability of these institutions. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all. We may be required to issue performance bonds or provide letters of credit, which restricts our ability to access any cash used as collateral for the bonds or letters of credit. While we have been required to provide performance bonds in the form of surety bonds or other forms of security and letters of credit in the past, the size of the bonds and letters of credit was not material. In recent years, we have entered into contracts that require us to post bonds and to deliver letters of credit of significant magnitude, and somesuch as our prior $5.0 million irrevocable letter of our suppliers have asked uscredit (secured by a $5.0 million deposit in an escrow account) as part of the agreement with Commonwealth Edison Company (“ComEd”) to provide letters of credit. Ininstall the Resilient Electric Grid (“REG”) system in Chicago. Similarly, in many other instances, we have been required to deposit cash in escrow accounts as collateral for these instruments, which is unavailable to us for general use for significant periods of time. Should we be unable to obtain performance bonds or letters of credit in the future, significant future potential revenue could become unavailable to us. Further, should our working capital situation deteriorate, we would not be able to access the restricted cash to meet working capital requirements. 14
Changes in exchange rates could adversely affect our results fromof operations. Currency exchange rate fluctuations could have an adverse effect on our revenues and results of operations, and we could experience losses with respect to hedging activities. In fiscal 2015, 85%2022, 45% of our revenues were recognized from sales outside of the United States. In addition, approximately 64%10% of our revenues in fiscal 20152022 were derived under sales contracts where prices were denominated in the Euro. Unfavorable currency fluctuations could require us to increase prices to foreign customers, which could result in a lesser number of orders, and therefore lower revenues, from such customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could be adversely affected. In addition, most sales made by our foreign subsidiaries are denominated in the currency of the country in which these products are sold, and the currency they receive in payment for such sales could be less valuable at the time of receipt as a result of exchange rate fluctuations. From time to time, we enter into derivative instruments, including forward foreign exchange contracts and currency options to reduce currency exposure arising from intercompany sales of inventory and exposures arising from the sale of products denominated in one currency while costs are denominated in another. However, we cannot be certain that our efforts will be adequate to protect us against significant currency fluctuations or that such efforts will not expose us to additional exchange rate risks. If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired and may lead investors and other users to lose confidence in our financial data.data. Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements. We note that a system of procedures If material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and controls, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all systems of procedures and controls, no evaluation can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple errors or mistakes. Additionally, procedures and controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override. The design of any system of procedures and controls also is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our systems of procedures and controls, as we further develop and enhance them, may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective system of procedures and controls, misstatements due to errors or fraud may occur and not be detected. Such misstatements could be material and require a restatement ofrequired to restate our financial statements.results.
If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information, and we may be unable to meet our reporting obligations or comply with the requirements of the SEC or the Sarbanes-Oxley Act of 2002, which could result in the imposition of sanctions, including the inability of registered broker dealers to make a market in our common stock, or an investigation by regulatory authorities. Any such action or other negative results caused by our inability to meet our reporting requirements or to comply with legal and regulatory requirements or by our disclosure of an accounting, reporting or control issue could adversely affect the trading price of our securities and our business. Significant deficiencies or material weaknesses in our internal control over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain. Our Term Loans include certain covenants and other events of default. Should we not comply with these covenants or incur an event of default, Hercules may accelerate our payment obligations under our Term Loans, which could have an adverse effect on our liquidity.
Our Term Loans include certain financial and administrative covenants, including a requirement to maintain a minimum unrestricted U.S. cash balance equal to the lower of $2.0 million or the aggregate outstanding principal balance of the Term Loans. As of March 31, 2016, the minimum threshold was $2.0 million.
If we fail to stay in compliance with our covenants or suffer some other event of default under the Term Loans, Hercules may accelerate our payment obligations, and we may be required to repay the outstanding principal in cash. Should this occur, our liquidity would be adversely impacted.
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Risks Related to Our Operations A significant portion of our revenues are derived from a single customer.
Our largest customer is Inox in India. Inox accounted for 62% of our total revenues during the fiscal year ended March 31, 2016 and 56% of our revenues during the fiscal year ended March 31, 2015. Revenues from Inox are supported by supply contracts to purchase, and a license to make, use and supply, wind turbine electrical control systems. If Inox cancelled such contracts, or discontinued future purchases from us under the supply contracts, we would likely be unable to replace the related revenues. This would have a material adverse impact on our operating results and financial position.
Our financial condition may have an adverse effect on our customer and supplier relationships.
Our relationships with our customers and suppliers are predicated on the belief that we will continue to operate. Our customers, particularly in the utility industry, are generally risk averse and may not enter into sales contracts with us if there is uncertainty regarding our ability to continue operating through the term of our warranty obligation. This has had and may continue to have an adverse effect on our ability to grow our revenues. In addition, current and future suppliers may be less likely to grant us credit, resulting in a negative impact on our working capital and cash flows.
Our success in addressing the wind energy market is dependent on the manufacturers that license our designs.
Because an important element of our strategy for addressing the wind energy market involves the license of our wind turbine designs to manufacturers of those systems, the financial benefits to us from our products for the wind energy market are dependent on the success of these manufacturers in selling wind turbines based on our designs. We may not be able to enter into marketing or distribution arrangements with third parties on financially acceptable terms, or at all, and third parties may not be successful in selling our products or applications incorporating our products.
Our success is dependent upon attracting and retaining qualified personnel and our inability to do so could significantly damage our business and prospects.
We have attracted a highly skilled management team and specialized workforce, including scientists, engineers, researchers, manufacturing, marketing and sales professionals. If we were to lose the services of any of our executive officers or key employees, our business could be materially and adversely impacted.
Hiring and retaining good personnel for our business is challenging, and highly qualified technical personnel are likely to remain a limited resource for the foreseeable future despite current economic conditions and high unemployment levels. We may not be able to hire the necessary personnel to implement our business strategy. In addition, we may need to provide higher compensation or more training to our personnel than we currently anticipate. Moreover, any officer or employee can terminate his or her relationship with us at any time.
Over the past several years, we have substantially reduced our global workforce in order to lower expenses, reorganize our global operations, and streamline various functions of the business, to match the demand for our products. Employee retention may be a particularly challenging issue following reductions in workforce and organizational changes since we also must continue to motivate employees and keep them focused on our strategies and goals. If we lose any key personnel, we may not be able to find qualified individuals to replace them, and our business, results of operations and financial condition could be materially adversely affected.
We may not realize all of the sales expected from our backlog of orders and contracts. We cannot assure you that we will realize the revenue we expect to generate from our backlog in the periods we expect to realize such revenue, or at all. In addition, the backlog of orders, if realized, may not result in profitable revenue. Backlog represents the value of contracts and purchase orders received for which delivery is expected in the next twelve months. Our customers have the right under some circumstances and with some penalties or consequences to terminate, reduce or defer firm orders that we have in backlog. In addition, our government contracts are subject to the risks described below. If our customers terminate, reduce or defer firm orders, we may be protected from certain costs and losses, but our sales will nevertheless be adversely affected, and we may not generate the revenue we expect. Although we strive to maintain ongoing relationships with our customers, there is an ongoing risk that they may cancel orders or reschedule orders due to fluctuations in their business needs or purchasing budgets. 16
This has had, and may continue to have, an adverse effect on our ability to grow our revenues. In addition, current and future suppliers may be less likely to grant us credit, resulting in a negative impact on our working capital and cash flows. Our contracts with the U.S. government are subject to audit, modification or termination by the U.S. government and include certain other provisions in favor of the government. The continued funding of such contracts remains subject to annual congressional appropriation, which, if not approved, could reduce our revenue and lower or eliminate our profit. As a company that contracts with the U.S. government, we are subject to financial audits and other reviews by the U.S. government of our costs and performance, accounting, and general business practices relating to these contracts. Based on the results of these audits, the U.S. government may adjust our contract-related costs and fees. We cannot be certain that adjustments arising from government audits and reviews would not have a material adverse effect on our results of operations. Our businessU.S. government contracts customarily contain other provisions that give the government substantial rights and operationsremedies, many of which are not typically found in commercial contracts, including provisions that allow the government to: | • | obtain certain rights to the intellectual property that we develop under the contract; |
| • | decline to award future contracts if actual or apparent organizational conflicts of interest are discovered, or to impose organizational conflict mitigation measures as a condition of eligibility for an award; |
| • | suspend or debar us from doing business with the government or a specific government agency; and |
| • | pursue criminal or civil remedies under the False Claims Act, False Statements Act and similar remedy provisions unique to government contracting. |
All of our U.S. government contracts, as well as certain of our contracts with third parties that are dependent on U.S. government contracts, can be terminated by the U.S. government for its convenience. Termination-for-convenience provisions typically provide only for our recovery of costs incurred or committed, and for settlement of expenses and profit on work completed prior to termination. In addition to the right of the U.S. government to terminate its contracts with us, U.S. government contracts are conditioned upon the continuing approval by the U.S. Congress of the necessary spending to honor such contracts. Congress often appropriates funds for a program on a fiscal year basis even though contract performance may take more than one year. Consequently, at the beginning of many major governmental programs, contracts often may not be fully funded, and additional monies are then committed to the contract only if, as and when appropriations are made by the U.S. Congress for future fiscal years. In addition, government shutdowns could prevent or delay such contracts from being funded. Failure by the U.S. Congress to further suspend or increase the debt ceiling could delay or result in the loss of contracts for the procurement of our products and services, and we may be asked or required to continue to perform for some period of time on certain of our U.S. government contracts, even if the U.S. government is unable to make timely payments. We cannot be certain that our U.S. government contracts, or our contracts with third parties that relate to projects for the U.S. government will not be terminated or suspended in the future. The U.S. government’s termination of, or failure to fully fund, one or more of our contracts would be adversely impactedhave a negative impact on our operating results and financial condition. Further, in the event of a failure or security breachthat any of our information technology infrastructure. We rely upon the capacity, reliability, and security of our information technology hardware and software infrastructure andgovernment contracts are terminated for cause, it could affect our ability to expand and update this infrastructureobtain future government contracts which could, in response to our changing needs. We are constantly updating our information technology infrastructure. Any failure to manage, expand, and update our information technology infrastructure or any failure in the operation of this infrastructure couldturn, seriously harm our business.
Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions. Our business is also subject to break-ins, sabotage, and intentional acts of vandalism by third parties as well as employees. Our business activities in China may increase our risks to such breaches. For example, a former employee of our Austrian subsidiary pled guilty in September 2011 to charges of economic espionage and fraudulent manipulation of data. The evidence presented during the trial showed that this former employee was contracted by Sinovel through an intermediary while employed by us and improperly obtained and transferred to Sinovel portions of our wind turbine control software source code developed for Sinovel’s 1.5MW wind turbines. Moreover, the evidence shows that this former employee illegally used source codeability to develop for Sinovel, a software modification to circumvent the encryptionour technologies and remove technical protection measures on the PM3000 power converters in 1.5MW wind turbines in the field. Any system failure, accident, or security breach could result in disruptions to our operations. To the extent that any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of confidential information, it could harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.products.
We may have manufacturing quality issues at our manufacturing facility in Romania, which would negatively affect our revenues and financial position.
We have leased a manufacturing facility in Timisoara, Romania, where we manufacture wind turbine electrical control systems for all other markets apart from the Chinese market. If we experience delays or increased costs, cannot produce a high quality product, are unable to hire and to retain a sufficient number of qualified personnel, or other unforeseen events occur,
The COVID-19 pandemic has adversely impacted our business, financial condition and results of operations and other future pandemics or health crises may have similar impacts. The COVID-19 pandemic continues to evolve. At times, our suppliers have experienced some production disruption due to the COVID-19 pandemic and certain of our customers have been adversely impacted as well, which have collectively adversely impacted our business, financial condition and results of operations. As a result, we have been experiencing delays or difficulty sourcing products and some inflationary pressure in our supply chains, which have started to and could continue to negatively affect our business and financial results. The extent to which the COVID-19 pandemic continues to impact our business, liquidity, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, the location, duration and magnitude of future waves of infection, new mutations of the virus, timing, effectiveness and adoption of vaccines, travel restrictions and social distancing in the United States and other countries, the duration and extent of future business closures or business disruptions and the effectiveness of actions taken to contain and treat the disease. Other future pandemics or health crises may cause similar disruptions and adversely affected.impact our business, financial condition and results of operations. Changes in U.S. government defense spending could negatively impact our financial position, results of operations, liquidity and overall business. We have several contracts with the U.S. government, including defense-related programs with the U.S. Department of Defense. Changes in U.S. government defense spending for various reasons, including as a result of potential changes in policy positions or priorities that may result from the U.S. presidential and congressional elections, could negatively impact our results of operations, financial condition and liquidity. Our programs are subject to U.S. government policies, budget decisions and appropriation processes which are driven by numerous factors including: (1) geopolitical events; (2) macroeconomic conditions; and (3) the ability of the U.S. government to enact relevant legislation, such as appropriations bills. In recent years, U.S. government appropriations have been affected by larger U.S. government budgetary issues and related legislation. In prior years, the U.S. government has been unable to timely complete its budget process before the end of its fiscal year, resulting in governmental shut-downs or providing only enough funds for U.S. government agencies to continue operating at prior-year levels. Significant changes in U.S. government defense spending or changes in U.S. government priorities, policies and requirements could have a material adverse effect on our results of operations, financial condition and liquidity. We rely upon third-party suppliers for the components and subassemblies of many of our WindGrid and GridWind products, making us vulnerable to supply shortages and price fluctuations, which could harm our business. Many of our components and subassemblies are currently manufactured for us by a limited number of qualified suppliers. Any interruption in the supply of components or subassemblies, or our inability to obtain substitute components or subassemblies from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers, which would have an adverse effect on our business and operating results. We are producing certain Wind products in our manufacturing facilities in China and Romania.
In order to minimize costs and time to market, we have and will continue to identify local suppliers that meet our quality standards to produce certain of our subassemblies and components. These efforts may not be successful. In addition, any event whichthat negatively impacts our supply, including, among others, wars, terrorist activities, cyberattacks, natural disasters and outbreaks of infectious disease, including the COVID-19 pandemic, could delay or suspend shipments of products or the release of new products or could result in the delivery of inferior products. Our revenues from the affected products would decline or we could incur losses until such time as we are able to restore our production processes or put in place alternative contract manufacturers or suppliers. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies. Uncertainty surrounding our prospects and financial condition may have an adverse effect on our customer and supplier relationships. Our relationships with our customers and suppliers are predicated on the belief that we will continue to operate. Our customers, particularly in the utility industry, are generally risk averse and may not enter into sales contracts with us if there is uncertainty regarding our ability to support working capital needs of large-scale projects. We have not manufactured our Amperium wire in commercial quantities, and a failure to manufacture our Amperium wire in commercial quantities at acceptable cost and quality levels would substantially limit our future revenue and profit potential. As part of our effort to increase manufacturing efficiency, we moved from our former manufacturing facility located in Devens, Massachusetts to our smaller-scale leased facility located in Ayer, Massachusetts. However, we have not yet manufactured our Amperium wire in commercial quantities at our Ayer facility or any other facility. Failure to successfully produce commercial quantities of HTS wire with an acceptable yield and cost could adversely affect our ability to meet customer demand for our products and could increase the cost of production versus projections, both of which could adversely impact our operating and financial results. Our success is dependent upon attracting and retaining qualified personnel and our inability to do so could significantly damage our business and prospects. We have attracted a highly skilled management team and specialized workforce, including scientists, engineers, researchers, manufacturing, personnel, and marketing and sales professionals. Hiring and retaining good personnel for our business is challenging, and highly qualified technical personnel are likely to remain a limited resource for the foreseeable future. We may not be able to hire the necessary personnel to implement our business strategy. In addition, we may need to provide higher compensation or more training to our personnel than we currently anticipate. Moreover, any officer or employee can terminate his or her relationship with us at any time. Losing the services of any of our executive officers or key employees could materially and adversely impact our business. A significant portion of our Wind segment revenues are derived from a single customer. If this customer’s business is negatively affected, it could adversely impact our business. A significant portion of our Wind segment revenues are derived from Inox. Revenues from Inox are supported by a supply contract to purchase, and a license to make, use and supply, wind turbine ECS. Inox has been active in the new central and state government auction regime in India and has a cumulative order book of over 1.4 GW. However, we cannot predict if and how successful Inox will be in executing on these orders or in obtaining new orders under the new central and state auction regime. In addition, Inox’s ability to perform under the supply contract has been and may continue to be hampered by the prolonged impacts of the COVID-19 pandemic. Any failure by Inox to succeed under this regime, or any delay in Inox’s ability to deliver its wind turbines, could result in fewer ECS shipments to Inox. Inox has historically failed to post letters of credit and take delivery of forecasted ECS quantities. Our success in addressing the wind energy market is dependent on the manufacturers that license our designs. Because an important element of our strategy for addressing the wind energy market involves the license of our wind turbine designs to manufacturers of those systems, the financial benefits to us from our products for the wind energy market are dependent on the success of these manufacturers in selling wind turbines based on our designs. We may not be able to enter into marketing or distribution arrangements with third parties on financially acceptable terms, or at all, and third parties may not be successful in selling our products or applications incorporating our products. Our business and operations would be adversely impacted in the event of a failure or security breach of our or any critical third parties' information technology infrastructure and networks. We rely upon the capacity, reliability, and security of information technology hardware and software infrastructure and networks (collectively, "IT Systems"), and our ability to expand and update IT Systems in response to our changing needs. We manage certain IT Systems but also rely on IT Systems and various products and services provided by critical third-party vendors and others in the supply chain. We also collect and store sensitive and confidential information in the ordinary course of our business. Any failure to manage, expand, or update our IT Systems or any disruption to or failure in the operation of such IT Systems could harm our business. In addition, the costs associated with updating and securing our IT Systems are likely to increase as such security measures become more complex, which may harm our operating results and financial condition. Despite our implementation of security measures, all IT Systems are vulnerable to disruption, compromise and damage from computer viruses, bugs or vulnerabilities, natural disasters, human error, intentional conduct, cyberattacks, unauthorized access and other similar disruptions. Our business is also subject to break-ins, sabotage, and intentional acts of vandalism by third parties as well as employees. Our business activities in China may increase our risks to such breaches. We cannot guarantee the security or protection of any IT Systems. Threat actors, such as ransomware groups, are becoming increasingly sophisticated in using techniques that are designed to circumvent controls, evade detection and remove or obfuscate forensic evidence. As a result, we and our third-party providers may be unable to timely or effectively anticipate, detect, or recover from cyberattacks in the future. We also face increased cyber risk due to the number of our and others' employees who are (and may continue to be) working remotely. Any failure, accident, security breach, or cyberattack to our IT Systems or those of third parties upon which we rely could result in disruptions to our operations, loss, damage or compromise to our data, or inappropriate disclosure of confidential information. Any or all of the foregoing could harm our reputation, result in substantial remediation and compliance costs, lead to lost revenues and business opportunities, lead to regulatory investigations and litigation, and related fines or penalties, increase our insurance premiums and have other materially adverse effects on our business and results. Our insurance policies may not cover, or may be insufficient to cover, any or all costs, losses and liability associated with any cyberattacks, security incidents or other disruptions. Failure to comply with evolving data privacy and data protection laws and regulations or to otherwise protect personal data, may adversely impact our business and financial results. We are subject to many rapidly evolving privacy and data protection laws and regulations in the United States, Europe and around the world. This requires us to operate in a complex environment where there are significant constraints on how we can process personal data across our business. For example, European General Data Protection Regulation (the “GDPR”), which became effective in May 2018, has established stringent data protection requirements for companies doing business in or handling personal data of individuals in the European Union. The GDPR imposes obligations on data controllers and processors including the requirement to maintain a record of their data processing and to implement policies and procedures as part of their mandated privacy governance framework. Breaches of the GDPR could result in substantial fines, which in some cases could be up to four percent of our worldwide revenue. In addition, a breach of the GDPR or other data privacy or data protection laws or regulations could result in regulatory investigations, reputational damage, orders to cease/change our use of data, enforcement notices, as well potential civil claims including class action type litigation. There is a risk that we may be subject to fines and penalties, litigation and reputational harm if we fail to properly process or protect the data or privacy of third parties or comply with the GDPR, and other laws that have been enacted, such as the Massachusetts Data Privacy Law including The Safeguards Regulations, the California Consumer Privacy Act and other applicable data privacy and data protection regimes. Many of our revenue opportunities are dependent upon subcontractors and other business collaborators. Many of the revenue opportunities for our business involve projects, such as the installation of superconductor cables in power grids and electrical system hardware in wind turbines, in which we collaborate with other companies, including suppliers of cryogenic systems, manufacturers of electric power cables and manufacturers of wind turbines. As a result, most of our current and planned revenue-generating projects involve business collaborators on whose performance our revenue is dependent. If these business collaborators fail to deliver their products or perform their obligations on a timely basis or fail to generate sufficient demand for the systems they manufacture, our revenue from the project may be delayed or decreased, and we may not be successful in selling our products. 17
If we fail to implement our business strategy successfully, our financial performance could be harmed. Our future financial performance and success are dependent in large part upon our ability to implement our business strategy successfully. Our business strategy envisions several initiatives, including driving revenue growth and enhancing operating results by increasing customer adoption of our products by targeting high-growth segments with commercial products, pursuing overseas markets, anticipating customer needs in the development ofand system-level solutions, strengthening our technology leadership while lowering cost and pursuing targeted strategic alliances.products. We may not be able to implement our business strategy successfully or achieve the anticipated benefits of our business plan. If we are unable to do so, our long-term growth and profitability may be adversely affected. Even if we are able to implement some or all of the initiatives of our business plan successfully, our operating results may not improve to the extent we anticipate, or at all. In addition, to the extent we have misjudged the nature and extent of industry trends or our competition, we may have difficulty in achieving our strategic objectives. Any failure to implement our business strategy successfully may adversely affect our business, financial condition and results of operations. In addition, we may decide to alter or discontinue certain aspects of our business strategy at any time. Our ability to implement our business strategy could also be affected by a number of factors beyond our control, such as increased competition, legal developments, government regulation, general economic conditions, including as a result of the COVID-19 pandemic and the ongoing war between Russia and Ukraine, or increased operating costs or expenses. Problems with product quality or product performance may cause us to incur warranty expenses and may damage our market reputation and prevent us from achieving increased sales and market share. Consistent with customary practice in our industry, we warrantguarantee our products and/or services to be free from defects in material and workmanship under normal use and service. We generally provide a one- to three-year warranty on our products, commencing upon installation. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience. The possibility of future product failures or issues related to services we provided could cause us to incur substantial expenses to repair or replace defective products or re-perform such services.services potentially in excess of our reserves. Furthermore, widespread product failures may damage our market reputation and reduce our market share and cause sales to decline. Our contracts with the U.S. government are subject to audit, modification or termination by the U.S. government and include certain other provisions in favor of the government. The continued funding of such contracts remains subject to annual congressional appropriation, which, if not approved, could reduce our revenue and lower or eliminate our profit.
As a company that contracts with the U.S. government, we are subject to financial audits and other reviews by the U.S. government of our costs and performance, accounting, and general business practices relating to these contracts. Based on the results of these audits, the U.S. government may adjust our contract-related costs and fees. We cannot be certain that adjustments arising from government audits and reviews would not have a material adverse effect on our results of operations.
Our U.S. government contracts customarily contain other provisions that give the government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the government to:
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| obtain certain rights to the intellectual property that we develop under the contract;
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| decline to award future contracts if actual or apparent organizational conflicts of interest are discovered, or to impose organizational conflict mitigation measures as a condition of eligibility for an award;
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| suspend or debar us from doing business with the government or a specific government agency; and
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| pursue criminal or civil remedies under the False Claims Act, False Statements Act and similar remedy provisions unique to government contracting.
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All of our U.S. government contracts can be terminated by the U.S. government for its convenience, including our contract with the Department of Homeland Security (“DHS”) to deploy our REG system in Commonwealth Edison’s (“ComEd”) electric grid in Chicago, Illinois (“Project REG”). Moving to the manufacturing and construction stage of Project REG is dependent upon both DHS and ComEd agreeing to proceed following the successful completion of a detailed deployment plan. We can provide no assurance that DHS and ComEd will agree to proceed with the project. Termination-for-convenience provisions typically provide only for our recovery of costs incurred or committed, and for settlement of expenses and profit on work completed prior to termination. In addition to the right of the U.S. government to terminate its contracts with us, U.S. government contracts are conditioned upon the continuing approval by the U.S. Congress of the necessary spending to honor such contracts. Congress often appropriates funds for a program on a fiscal-year basis even though contract performance may take more than one year. Consequently, at the beginning of many major governmental programs, contracts often may not be fully funded, and additional monies are then committed to the contract only if, as and when appropriations are made by the U.S. Congress for future fiscal years.
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We cannot be certain that our U.S. government contracts, including our contract for Project REG, will not be terminated or suspended in the future. The U.S. government’s termination of, or failure to fully fund, one or more of our contracts would have a negative impact on our operating results and financial condition. Further, in the event that any of our government contracts are terminated for cause, it could affect our ability to obtain future government contracts which could, in turn, seriously harm our ability to develop our technologies and products.
Many of our customers outside of the United States particularly in China, aremay be either directly or indirectly related to governmental entities, and we could be adversely affected by violations of the United States Foreign Corrupt Practices Act and similar worldwide anti-bribery laws outside the United States. The U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Many of our customers outside of the United States are, either directly or indirectly, related to governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances strict compliance with anti-bribery laws may conflict with local customs and practices. Our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or agents. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our business, results of operations and financial condition. We have had limited success marketing and selling our superconductor products and system-level solutions, and our failure to more broadly market and sell our products and solutions could lower our revenue and cash flow. To date, we have had limited success marketing and selling our superconductor products and system-level solutions, and there are few people who have significant experience marketing or selling superconductor products and system-level solutions. Once our products and solutions are ready for widespread commercial use, we will have to develop a marketing and sales organization that will effectively demonstrate the advantages of our products over both more traditional products, and competing superconductor products orand other technologies. We may not be successful in our efforts to market this technology and we may not be able to establish an effective sales and distribution organization. We may decide to enter into arrangements with third parties for the marketing or distribution of our products, including arrangements in which our products, such as Amperium wire, are included as a component of a larger product, such as a power cable system. By entering into marketing and sales alliances, the financial benefits to us of commercializing our products will be dependent on the efforts of others. We may acquire additional complementary businesses or technologies, which may require us to incur substantial costs for which we may never realize the anticipated benefits. Our priorrecent acquisitions have required substantial integration and management efforts. As a result of any additional acquisition we pursue, management’s attention and resources may be further diverted from our other businesses. An acquisition may also involve the payment of a significant purchase price, which could reduce our cash position or dilute our stockholders and require significant transaction-related expenses. Achieving the benefits of any acquisition involves additional risks, including: | ·•
| difficulty assimilating acquired operations, technologies and personnel; | difficulty assimilating acquired operations, technologies and personnel;
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| inability to retain management and other key personnel of the acquired business; | inability to retain management and other key personnel of the acquired business;
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| changes in management or other key personnel that may harm relationships with the acquired business’s customers and employees; | changes in management or other key personnel that may harm relationships with the acquired business’s customers and employees;
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| unforeseen liabilities of the acquired business; | unforeseen liabilities of the acquired business;
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| diversion of management’s and employees’ attention from other business matters as a result of the integration process; | diversion of management’s and employees’ attention from other business matters as a result of the integration process;
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| mistaken assumptions about volumes, revenuerevenues and costs associated with the acquired business, including synergies; |
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| limitations on rights to indemnity from the seller; | limitations on rights to indemnity from the seller;
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| mistaken assumptions about the overall costs of equity or debt used to finance the acquisition; and | mistaken assumptions about the overall costs of equity or debt used to finance the acquisition; and
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| unforeseen difficulties operating in new product areas, with new customers, or in new product areas, with new customers, or in new geographic areas. |
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We cannot provide any assurance that we will realize any of the anticipated benefits of any acquisition, including our NEPSI Acquisition completed in October 2020, and Neeltran, Inc. acquisition completed in May 2021, and if we fail to realize these anticipated benefits, our operating performance could suffer. We or third parties on whom we depend may be adversely affected by natural disasters, including events resulting from climate change, and our business continuity and disaster recovery plans may not adequately protect us or our value chain from such events. Natural disasters (including, but not limited to tornadoes, earthquakes, fires, storms, floods, droughts and extreme temperatures) and chronic changes in the physical environment could severely disrupt our operations and have a material adverse effect on our business, results of operations, financial condition and prospects. Climate change may increase the frequency or intensity of such events. If a natural disaster, power outage, or other event, including human acts such as terrorism, occurred that prevented us from fully utilizing our value chain or facilities, that damaged critical infrastructure, such as the manufacturing facilities on which we rely, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place may prove inadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a material adverse effect on our business. In addition, changes in climate change-related laws or regulations, including laws relating to greenhouse gas emissions, could lead to new or additional compliance requirements and expenditures, and subject us to additional operational costs and restrictions, including increased energy and raw material costs and other compliance requirements which could negatively impact our reputation, business, capital expenditures, results of operations and financial position. Risks Related to Our Markets Our success depends upon
Adverse changes in domestic and global economic conditions could adversely affect our operating results. We have become increasingly subject to the commercial use of high temperature superconductor (“HTS”) products, which is currently limited,risks arising from adverse changes in domestic and a widespread commercial market for our products may not develop. To date, there has been no widespread commercial use of HTS products. Even if the technological hurdles currently limiting commercial uses of HTS products are overcome, it is uncertain whether a robust commercial market for those new and unproven products will ever develop. To date, many projects to install superconductor cables and products in power grids have been funded or subsidized by the governmental authorities. If this funding is curtailed, grid operators may not continue to use superconductor cables and products in their projects.
In addition, we believe in-grid demonstrations of superconductor power cables are necessary to convince utilities and power grid operators of the benefits of this technology. Even if a project is funded, completion of projects can be delayedglobal economic conditions, including as a result of other factors.
Itpolitical instability in the United States. In recent years, financial markets have been volatile and the state of both the domestic and global economies has been uncertain. Political instability in the United States, such as the failure to increase the federal debt ceiling, could lead to further financial market volatility and harm the economy. Adverse credit conditions in the future could have a negative impact on our ability to execute on future strategic activities. In addition, if credit is possible thatdifficult to obtain in the market demands we currently anticipatefuture, some customers may delay or reduce purchases. Similarly, inflationary pressures have increased and may increase our costs or force us to increase prices for our HTSproducts. In particular, in fiscal 2021 and 2022, we experienced substantial inflationary pressure in our supply chain. These events have resulted or could in the future result in higher product costs, reductions in sales of our products, longer sales cycles, slower adoption of new technologies, increased accounts receivable and inventory write-offs and increased price competition. We also purchase large amounts of commodity-based raw materials. Prevailing prices for such commodities are subject to fluctuations due to changes in supply and demand and a variety of additional factors beyond our control, such as global political and economic conditions. Any of these events would likely harm our business, results of operations and financial condition.
Our international operations are subject to risks that we do not face in the United States, which could have an adverse effect on our operating results. In recent years, a substantial amount of our consolidated revenues were recognized from customers outside of the United States. For example, 45% of our revenues in fiscal 2022 and 38% of our revenues in fiscal 2021 were recognized from sales outside the United States. We also manufacture certain of our products and purchase a portion of our raw materials and components from suppliers in other foreign countries. The ongoing war between Ukraine and Russia has caused increased raw material costs and material shortages and, as a result, adversely impacted certain of our suppliers. Our international operations are subject to a variety of risks that we do not face in the United States, including: | • | potentially longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable; |
| • | difficulties in staffing and managing our foreign offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations; |
| • | additional withholding taxes or other taxes on our foreign income and repatriated cash, and tariffs or other restrictions on foreign trade or investment, including export duties and quotas, trade and employment restrictions; |
| • | imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements; |
| • | increased exposure to foreign currency exchange rate risk; |
| • | reduced protection for intellectual property rights in some countries; and |
| • | natural disasters, pandemics, political unrest, war or acts of terrorism. |
Trade tensions between the U.S. and China, the U.S. and Russia, as well as those between the U.S. and Canada, Mexico and other countries have been escalating in recent years. For example, in March 2022, the U.S. and other countries imposed broad-based sanction programs against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People's Republic and the so-called Luhansk People's Republic. The United States, the European Union, the United Kingdom and other countries may implement additional sanctions, export controls or other measures against Russia, Belarus and other countries, regions, officials, individuals or industries in the respective territories. Such sanctions and other measures, as well as the existing and potential further responses from Russia or other countries to such sanctions, tensions and military actions, could adversely affect the global economy and financial markets and could adversely affect our business, financial condition and results of operations. We cannot predict whether the United States or any other country will not develop andimpose new quotas, tariffs, taxes or other trade barriers upon the importation or exportation of our products or gauge the effect that they will never achieve widespread commercial acceptance. In such event, wenew barriers would nothave on our financial position or results of operations. These new tariffs or any additional tariffs or other trade barriers may cause our costs to increase, our products to be able to implement our strategy,less competitive, and our profits couldbusiness, results of operations and financial position to be reduced or eliminated. Even if a commercial market formaterially adversely affected. Our overall success in international markets depends, in part, upon our HTS products wereability to develop, commercial terms requested by utilitiessucceed in differing legal, regulatory, economic, social and power grid operators relating to bonding requirements, limitations of liability, warranty periods, or other contractual provisions,political conditions. We may not be acceptablesuccessful in developing and implementing policies and strategies that will be effective in managing these risks in each country where we do business or conduct operations. Our failure to us,manage these risks successfully could harm our international operations and reduce our international sales, thus lowering our total revenue and increasing losses. Our products face competition, which could impedelimit our ability to enter into contractual arrangementsacquire or retain customers. The markets for the saleour products are competitive and many of our competitors have substantially greater financial resources and research and development, manufacturing and marketing capabilities than we do. In addition, as our target markets develop, other large industrial companies may enter these fields and compete with us. We face competition from other companies offering FACTS systems similar to our D-VAR products. These include adaptive VAR compensators, Dynamic voltage restorers (“DVRs”), and STATCOMs produced by ABB, Siemens, Mitsubishi, RXHK, NR Electric Co,. and Ingeteam, and battery-based uninterruptible power supply (“UPS”) systems offered by various companies around the world. We face competition from other companies offering medium-voltage metal-enclosed power capacitor banks and harmonic filter banks for use on electric power systems similar to our NEPSI products. These include Controllix PowerSide, Elgin Power Solutions (formally Gilbert), Scott Engineering and QVARx. We face competition from other companies offering DC power supply systems similar to our Neeltran products. These include Scr Controlled Rectifiers, IGBT controlled choppers produced by ABB, Siemens, Friem Dynapower, and Nidec offering systems around the world. With our HTS-based REG product, we are offering a new approach that provides alternatives to utilities for power system design. Therefore, we believe that we compete with traditional approaches such as new full-sized substations, overhead and underground transmission, and urban power transformers. We believe we are currently the only company that can offer HTS-based SPS products that have been fully qualified for use aboard U.S. Navy surface combatants. Therefore, the primary competition for our SPS products is currently coming from defense contractors that provide the copper-based systems that our lighter, more efficient HTS products.versions have been developed to replace. Companies such as L3 Harris, Raytheon, and Ultra have the bulk of the copper-based business today. Growth of
As the HTS wire, superconductor electric motors and generators, and power electronic systems markets develop, other large industrial companies may enter those fields and compete with us. If we are unable to compete successfully, it may harm our business, which in turn may limit our ability to acquire or retain customers. With respect to our Wind business, other companies that serve the wind turbine components industry include ABB, Hopewind, and Semikron. We also face indirect competition in the wind energy market depends largely on the availability and size of government subsidies and economic incentives. At present, the cost of wind energy exceeds the cost of conventional power generation in many locations around the world. Various governments have used different policy initiatives to encourage or accelerate the development and adoption of wind energy and other renewable energy sources. Renewable energy policies are in place in the European Union, certain countries in Asia, including India, China, Japan and South Korea, and many of the states in Australia and the United States. Examples of government- sponsored financial incentives include capital cost rebates, feed-in tariffs, tax credits, net metering and other incentives to end-users, distributors, system integrators andfrom global manufacturers of wind energy products to promoteturbines, such as Siemens Gamesa, General Electric, Vestas and Suzlon. We face competition for the usesupply of wind energyturbine engineering design services from design engineering firms such as Aerovide and W2E.
The competition in these markets could adversely affect our operating results by reducing the volume of the products we sell or the prices we can charge. These competitors may be able to reduce dependency on other formsrespond more rapidly than us to new or emerging technologies or changes in customer requirements. They may also devote greater resources to the development, promotion and sale of energy. Governments may decidetheir products than we do. Our success depends significantly upon our ability to reduce or eliminate these economic incentives for political, financial or other reasons. Reductions in, or eliminations of, government subsidies and economic incentives before the wind energy industry reaches a sufficient scale to be cost-effective in a non-subsidized marketplace could reduce demand forenhance our products and adversely affecttechnologies and to develop and introduce, on a timely and cost-effective basis, new products and features that meet changing customer requirements and incorporate technological enhancements. If we are unable to develop new products and enhance functionalities or technologies to adapt to these changes, our business prospects and results of operations.will suffer. We can provide no assurance that we will continue to effectively compete against our current competitors or additional companies that may enter our markets. We have operations in, and depend on sales in, emerging markets, including India, and China, and global conditions could negatively affect our operating results or limit our ability to expand our operations outside of these countries.markets. Changes in India’s or China’s political, social, regulatory and economic environment may affect our financial performance. We have operations in India and China and, in recent years, a significant portion of our total revenues has been derived from customers in these markets.India. Our financial performance depends upon our ability to carry on our operations and marketsell our products in these countries,markets such as India, as well as other emerging markets around the world. We are, and will continue to be, subject to financial, political, economic and business risks in connection with our operations and sales in these emerging markets. In addition to the business risks inherent in developing and servicing these markets, economic conditions may be more volatile, legal and regulatory systems less developed and predictable, and the possibility of various types of adverse governmental action more pronounced in emerging markets. In addition, inflation, fluctuations in currency and interest rates, competitive factors, civil unrest, public health emergencies and labor problems could affect our revenues, expenses and results of operations. Our operations could also be adversely affected by acts of war, terrorism or the threat of any of these events as well as government actions such as controls on imports, exports and prices, tariffs, new forms of taxation, or changes in fiscal regimes and increased government regulation in the countries in which we operate or service customers. Unexpected or uncontrollable events or circumstances in any of these markets could have a material adverse effect on our financial results and cash flows. Our financial performance could be affected by the political and social environment in India. In recent years, India has experienced civil unrest and terrorism and has been involved in conflicts with neighboring countries. The potential for hostilities between India and Pakistan has been high in light of tensions related to recent terrorist incidents in India and the unsettled nature of the regional geopolitical environment, including events in and related to Afghanistan and Iraq. 20
With respect to our activities in all emerging markets, we may be impacted by issues with managing foreign sales operations, including long payment cycles, potential difficulties in accounts receivable collection and, especially from significant customers, fluctuations in the timing and amount of orders. The adverse effect of any of these issues on our business could be increased due to the concentration of our business with a small number of customers. For instance, the Chinese government has, in the past, restricted lending from banks to companies in China as a means to fight inflation, resulting in a limitation of access to credit. Problems with collections from, or sales to, any one of those customers could reduce our revenue and harm our financial performance. Operations in foreign countries also expose us to risks relating to difficulties in enforcing our proprietary rights, currency fluctuations and adverse or deteriorating economic conditions. For example, the ongoing war between Ukraine and Russia has caused increased raw material costs and material shortages for, and, adversely impacted, certain of our suppliers. If we experience problems with obtaining registrations, compliance with foreign country or applicable U.S. laws, or if we experience difficulties in payments or intellectual property matters in foreign jurisdictions, or if significant political, economic or regulatory changes occur, our results of operations would be adversely affected. Our success depends upon the commercial adoption of the REG system, which is currently limited, and a widespread commercial market for our products face intense competition,may not develop. To date, there has been no widespread commercial use of the REG system. It is uncertain whether a robust commercial market for those new and unproven products will ever develop. In addition, we believe in-grid demonstrations of REG systems are necessary to convince utilities and power grid operators of the benefits of this technology. Even if a project is funded, completion of projects can be delayed as a result of other factors. It is possible that the market demands we currently anticipate for our REG system will not develop and that they will never achieve widespread commercial acceptance. In such event, we would not be able to implement our strategy, and our results of operations could be reduced or eliminated. Even if a commercial market for our REG systems were to develop, commercial terms requested by utilities and power grid operators relating to bonding requirements, limitations of liability, warranty periods, or other contractual provisions, may not be acceptable to us, which could limitimpede our ability to acquire or retain customers. The marketsenter into contractual arrangements for our products are intensely competitive and manythe sale of our REG system.
Industry consolidation could result in more powerful competitors have substantially greater financial resources, research and development, manufacturing and marketing capabilities thanfewer customers. Competitors in the industries in which we do. In addition, asoperate are consolidating. If our target markets develop, other large industrial companies may enter these fields andcompetitors consolidate, they likely will increase their market share, gain economies of scale that enhance their ability to compete with us. Our Wind business faces competition for the supply of wind turbine engineering design services from design engineering firms such as GL Garrad Hassan, and from licensors of wind turbine systems such as Aerodyn.
Our Wind business also faces competition from companies offering power electronic converters for use in applications for which we expect to sell our PowerModule products. These companies include ABB, Hopewind, Semikron, Shinergy, Vacon and Xantrex (a subsidiary of Schneider Electric).
Finally, our Wind business faces competition from companies offering wind turbine electrical system components, including ABB, Ingeteam, Mita-Teknik, and Woodward. We also face indirect competition in the wind energy market from global manufacturers of wind energy systems, such as Gamesa, General Electric, Suzlon and Vestas.
Our Grid business faces competition from companies offering FACTS systems similar to our D-VAR products. These include SVCs from ABB, General Electric, AREVA, Mitsubishi Electric and Siemens; adaptive VAR compensators and STATCOMs produced by ABB, Siemens, and S&C Electric; dynamic voltage restorers produced by companies such as ABB and S&C Electric; and flywheels and battery-based UPS systems offered by various companies around the world.
Our Grid business also faces competition both from suppliers of traditional wires made from materials such as copper and from companies who are developing HTS wires.
Finally, our Grid business faces competition for our Amperium wire from a number of companies in the United States and abroad who are developing 2G HTS wire technology. These include Superconductor Technologies and Superpower (a subsidiary of Furukawa) in the United States; Fujikura, and Sumitomo in Japan; SuNAM in South Korea; BASF in Europe; Innova and Shanghai Creative Superconductor in China; and SuperOx in Russia. With our HTS-based REG product, we are offering a new approach that provides alternatives to utilities for power system design. Therefore, we believe that we compete with traditional approaches such as new full-sized substations, overhead and underground transmission, and urban power transformers.
We believe we are currently the only company that can offer HTS-based SPS that have been fully qualified for use aboard Navy surface combatants. Therefore, the primary competition for our SPS products is currently coming from defense contractors that provide the copper-based systems that our lighter, more efficient HTS versions have been developed to replace. Companies such as L3, Excelis, Raytheon and Textron have the bulk of the copper-based business today. However, over time, as the HTS-based SPS proliferate to the fleet, companies that have the capability to manufactureus and/or package HTS wire into robust, turn-key systems will most likely attempt to duplicate ouracquire additional products and thus additional competitiontechnologies that could displace our product offerings. Our customer base also is expected from more traditional HTS competitors such as those listed above.
As the HTS wire, superconductor electric motorsundergoing consolidation. Consolidation within our customers’ industries could affect our customers and generators, and power electronic systems markets develop, other large industrial companies may enter those fields and competetheir relationships with us. If one of our competitors’ customers acquires any of our customers, we may lose that business. Additionally, if our customers become larger and more concentrated, they could exert pricing pressure on all suppliers, including us. If we were to lose market share or customers or face pricing pressure due to consolidation of our customers, our results of operations and financial condition could be adversely affected.
The increasing focus on environmental sustainability and social initiatives could increase our costs, and inaction could harm our reputation and adversely impact our financial results. There has been increasing public focus by investors, customers, environmental activists, the media and governmental and nongovernmental organizations on a variety of environmental, social and other sustainability matters. If we are unable to compete successfully, it may harmnot effective in addressing environmental, social and other sustainability matters affecting our business, whichor setting and meeting relevant sustainability goals, our reputation and financial results may suffer. We may experience increased costs in turn may limit our abilityorder to acquire or retain customers. 21
Our international operations are subject to risks that we do not face in the United States,execute upon any sustainability goals and measure achievement of those goals, which could have an adverse effectimpact on our operating results.
In recent years, a substantial majoritybusiness and financial condition. While we may at times engage in voluntary initiatives (such as voluntary disclosures, certifications, or goals, among others) to improve our ESG profile, such initiatives may be costly and may not have the desired effect. Moreover, we may not be able to successfully complete such initiatives due to factors that are within or outside of our consolidated revenues were recognized fromcontrol. Even if this is not the case, our actions may subsequently be determined to be insufficient by various stakeholders, and we may be subject to investor or regulator engagement on our ESG efforts, even if such initiatives are currently voluntary. Certain market participants, including major institutional investors and capital providers, use third-party benchmarks and scores to assess companies’ ESG profiles in making investment or voting decisions. We have limited and in some instances no visibility or control over these scores or their underlying methodologies. Unfavorable ESG ratings could lead to increased negative investor sentiment towards us or our industry, which could negatively impact our share price as well as our access to and cost of capital. To the extent ESG matters negatively impact our reputation, it may also impede our ability to compete as effectively to attract and retain employees or customers, outsidewhich may adversely impact our operations. In addition, this emphasis on environmental, social, and other sustainability matters has resulted and may result in the adoption of new laws and regulations, including new reporting requirements. If we fail to comply with new laws, regulations, or reporting requirements, our reputation and business could be adversely impacted.
Growth of the wind energy market depends largely on the availability and size of government subsidies, economic incentives and legislative programs designed to support the growth of wind energy. At present, the cost of wind energy exceeds the cost of conventional power generation in many locations around the world. Various governments have used different policy initiatives to encourage or accelerate the development and adoption of wind energy and other renewable energy sources. Renewable energy policies are in place in the European Union, certain countries in Asia, including India, China, Japan and South Korea, and many of the states in Australia and the United States. For example, 85%Examples of our revenues in fiscal 2015government sponsored financial incentives include capital cost rebates, feed-in tariffs, tax credits, net metering and 86%other incentives to end-users, distributors, system integrators and manufacturers of our revenues in fiscal 2014 were recognized from sales outsidewind energy products to promote the United States. Our international operations are subjectuse of wind energy and to a varietyreduce dependency on other forms of risks that we do not face inenergy. In the United States, including: | ·
| potentially longer payment cycles for sales in foreign countriesvarious legislation and regulations designed to support the growth of wind energy have been implemented or proposed by the federal government, such as the Production Tax Credit for Renewable Energy (“PTC”) and the Clean Power Plan. Governments, including the U.S. government, may decide to reduce or eliminate these economic incentives, or curtail legislative programs supportive of wind energy technologies for political, financial or other reasons. Any reductions in, or eliminations of, government subsidies, economic incentives or favorable legislative programs before the wind energy industry reaches a sufficient scale to be cost-effective in a non-subsidized marketplace could reduce demand for our products and difficulties in collecting accounts receivable;
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| difficulties in staffing and managing our foreign offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
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| additional withholding taxes or other taxes on our foreign income and repatriated cash, and tariffs or other restrictions on foreign trade or investment, including export duties and quotas, trade and employment restrictions;
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| political unrest, war or acts of terrorism.
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Our overall success in international markets depends, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not be successful in developing and implementing policies and strategies that will be effective in managing these risks in each country where we do business or conduct operations. Our failure to manage these risks successfully could harm our international operations and reduce our international sales, thus lowering our total revenue and reducing or eliminating our profits.
Adverse changes in domestic and global economic conditions could adversely affect our operating results.business prospects and results of operations.
We have become increasingly subject to
Lower prices for other fuel sources may reduce the risks arising from adverse changes in domestic and global economic conditions. In recent years, the state of both the domestic and global economies has been uncertain due to the difficulty in obtaining credit, weak economic recovery, and financial market volatility. Adverse credit conditions in the futuredemand for wind energy development, which could have a negative impactmaterial adverse effect on our ability to execute on future strategic activities. In addition, if creditgrow our Wind business. The wind energy market is difficultaffected by the price and availability of other fuels, including nuclear, coal, natural gas and oil, as well as other sources of renewable energy. To the extent renewable energy, particularly wind energy, becomes less cost-competitive due to obtainreduced government targets, increases in the future, some customers may delay or reduce purchases. This couldcost of wind energy, as a result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies, increased accounts receivableregulations, and inventory write-offsincentives that favor alternative renewable energy, cheaper alternatives or otherwise, demand for wind energy and increased price competition. Anyother forms of these events would likely harmrenewable energy could decrease. Slow growth or a long-term reduction in the demand for renewable energy could have a material adverse effect on our business, results of operations and financial condition.ability to grow our Wind business. Risks Related to Our Technologies We may be unable to adequately prevent disclosure of trade secrets and other proprietary information. We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely, in part, on confidentiality agreements with our employees, contractors, consultants, outside scientific collaborators and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets or independently develop processes or products that are similar or identical to our trade secrets and courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. For example, based, in part, upon evidence obtained through an internal investigation and a criminal investigation conducted by Austrian authorities regarding the actions of a former employee of our Austrian subsidiary, we believe that Sinovel illegally obtained and used our intellectual property in violation of civil and criminal intellectual property laws. In July 2011, a former employee of our Austrian subsidiary was arrested in Austria on charges of economic espionage and fraudulent manipulation of data. In September 2011, the former employee pled guilty to the charges, and was imprisoned. On September 13, 2011, we commenced a series of legal actions in China against Sinovel and other parties alleging the illegal use of our intellectual property. We cannot provide any assurance as to the outcome of these legal actions. This or future litigation with Sinovel could result in substantial costs and divert management’s attention and resources, which could have an adverse effect on our business, operating results and financial condition. In addition, such proceedings may make it more difficult to finance our operations. If we are unsuccessful in this litigation and fail to maintain adequate protection of this intellectual property, our competitive business position would be adversely affected. For more information about these legal proceedings, see Part I, Item 3, “Legal Proceedings.”
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Our patents may not provide meaningful protection for our technology, which could result in us losing some or all of our market position. We own or have licensing rights under many patents and pending patent applications. However, the patents that we own or license may not provide us with meaningful protection of our technologies and may not prevent our competitors from using similar technologies for a variety of reasons, such as: | • | ·the patent applications that we or our licensors file may not result in patents being issued;
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| • | the patent applications that we or our licensors fileany patents issued may not result in patents being issued;be challenged by third parties; and
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| • | ·others may independently develop similar technologies not protected by our patents or design around the patented aspects of any technologies we develop.
| any patents issued may be challenged by third parties; and
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| others may independently develop similar technologies not protected by our patents or design around the patented aspects of any technologies we develop.
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Moreover, we could incur substantial litigation costs in defending the validity of or enforcing our own patents. We also rely on trade secrets and proprietary know-how to protect our intellectual property. However, our non-disclosureconfidentiality agreements and other safeguards may not provide meaningful protection for our trade secrets and other proprietary information. If the patents that we own or license or our trade secrets and proprietary know-how fail to protect our technologies, our market position may be adversely affected. There are a number of technological challenges that must be successfully addressed before our superconductor products can gain widespread commercial acceptance, and our inability to address such technological challenges could adversely affect our ability to acquire customers for our products. Many of our superconductor products are in the early stages of commercialization, while others are still under development. There are a number of technological challenges that we must successfully address to complete our development and commercialization efforts for superconductor products. We will also need to improve the performance and reduce the cost of our Amperium wire to expand the number of commercial applications for it. We may be unable to meet such technological challenges or to sufficiently improve the performance and reduce the costs of our Amperium wire. Delays in development, as a result of technological challenges or other factors, may result in the introduction or commercial acceptance of our superconductor products later than anticipated. Third parties have or may acquire patents that cover the materials, processes and technologies we use or may use in the future to manufacture our Amperium products, and our success depends on our ability to license such patents or other proprietary rights. We expect that some or all of the HTS materials, processes and technologies we use in designing and manufacturing our products are or will become covered by patents issued to other parties, including our competitors. The owners of these patents may refuse to grant licenses to us, or may be willing to do so only on terms that we find commercially unreasonable. If we are unable to obtain these licenses, we may have to contest the validity or scope of those patents or re-engineer our products to avoid infringement claims by the owners of these patents. It is possible that we will not be successful in contesting the validity or scope of a patent, or that we will not prevail in a patent infringement claim brought against us. Even if we are successful in such a proceeding, we could incur substantial costs and diversion of management resources in prosecuting or defending such a proceeding. Our technology and products could infringe intellectual property rights of others, which may require costly litigation and, if we are not successful, could cause us to pay substantial damages and disrupt our business. In recent years, there has been significant litigation involving patents and other intellectual property rights in many technology-related industries. There may be patents or patent applications in the United States or other countries that are pertinent to our products or business of which we are not aware. The technology that we incorporate into and use to develop and manufacture our current and future products, including the technologies we license, may be subject to claims that they infringe the patents or proprietary rights of others. The success of our business will also depend on our ability to develop new technologies without infringing or misappropriating the proprietary rights of others. Third parties may allege that we infringe patents, trademarks or copyrights, or that we misappropriated trade secrets. These allegations could result in significant costs and diversion of the attention of management. If a successful claim were brought against us and we are found to infringe a third party’s intellectual property rights, we could be required to pay substantial damages, including treble damages if it is determined that we have willfully infringed such rights, or be enjoined from using the technology deemed to be infringing, or using, making or selling products deemed to be infringing. If we have supplied infringing products or technology to third parties, we may be obligated to indemnify these third parties for damages they may be required to pay to the patent holder and for any losses they may sustain as a result of the infringement. In addition, we may need to attempt to license the intellectual property right from such third party or spend time and money to design around or avoid the intellectual property. Any such license may not be available on reasonable terms, or at all. An adverse determination may subject us to significant liabilities and/or disrupt our business. 23
Risks Related to Our Legal Matters
We have filed a demand for arbitration and other lawsuits against our former largest customer, Sinovel, regarding amounts we contend are overdue. We cannot be certain as to the outcome of these proceedings.
On March 31, 2011, Sinovel refused to accept contracted scheduled shipments with a revenue value of approximately $65.2 million. In addition, as of March 31, 2011, we had approximately $62.0 million of receivables (excluding value-added tax) outstanding from Sinovel. We have not received payment from Sinovel for these outstanding receivables that are now past due, nor have we been notified as to when, if ever, they will accept contracted shipments that were scheduled for delivery after March 31, 2011. No payment has been received from Sinovel since early March 2011. Because Sinovel did not give us notice that it intended to delay deliveries as required under the contracts, we believe that these actions constitute material breaches of our contracts. Additionally, we believe that Sinovel illegally obtained and used our intellectual property in violation of civil and criminal intellectual property laws.
On September 13, 2011, we filed a claim for arbitration against Sinovel in Beijing, China to compel Sinovel to pay us for past product shipments and to accept all contracted but not yet delivered core electrical components and spare parts under all existing contracts with us. In addition, we have filed civil complaints in China against Sinovel alleging the illegal use of our intellectual property. Sinovel has filed counterclaims against us with the Beijing Arbitration Commission for breach of the same contracts under which we filed our original arbitration claim. Sinovel claims, among other things, that the goods supplied by us do not conform to the standards specified in the contracts and has claimed net damages in the amount of approximately 1.2 billion Chinese yuan (“RMB”) (approximately $190.0 million). Sinovel also filed a claim with the Beijing Arbitration Commission against us for breach of the same contracts under which we filed our original arbitration claim. Sinovel claimed, among other things, that the goods supplied by us do not conform to the standards specified in the contracts and claimed damages in the amount of approximately RMB 105.0 million (approximately $17.0 million). As the legal proceedings continue, we and Sinovel may identify additional amounts in dispute. We cannot provide any assurance as to the outcome of these legal actions or that, if we prevail, we ultimately will be able to collect any amounts awarded. Moreover, these legal proceedings could result in the incurrence of significant legal and related expenses, which may not be recoverable depending on the outcome of the litigation. An award by the arbitration panel or court in favor of Sinovel and/or the incurrence of significant legal fees that are not recoverable could adversely impact our operating results. For more information about these legal proceedings, see Part I, Item 3, “Legal Proceedings.”
In April 2016, we were notified that our income tax filings in China were to be examined for the 2013 and 2014 calendar years. The income tax filings in these years include carried-forward tax positions related to the aforementioned events in 2011. These positions include, but are not limited to, the continuing requirement to repay liabilities to other AMSC legal entities for the purchase of raw materials and other components incorporated into the goods sold to Sinovel, which are not able to be repaid by our subsidiary in China until it is paid the past-due amounts owed by Sinovel. While we believe our tax positions are appropriate, there can be no assurance that the Tax Authority in China will not challenge these positions in a manner that would result in an adverse ruling against us, which could result in a disruption to our operations in China, and could have an adverse effect on our business and results of operations.
We have been named as a party in various legal proceedings, and we may be named in additional litigation, all of which will require significant management time and attention, result in significant legal expenses and may result in an unfavorable outcome, which could have a material adverse effect on our business, operating results and financial condition.
We are and may become subject to various legal proceedings and claims that arise in or outside the ordinary course of business. Certain current lawsuits and pending proceedings are described under Part I, Item 3. “Legal Proceedings.”
The results of these lawsuits and future legal proceedings cannot be predicted with certainty. Also, our insurance coverage may be insufficient, our assets may be insufficient to cover any amounts that exceed our insurance coverage, and we may have to pay damage awards or otherwise may enter into settlement arrangements in connection with such claims. Any such payments or settlement arrangements in current or future litigation could have a material adverse effect on our business, operating results or financial condition. Even if the plaintiffs’ claims are not successful, current future litigation could result in substantial costs and significantly and adversely impact our reputation and divert management’s attention and resources, which could have a material adverse effect on our business, operating results or financial condition. In addition, such lawsuits may make it more difficult to finance our operations.
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Risks Related to Our Common Stock Our common stock has experienced, and may continue to experience, significant market price and volume fluctuations, which may prevent our stockholders from selling our common stock at a profit and could lead to costly litigation against us that could divert our management’s attention. The market price of our common stock has historically experienced significant volatility and may continue to experience such volatility in the future. Factors such as our financial performance, liquidity requirements, technological achievements by us and our competitors, the establishment of development or strategic relationships with other companies, strategic acquisitions, new customer orders and contracts, and our introduction of commercial products may have a significant effect on the market price of our common stock. The stock market in general, and the stock of high technology companies, in particular, have, in recent years, experienced extreme price and volume fluctuations, which are often unrelated to the performance or condition of particular companies. Such broad market fluctuations have and could continue to adversely affect the market price of our common stock. Due to these factors, the price of our common stock may decline, and investors may be unable to resell their shares of our common stock for a profit. Following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. In the past, we have been subject to a number of class action lawsuits which were filed against us on behalf of certain purchasers of our common stock. If we become subject to additional litigation of this kind in the future, it could result in additional substantial litigation costs, a damages award against us and the further diversion of our management’s attention. General Risk Factors Unfavorable results of legal proceedings could have a material adverse effect on our business, operating results and financial condition. From time to time, we may become subject to legal proceedings and claims that arise in or outside the ordinary course of business. Results of legal proceedings cannot be predicted with certainty. Our insurance coverage may be insufficient, our assets may be insufficient to cover any amounts that exceed our insurance coverage, and we may have to pay damage awards or otherwise may enter into settlement arrangements in connection with such claims. Any such payments or settlement arrangements in legal proceedings could have a material adverse effect on our business, operating results or financial condition. Regardless of merit, legal proceedings could result in substantial costs and significantly and adversely impact our reputation and divert management’s attention and resources, which could have a material adverse effect on our business, operating results or financial condition. In addition, such lawsuits may make it more difficult to finance our operations. Item 1B. | UNRESOLVED STAFF COMMENTS |
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Not applicable. |
Our corporate headquarters FACTS manufacturing and Amperium wireGrid manufacturing operations are located in a 355,000-square-footleased 88,000-square-foot facility owned by us andin Ayer, Massachusetts. Additionally, we have Grid manufacturing operations located in Devens, Massachusetts.a leased 77,500 square-foot facility in Westminster, Massachusetts as well as an owned 35,000 square-foot facility in Queensbury, New York and an owned 85,000 square-foot facility in New Milford, Connecticut. We also occupy leased facilities located in New Berlin, Wisconsin; Suzhou, China; Klagenfurt, Austria;Australia, Austria, India, Wisconsin, Washington and Timisoara, Romaniathe United Kingdom with a combined total of approximately 183,00072,000 square feet of space. These leases have varying expiration dates through March 2021 whichthrough November 2027 which can generally be terminated at our request after a six monthsix-month advance notice. Our otherThese locations focus primarily on applications engineering,research and development, sales and/or field service and do not have significant leases or physical presence. We believe all of these facilities are well-maintained and suitable for their intended uses. The following table summarizes information regarding our significant leased and owned properties, as of March 31, 2016:2023: Location | Supporting | | Square footage | | | Owned/Leased | United States | | | | | | | Devens,Ayer, Massachusetts
| Corporate & Grid Segment | | | 88,000 | | Leased | Westminster, Massachusetts | 355,000Grid Segment
| | | 77,500 | | Leased | Queensbury, New York | Grid Segment | | | 35,000 | | Owned | New Berlin, WisconsinMilford, Connecticut | Wind & Grid SegmentsSegment
| | | 85,000 | | Owned |
We are not party to any material legal proceedings. Item 4. | 50,000
| | | Leased
| China
| | | | | | | Suzhou & Beijing
| Wind Segment
| | 39,000
| | | Leased
| Austria
| | | | | | | Klagenfurt
| Wind Segment
| | 32,000
| | | Leased
| Romania
| | | | | | | Timisoara
| Wind Segment
| | 62,000
| | | Leased
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On September 13, 2011, we commenced a series of legal actions in China against Sinovel. Our Chinese subsidiary, Suzhou AMSC Superconductor Co. Ltd., filed a claim for arbitration with the Beijing Arbitration Commission in accordance with the terms of our supply contracts with Sinovel. The case is captioned (2011) Jing Zhong An Zi No. 0963. On March 31, 2011, Sinovel refused to accept contracted shipments of 1.5 MW and 3 MW wind turbine core electrical components and spare parts that we were prepared to deliver. We allege that these actions constitute material breaches of our contracts because Sinovel did not give us notice that it intended to delay deliveries as required under the contracts. Moreover, we allege that Sinovel has refused to pay past due amounts for prior shipments of core electrical components and spare parts. We are seeking compensation for past product shipments and retention (including interest) in the amount of approximately RMB 485 million (approximately $76 million) due to Sinovel’s breaches of our contracts. We are also seeking specific performance of our existing contracts as well as reimbursement of all costs and reasonable expenses with respect to the arbitration. The value of the undelivered components under the existing contracts, including the deliveries refused by Sinovel in March 2011, amounts to approximately RMB 4.6 billion (approximately $720 million).
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On October 8, 2011, Sinovel filed with the Beijing Arbitration Commission an application under the caption (2011) Jing Zhong An Zi No. 0963, for a counterclaim against us for breach of the same contracts under which we filed our original arbitration claim. Sinovel claimed, among other things, that the goods supplied by us do not conform to the standards specified in the contracts and claimed damages in the amount of approximately RMB 370 million (approximately $58 million). On October 17, 2011, Sinovel filed with the Beijing Arbitration Commission a request for change of counterclaim to increase its damage claim to approximately RMB 1 billion (approximately $157 million). On December 22, 2011, Sinovel filed with the Beijing Arbitration Commission an additional request for change of counterclaim to increase its damages claim to approximately RMB 1.2 billion (approximately $190 million). On February 27, 2012, Sinovel filed with the Beijing Arbitration Commission an application under the caption (2012) Jing Zhong An Zi No. 0157, against us for breach of the same contracts under which we filed our original arbitration claim. Sinovel claimed, among other things, that the goods supplied by us do not conform to the standards specified in the contracts and claimed damages in the amount of approximately RMB 105 million (approximately $17 million). We believe that Sinovel’s claims are without merit and we intend to defend these actions vigorously. Since the proceedings in this matter are still in the early technical review phase, we cannot reasonably estimate possible losses or range of losses at this time.
We also submitted a civil action application to the Beijing No. 1 Intermediate People’s Court under the caption (2011) Yi Zhong Min Chu Zi No. 15524, against Sinovel for software copyright infringement on September 13, 2011. The application alleges Sinovel’s unauthorized use of portions of our wind turbine control software source code developed for Sinovel’s 1.5MW wind turbines and the binary code, or upper layer, of our software for the PM3000 power converters in 1.5MW wind turbines. In July 2011, a former employee of our Austrian subsidiary was arrested in Austria on charges of economic espionage and fraudulent manipulation of data. In September 2011, the former employee pled guilty to the charges, and was imprisoned. As a result of our internal investigation and a criminal investigation conducted by Austrian authorities, we believe that this former employee was contracted by Sinovel through an intermediary while employed by us and improperly obtained and transferred to Sinovel portions of our wind turbine control software source code developed for Sinovel’s 1.5MW wind turbines. Moreover, we believe the former employee illegally used source code to develop for Sinovel a software modification to circumvent the encryption and remove technical protection measures on the PM3000 power converters in 1.5MW wind turbines in the field. We are seeking a cease and desist order with respect to the unauthorized copying, installation and use of our software, monetary damages of approximately RMB 38 million ($6 million) for our economic losses and reimbursement of all costs and reasonable expenses. The Beijing No. 1 Intermediate People’s Court accepted the case, which was necessary in order for the case to proceed. On September 15, 2014, the Beijing No. 1 Intermediate People’s Court held its first substantive hearing in the Beijing case. At the hearing, the parties presented evidence, reviewed claims, and answered questions from the court. On April 24, 2015, we received notification from the Beijing No. 1 Intermediate People’s Court that it dismissed the case for what it cited was a lack of evidence. On May 6, 2015, we filed an appeal of the Beijing No. 1 Intermediate People’s Court decision to dismiss the case with the Beijing Higher People’s Court. On September 8, 2015, the Beijing Higher People’s Court held its first substantive hearing on our appeal of the Beijing No. 1 Intermediate People’s Court’s dismissal of the case. At the hearing, the parties presented evidence and answered questions from the court. We are awaiting a decision from the Beijing Higher People’s Court.
We submitted a civil action application to the Beijing Higher People’s Court against Sinovel and certain of its employees for trade secret infringement on September 13, 2011 under the caption (2011) Gao Min Chu Zi No. 4193. The application alleges the defendants’ unauthorized use of portions of our wind turbine control software source code developed for Sinovel’s 1.5MW wind turbines as described above with respect to the Copyright Action. We are seeking monetary damages of RMB 2.9 billion (approximately $453 million) for the trade secret infringement as well as reimbursement of all costs and reasonable expenses. The Beijing Higher People’s Court has accepted the case, which was necessary in order for the case to proceed. On December 22, 2011 the Beijing Higher People’s Court transferred the case to the Beijing No. 1 Intermediate People’s Court under the caption (2011) Gao Min Chu Zi No. 4193. On June 7, 2012, we received an Acceptance Notice from the Beijing No.1 Intermediate People’s Court under the caption (2012) Yi Zhong Min Chu Zi No.6833. The Beijing No. 1 Intermediate Court held the first substantive hearing on May 11, 2015. On June 15, 2015, we submitted a request for the withdrawal of our complaint to the Beijing No. 1 Intermediate Court. On June 16, 2015, the Beijing No. 1 Intermediate Court granted our request. We immediately filed a civil action application to the Beijing Intellectual Property Court against the same parties and seeking the same amount of monetary damages for trade secret infringement on June 16, 2015 under the caption (2015) Jin Zhi Min Chu Zi No. 1135. On January 18, 2016, the Beijing Intellectual Property Court held its first substantive hearing on our trade secret infringement case. At the hearing, the parties presented evidence, reviewed claims and answered questions from the court. We are awaiting a decision from the Beijing Intellectual Property Court.
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On September 16, 2011, we filed a civil copyright infringement complaint in the Hainan Province No. 1 Intermediate People’s Court against Dalian Guotong Electric Co. Ltd. (“Guotong”), a supplier of power converter products to Sinovel, and Huaneng Hainan Power, Inc. (“Huaneng”), a wind farm operator that has purchased Sinovel wind turbines containing Guotong power converter products. The case is captioned (2011) Hainan Yi Zhong Min Chu Zi No. 62. The application alleges that our PM1000 converters in certain Sinovel wind turbines have been replaced by converters produced by Guotong. Because the Guotong converters are being used in wind turbines containing our wind turbine control software, we believe that our copyrighted software is being infringed. We are seeking a cease and desist order with respect to the unauthorized use of our software, monetary damages of RMB 1.2 million ($0.2 million) for our economic losses (with respect to Guotong only) and reimbursement of all costs and reasonable expenses. The court has accepted the case, which was necessary in order for the case to proceed. In addition, upon the request of the defendant Huaneng, Sinovel has been added by the court to this case as a defendant and Huaneng has been released from this case. On November 18, 2014, the Hainan No. 1 Intermediate People’s Court held its first substantive hearing in the Hainan case. At the hearing, the parties presented evidence, reviewed claims, and answered questions from the court. On June 3, 2015, we received notification from the Hainan No. 1 Intermediate People’s Court that it dismissed the case for what it cited was a lack of evidence. On June 18, 2015 we filed an appeal of the Hainan No. 1 Intermediate People’s Court decision to dismiss the case with the Hainan Higher People’s Court. On August 20, 2015, the Hainan Higher People’s Court accepted the appeal under the caption (2015) QiongZhi Min Zhong Zi No. 6. On November 26, 2015, the Hainan Higher People’s Court held its first substantive hearing on our appeal of the Hainan No. 1 Intermediate People’s Court’s dismissal of the case. At the hearing, the parties presented evidence and answered questions from the court. We are awaiting a decision from the Hainan Higher People’s Court.
Item 4.
| MINE SAFETY DISCLOSURES |
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Not Applicable. 27
PART II Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock has been listed on the NASDAQNasdaq Global Select Market under the symbol “AMSC” since 1991. The following table sets forth the high and low sales price per share of our common stock as reported on the NASDAQ Global Select Market for each quarter of the two most recent fiscal years. The sales prices in this table have been adjusted to reflect the 1-for-10 reverse stock split effected March 24, 2015. | Common Stock | | | Price | | | High | | | Low | | Fiscal year ended March 31, 2016: | | | | | | | | First quarter | $ | 10.89 | | | $ | 5.10 | | Second quarter | | 5.94 | | | | 3.26 | | Third quarter | | 7.89 | | | | 3.81 | | Fourth quarter | | 9.05 | | | | 5.28 | | | | | | | | | | Fiscal year ended March 31, 2015: | | | | | | | | First quarter | $ | 16.90 | | | $ | 12.50 | | Second quarter | | 21.50 | | | | 14.00 | | Third quarter | | 14.30 | | | | 6.98 | | Fourth quarter | | 8.80 | | | | 5.67 | |
Holders The number of holders of record of our common stock on May 25, 201629, 2023 was 326.175. Dividend Policy We have never paid cash dividends on our common stock. We currently intend to retain earnings, if any, to fund the development and growth of our business and do not anticipate paying cash dividends for the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. The Term Loans with Hercules Technology Growth Capital, Inc. which are discussed further in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, prohibit us from paying cash dividends. Stock Performance Graph The following graph compares the cumulative total stockholder return on our common stock from March 31, 20112018 to March 31, 20162023 with the cumulative total return of (i) the Russell 2000Nasdaq Composite Index and (ii) the Russell Microcap Index and the S&P 500. We added the Russell Microcap Index in this Annual Report because we believe that this index is more closely aligned to our size and market capitalization than the S&P 500. Nasdaq Electrical Components & Equipment Index. This graph assumes the investment of $100.00 on March 31, 20112018 in our common stock, the Russell 2000Nasdaq Composite Index and the Russell MicrocapNasdaq Electrical Components & Equipment Index, and the S&P 500, and assumes any dividends are reinvested. Measurement points are March 31, 2012;2018; March 31, 2013;2019; March 31, 2014;2020; March 31, 2015;2021; March 31, 2022; and March 31, 2016.2023. 28
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among American Superconductor Corporation, the Russell 2000 Index, the Russell MicrocapNasdaq Composite Index and the S&P 500Nasdaq Electrical Components & Equipment Index
Company/Index | 3/31/11 | | 3/31/12 | | 3/31/13 | | 3/31/14 | | 3/31/15 | | 3/31/16 | | American Superconductor Corp. | | 100.00 | | | 16.57 | | | 10.74 | | | 6.47 | | | 2.59 | | | 3.06 | | Russell Microcap | | 100.00 | | | 96.64 | | | 111.39 | | | 146.61 | | | 150.45 | | | 129.13 | | Russell 2000 | | 100.00 | | | 98.43 | | | 112.80 | | | 139.06 | | | 148.51 | | | 132.06 | | S&P 500 | | 100.00 | | | 108.54 | | | 123.69 | | | 150.73 | | | 169.92 | | | 172.95 | |
| | | Fiscal year ended March 31, | Company/Index | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | American Superconductor Corporation | | 100.00 | | 220.96 | | 94.16 | | 325.77 | | 130.76 | | 84.36 | Nasdaq Composite Index | | 100.00 | | 111.71 | | 116.65 | | 198.48 | | 191.21 | | 176.12 | Nasdaq Electrical Components & Equipment Index | | 100.00 | | 107.33 | | 82.52 | | 155.74 | | 139.45 | | 156.80 |
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ItemItem 6.
| SELECTED FINANCIAL DATARESERVED
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The following selected financial data reflects the results of operations and balance sheet data for the fiscal years ended March 31, 2012 to 2016. Per share data has been restated to reflect the 1-for-10 reverse stock split effected on March 24, 2015. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K, in order to understand further the factors that may affect the comparability of the financial data presented below.
| Fiscal year ended March 31, | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | (In thousands, except per share data) | | | | | | | | | | | | | | | | | | | | | | Revenues | $ | 96,023 | | | $ | 70,530 | | | $ | 84,117 | | | $ | 87,419 | | | $ | 76,543 | | Net loss | | (23,139 | ) | | | (48,656 | ) | | | (56,258 | ) | | | (66,131 | ) | | | (136,827 | ) | Net loss per common share - basic | | (1.76 | ) | | | (5.74 | ) | | | (8.98 | ) | | | (12.46 | ) | | | (26.91 | ) | Net loss per common share - diluted | | (1.76 | ) | | | (5.74 | ) | | | (8.98 | ) | | | (12.46 | ) | | | (26.91 | ) | Total assets | | 135,318 | | | | 133,825 | | | | 168,509 | | | | 216,754 | | | | 255,056 | | Working capital | | 42,334 | | | | 17,319 | | | | 35,459 | | | | 40,428 | | | | 57,248 | | Cash, cash equivalents, marketable securities and restricted cash | | 40,721 | | | | 24,548 | | | | 49,421 | | | | 50,199 | | | | 66,209 | | Long term debt, net of discount | | 1,367 | | | | 3,877 | | | | 6,380 | | | | 9,248 | | | | - | | Stockholders’ equity | | 83,549 | | | | 79,893 | | | | 112,259 | | | | 125,118 | | | | 164,879 | |
Included in the net loss for the fiscal year ended March 31, 2016 was stock-based compensation expense of $3.2 million, restructuring and impairment charges of $0.8 million, gains on sales of our minority investments of $3.1 million, non-cash interest expense of $0.4 million, and a loss from the change in fair value of warrants and derivatives of $0.2 million. Included in the net loss for the fiscal year ended March 31, 2015 was stock-based compensation expense of $5.9 million, restructuring and impairment charges of $5.4 million, non-cash interest expense of $0.6 million, arbitration award expense of $9.0 million and a gain from the change in fair value of warrants and derivatives of $4.0 million. Included in the net loss for the fiscal year ended March 31, 2014 was stock-based compensation expense of $10.7 million, restructuring and impairment charges of $3.0 million, a prepaid value added tax reserve of $1.4 million, non-cash interest expense of $7.7 million, a loss on extinguishment of debt of $5.2 million and a gain from the change in fair value of warrants and derivatives of $1.9 million. Included in the net loss for the fiscal year ended March 31, 2013 was stock-based compensation expense of $8.1 million, restructuring and impairment charges of $7.9 million, a loss contingency of $1.8 million, non-cash interest expense of $12.4 million as well as gains from the change in fair value of warrants and derivatives and recoveries of adverse purchase commitments of $7.6 million and $7.8 million, respectively. Included in the net loss for the fiscal year ended March 31, 2012 was stock-based compensation expense of $9.9 million, a write-off of an advance payment to The Switch Engineering OY (“The Switch”) of $20.6 million, restructuring and impairment charges of $9.2 million, expense of patent costs of $4.9 million, and Sinovel legal expenses of $5.8 million.
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Item 7. | MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Executive Overview We are a leading system provider of megawatt-scale power resiliency solutions that lowerOrchestrate the costRhythm and Harmony of wind powerPower on the Grid™, and protect and expand the capability of our Navy's fleet. Our solutions enhance the performance of the power grid.grid, protect our Navy’s fleet, and lower the cost of wind power. In the power grid market, we enable electric utilities, industrial facilities, and renewable energy project developers to connect, transmit and distribute smarter, cleaner and better power through our transmission planning services and power electronics and superconductor-based systems. In the wind power market, we enable manufacturers to field highly competitive wind turbines through our advanced power electronics and control system products, engineering, and support services. In theOur power grid market, we enable electric utilities and renewable energy project developers to connect, transmit and distribute power through our transmission planning services and power electronics and superconductor-based products. Our wind and power grid products and services provide exceptional reliability, security, efficiency and affordability to our customers. Our wind and power gridsystem solutions help to improve energy efficiency, alleviate power grid capacity constraints, improve system resiliency, and increase the adoption of renewable energy generation. Demand for our solutions is driven by the growing needs for modernized smart grids that improve power reliability, security and quality, the U.S. Navy's effort to upgrade in-board power systems to support fleet electrification, and the need for increased renewable sources of electricity, such as wind and solar energy, and for modernized smart grids that improve power reliability, security and quality.energy. Concerns about these factors have led to increased spending by corporations and the military, as well as supportive government regulations and initiatives on local, state, national and globalnational levels, including renewable portfolio standards, tax incentives and international treaties. We manufacture products using two proprietary core technologies: PowerModulePowerModule™ programmable power electronic converters and our AmperiumAmperium® high temperature superconductor (HTS)("HTS") wires. These technologies and our system-level solutions are protected by a broad and deep intellectual property portfolio consisting of hundreds of patents and licenses worldwide. We operate our business under two market-facing business units: WindGrid and Grid.Wind. We believe this market-centric structure enables us to more effectively anticipate and meet the needs of wind turbine manufacturers, power generation project developers, the Navy's ship protection systems, electric utilities and electric utilities.wind turbine manufacturers. | ●
• | Wind. Grid. Through our WindtecGridtec™ Solutions,TM, our Wind business segment enables manufacturers to field wind turbines with exceptional power output, reliability and affordability. We supply advanced power electronics and control systems, license our highly engineered wind turbine designs, and provide extensive customer support services to wind turbine manufacturers. Our design portfolio includes a broad range of drivetrains and power ratings of 2 MW and higher. We provide a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility.
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| Grid. Through our Gridtec SolutionsTM, our Grid business segment enables electric utilities and renewable energy project developers to connect, transmit and distribute power with exceptional efficiency, reliability, security and affordability. We provide transmission planning services that allow us to identify power grid congestion, poor power quality, and other risks, which help us determine how our solutions can improve network performance. These services often lead to sales of our grid interconnection solutions for wind farms and solar power plants, power quality systems and transmission and distribution cable systems. We also sell ship protection products to the U.S. Navy through our Grid business segment.
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| • | Wind. Through our Windtec™ Solutions, our Wind business segment enables manufacturers to field wind turbines with exceptional power output, reliability and affordability. We supply advanced power electronics and control systems, license our highly engineered wind turbine designs, and provide extensive customer support services to wind turbine manufacturers. Our design portfolio includes a broad range of drivetrains and power ratings of 2 MW and higher. We provide a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility. |
Our fiscal year begins on April 1 and ends on March 31. When we refer to a particular fiscal year, we are referring to the fiscal year beginning on April 1 of that same year. For example, fiscal 20152022 refers to the fiscal year beginning on April 1, 2015.2022. Other fiscal years follow similarly. We have experienced recurring operating losses
On October 31, 2018, we entered into a Subcontract Agreement with Commonwealth Edison Company (“ComEd”) (the “Subcontract Agreement”) for the manufacture and asinstallation of March 31, 2016 had an accumulated deficitthe Company’s resilient electric grid ("REG") system within ComEd’s electric grid in Chicago, Illinois (the “Project”), which became effective on June 20, 2019. Under the terms of $928.2 million.the Subcontract Agreement, we agreed, among other things, to provide the REG system and to supervise ComEd’s installation of the REG system in Chicago. As part of our separate cost sharing arrangement with DHS under the Prime Contract, we received funding provided by DHS in connection with the Subcontract Agreement of approximately $10.0 million, which represents the total amount of revenue we recognized over the term of the Subcontract Agreement and includes $1.0 million that we agreed to reimburse ComEd for costs incurred by ComEd while undertaking its tasks under the Subcontract Agreement (the “Reimbursement Amount”). In addition, we have experienced recurring negative operating cash flows. At March 31, 2016,were required to deliver an irrevocable letter of credit in the amount of $5.0 million to secure certain Company obligations under the Subcontract Agreement, which we had cashdid, and cash equivalentsdeposited $5.0 million in an escrow account as collateral to secure such letter of $39.3 million. Cash used in operations forcredit. This irrevocable letter of credit was terminated and the full $5.0 million was returned from escrow to us during the fiscal year ended March 31, 2016 was $4.6 million.2023. Over
We are experiencing substantial inflationary pressure in our supply chain and some delays in sourcing materials needed for our products, resulting in some production disruption both of which have increased our cost of revenues and decreased gross margin. Changes in macroeconomic and market conditions arising from the last several years, we have entered into several debtCOVID-19 pandemic, or for other reasons, such as the ongoing war between Russia and equity financing arrangements in order to enhance liquidity. Since April 1, 2012, we generated aggregate cash flows from financing activitiesUkraine, inflation, rising interest rates, instability of $71.0 million. This amount includes proceeds from our April 2015 equity offering, which generated net proceeds of approximately $22.3 million, after deducting underwriting discounts and commissions and estimated offering expenses. See Note 9, “Debt”, and Note 12 “Stockholders’ Equity” for further discussion of these financing arrangements. We believe that we are in compliance with the covenants and restrictions includedfinancial institutions, political instability in the agreements governing ourUnited States, including failure to raise the federal debt arrangements as of March 31, 2016. 31
In March 2016, the Company entered into a set of agreements to jointly develop an advanced low cost manufacturing process for second generation high temperature superconductor wire with BASF Corporation (“BASF”). Under the joint development agreement, the Company’s manufacturing know-how for its Amperium® superconductor wireceiling, labor force availability, sourcing, material delays and BASF's chemical solution deposition production technology will be combined. As part of the agreements, the Company also entered into a royalty-bearing, non-exclusive license under which the Company agreed to provide BASF a specified portion of its second generation (2G) high temperature superconductor (HTS) wire manufacturing technology.
Our cash requirements depend on numerous factors, including the successful completion of our product development activities, our ability to commercialize our Resilient Electric Grid REG and ship protection system solutions, rate of customer and market adoption of our products, collecting receivables according to established terms, and the continued availability of U.S. government funding during the product development phase of our Superconductors based products. In December 2015, we entered into a set of strategic agreements valued at approximately $210.0 million with Inox, which includes a multi-yearglobal supply contract pursuant to which the Company will supply electric control systems to Inox and a license agreement allowing Inox to manufacture a limited number of electrical control systems over the next three to four years. After this initial three to four year period, Inox agreed that the Company will continue as Inox’s preferred supplier and Inox will be required to purchase from the Company a majority of its electric control systems requirements for an additional three-year period. These agreements are expected to provide a foundation for the business as we pursue our longer-term objectives. During the fourth quarter of fiscal 2015, Inox made the upfront payment of $6.0 million required under the license agreement, but as of the date of this Annual Report it has not made the $2.0 million advance payment required under the supply contract. Significant deviations to our business plan with regard to these factors and events, including any prolonged disruption in our revenues with our largest customers, which are important drivers to our business,chain disruptions could have a material adverse effect on our operating performance,business, financial condition and future business prospects. We expectresults of operation.
From time-to-time we may undertake restructuring activities in order to pursue the expansionalign our global organization in a manner that we believe will better position us to achieve our long-term goals. In January 2023, we undertook a reduction in force that involved approximately 5% of our operations through internal growth, diversificationglobal workforce. This restructuring will cause us to incur $1.0 million of cash expense and is expected to result in annualized cost savings of approximately $5 million, beginning in fiscal 2023. In February 2023, we completed the process of determining and verifying our customer base,eligibility and potential strategic alliances. See “Liquidity and Capital Resources” below for additional discussion. On October 6, 2015, 100%amount of payroll tax credits known as the Employee Retention Credit (“ERC”) under the CARES Act which Congress enacted as part of the outstanding common stockTaxpayer Certainty and Disaster Tax Relief Act of Blade Dynamics Limited (“Blade Dynamics”) was acquired by2020. This resulted in filing certain amended payroll tax forms for eligible quarters in 2020 and 2021, which, in the aggregate, totaled $3.3 million. We have accordingly recognized a subsidiaryreceivable in prepaid expenses and other current assets and a benefit to cost of General Electric Company. After deducting transactionrevenues and operating expenses we received net proceeds of $2.8 million fromin the sale, which was recorded as a gain during the yearquarter ended March 31, 2016. Additionally, under the terms of the purchase agreement, we may be entitled to receive up to an additional $1.2 million in proceeds, upon the successful achievement of certain milestones by Blade Dynamics over the next three years. On March 11, 2016, we sold 100% of our minority investment in Tres Amigas to an investor for $0.6 million. We received $0.3 million according to the terms of the purchase agreement upon closing, which was recorded as a gain during the three months ended March 31, 2016. The final $0.3 million is to be paid when Tres Amigas achieves the earlier of certain agreed-upon financing conditions which is expected to occur during the first half of fiscal 2016. See Note 15, “Minority Investments”, for further information about such investment.2023.
Results of Operations Fiscal Years Ended March 31, 20162023 and March 31, 20152022 Revenues Total revenues increaseddecreased by 36%2% to $96.0$106.0 million in fiscal 20152022 from $70.5$108.4 million in fiscal 2014.2021. Our revenues are summarized as follows (in thousands): | Fiscal Years Ended March 31, | | | 2016 | | | 2015 | | Revenues: | | | | | | | | Wind | $ | 68,883 | | | $ | 51,307 | | Grid | | 27,140 | | | | 19,223 | | Total | $ | 96,023 | | | $ | 70,530 | |
Revenues in our Wind business unit consist of revenues from wind turbine electrical systems and core components, wind turbine license and development contracts, service contracts and consulting arrangements. Our Wind business unit accounted for 72% of total revenues in fiscal 2015 and 73% in fiscal 2014. Revenues in the Wind business unit increased 34% to $68.9 million in fiscal 2015 from $51.3 million in fiscal 2014. The increase in Wind business unit revenues was driven primarily by higher revenues from Inox in India.
| | | Fiscal Years Ended March 31, | | | | | 2023 | | | 2022 | | Revenues: | | | | | | | | | Grid | | $ | 94,631 | | | $ | 98,876 | | Wind | | | 11,353 | | | | 9,559 | | Total | | $ | 105,984 | | | $ | 108,435 | |
Revenues in our Grid business unit consist of revenuesare derived from our FACTS products, including D-VAR and D-SVCproduct sales, NEPSI product sales, Neeltran product sales, HTS wire sales, revenues undership protection systems ("SPS"), government-sponsored electric utility projects license contracts and other prototype development contracts. We also engineer, install and commission our products on a turnkey-basis for some customers. The Grid business unit accounted for 28%89% of total revenues in fiscal 20152022 and 27%91% in fiscal 2014.2021. Grid revenue increased 41%revenues decreased 4% to $27.1$94.6 million in fiscal 20152022 from $19.2$98.9 million in fiscal 2014.2021. The increasedecrease in revenues was primarily due to higherdriven by lower D-VAR system revenues than in the prior year period. Revenues in our Wind business unit are derived from wind turbine electrical control systems and thecore components, wind turbine license to BASF. 32
Revenues from Project HYDRA and Project REG represented 6%development contracts, service contracts and consulting arrangements. Our Wind business unit accounted for 11% of total revenues in fiscal 2022 and 9% in fiscal 2021. Revenues in the Wind business unit increased 19% to $11.4 million in fiscal 2022 from $9.6 million in fiscal 2021. The increase over the prior year period was primarily driven by shipments of our Grid business unit’s revenue for fiscal 2015 and 2014, respectively. Our revenues for these projects are derived by funding from the Department of Homeland Security (“DHS”). Project HYDRA is a project with Consolidated Edison, Inc. (“ConEd”electrical control systems ("ECS") to demonstrate our REG productINOX in ConEd’s electric grid. Project REG is a project with Commonwealth Edison, Inc. (“ComEd”)fiscal 2022, compared to permanently install our REG product in ComEd’s electric grid. This fault current limiting cable system is designed to utilize customized Amperium® HTS wire, and ancillary controls to deliver more power through the grid while also being able to suppress power surges that can disrupt service. DHS has committed 100% of the total expected funding of $29.0 million for Project HYDRA. Under Project REG, DHS is expected to invest up to $60.0 million to enable the deployment of the REG system in Chicago’s electric grid. We have substantially completed the first phase of the project which among other things, has resulted in the creation of a detailed deployment plan. In the fiscal year ended March 31, 2015, DHS committed funding of $1.5 million for this phase of the project. During the fiscal year ended March 31, 2016, DHS committed funding of an additional $3.7 million, for a total of $5.2 million. This additional funding serves as a bridge between the detailed deployment plan and construction phases of the project. The period of performance to complete the engineering work extends through May 31, 2017. The final phase of the project involves the delivery of the REG system and the associated construction and deployment of the system in ComEd’s grid. We will not begin this phase of the project until all parties agree to proceed. There can be no assurance that all parties will agree to proceed with the project.2021.
Cost of Revenues and Gross Margin Cost of revenues increased by 10% 3% to $74.0$97.5 million in fiscal 2015,2022, compared to $67.4$94.9 million in fiscal 2014.2021. Gross margin increaseddecreased to 22.9%8% in fiscal 2022 from 12% in fiscal 2015 from 4.4% in fiscal 2014.2021. The increasedecrease in gross margin in fiscal 20152022 was driven primarily by higherdue to an unfavorable product mix, inflation pressure in our supply chain, and additional expenses incurred to complete and deliver certain projects from the preacquisition Neeltran backlog. Included in cost of revenues including increased royaltyis a $1.8 million benefit from the ERC recognized in fiscal 2022. Cost of revenues in fiscal 2022 and license revenue compared to fiscal 2014.2021 includes total amortization expense of less than $0.1 million as a result of the acquired backlog intangible assets from our acquisitions of Northeast Power Systems, Inc. and related assets ("NEPSI") and Neeltran, Inc. and related assets ("Neeltran"). Operating Expenses Research and development Research and development (“R&D&D”) expenses increaseddecreased by 4% 14% to $12.3$9.0 million, or 13%8% of revenue in fiscal 2015,2022, compared to $11.9$10.5 million, or 17%10% of revenue, in fiscal 2014. 2021. Included in R&D is a $0.7 million benefit from the ERC recognized in fiscal 2022. The slight increasedecrease in R&D expenses is primarily thea result of new product development expenses in our Grid segment, partially offset by lower stocktotal compensation expense. Selling, general, and administrative Selling, general and administrative (“SG&A”) expenses decreasedincreased by 1%4% to $28.9$28.7 million, or 30%27% of revenue in fiscal 2022 from $27.5 million, or 25% of revenue, in fiscal 20152021. Included in SG&A is a $0.8 million benefit from $29.2 million, or 41% of revenue,the ERC recognized in fiscal 2014. The slight decrease in SG&A expenses in fiscal 2015 was primarily due to lower stock compensation expense, partially offset by the reversal of legal costs for the Catlin insurance claim as result of our settlement agreement with Catlin Insurance Company (“Catlin”) in fiscal 2014.2022. Amortization of acquisition related intangibles We recorded $0.2$2.7 million in both fiscal 20152022 and $2.5 million in fiscal 20142021 in amortization expense related to our core technology and know-how, customer relationships, and trade names and trademarkother intangible assets. The increase in amortization expense is primarily a result of the Neeltran acquisition. Restructuring
Change in fair value of contingent consideration The change in fair value of our contingent consideration for the earnout payment on the NEPSI acquisition resulted in a loss of $ 0.1 million in fiscal 2022. The change in the fair value of our contingent consideration for the earnout payment on the NEPSI acquisition resulted in a gain of $5.9 million in fiscal 2021. The change in the fair value was primarily driven by the change in our stock price and impairmentsassumptions on likelihood of achieving revenue targets. Restructuring We recorded restructuring and impairment charges of $0.8$1.0 million in fiscal 2015, compared to $5.4 million2022 for severance pay as a result of the reduction in force announced on January 24, 2023. There were no restructuring charges recorded in fiscal 2014. For fiscal 2015, this consists primarily of an impairment charge of $0.7 million to fully impair our investment in Tres Amigas. For fiscal 2014, this consists of restructuring charges of $0.6 million for employee severance costs, and $1.3 million for facility and relocation costs primarily for the consolidation of our Grid manufacturing operations into our Devens facility. In addition, we recorded an impairment charge of $3.5 million to fully impair our minority investment in Blade Dynamics.2021. Operating loss Our operating loss is summarized as followsfollows (in thousands): | Fiscal Years Ended March 31, | | | 2016 | | | 2015 | | Operating loss: | | | | | | | | Wind | $ | (1,256 | ) | | $ | (14,321 | ) | Grid | | (14,835 | ) | | | (26,890 | ) | Unallocated corporate expenses | | (4,027 | ) | | | (11,306 | ) | Total | $ | (20,118 | ) | | $ | (52,517 | ) |
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| | | Fiscal Years Ended March 31, | | | | | 2023 | | | 2022 | | Operating income (loss): | | | | | | | | | Grid | | $ | (24,615 | ) | | $ | (20,725 | ) | Wind | | | (2,547 | ) | | | (1,554 | ) | Unallocated corporate expenses | | | (5,847 | ) | | | 1,190 | | Total | | $ | (33,009 | ) | | $ | (21,089 | ) |
The Grid segment generated an operating loss of $24.6 million in fiscal 2022 and $20.7 million in fiscal 2021. The increase in the Grid business unit operating loss was due to lower gross margins driven by a less favorable product mix and additional expenses incurred to deliver on the Neeltran acquired backlog. In addition, Grid segment operating loss includes a $3.3 million benefit from the ERC that was recognized in fiscal 2022. The Wind segment generated an operating loss of $1.3$2.5 million in fiscal 2022 and $1.6 million in fiscal 20152021. The increase in the Wind business unit operating loss was due to lower gross margins in fiscal 2022, compared to an operating loss of $14.3 million in fiscal 2014. The decrease in operating loss for fiscal 2015 was primarily attributable to increased revenues, partially offset by a lower consumption of previously written-off inventory used in our electrical control systems. Additionally, fiscal 2014 included a one-time charge of $9.0 million relating to the arbitration award to Ghodawat.2021. Grid operating loss decreased to $14.8 million in fiscal 2015 from $26.9 million in fiscal 2014. The decrease in operating loss for fiscal 2015 is primarily attributed to higher D-VAR system revenues, increased production which resulted in better factory absorption, and license revenue recognized from the license agreement with BASF in the fourth quarter of fiscal 2015.
Unallocated corporate expenses in fiscal 2015 included restructuring and impairment charges2022 consisted of $0.8a loss on contingent consideration of $0.1 million, stock-based compensation expense of $4.7 million and $3.2 million in stock-based compensation expense.a restructuring charge of $1.0 million. Unallocated corporate expenses in fiscal 2014 included restructuring and impairment charges2021 consisted of $5.4 million anda gain on contingent consideration of $5.9 million inoffset by stock-based compensation expense.expense of $4.7 million. Change in fair value of derivatives and warrants
The change in fair value of derivatives and warrants resulted in a loss of $0.2Interest income, net
Interest income, net was $0.3 million in fiscal 2015 and a gain of $4.0 million in fiscal 2014. The changes in the fair value were primarily due to changes in our stock price, which is a key valuation metric on the derivative liabilities. Gain on sale of minority interest
We recorded a gain on sale of minority interests of $3.1 million in the fiscal year ended March 31, 2016, related to the sale of our investments in Blade Dynamics and Tres Amigas. Both of these investments had been fully impaired at the time of their sale.
Interest expense, net
Interest expense, net was $1.0 million in fiscal 20152022 compared to $1.9$0.1 million for fiscal 2014.2021. The decreaseincrease in interest expense, net was primarily driven by lower interest expense due to the maturity of one of our term loans with Hercules Technology Growth Capital, Inc. (“Hercules”) in December 2014.
Other (expense) income, net
Other expense, net was $2.5 million in fiscal 2015, compared to other income, net of $1.6 million in fiscal 2014. The decrease in other income, net, was due primarily to losses fromincreased interest rates in fiscal 2022.
China dissolution China dissolution expense was $1.9 million in fiscal 2022 compared to no activity in fiscal 2021. The China dissolution expense during fiscal 2022, was driven by the liquidation of our China entity, resulting in a foreign currency fluctuations as a resultloss from the cumulative translation release of the strengthening of the Euro against the U.S. dollar$1.9 million in fiscal 2015.2022 in which there was no similar transaction in fiscal 2021. Other expense, net Other expense, net was $0.1 million in fiscal 2022, compared to other expense, net of less than $0.1 million in fiscal 2021. The increase in other expense was driven by the impacts of fluctuations in foreign currencies in fiscal 2022. Income Taxes We recorded an income tax expense of $2.4$0.2 million in fiscal 2015,2022 compared to an income tax benefit of $0.2$1.8 million in fiscal 2014.2021. The increase in income tax expense is a result of purchase accounting for the acquired intangible assets and the resulting deferred tax liability from the NEPSI Acquisition in the prior year. The Company recorded a deferred tax liability of $2.3 million, primarily for the difference in book and tax basis on the intangible assets acquired in fiscal 2021. As a result, the Company was able to benefit from additional deferred tax assets and therefore released a corresponding valuation allowance of $2.3 million during the fiscal year ended March 31, 2022. The tax benefit was offset during fiscal 2021 by income tax expense in foreign jurisdictions. Net loss Net loss was $35.0 million in fiscal 2022, compared to net loss of $19.2 million in fiscal 2021. The increase in net loss was driven primarily by increases in income taxes in foreign jurisdictions and foreign withholding taxes. Certain asset write-offs in our foreign jurisdictions are considered permanent differences and are not tax deductible. Other asset write-offs, such as inventory and prepaid value-added taxes in China, are not currently deductible and result in deferred tax assets. Due to uncertainty aroundlower gross margins, the realization of these deferred tax assets, they have been fully reserved asimpact of the end ofChina dissolution in fiscal 2022 and partially offset by the fiscal years ended March 31, 2016, 2015 and, 2014, respectively.ERC benefit.
Please refer to the “Risk Factors” section in Part I, Item 1A, for a discussion of certain factors that may affect our future results of operations and financial condition.
Fiscal Years Ended March 31, 2015 and March 31, 2014
Revenues
Total revenues decreased by 16% to $70.5 million in fiscal 2014 from $84.1 million in fiscal 2013. Our revenues are summarized as follows (in thousands):
| Fiscal Years Ended | | | March 31, | | | 2015 | | | 2014 | | Revenues: | | | | | | | | Wind | $ | 51,307 | | | $ | 55,608 | | Grid | | 19,223 | | | | 28,509 | | Total | $ | 70,530 | | | $ | 84,117 | |
Our Wind business unit accounted for 73% of total revenues in fiscal 2014 and 66% in fiscal 2013. Revenues in the Wind business unit decreased 8% to $51.3 million in fiscal 2014 from $55.6 million in fiscal 2013. The decrease in Wind business unit revenues was driven primarily by lower revenues in China partially offset by higher revenues from Inox in India.
The Grid business unit accounted for 27% of total revenues in fiscal 2014 and 34% in fiscal 2013. Grid revenue decreased 33% to $19.2 million in fiscal 2014 from $28.5 million in fiscal 2013. The decrease in revenues was primarily due to lower D-VAR system revenues.
Revenues from Project HYDRA and Project REG represented 9% and 7% of our Grid business unit’s revenue for fiscal 2014 and 2013, respectively. Our revenues for these projects are derived by funding from DHS. DHS has committed 100% of the total expected funding of $29.0 million for Project HYDRA. Under Project REG, DHS is expected to invest up to $60.0 million to enable the deployment of the REG system in Chicago’s electric grid. We are currently working on the first phase of the project which among other things, will result in the creation of a detailed deployment plan. Funding of $1.5 million for this phase of the project has been committed by DHS. Subsequent phases of the project involve the delivery of the REG system and the associated construction and deployment of the system in ComEd’s grid. We will not begin these phases of the project until all parties agree to proceed. There can be no assurance that all parties will agree to proceed with the project.
Cost of Revenues and Gross Margin
Cost of revenues decreased by 7% to $67.4 million in fiscal 2014, compared to $72.9 million in fiscal 2013. Gross margin decreased to 4.4% in fiscal 2014 from 13.4% in fiscal 2013. The decrease in gross margin in fiscal 2014 was driven primarily by higher 100% margin revenue from Chinese and other customers in fiscal 2013 compared to fiscal 2014, partially offset by higher usage of previously written off inventory used in our electrical control systems in fiscal 2014.
Operating Expenses
Research and development
R&D expenses decreased by $0.3 million to $11.9 million, or 17% of revenue for fiscal 2014 compared to $12.2 million, or 14% of revenue for fiscal 2013. The decrease in fiscal 2014 was driven primarily due to the decreased headcount and related labor spending as a result of restructuring activities undertaken in fiscal 2013, as well as a reduction in spending required to support license and development for our Wind customers.
Selling, general, and administrative
SG&A expenses decreased by 22% to $29.2 million, or 41% of revenue in fiscal 2014 from $37.2 million, or 44% of revenue in fiscal 2013. The decrease in SG&A expenses in fiscal 2014 was primarily due to lower stock compensation expense and the reversal of legal costs for the Catlin insurance claim as result of our settlement agreement with Catlin.
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Arbitration award expense
We recorded an arbitration award expense of $9.0 million in the year ended March 31, 2015 following a decision by the ICC Court on August 29, 2014, finding us liable for damages of approximately €8.3 million under a breach of contract proceeding against Ghodawat Energy Pvt. Ltd. (“Ghodawat”). We entered into an agreement to settle this claim with Ghodawat for €7.45 million on February 4, 2015. We paid the settlement amount on February 10, 2015. As a result of this settlement, we recorded a reversal of an excess accrual of approximately $1.2 million during the fourth quarter of fiscal 2014.
Amortization of acquisition related intangibles
We recorded $0.2 million in fiscal 2014 and $0.3 million in fiscal 2013 in amortization expense related to our core technology and know-how, and trade names and trademark intangible assets.
Restructuring and impairments
We recorded restructuring and impairment charges of $5.4 million in fiscal 2014, compared to $3.0 million in fiscal 2013. For fiscal 2014, this consists of restructuring charges of $0.6 million for employee severance costs, and $1.3 million for facility and relocation costs primarily for the consolidation of our Grid manufacturing operations into our Devens facility. In addition, we recorded an impairment charge of $3.5 million to fully impair our minority investment in Blade Dynamics. For fiscal 2013, the restructuring and impairment charges primarily consisted of employee severance costs of $1.7 million and an impairment charge of $1.3 million for our minority investment in Blade Dynamics.
Operating loss
Our operating loss is summarized as follows (in thousands):
| Fiscal Years Ended | | | March 31, | | | 2015 | | | 2014 | | Operating loss: | | | | | | | | Wind | $ | (14,321 | ) | | $ | (5,213 | ) | Grid | | (26,890 | ) | | | (22,523 | ) | Unallocated corporate expenses | | (11,306 | ) | | | (13,693 | ) | Total | $ | (52,517 | ) | | $ | (41,429 | ) |
Wind generated an operating loss of $14.3 million in fiscal 2014 compared to an operating loss of $5.2 million in fiscal 2013. The increase in operating loss for fiscal 2014 was primarily attributable to lower revenues and the approximately $9.0 million arbitration award expense associated with the Ghodowat settlement, partially offset by the reversal of legal expenses associated with the Catlin settlement.
Grid operating loss increased to $26.9 million in fiscal 2014 from $22.5 million in fiscal 2013. The increase in operating loss for fiscal 2014 is primarily attributed to the lower revenues.
Unallocated corporate expenses in fiscal 2014 included restructuring and impairment charges of $5.4 million and $5.9 million in stock-based compensation expense. Unallocated corporate expenses in fiscal 2013 included restructuring and impairment charges of $3.0 million and $10.7 million in stock-based compensation expense.
Change in fair value of derivatives and warrants
The change in fair value of derivatives and warrants resulted in gains of $4.0 million in fiscal 2014 and $1.9 million in fiscal 2013. The gains were driven by mark-to-market adjustments due primarily to our lower stock price on the derivative liabilities and the extinguishment of our unsecured, senior convertible note (the “Exchanged Note”) with Capital Ventures International (“CVI”) in fiscal 2013. See “Loss on extinguishment of debt” below.
Loss on extinguishment of debt
We recorded a $5.2 million loss in fiscal 2013 related to extinguishment of the Exchanged Note in exchange for approximately 663,000 shares of common stock.
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Interest expense, net
Interest expense, net was $1.9 million in fiscal 2014 compared to $9.7 million for fiscal 2013. The decrease in interest expense, net was primarily driven by lower non-cash interest expense due to the conversion of the remaining outstanding balance on the Exchanged Note into common stock on March 2, 2014.
Other income (expense), net
Other income, net was $1.6 million in fiscal 2014, compared to other expense, net of $1.0 million in fiscal 2013. The increase in other income, net was due primarily to gains from foreign currency fluctuations as a result of the strengthening of the U.S. dollar against the Euro.
Income Taxes
We recorded an income tax benefit of $0.2 million in fiscal 2014, compared to income tax expense of $0.9 million in fiscal 2013. The decrease in income tax expense was driven primarily by a reversal of an uncertain tax position in Austria upon completion of tax audits for prior tax periods.
Certain asset write-offs in our foreign jurisdictions are considered permanent differences and are not tax deductible. Other asset write-offs, such as inventory and prepaid value-added taxes in China, are not currently deductible and result in deferred tax assets. Due to uncertainty around the realization of these deferred tax assets, they have been fully reserved as of the end of the fiscal years ended March 31, 2015 and March 31, 2014.
Non-GAAP Measures
Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.generally accepted accounting principles in the United States (“GAAP”). The non-GAAP measures included in this Form 10-K, however, should be considered in addition to, and not as a substitute for or superior to the comparable measure prepared in accordance with GAAP. 37
We define non-GAAP net loss as net loss before gain on sale of interest in minority investments, stock-based compensation, arbitration award expense, amortization of acquisition-related intangibles, restructuring and impairment charges, consumption of zero cost-basis inventory,acquisition costs, changes in fair value of derivatives and warrants, non-cash interest expense,contingent consideration, China dissolution, ERC tax benefit, and other non-cash or unusual charges, net of any tax effects related to these items, indicated in the table below.charges. We believe non-GAAP net loss assists management and investors in comparing our performance across reporting periods on a consistent basis by excluding these non-cash or non-recurring charges and other items that we do not believe are indicative of our core operating performance. We also regard non-GAAP net loss as a useful measure of operating performance which more closely aligns net loss with cash used in/provided by continuing operations. In addition, we use non-GAAP net loss as a factor in evaluating management’s performance when determining incentive compensation and to evaluate the effectiveness of our business strategies. A reconciliation of GAAP to non-GAAP to GAAP net loss is set forth in the table below (in thousands, except per share data): | Year ended March 31, | | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | | | Net loss | $ | (23,139 | ) | | $ | (48,656 | ) | | $ | (56,258 | ) | Gain on sale of interest in minority investments, net of tax effect | | (2,919 | ) | | | - | | | | - | | Stock-based compensation | | 3,248 | | | | 5,936 | | | | 10,696 | | Arbitration award expense | | - | | | | 8,987 | | | | - | | Amortization of acquisition-related intangibles | | 157 | | | | 157 | | | | 287 | | Restructuring and impairment charges | | 779 | | | | 5,366 | | | | 2,998 | | Sinovel litigation | | - | | | | - | | | | 18 | | Consumption of zero cost-basis inventory | | (4,960 | ) | | | (7,982 | ) | | | (4,308 | ) | Prepaid VAT reserve | | - | | | | - | | | | 1,426 | | Change in fair value of derivatives and warrants | | 228 | | | | (3,963 | ) | | | (1,872 | ) | Loss on extinguishment of debt | | - | | | | - | | | | 5,197 | | Non-cash interest expense | | 359 | | | | 566 | | | | 7,713 | | Non-GAAP net loss | $ | (26,247 | ) | | $ | (39,589 | ) | | $ | (34,103 | ) | | | | | | | | | | | | | Non-GAAP net loss per share | $ | (1.99 | ) | | $ | (4.67 | ) | | $ | (5.45 | ) | Weighted average shares outstanding - basic and diluted | | 13,178 | | | | 8,477 | | | | 6,262 | |
| | | Year ended March 31, | | | | | 2023 | | | 2022 | | Net loss | | $ | (35,041 | ) | | $ | (19,193 | ) | Stock-based compensation | | | 4,729 | | | | 4,661 | | Amortization of acquisition-related intangibles | | | 2,784 | | | | 2,623 | | Acquisition costs | | | - | | | | 681 | | Change in fair value of contingent consideration | | | 70 | | | | (5,850 | ) | China dissolution | | | 1,921 | | | | — | | ERC tax benefit | | | (3,283 | ) | | | — | | Non-GAAP net loss | | | (28,820 | ) | | | (17,078 | ) | | | | | | | | | | | Non-GAAP net loss per share | | $ | (1.03 | ) | | $ | (0.63 | ) | Weighted average shares outstanding - basic and diluted | | | 27,848 | | | | 27,203 | |
We generated aincurred non-GAAP net loss losses of $26.2$28.8 million or $1.99$1.03 per share for fiscal 2022, compared to $17.1 million, or $0.63 per share, for fiscal 2015, compared to $39.6 million, or $4.67 per share, for fiscal 2014, and $34.1 million, or $5.45 per share, for fiscal 2013. The decrease in non-GAAP net loss in fiscal 2015 over 2014 was primarily related to higher revenues in both business units, as well as higher gross margin as previously discussed.2021. The increase in non-GAAP net loss in fiscal 2014 over 20132022 compared to fiscal 2021 was primarily relateddue to a higher operating loss driven by lower revenues in fiscal 2014 and mix of higher margin revenue with no cost in fiscal 2013 from Chinese and other customers.gross margins. 38
Liquidity and Capital Resources We have experienced recurring operating losses and as of March 31, 2023 had an accumulated deficit of $1,055.5 million. Our cash requirements depend on numerous factors, including the successful completion of our product development activities, our ability to commercialize our REG and ship protection system solutions, the rate of customer and market adoption of our products, collecting receivables according to established terms, and the continued availability of U.S. government funding during the product development phase of our Superconductors based products. superconductor-based products and whether Inox is successful in executing on Solar Energy Corporation of India Limited orders or in obtaining additional orders under the new central and state auction regime. We continue to closely monitor our expenses and, if required, expect to reduce our operating and capital spending to enhance liquidity In December 2015,February 2021, we entered intofiled a setshelf registration statement on Form S-3 that will expire in February 2024 (the “Form S-3”). The Form S-3 allows us to offer and sell from time-to-time up to $250 million of strategic agreements valued at approximately $210.0 million with Inox, which includes a multi-year supply contract pursuantcommon stock, debt securities, warrants or units comprised of any combination of these securities. The Form S-3 is intended to whichprovide us flexibility to conduct registered sales of our securities, subject to market conditions, in order to fund our future capital needs. The terms of any future offering under the Company will supply electric control systems to Inox and a license agreement allowing Inox to manufacture a limited number of electrical control systems over the next three to four years. After this initial three to four year period, Inox agreed that the Company will continue as Inox’s preferred supplier and InoxForm S-3 will be requiredestablished at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to purchase from the Company a majoritycompletion of its electric control systems requirements for an additional three-year period. During the fourth quarter of fiscal 2015, Inox made the upfront payment of $6.0 million required under the license agreement, but as of the date of this Annual Report it has not made the $2.0 million advance payment required under the supply contract. These agreements are expected to provide a foundation for the business as we pursue our longer-term objectives. Significant deviations from our business plan with regard to these factors and events, including any prolonged disruption in our revenues with our largest customers, which are important drivers to our business, could have a material adverse effect on our operating performance, financial condition, and future business prospects. We expect to pursue the expansion of our operations through internal growth, diversification of our customer base, and potential strategic alliances.such offering. At March 31, 2016,2023, we had cash, cash equivalents and restricted cash of $40.7$25.7 million, compared to $24.5$49.5 million at March 31, 2015, an increase2022, a decrease of $16.2$23.8 million. As of March 31, 2023, we had approximately $1.9 million of cash, cash equivalents and restricted cash in foreign bank accounts. Our cash, and cash equivalents and restricted cash are summarized as follows (in thousands): | March 31, | | | March 31, | | | 2016 | | | 2015 | | Cash and cash equivalents | $ | 39,330 | | | $ | 20,490 | | Restricted cash | | 1,391 | | | | 4,058 | | Total cash, cash equivalents, and restricted cash | $ | 40,721 | | | $ | 24,548 | |
As of March 31, 2016, we had approximately $22.0 million of cash, cash equivalents, and restricted cash in foreign bank accounts, with a majority of this cash located in Europe. The increase in total cash and cash equivalents, and restricted cash was due primarily to cash provided by financing activities. See further discussion below.
| | | March 31, 2023 | | | March 31, 2022 | | Cash and cash equivalents | | $ | 23,360 | | | $ | 40,584 | | Restricted cash | | | 2,315 | | | | 8,902 | | Total cash, cash equivalents and restricted cash | | $ | 25,675 | | | $ | 49,486 | |
Net cash used in operating activities was $4.6 million, $32.7 million $22.5 million and $13.3$19.0 million in fiscal 2015, 20142022 and 2013,2021, respectively. The decreaseincrease in net cash used in operations in fiscal 20152022 compared to fiscal 20142021 was duedriven primarily to lower net loss for the reasons discussed above. The increaseby purchases of inventory and decreased cash collections in fiscal 2014 compared to fiscal 2013 was primarily driven by our higher net loss exclusive of non-cash items, the arbitration settlement payment to Ghodawat, and less cash generated by working capital in fiscal 2014 compared to fiscal 2013.2022. Net cash provided byused in investing activities was $4.9 million, $1.8$1.5 million and $4.0$7.2 million in fiscal 2015, 20142022 and 2013,2021, respectively. The increasedecrease in net cash provided byused in investing activities in fiscal 20152022 compared to fiscal 20142021 was due primarily to the proceeds from the sale of our minority interests in Blade Dynamics and Tres Amigas. The decrease in net cash provided by investing activitiesNeeltran acquisition in fiscal 2014 compared to2021, in which no similar transaction occurred in fiscal 2013 was driven primarily by a decrease in the change for restricted cash.2022. Net cash provided by financing activities was $18.2 million, $8.8$0.2 million and $12.8$0.1 million in fiscal 2015, 20142022 and 2013,2021, respectively. The increase in net cash provided by financing activities in fiscal 20152022 compared to fiscal 20142021 was primarily due to net proceedsthe repurchase of $22.3 million from the issuance of 4.0 million shares of commontreasury stock in April 2015,fiscal 2021, in which was an increase of $7.3 million over the prior year period net offering proceeds from the sale of shares under our At-Market Sales Arrangement and an equity offering in November 2014. See Note 10, “Warrants and Derivative Liabilities” for further information on the November 2014 equity offering. Additionally, amounts used to repay debt decreased by $3.3 million compared to the prior year period due to the repayment in full of one of our term loans in the prior-year period. The decrease in cash provided by financing activitiesno similar transaction occurred in fiscal 2014 compared to fiscal 2013 is primarily due to the net proceeds received from our debt arrangements in fiscal 2013 and an increase in repayment under these debt arrangements in fiscal 2014, partially offset by net proceeds from a public equity offering in November 2014.2022. . At March 31, 2016 and 2015,2023, we had $0.5$0.6 million and $2.8 million, respectively, of restricted cash included in currentlong-term assets and $0.9$1.7 million and $1.2of restricted cash in short-term assets. At March 31, 2022, we had $6.1 million respectively of restricted cash included in long-term assets and $2.8 million of restricted cash in short-term assets. These amounts included in restricted cash primarily represent collateral deposits to secure surety bonds and letters of credit for various customer contracts. These deposits are held in interest bearing accounts. 39
On November 15, 2013, we amended our Loan and Security Agreement (the “Term Loan”) with Hercules and entered into a new term loan (the “Term Loan B”), borrowing $10.0 million. After closing fees and expenses, we received net proceeds of $9.8 million. The Term Loan B bears an interest rate equal to 11% plusrestricted cash held in escrow in long-term assets at the percentage, if any, in which the prime rate as reported by The Wall Street Journal exceeds 3.75%. We made interest-only payments from December 1, 2013 to May 31, 2014. If we achieved certain revenue targets for the six-month period ending March 31, 2014, interest only payments would continue through August 31, 2014. We did not achieve the revenue required to extend this interest only period. Beginning June 1, 2014, we began making payments on the Term Loan B in equal monthly installments which will end on November 1, 2016.
On December 19, 2014, we entered into another amendment with Hercules (the “Hercules Second Amendment”) and entered into a new term loan (the “Term Loan C”), borrowing an additional $1.5 million (we collectively refer to the Term Loan B, and Term Loan C as the “Term Loans”). After closing fees and expenses, the net proceeds from the Term Loan C were $1.4 million. The Term Loan C bears the same interest rate as the Term Loan B. We are making interest only payments until maturity on June 1, 2017, when the loan is scheduled to be repaid in its entirety.
The Term Loans are secured by substantially all of our existing and future assets, including a mortgage on real property owned by our wholly-owned subsidiary, ASC Devens LLC, and located at 64 Jackson Road, Devens, Massachusetts. The Term Loans contain certain covenants that restrict our ability to, among other things, incur or assume certain debt, merge or consolidate, materially change the nature of our business, make certain investments, acquire or dispose of certain assets, make guarantees or grant liens on our assets, make certain loans, advances or investments, declare dividends or make distributions or enter into transactions with affiliates. In addition, there is a covenant that requires us to maintain a minimum unrestricted cash balance (the “Minimum Threshold”) in the United States. As part of the Hercules Second Amendment, this Minimum Threshold was amended to be the lower of $5.0 million or the aggregate outstanding principal balance of the Term Loans. As a result of the April 2015 offering (see discussion below), the Minimum Threshold was reduced to the lesser of $2.0 million or the aggregate outstanding principal balance of the Term Loans. As of March 31, 2016,2022 securing the Minimum Thresholdletter of credit with Com Ed on the REG project was $2.0 million. The eventsreleased back to us in the fourth quarter of default under the Term Loans include, but are not limited to, failure to pay amounts due, breaches of covenants, bankruptcy events, cross defaults under other material indebtedness and the occurrence of a material adverse effect and/or change in control. In the case of a continuing event of default, Hercules may, among other remedies, declare due all unpaid principal amounts outstanding and any accrued but unpaid interest and foreclose on all collateral granted to Hercules as security under the Term Loans.fiscal 2022.
We believe we are ina party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and expect to remain in compliance withlong-term liquidity and capital resource needs. Certain contractual obligations are reflected on the covenants and restrictions under the Term Loansconsolidated balance sheet as of the dateMarch 31, 2023, while others are considered future commitments. We have various contractual arrangements, under which we have committed to purchase certain minimum quantities of goods or services on an annual basis. For information regarding our other contractual obligations, refer to Note 12, "Contingent Consideration," Note 14, "Debt," Note 15, "Leases" and Note 17, "Commitments and Contingencies" to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. If we fail to stay in compliance with our covenants or experience some other event of default, we may be forced to repay the outstanding principal on the Term Loans. We have experienced recurring operating losses and as of March 31, 2016, had an accumulated deficit of $928.2 million. In addition, we have experienced recurring negative operating cash flows. At March 31, 2016, we had cash and cash equivalents of $39.3 million, as compared to cash used in operations of $4.6 million for the year ended March 31, 2016. In April 2015, we completed an equity offering which raised net proceeds of $22.3 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us from the sale of 4.0 million shares of our common stock at a public offering price of $6.00 per share. On October 6, 2015, 100% of the outstanding common stock of Blade Dynamics was acquired by a subsidiary of General Electric Company. After deducting transaction expenses, we received net proceeds of $2.8 million from the sale, which was recorded as a gain during the year ended March 31, 2016. Additionally, under the terms of the purchase agreement, we may be entitled to receive up to an additional $1.2 million in proceeds, upon the successful achievement of certain milestones by Blade Dynamics over the next three years. On March 11, 2016, we sold 100% of our minority investment in Tres Amigas to an investor for $0.6 million. We received $0.3 million according to the terms of the purchase agreement upon closing, which was recorded as a gain during the three months ended March 31, 2016. The final $0.3 million is to be paid when Tres Amigas achieves the earlier of certain agreed-upon financing conditions which is expected to occur during the first half of fiscal 2016. In addition, in December 2015, we entered into a set of strategic agreements valued at approximately $210.0 million with Inox, as discussed above. These agreements are expected to provide a foundation for the business as we pursue our longer-term objectives.
We believe we have sufficient available liquidity to fund our operations and capital expenditures and scheduled cash payments under our debt obligations for the next twelve months. In addition, we may seek to raise additional capital, which could be in the form of loans, convertible debt or equity, to fund our operating requirements and capital expenditures. Our liquidity is highly dependent on our ability to increase revenues, control our operating costs, and our ability to maintain compliance with the covenants and restrictions on our debt obligations (or obtain waivers from our lender in the event of non-compliance), and our ability to raise additional capital, if necessary. There can be no assurance that we will be able to continue to raise additional capital from other sourceson favorable terms or at all, or execute on any other means of improving our liquidity as described above. Additionally, the impact of the COVID-19 pandemic or other sources of instability, including the ongoing war between Russia and Ukraine, instability of financial institutions and political instability in the United States, on the global financial markets may reduce our ability to raise additional capital, if necessary, which could negatively impact our liquidity. We also continue to closely monitor our expenses and, if required, we intend to reduce our operating and capital spending to enhance liquidity. 40
Legal Proceedings We
From time to time, we are involved in legal and administrative proceedings and claims of various types. See Part II, Item 1, “Legal Proceedings,” for additional information. We record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. We review these estimates each accounting period as additional information is known and adjust the loss provision when appropriate. If a matter is both probable to result in liability and the amounts of loss can be reasonably estimated, we estimate and disclose the possible loss or range of loss to the extent necessary to make the consolidated financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in our consolidated financial statements. Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating transactions that are not required to be reflected on our balance sheet except as discussed below.
We occasionally enter into construction contracts that include a performance bond. As these contracts progress, we continually assess the probability of a payout from the performance bond. Should we determine that such a payout is probable, we would record a liability.
In addition, we have various contractual arrangements, under which we have committed to purchase certain minimum quantities of goods or services on an annual basis.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties. Operating leases include minimum payments under leases for our facilities and certain equipment; see Item 2, “Properties,” for more information. Purchase commitments represent enforceable and legally binding agreements with suppliers to purchase goods or services. As of March 31, 2016, we are committed to make the following payments under contractual obligations (in thousands):
| | | | Payments Due by Period | | | | | | | Less than | | | | | | | | | | | More than | | | Total | | | 1 year | | | 1-3 Years | | | 3-5 Years | | | 5 Years | | Non-cancellable purchase commitments | $ | 20,403 | | | $ | 20,403 | | | $ | - | | | $ | - | | | $ | - | | Senior Term Loans | | 4,167 | | | | 2,667 | | | | 1,500 | | | | - | | | | - | | Operating leases (rent) | | 2,029 | | | | 1,047 | | | | 653 | | | | 329 | | | | - | | Operating leases (other) | | 170 | | | | 88 | | | | 69 | | | | 13 | | | | - | | Total contractual obligations | $ | 26,769 | | | $ | 24,205 | | | $ | 2,222 | | | $ | 342 | | | $ | - | |
Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (IASB) issued, ASU Revenue from Contracts with Customers 2014-09 (Topic 606). The guidance substantially converges final standards on revenue recognition betweenJune 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in ASU 2016-13 provide more decision-useful information about the expected credit losses on financial instruments and IASB providingother commitments to extend credit held by a framework on addressing revenue recognition issues and, upon itsreporting entity at each reporting date. Following the release of ASU 2019-10 in November 2019, the new effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles. The ASU is effective foras long as we remain a smaller reporting company, would be annual reporting periods beginning after December 15, 2017.2022. We are currently evaluatingevaluated the impact if any,of the adoption of ASU 2014-09 may2016-13, and we do not expect it to have a material impact on our current practices.consolidated financial statements. In July 2014,October 2021, the FASB issued ASU 2014-12, Compensation – Stock Compensation2021-08, Business Combinations (Topic 718)805): Accounting for Share Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period. To account for such awards, a reporting entity should apply existing guidance in FASB Accounting Standards Codification Topic 718, Compensation – Stock Compensation, as it relates to awardsContract Assets and Contract Liabilities from Contracts with performance conditions that affect vesting. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. This ASU is effective for annual reporting periods and interim periods, within those annual periods beginning after December 15, 2015. We are currently evaluating the impact, if any, the adoption of ASU 2014-12 may have on our current practices. In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern. The new standard explicitly requires the assessment at interim and annual periods, and provides management with its own disclosure guidance. This ASU is effective for annual reporting periods and interim periods, within those annual periods ending after December 15, 2016. We are currently evaluating the impact, if any, the adoption of ASU 2014-15 may have on our current practices.
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In April 2015, the FASB issued ASU 2015-03 Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Customers. The amendments in ASU 2015-03 require an entity to present debt issuance costs on2021-08 will improve the balance sheet asaccounting for acquired revenue contracts with customers in a direct deduction frombusiness combination. Following the related debt liability as opposed to an asset. Amortizationrelease of ASU 2021-08 in October 2021, the costsnew effective date will continue to be reported as interest expense. This ASU is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years.2022. We are currently evaluatingevaluated the impact, if any,impact of the adoption of ASU 2015-03 may have on our current practices2021-08, and currentlywe do not believe there will be anexpect it to have a material impact on our consolidated results of operations, financial condition, or cash flow.statements.
In June 2015,November 2021, the FASB issued ASU 2015-10 Technical Corrections and Improvements. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The amendments in ASU 2015-10 clarify and correct some2021-10 will improve financial reporting by requiring disclosures that increase the transparency of transactions with government accounted for by applying a grant or contribution accounting model by analogy. Following the difference that arose between original guidance from FASB, EITF and other sources, and the translation intorelease of ASU 2021-10 in November 2021, the new Codification. This ASU is effective fordate will be annual reporting periods beginning after December 15, 2015,2021. As of April 1, 2022, we adopted ASU 2021-10 and interim periods within those fiscal years. We are currently evaluating thenoted no material impact if any, the adoption of ASU 2015-10 may have on our current practices and currently do not believe there will be an impact on our consolidated results of operations, financial condition, or cash flow. In July 2015, the FASB issued ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in ASU 2015-11 clarify the proper way to identify market value in the use of lower of cost or market value valuation method. As market value could be determined multiple ways under prior standards, it will now be considered as net realizable value. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. We are currently evaluating the impact, if any, the adoption of ASU 2015-11 may have on our current practices.
In September 2015, the FASB issued ASU 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined. This ASU is effective for annual reporting periods beginning after December 15, 2015, and interim periods within those fiscal years. We are currently evaluating the impact, if any, the adoption of ASU 2015-16 may have on our current practices, and currently do not believe there will be an impact on our consolidated results of operations, financial condition, or cash flow.
In November 2015, the FASB issued ASU 2015-17 Balance Sheet Classification of Deferred Taxes. This ASU simplifies the presentation of deferred income taxes and requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. We early-adopted ASU 2015-17 effective January 1, 2016 on a prospective basis. Adoption of this ASU resulted in all deferred tax assets and liabilities being presented as non-current in the Consolidated Balance Sheet as of January 1, 2016. No prior periods were retrospectively adjusted.
In January 2016, the FASB issued ASU 2016-01 Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01 will enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the impact, if any, the adoption of ASU 2016-01 may have on our current practices.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the effects adoption of this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent consideration. The ASU is effective for annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact, if any, the adoption of ASU 2016-08 may have on our current practices.
In March 2016, the FASB issued ASU 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 will simplify several aspects of the accounting for share-based payment transactions, including tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. We are currently evaluating the impact, if any, the adoption of ASU 2016-09 may have on our current practices.
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In April 2016, the FASB issued ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in ASU 2016-10 will clarify the identification of performance obligations and the licensing implementation guidance. The ASU is effective for annual reporting periods beginning after December 15, 2017. We are currently evaluating the impact, if any, the adoption of ASU 2016-10 may have on our current practices.
We do not believe that, outside of those disclosed here, there are any other recently issued accounting pronouncements that will have a material impact on our consolidated financial statements. Critical Accounting Policies and Estimates The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ under different assumptions or conditions. Our accounting policies that involve the most significant judgments and estimates are as follows: | ·
| Valuation of long-lived assets;
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| Stock-based compensation;
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| Fair value of financial instruments.
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Revenue recognition We recognize revenue for product sales upon customer acceptance, which can occur at the time of delivery, installation, or post-installation, where applicable, provided persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Existing customers are subject to ongoing credit evaluations based on payment history and other factors. If it is determined during the arrangement that collectability is not reasonably assured, revenue is recognized on a cash basis of accounting. Certain of our contracts involve retention amounts which are contingent upon meeting certain performance requirements through the expiration of the contract warranty periods. For contractual arrangements that involve retention, we recognize revenue for these amounts upon the expiration of the warranty period, meeting the performance requirements and when collection of the fee is reasonably assured.
For certain arrangements, such as contracts to perform research and development, prototype development contracts and certain customized product sales, we record revenues using the percentage-of-completionover-time method, measured by the relationship of costs incurred to total estimated contract costs. Percentage-of-completionOver-time revenue recognition accounting is predominantly used on certain turnkey power systems installations for electric utilities and long-term prototype development contracts with the U.S. government. In addition, some contracts contain an element of variable consideration, including liquidated damages and/or penalties, which requires payment to the customer in the event that delivery timelines or milestones are not met. We follow thisestimate the total consideration payable by the customer when the contracts contain variable consideration provisions, based on the most likely amount anticipated to be recognized for transferring the promised goods or services. As a result, we may constrain revenue to the extent that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Significant judgement is required to estimate the total expected costs and variable consideration for projects that typically have a timeline of 12-24 months. Any increase or decrease in estimated costs to complete a performance obligation without a corresponding change to the contract price could impact the calculation of cumulative revenue to date and gross profit on the project. Similar, if we recognize revenue based upon our current estimate of variable consideration, and our estimate is later adjusted, we may be required to increase or decrease cumulative revenue to date and gross profit on the project. Factors that may result in a change to our estimate include delays in manufacturing, unforeseen engineering problems, the performance of subcontractors and material suppliers, among others. We have a long history of working with multiple types of projects and preparing cost estimates, and we rely on the expertise of key personnel to prepare what we believe are reasonable best estimates given available facts and circumstances. Due to the nature of the work involved, however, judgment is involved to estimate the total costs to complete, and the amounts estimated could have a material impact on the revenue we recognize in each accounting period. We cannot estimate unforeseen events and circumstances which may result in actual results being materially different from previous estimates. See Note 4, “Revenue Recognition,” for additional information. Business Acquisitions We account for acquisitions using the purchase method since reasonably dependableof accounting in accordance with ASC 805, Business Combinations. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Intangible assets, if identified, are also recorded. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions as well as the use of specialists as needed. The Company utilizes management estimates and an independent third-party valuation firm to assist in determining the fair values of assets acquired, including intangible assets and liabilities assumed. The primary intangible assets acquired include customer relationship and trade names. Intangible assets are initially valued using a methodology commensurate with the intended use of the asset. The fair value of customer relationships is measured using the multi-period excess earnings method (“MPEEM”). The fair value of the trade names is measured using a relief-from-royalty (“RFR”) approach. The basis for future sales projections for both the MPEEM and RFR are based on internal revenue forecasts which the Company believes represents reasonable market participant assumptions. The future cash flows are discounted using an applicable discount rate. The key uncertainties in the calculations, as applicable, are the selection of an appropriate royalty rate, assumptions used in developing estimates of future cash flows, including revenue growth and expense forecasts, assumed customer attrition rates, as well as perceived risks associated with those forecasts in determining the revenuesdiscount rate. There is inherent uncertainty in forecasted cash flows and costs applicable to various stages of a contract can be made. However, the ability to reliably estimate total costs at completion is challenging, especially on long-term prototype development contracts,therefore, actual results may differ and could result in a subsequent impairment charge of acquired intangibles and/or goodwill. The consideration for our acquisitions may include future payments that are contingent upon the occurrence of a particular event. We record a contingent consideration obligation for such contingent consideration payments at fair value on the acquisition date. We estimate the fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and the likelihood of making related payments. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in contract estimates. For contracts where reasonably dependable estimatesany of the revenues and costs cannot be made, we followassumptions described above, can materially impact the completed-contract method. We enter into sales arrangements that may provide for multiple deliverables to a customer. Sales of certain products may include extended warranty and support or service packages, and at times include performance bonds. As these contracts progress, we continually assess the probability of a payout from the performance bond. Should we determine that such a payout is likely; we would record a liability. We would reduce revenue to the extent a liability is recorded. In addition, we enter into licensing arrangements that include training services.
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Deliverables are separated into more than one unit of accounting when (1) the delivered element(s) have value to the customer on a stand-alone basis, and (2) delivery of the undelivered element(s) is probable and substantially in our control. In general, revenues are separated between the different product shipments which have stand-alone value, and the various services to be provided. Revenue for product shipments is recognized in accordance with our policy for product sales, while revenues for the services are recognized over the period of performance. We identify all goods and/or services that are to be delivered separately under a sales arrangement and allocate revenue to each deliverable based on the element’s fair value as determined by vendor-specific objective evidence (“VSOE”), which is the price charged when that element is sold separately, or third-party evidence (“TPE”). When VSOE and TPE are unavailable, fair value is based on our best estimate of selling price utilizing a cost plus reasonable margin consistent with how we have set pricing historicallycontingent consideration recorded at each reporting period. See Note 3, "Acquisitions," for similar products and services. When our estimates are used to determine fair value, we make our estimates using reasonable and objective evidence to determine the price. We review VSOE and TPE at least annually. If we conclude we are unable to establish fair values for one or more undelivered elements within a multiple-element arrangement using VSOE then we use TPE or the best estimate of the selling price for that unit of accounting, being the price at which the vendor would transact if the unit of accounting were sold by the vendor regularly on a standalone basis.additional information.
Our license agreements provide either for the payment of contractually determined paid-up front license fees or milestone based payments in consideration for the grant of rights to manufacture and or sell products using our patented technologies or know-how. Some of these agreements provide for the release of the licensee from intellectual property infringements past and future claims. When we can determine that we have no further obligations other than the grant of the license and that we have fully transferred the technology knowhow, we will recognize the revenue. In certain arrangements we may also agree to provide training services to transfer the technology know-how. In other license arrangements we have determined that the licenses have no standalone value to the customer and are not separable from training services as we can only fully transfer the technology knowhow through the training component. Accordingly, we account for these arrangements as a single unit of accounting, and recognize revenue over the period of its performance and milestones that have been achieved. Costs for these arrangements are expensed as incurred.
In December 2015, we entered into a set of strategic agreements valued at approximately $210.0 million with Inox, which includes a multi-year supply contract pursuant to which we will supply electric control systems to Inox and a license agreement allowing Inox to manufacture a limited number of electrical control systems over the next three to four years. We determined this license has standalone value to the customer and can be separated from the supply contract. The license agreement includes customer acceptance criteria to demonstrate the know-how to manufacture the electrical control systems has been fully transferred. We will defer revenue recognition for the allocable portion of the license until this acceptance criteria has been met.
In March 2016, we entered into a set of agreements to jointly develop an advanced low cost manufacturing process for second generation high temperature superconductor wire with BASF. In the joint development, our manufacturing know-how for our Amperium® superconductor wire and BASF's chemical solution deposition production technology will be combined. As part of the agreements, we also entered into a royalty-bearing, non-exclusive license under which we will provide BASF a specified portion of our second generation (2G) high temperature superconductor (HTS) wire manufacturing technology. We determined that the license rights we provide to BASF have standalone value from the ongoing joint development effort. We transferred the license rights to BASF in March 2016 recording $3.0M of license revenues in the fiscal year ended March 31, 2016 as there were no remaining obligations associated with these rights. Any newly developed intellectual property as a result of the joint development will be owned by BASF. Should this development effort be successful, we have the right to incorporate this new technology into our manufacturing process on a royalty-free basis. BASF has also agreed to make guaranteed annual payments to us through 2017 and has an option to continue the joint development through 2018. We will record revenue for the research and development services we are providing over the term of the arrangement.
We have elected to record taxes collected from customers on a net basis and do not include tax amounts in revenue or costs of revenue.
Customer deposits received in advance of revenue recognition are recorded as deferred revenue until customer acceptance is received. Deferred revenue also represents the amount billed to and/or collected from commercial and government customers on contracts which permit billings to occur in advance of contract performance/revenue recognition.
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Accounts Receivable
Accounts receivable consist of amounts owed by commercial companies and government agencies. Accounts receivable are stated net of allowances for doubtful accounts. Our accounts receivable relate principally to a limited number of customers. As of March 31, 2016, Inox accounted for approximately 84% of our total receivable balance, with no other customers accounting for greater than 10% of the balance. As of March 31, 2015, Inox accounted for approximately 56% of our total receivable balance, with no other customers accounting for greater than 10% of the balance. Changes in the financial condition or operations of our customers may result in delayed payments or non-payments which would adversely impact our cash flows from operating activities and/or our results of operations. As such we may require collateral, advanced payment or other security based upon the customer history and/or creditworthiness. In determining the allowance for doubtful accounts, we evaluate the collectability of accounts receivable based primarily on the probability of recoverability based on historical collection and write-off experience, the age of past due receivables, specific customer circumstances, and current economic trends. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances may be required. Failure to accurately estimate the losses for doubtful accounts and ensure that payments are received on a timely basis could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Inventory
Inventories include material, direct labor and related manufacturing overhead, and are stated at the lower of cost or market determined on a first-in, first-out basis. We record inventory when we take delivery and title to the product according to the terms of each supply contract.
Program costs may be deferred and recorded as inventory on contracts on which costs are incurred in excess of approved contractual amounts and/or funding, if future recovery of the costs is deemed probable.
At each balance sheet date, we evaluate our ending inventories for excess quantities and obsolescence. Inventories that management considers excess or obsolete are reserved. Management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. Once inventory is written down and a new cost basis is established, it is not written back up if demand increases.
We recorded inventory reserves of $2.7 million during fiscal 2015 and $1.4 million during fiscal 2014, respectively, based on evaluating our ending inventories for excess quantities and obsolescence. We recorded an inventory reserve of approximately $63.9 million during fiscal 2010 based on our evaluation of forecasted demand in relation to the inventory on hand and market conditions surrounding our products as a result of the assumption that Sinovel and certain other customers in China would fail to meet their contractual obligations and demand that was previously forecasted would fail to materialize. If, in any period, we are able to sell inventories that were not valued or that had been reserved in a previous period, related revenues would be recorded without any offsetting charge to cost of revenues, resulting in a net benefit to our gross profit in that period. In fiscal 2015, 2014, and 2013, $5.0 million, $8.0 million, and $4.3 million respectively, were recognized as a net benefit to gross profit for inventory previously reserved in fiscal year 2010.
Valuation of long-lived assets We periodically evaluate our long-lived assets, consisting principally of fixed and amortizable intangible assets for potential impairment. In accordance with the applicable accounting guidance for the treatment of long-lived assets, we review the carrying value of our long-lived assets or asset group that is held and used, including intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Under the held and used approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The determination of our asset groups involves a significant amount of judgment, assumptions and estimates. We evaluate our long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable from the estimated undiscounted future cash flows. Our judgments regarding the existence of impairment indicators are based on market and operational performance. Indicators of potential impairment include: | • | ·a significant change in the manner in which an asset group is used;
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| • | a significant changedecrease in the manner in whichmarket value of an asset group is used;group; |
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| • | ·identification of other impaired assets within a reporting unit;
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| • | a significant decreaseadverse change in its business or the market value of an asset group;industry in which it is sold; |
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| identification of other impaired assets within a reporting unit;
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| a significant adverse change in its business or the industry in which it is sold;
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| a current period operating cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the asset group; and |
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| significant advances in our technologies that require changes in our technologies that require changes in our manufacturing process. |
We evaluate recoverability of long-lived assets and definite-lived intangible assets by estimating the undiscounted future cash flows associated with the expected uses and disposition of those assets. When those comparisons indicate that the carrying value of those assets is greater than the undiscounted cash flows, we recognize an impairment loss for the amount that the carrying value exceeds the fair value. The Company has not made any material changes to the method of evaluating for impairment during the last three years. There were no indicators requiring further impairment testing on our long-lived assets during the fiscal years ended March 31, 2023 or 2022. Goodwill Goodwill represents the excess of cost over net assets of acquired businesses that are consolidated. We perform our annual assessment of goodwill on February 28th of each fiscal year and whenever events or changes in circumstances or a triggering event indicate that the carrying amount may not be recoverable. An entity is permitted to first assess qualitatively whether it is necessary to perform a goodwill impairment test. Significant judgment is required to determine if an indication of impairment has taken place. Factors to be considered include the following: adverse change in operating results, decline in strategic business plans, significantly lower future cash flows, and sustainable declines in market data such as market capitalization. The quantitative impairment test is required only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. We determine the fair value of a reporting unit, using a methodology which combines an income approach, using a discounted cash flow method, with a market approach. The income approach includes estimates and assumptions about revenue growth rates, operating margins and terminal growth rates, discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. These estimates are based on historical experiences, our projects of future operating activity and our weighted-average cost of capital. A significant change in events, circumstances or any of these assumptions could adversely affect these estimates, which could result in an impairment. We performed our annual assessment of goodwill on February 28, 2023 and noted no triggering events from the analysis date to March 31, 2023 and determined that there was no impairment to goodwill. See Note 5, “Goodwill,” for further information regarding our goodwill valuation assumptions. Income taxes Our provision for income taxes is composedcomprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current fiscal year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards using expected tax rates in effect in the years during which the differences are expected to reverse. During November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires thatAll deferred tax assets and liabilities be classified as non-current in a statement of financial position. We early-adopted ASU 2015-17 effective January 1, 2016 on a prospective basis. Adoption of this ASU resulted in all deferred tax assets and liabilities beingare presented as non-current in the Consolidated Balance Sheet as of January 1, 2016. No prior periods were retrospectively adjusted.Sheet. We regularly assess our ability to realize our deferred tax assets. Assessments of the realization of deferred tax assets require that management consider all available evidence, both positive and negative, and make significant judgments about many factors, including the amount and likelihood of future taxable income. Based on all the available evidence, we have recorded valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realizable due to the taxable losses that have been incurred since our inception and uncertainty around our future profitability. Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. We include interest and penalties related to gross unrecognized tax benefits within the provision for income taxes. See Note 11,13, “Income Taxes,” of our consolidated financial statements for further information regarding our income tax assumptions and expenses. We evaluate our permanent reinvestment assertions with respect to foreign earnings at each reporting period. We have not recorded a deferred tax asset for the temporary difference associated with the excess of the tax basis over the book basis in our Austrian and Chinese subsidiaries as the future tax benefit is not expected to reverse in the foreseeable future. We have recorded a deferred tax liability as of March 31, 2016 for the undistributed earnings of our remaining foreign subsidiaries for which we can no longer assert are permanently reinvested. The total amount of undistributed earnings available to be repatriated at March 31, 2016 was $1.2 million resulting in the recording of a $0.4 million net deferred federal and state income tax liability. See Note 11, “Income Taxes,” of our consolidated financial statements for the results of this assessment.
Stock-based compensation
We measure compensation cost arising from the grant of share-based payments to employees at fair value and recognize such cost over the period during which the employee is required to provide service in exchange for the award, usually the vesting period. Total stock-based compensation expense recognized during the fiscal years ended March 31, 2016, 2015, and 2014 was $3.2 million, $5.9 million, and $10.7 million, respectively. For awards with service conditions only, we recognize compensation cost on a straight-line basis over the requisite service/vesting period. For awards with performance conditions, accruals of compensation cost are made based on the probable outcome of the performance conditions. The cumulative effect of changes in the probability outcomes are recorded in the period in which the changes occur.
Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. Management determined that expected volatility rates should be estimated based on historical and implied volatilities of our common stock. The expected term represents the average time that the options that vest are expected to be outstanding based on the vesting provisions and our historical exercise, cancellation and expiration patterns. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if circumstances change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate an expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Note 12, “Stockholders’ Equity,” of our consolidated financial statements for further information regarding our stock-based compensation assumptions and expenses.
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Contingencies
From time to time, we are involved in legal and administrative proceedings and claims of various types. We record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. We review these estimates each accounting period as additional information is known and adjust the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in our consolidated financial statements. If, with respect to a matter, it is not both probable to result in liability and the amount of loss cannot be reasonably estimated, an estimate of possible loss or range of loss shall be disclosed unless such an estimate cannot be made. We do not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred. During the fiscal year ended March 31, 2015, we reversed legal expenses of approximately $2.2 million incurred in connection with the Ghodawat arbitration that were covered by our Catlin settlement. See Note 13, “Commitments and Contingencies”, of our consolidated financial statements for further information.
Product Warranty
Warranty obligations are incurred in connection with the sale of our products. We generally provide a one to three year warranty on our products, commencing upon installation. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. Future warranty costs are estimated based on historical performance rates and related costs to repair given products. The accounting estimate related to product warranty involves judgment in determining future estimated warranty costs. Should actual performance rates or repair costs differ from estimates, revision to the estimated warranty liability would be required.
Debt
For debt arrangements, we consider any embedded equity-linked components and account for the fair value of any embedded warrants and derivatives. We elect not to use the fair value option for recording debt arrangements and elect to record the debt at the stated value of the loan agreement on the date of issuance. Any other elements present are reviewed to determine if they are embedded derivatives requiring bifurcation and requiring valuation under the fair value option. Derivatives and warrants, which meet the condition to satisfy an obligation by issuing a variable number of equity shares, are recorded at fair value. The carrying value assigned to the host instrument will be the difference between the previous carrying value of the host instrument and the fair value of the warrants and derivatives. There is no immediate gain/loss from the initial recognition and measurement if the embedded derivative is accounted for separately from its host contract. There is an offsetting debt discount or premium as a result of the fair value assigned to the warrants and derivatives, as well as any debt issuance costs, which is amortized under the effective interest method over the term of the loan. Each reporting period, fair value is assessed for the warrants and derivatives with the change in value being recorded as other income/loss. See Note 9, “Debt,” and Note 10, “Warrants and Derivative Liabilities,” of our consolidated financial statements for a full discussion regarding the activity and financial impact for our debt, warrants and derivative liabilities.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, derivatives, warrants, and the term loans. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses due to their short nature approximate fair value at March 31, 2016 and 2015. The estimated fair values have been determined through information obtained from market sources and management estimates. The fair value for the debt and warrant arrangements have been estimated by management based on the terms that we believe we could obtain in the current market for debt with the same terms and similar maturities. The warrants are subject to revaluation at each balance sheet date, and any change in fair value will be recorded as a change in fair value in other (expense) income until the earlier of the warrants’ exercise or expiration. We rely on assumptions used in a lattice model to determine the fair value of the warrants. We have appropriately valued the warrants within Level 3 of the valuation hierarchy.
ItemItem 7A.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time as our business practices evolve and could have a material adverse impact on our financial results.
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Cash and cash equivalents
Our exposure to market risk through financial instruments, such as investments in marketable securities, is limited to interest rate risk and is not material. Our investments in marketable securities consist primarily of government-backed securities and commercial paper and are designed, in order of priority, to preserve principal, provide liquidity, and maximize income. Investments are monitored to limit exposure to mortgage-backed securities and similar instruments responsible for the recent turmoil in the credit markets. Interest rates are variable and fluctuate with current market conditions. We do not believe that a 10% change in interest rates would have a material impact on our financial position or results of operations.
Foreign currency exchange risk
The functional currency of each of our foreign subsidiaries is the U.S. dollar, except for AMSC Austria, for which the local currency (Euro) is the functional currency, and AMSC China, for which the local currency (Renminbi) is the functional currency. The assets and liabilities of AMSC Austria and AMSC China are translated into U.S. dollars at the exchange rate in effect at the balance sheet date and income and expense items are translated at average rates for the period. Cumulative translation adjustments are excluded from net income (loss) and shown as a separate component of stockholders’ equity.
We face exposure to movements in foreign currency exchange rates whenever we, or any of our subsidiaries, enter into transactions with third parties that are denominated in currencies other than our functional currency. Intercompany transactions between entities that use different functional currencies also expose us to foreign currency risk. Gross margins of products we manufacture in the U.S and sell in currencies other than the U.S. dollar are also affected by foreign currency exchange rate movements. In addition, a portion of our earnings is generated by our foreign subsidiaries, whose functional currencies are other than the U.S. dollar, and our revenues and earnings could be materially impacted by movements in foreign currency exchange rates upon the translation of the earnings of such subsidiaries into the U.S. dollar. If the functional currency for AMSC Austria and AMSC China were to fluctuate by 10% the net effect would be immaterial to our consolidated financial statements.
Foreign currency gains (losses), are included in net loss and were ($2.3) million, $2.7 million and ($0.1) million for the fiscal years ended March 31, 2016, 2015 and 2014, respectively.
48This item is not required for smaller reporting companies.
ItemItem 8.
| FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors and Stockholders of American Superconductor Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of American Superconductor Corporation and its subsidiaries (collectively, the “Company”)(the Company) as of March 31, 20162023 and 2015, and2022, the related consolidated statements of operations, comprehensive loss, stockholders’income (loss), stockholders' equity and cash flows for eachthe years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the three years in the period ended March 31, 2016, and the financial statement schedule of American Superconductor Corporation and subsidiaries listed in Item 15Company as of March 31, 20162023 and 20152022, and the results of its operations and its cash flows for each of the three years then ended, in conformity with accounting principles generally accepted in the period ended March 31, 2016. We also have audited the Company’s internal control over financial reporting asUnited States of March 31, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The Company’s management is responsible for these financial statements and the financial statement schedule, 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 Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements, and the financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.America. We conducted our auditshave also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated May 31, 2023 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, and whether effective internal control over financial reporting was maintained in all material respects.due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.statements. We believe that our audits provide a reasonable basis for our opinions.opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding
Critical AuditMatters The critical audit matters communicated below are matters arising from the reliabilitycurrent period audit of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertainwere communicated or required to be communicated to the maintenance of recordsaudit committee and that: (1) relate to accounts or disclosures that in reasonable detail, accurately and fairly reflectare material to the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements and (2) involve especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter 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 (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effectany way our opinion on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Superconductor Corporation and its subsidiaries as of March 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2016, in conformity with accounting principles generally accepted in the United States of America, and in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, presents fairlyand we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition As described in all material respectsNotes 2 and 4 of the information set forth therein. Alsoconsolidated financial statements, a significant portion of the Company’s revenue is generated pursuant to nonstandard written contractual arrangements to design, develop, and/or manufacture products, and to provide related technical and other services according to the specifications of the customers. Because of the uniqueness of the terms and conditions in our opinion, American Superconductor Corporationthe customer contracts, there is significant analysis, and its subsidiaries maintained,at times significant judgments, that are made by management when evaluating the contracts for proper revenue recognition. The Company’s performance obligations under these contractual agreements are satisfied over time. For performance obligations satisfied over time, revenue is generally recognized by measuring progress through costs incurred to date relative to total estimated costs at completion, which requires management to estimate both total expected project costs and expected gross margin, including evaluating customer change orders, to determine the appropriate amount of revenue to recognize, which can require significant management judgment. We identified revenue recognition pertaining to customer contracts satisfied over time as a critical audit matter as there are significant judgments exercised by management in all material respects, effective internal control overdetermining revenue recognition. Given the high degree of management judgment involved in analyzing the terms and conditions of the Company’s unique customer contracts and the various management estimates that are used in the revenue calculations, the audit effort required to evaluate management’s judgments in determining revenue recognition for the Company’s contracts was extensive and required a high degree of auditor judgment. Our audit procedures related to revenue recognition included the following, among others: | ● | We obtained an understanding of the relevant controls related to revenue recognition and tested controls specific to management’s analysis of customer contract terms and application of relevant accounting guidance as well as determination of significant assumptions used in computing revenue for design and operating effectiveness, |
| ● | We selected a sample of contracts with customers and related revenue transactions and performed the following audit procedures: |
| o | Obtained customer contract, related invoices, purchase orders, and management revenue recognition analysis for each testing selection, to evaluate if relevant contractual terms and transaction price were appropriately considered by management and conclusions on revenue recognition method were in accordance with the relevant accounting guidance; and |
| o | Evaluated management’s estimations of total contract cost and contract profit by assessing actual costs to date against projections made throughout the course of the contract term. |
Goodwill Impairment As described in Notes 2 and 5 to the consolidated financial reportingstatements, the Company’s goodwill balance was $43.5 million as of March 31, 2016,2023. Management tests goodwill for impairment, at the reporting unit level, as of February 28 of each fiscal year, or more frequently if events or changes in circumstances indicate the asset might be impaired. To test goodwill for impairment, management compares the estimated fair value of each reporting unit with the carrying amount of each reporting unit, including the recorded goodwill. In estimating the fair value of each reporting unit, management uses a methodology which combines an income approach, using a discounted cash flows method, with a market approach, using a peer-based guideline company method based on criteria established in Internal Control — Integrated Framework issued by the Committeeaverage of Sponsoring Organizationspublished multiples of earnings of comparable entities with similar operations and economic characteristics. We identified the goodwill impairment assessment for the Company’s reporting units with material goodwill as a critical audit matter because of the Treadway Commission in 2013.significant estimates and assumptions used by management when estimating the fair value of the these reporting units, including management’s forecasts of revenue and expense growth rates and management’s selection of the discount rates for the income approaches and management’s estimates of the multiples of earnings of comparable entities with similar operations and economic characteristics for the market approaches. Auditing management’s estimates and assumptions involved a high degree of auditor judgment and increased audit effort, including the use of our fair value specialists, due to the impact these assumptions have on the goodwill impairment assessment. Our audit procedures related to the assessment of goodwill impairment included the following, among others: | ● | We obtained an understanding of the relevant controls relating to management's goodwill impairment assessment and tested such controls for design and operating effectiveness, including controls over management's review of the significant assumptions used in the estimate of fair value, such as forecasted revenue growth rates, gross margin, and selected discount rates. | | ● | We evaluated the reasonableness of management's forecasts of revenue and expense growth rates, including comparing projections to historical results. |
| ● | We tested the underlying data used by management in their development of forecasts of revenue and expense growth rates for accuracy and completeness. |
| ● | We evaluated the reasonableness of management's selection of comparable entities with similar operations and economic characteristics. | | ● | With the assistance of our valuation specialists, we evaluated the reasonableness of the Company's valuation methodology and significant assumptions by: |
| o | Evaluating the reasonableness of the discount rate and multiples of earnings by comparing the underlying source information to publicly available market data and verifying the accuracy of the calculations. |
| o | Evaluating the appropriateness of the valuation methods used by management and testing their mathematical accuracy. |
/s/ RSM US LLP
We have served as the Company's auditor since 2013. Boston, Massachusetts
May 31, 20162023 49
AMERICAN SUPERCONDUCTOR CORPORATION PART I — FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (In thousands) | March 31, | | | March 31, | | | March 31, | | March 31, | | | 2016 | | | 2015 | | | 2023 | | | 2022 | | ASSETS | | | | | | | | | | | | | | Current assets: | | | | | | | | | Cash and cash equivalents | $ | 39,330 | | | $ | 20,490 | | | $ | 23,360 | | | $ | 40,584 | | Accounts receivable, net | | 19,264 | | | | 9,879 | | | Accounts receivable | | | 30,665 | | | 20,280 | | Inventory | | 18,512 | | | | 20,596 | | | 36,986 | | | 23,666 | | Prepaid expenses and other current assets | | 5,778 | | | | 10,764 | | | 13,429 | | | 7,052 | | Restricted cash | | 457 | | | | 2,822 | | | | 1,733 | | | | 2,754 | | Total current assets | | 83,341 | | | | 64,551 | | | 106,173 | | | 94,336 | | | | | | | | | | | Property, plant and equipment, net | | 49,778 | | | | 56,097 | | | 12,309 | | | 13,656 | | Intangibles, net | | 854 | | | | 1,422 | | | 8,527 | | | 11,311 | | Right-of-use asset | | | 2,857 | | | 3,502 | | Goodwill | | | 43,471 | | | 43,471 | | Restricted cash | | 934 | | | | 1,236 | | | 582 | | | 6,148 | | Deferred tax assets | | 96 | | | | 7,766 | | | 1,114 | | | 1,224 | | Other assets | | 315 | | | | 2,753 | | | | 528 | | | | 239 | | | | | | | | | | | Total assets | $ | 135,318 | | | $ | 133,825 | | | $ | 175,561 | | | $ | 173,887 | | | | | | | | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | Accounts payable and accrued expenses | $ | 23,156 | | | $ | 21,615 | | | $ | 38,383 | | | $ | 29,140 | | Note payable, current portion, net of discount of $42 as of March 31, 2016 and $244 as of March 31, 2015 | | 2,624 | | | | 3,756 | | | Derivative liabilities | | 3,227 | | | | 2,999 | | | Deferred revenue | | 12,000 | | | | 11,019 | | | Deferred tax liabilities | | - | | | | 7,843 | | | Lease liability, current portion | | | 808 | | | 740 | | Debt, current portion | | | 75 | | | 72 | | Contingent consideration | | | 1,270 | | | 1,200 | | Deferred revenue, current portion | | | | 43,572 | | | | 22,812 | | Total current liabilities | | 41,007 | | | | 47,232 | | | 84,108 | | | 53,964 | | | | | | | | | | | Note payable, net of discount of $133 as of March 31, 2016 and $290 as of March 31, 2015 | | 1,367 | | | | 3,877 | | | Deferred revenue | | 9,269 | | | | 2,756 | | | Deferred revenue, long term portion | | | 7,188 | | | 7,222 | | Lease liability, long term portion | | | 2,184 | | | 2,900 | | Deferred tax liabilities | | 63 | | | | - | | | 243 | | | 297 | | Debt, long-term portion | | | 15 | | | 90 | | Other liabilities | | 63 | | | | 67 | | | | 26 | | | | 25 | | Total liabilities | | 51,769 | | | | 53,932 | | | | 93,764 | | | | 64,498 | | | | | | | | | | | Commitments and contingencies (Note 13) | | | | | | | | | Commitments and contingencies (Note 17) | | | | | | | | | | | | | | | | Stockholders' equity: | | | | | | | | | Common stock, $0.01 par value, 75,000,000 shares authorized; 14,107,126 and 9,624,275 shares issued at March 31, 2016 and 2015, respectively | | 141 | | | | 96 | | | Common stock, $0.01 par value, 75,000,000 shares authorized; 29,937,119 and 28,919,990 shares issued and 29,539,488 and 28,522,359 shares outstanding at March 31, 2023 and 2022, respectively | | | 299 | | | 289 | | Additional paid-in capital | | 1,011,813 | | | | 985,921 | | | 1,139,113 | | | 1,133,536 | | Treasury stock, at cost, 51,506 and 34,067 shares at March 31, 2016 and 2015, respectively | | (881 | ) | | | (771 | ) | | Treasury stock, at cost, 397,631 at March 31, 2023 and 2022, respectively | | | (3,639 | ) | | (3,639 | ) | Accumulated other comprehensive income (loss) | | 660 | | | | (308 | ) | | 1,571 | | | (291 | ) | Accumulated deficit | | (928,184 | ) | | | (905,045 | ) | | | (1,055,547 | ) | | | (1,020,506 | ) | Total stockholders' equity | | 83,549 | | | | 79,893 | | | | 81,797 | | | | 109,389 | | | | | | | | | | | Total liabilities and stockholders' equity | $ | 135,318 | | | $ | 133,825 | | | $ | 175,561 | | | $ | 173,887 | |
The accompanying notes are an integral part of the consolidated financial statements. 50
AMERICAN SUPERCONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) | Fiscal Year Ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | | Fiscal Year Ended March 31, | | | | | | | | | | | | | | | 2023 | | | 2022 | | Revenues | $ | 96,023 | | | $ | 70,530 | | | $ | 84,117 | | | $ | 105,984 | | | $ | 108,435 | | | | | | | | | | | | | | | Cost of revenues | | 74,041 | | | | 67,442 | | | | 72,858 | | | | 97,463 | | | | 94,943 | | | | | | | | | | | | | | | Gross profit | | 21,982 | | | | 3,088 | | | | 11,259 | | | 8,521 | | | 13,492 | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | Research and development | | 12,303 | | | | 11,878 | | | | 12,173 | | | 8,966 | | | 10,470 | | Selling, general and administrative | | 28,861 | | | | 29,217 | | | | 37,230 | | | 28,700 | | | 27,494 | | Arbitration award expense | | - | | | | 8,987 | | | | - | | | Restructuring and impairments | | 779 | | | | 5,366 | | | | 2,998 | | | Amortization of acquisition related intangibles | | 157 | | | | 157 | | | | 287 | | | 2,746 | | | 2,467 | | Change in fair value on contingent consideration | | | 70 | | | (5,850 | ) | Restructuring | | | | 1,048 | | | | — | | Total operating expenses | | 42,100 | | | | 55,605 | | | | 52,688 | | | 41,530 | | | 34,581 | | | | | | | | | | | | | | | Operating loss | | (20,118 | ) | | | (52,517 | ) | | | (41,429 | ) | | (33,009 | ) | | (21,089 | ) | | | | | | | | | | | | | | Change in fair value of derivatives and warrants | | (228 | ) | | | 3,963 | | | | 1,872 | | | Loss on extinguishment of debt | | - | | | | - | | | | (5,197 | ) | | Gain on sale of minority interests | | 3,092 | | | | - | | | | - | | | Interest expense, net | | (1,037 | ) | | | (1,882 | ) | | | (9,661 | ) | | Other (expense) income, net | | (2,457 | ) | | | 1,596 | | | | (991 | ) | | Interest income, net | | | 252 | | | 75 | | China dissolution | | | (1,921 | ) | | - | | Other expense, net | | | | (148 | ) | | | (28 | ) | | | | | | | | | | | | | | Loss before income tax expense | | (20,748 | ) | | | (48,840 | ) | | | (55,406 | ) | | | | | | | | | | | | | | | Loss before income tax expense (benefit) | | | (34,826 | ) | | (21,042 | ) | Income tax expense (benefit) | | 2,391 | | | | (184 | ) | | | 852 | | | | 215 | | | | (1,849 | ) | | | | | | | | | | | | | | Net loss | $ | (23,139 | ) | | $ | (48,656 | ) | | $ | (56,258 | ) | | $ | (35,041 | ) | | $ | (19,193 | ) | | | | | | | | | | | | | | Net loss per common share | | | | | | | | | | | | | Basic | $ | (1.76 | ) | | $ | (5.74 | ) | | $ | (8.98 | ) | | $ | (1.26 | ) | | $ | (0.71 | ) | Diluted | $ | (1.76 | ) | | $ | (5.74 | ) | | $ | (8.98 | ) | | $ | (1.26 | ) | | $ | (0.71 | ) | | | | | | | | | | | | | | Weighted average number of common shares outstanding | | | | | | | | | | | | | Basic | | 13,178 | | | | 8,477 | | | | 6,262 | | | | 27,848 | | | | 27,203 | | Diluted | | 13,178 | | | | 8,477 | | | | 6,262 | | | | 27,848 | | | | 27,203 | |
The accompanying notes are an integral part of the consolidated financial statements. 51
AMERICAN SUPERCONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS) (In thousands) | Fiscal Year Ended March 31, | | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | | | Net loss | $ | (23,139 | ) | | $ | (48,656 | ) | | $ | (56,258 | ) | | | | | | | | | | | | | Other comprehensive gain (loss), net of tax: | | | | | | | | | | | | Foreign currency translation gains (losses) | | 968 | | | | (2,147 | ) | | | 727 | | Total other comprehensive gain (loss), net of tax | | 968 | | | | (2,147 | ) | | | 727 | | Comprehensive loss | $ | (22,171 | ) | | $ | (50,803 | ) | | $ | (55,531 | ) |
| | | Fiscal Year Ended March 31, | | | | | 2023 | | | 2022 | | Net loss | | $ | (35,041 | ) | | $ | (19,193 | ) | Other comprehensive (loss) gain, net of tax: | | | | | | | | | China dissolution | | | 1,921 | | | | - | | Foreign currency translation loss | | | (59 | ) | | | (14 | ) | Total other comprehensive (loss) gain, net of tax | | | 1,862 | | | | (14 | ) | Comprehensive loss | | $ | (33,179 | ) | | $ | (19,207 | ) |
The accompanying notes are an integral part of the consolidated financial statements. AMERICAN SUPERCONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) | | Common Stock | | Additional | | | | | Accumulated Other | | | | | Total | | | Common Stock | | | Additional | | | | | | | Accumulated Other | | | | | | | Total | | | | Number | | Par | | Paid-in | | Treasury | | Comprehensive | | Accumulated | | Stockholders' | | | Number of Shares | | | Par Value | | | Paid-in
Capital | | | Treasury
Stock | | | Comprehensive Income (Loss) | | | Accumulated Deficit | | | Stockholders' Equity | | | | of Shares | | Value | | Capital | | Stock | | Income (Loss) | | Deficit | | Equity | | | Balance at March 31, 2013 | | | 6,030 | | $ | 60 | | $ | 924,390 | | $ | (313 | ) | $ | 1,112 | | $ | (800,131 | ) | $ | 125,118 | | | Balance at March 31, 2021 | | | | 27,988 | | | $ | 280 | | | $ | 1,121,495 | | | $ | (3,593 | ) | | $ | (277 | ) | | $ | (1,001,313 | ) | | $ | 116,592 | | Issuance of common stock - ESPP | | | 28 | | | — | | | $ | 241 | | | — | | | — | | | — | | | $ | 241 | | Issuance of common stock - Bonus payments | | | 158 | | | 2 | | | 2,278 | | | — | | | — | | | — | | | 2,280 | | Issuance of common stock - restricted shares | | | 404 | | | 4 | | | (4 | ) | | — | | | — | | | — | | | — | | Stock-based compensation expense | | | — | | | — | | | 4,661 | | | — | | | — | | | — | | | 4,661 | | Issuance of stock for 401(k) match | | | 40 | | | — | | | 481 | | | — | | | — | | | — | | | 481 | | Issuance of common stock - Neeltran acquisition | | | 302 | | | 3 | | | 4,384 | | | — | | | — | | | — | | | 4,387 | | Repurchase of treasury stock | | | — | | | — | | | — | | | (46 | ) | | — | | | — | | | (46 | ) | Cumulative translation adjustment | | | — | | | — | | | — | | | — | | | (14 | ) | | — | | | (14 | ) | Net loss | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (19,193 | ) | | | (19,193 | ) | Balance at March 31, 2022 | | | | 28,920 | | | $ | 289 | | | $ | 1,133,536 | | | $ | (3,639 | ) | | $ | (291 | ) | | $ | (1,020,506 | ) | | $ | 109,389 | | Issuance of common stock - ESPP | | | 10 | | | - | | | 168 | | | - | | | - | | | - | | | 168 | | | 60 | | | 1 | | | 234 | | | — | | | — | | | — | | | 235 | | Issuance of common stock - restricted shares | | | 178 | | | 2 | | | 500 | | | - | | | - | | | - | | | 502 | | | 827 | | | 8 | | | (8 | ) | | — | | | — | | | — | | | — | | Stock-based compensation expense | | | - | | | - | | | 10,696 | | | - | | | - | | | - | | | 10,696 | | | — | | | — | | | 4,729 | | | — | | | — | | | — | | | 4,729 | | Issuance of stock for 401(k) match | | | 21 | | | - | | | 425 | | | - | | | - | | | - | | | 425 | | | 130 | | | 1 | | | 622 | | | — | | | — | | | — | | | 623 | | Issuance of common stock-ATM, net of costs | | | 487 | | | 5 | | | 7,453 | | | - | | | - | | | - | | | 7,458 | | | Issuance of common stock to settle liabilities | | | 1,167 | | | 12 | | | 23,468 | | | - | | | - | | | - | | | 23,480 | | | Repurchase of treasury stock | | | - | | | - | | | - | | | (57 | ) | | - | | | - | | | (57 | ) | | Cumulative translation adjustment | | | - | | | - | | | - | | | - | | | 727 | | | - | | | 727 | | | — | | | — | | | — | | | — | | | 1,862 | | | — | | | 1,862 | | Net loss | | | - | | | - | | | - | | | - | | | - | | | (56,258 | ) | | (56,258 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (35,041 | ) | | | (35,041 | ) | Balance at March 31, 2014 | | | 7,893 | | $ | 79 | | $ | 967,100 | | $ | (370 | ) | $ | 1,839 | | $ | (856,389 | ) | $ | 112,259 | | | Issuance of common stock - ESPP | | | 17 | | | - | | | 124 | | | - | | | - | | | - | | | 124 | | | Issuance of common stock - restricted shares | | | 301 | | | 3 | | | (3 | ) | | - | | | - | | | - | | | - | | | Stock-based compensation expense | | | - | | | - | | | 5,936 | | | - | | | - | | | - | | | 5,936 | | | Issuance of stock for 401(k) match | | | 35 | | | - | | | 392 | | | - | | | - | | | - | | | 392 | | | Issuance of common stock-ATM, net of costs | | | 375 | | | 4 | | | 5,835 | | | - | | | - | | | - | | | 5,839 | | | Issuance of common stock-Hudson Bay Capital | | | 909 | | | 9 | | | 5,216 | | | - | | | - | | | - | | | 5,225 | | | Issuance of common stock to settle liabilities | | | 94 | | | 1 | | | 1,322 | | | - | | | - | | | - | | | 1,323 | | | Reverse stock split | | | - | | | - | | | (1 | ) | | - | | | - | | | - | | | (1 | ) | | Repurchase of treasury stock | | | - | | | - | | | - | | | (401 | ) | | - | | | - | | | (401 | ) | | Cumulative translation adjustment | | | - | | | - | | | - | | | - | | | (2,147 | ) | | - | | | (2,147 | ) | | Net loss | | | - | | | - | | | - | | | - | | | - | | | (48,656 | ) | | (48,656 | ) | | Balance at March 31, 2015 | | | 9,624 | | $ | 96 | | $ | 985,921 | | $ | (771 | ) | $ | (308 | ) | $ | (905,045 | ) | $ | 79,893 | | | Issuance of common stock - ESPP | | | 8 | | | - | | | 30 | | | - | | | - | | | - | | | 30 | | | Issuance of common stock - restricted shares | | | 409 | | | 4 | | | (4 | ) | | - | | | - | | | - | | | - | | | Stock-based compensation expense | | | - | | | - | | | 3,248 | | | - | | | - | | | - | | | 3,248 | | | Issuance of stock for 401(k) match | | | 66 | | | 1 | | | 376 | | | - | | | - | | | - | | | 377 | | | Issuance of common stock-equity offering | | | 4,000 | | | 40 | | | 22,242 | | | - | | | - | | | - | | | 22,282 | | | Repurchase of treasury stock | | | - | | | - | | | - | | | (110 | ) | | - | | | - | | | (110 | ) | | Cumulative translation adjustment | | | - | | | - | | | - | | | - | | | 968 | | | - | | | 968 | | | Net loss | | | - | | | - | | | - | | | - | | | - | | | (23,139 | ) | | (23,139 | ) | | Balance at March 31, 2016 | | | 14,107 | | $ | 141 | | $ | 1,011,813 | | $ | (881 | ) | $ | 660 | | $ | (928,184 | ) | $ | 83,549 | | | Balance at March 31, 2023 | | | | 29,937 | | | $ | 299 | | | $ | 1,139,113 | | | $ | (3,639 | ) | | $ | 1,571 | | | $ | (1,055,547 | ) | | $ | 81,797 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements. 53
AMERICAN SUPERCONDUCTOR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) | Fiscal Year Ended March 31, | | | Fiscal Year Ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2023 | | | 2022 | | Cash flows from operating activities: | | | | | | | | | | | | | | Net loss | $ | (23,139 | ) | | | (48,656 | ) | | $ | (56,258 | ) | | | $ | (35,041 | ) | | $ | (19,193 | ) | Adjustments to reconcile net loss to net cash used in operations: | | | | | | | | | | | | | | Depreciation and amortization | | 7,972 | | | | 9,554 | | | | 10,615 | | | | 5,361 | | | 5,341 | | Stock-based compensation expense | | 3,248 | | | | 5,936 | | | | 10,696 | | | | 4,729 | | | 4,661 | | Impairment of minority interest investments | | 746 | | | | 3,464 | | | | 1,265 | | | | Provision for excess and obsolete inventory | | 2,713 | | | | 1,386 | | | | 316 | | | | 1,467 | | | 1,902 | | Write-off prepaid taxes | | 289 | | | | - | | | | 1,426 | | | | Gain on sale from minority interest investments | | (3,092 | ) | | | - | | | | - | | | | Loss from minority interest investments | | 356 | | | | 743 | | | | 1,008 | | | | Change in fair value of derivatives and warrants | | 228 | | | | (3,963 | ) | | | (1,872 | ) | | | Loss on extinguishment of debt | | - | | | | - | | | | 5,197 | | | | Reversal of Catlin legal costs | | - | | | | (2,220 | ) | | | - | | | | Non-cash interest expense | | 359 | | | | 566 | | | | 7,713 | | | | Deferred income taxes | | | 24 | | | (2,403 | ) | Change in fair value of contingent consideration | | | 70 | | | (5,850 | ) | China dissolution | | | 1,921 | | | — | | Non-cash interest income | | | — | | | (49 | ) | Other non-cash items | | 1,462 | | | | (2,436 | ) | | | 1,980 | | | | 600 | | | 525 | | Unrealized foreign exchange gain on cash and cash equivalents | | | (226 | ) | | (186 | ) | Changes in operating asset and liability accounts: | | | | | | | | | | | | | | Accounts receivable | | (9,318 | ) | | | (2,677 | ) | | | 11,379 | | | | (10,360 | ) | | (3,760 | ) | Inventory | | (782 | ) | | | (1,887 | ) | | | 13,043 | | | | (14,796 | ) | | (3,307 | ) | Prepaid expenses and other current assets | | 5,608 | | | | (2,330 | ) | | | 12,512 | | | | (5,757 | ) | | (420 | ) | Accounts payable and accrued expenses | | 1,543 | | | | 5,579 | | | | (10,861 | ) | | | 8,660 | | | 4,695 | | Deferred revenue | | 7,248 | | | | 4,265 | | | | (21,426 | ) | | | | 20,863 | | | | (933 | ) | Net cash used in operating activities | | (4,559 | ) | | | (32,676 | ) | | | (13,267 | ) | | | | (22,485 | ) | | | (18,977 | ) | | | | | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | | | | | | Purchase of property, plant and equipment | | (1,201 | ) | | | (737 | ) | | | (278 | ) | | | (1,236 | ) | | (938 | ) | Proceeds from the sale of property, plant and equipment | | 47 | | | | 18 | | | | 54 | | | | Change in restricted cash | | 2,669 | | | | 2,248 | | | | 4,669 | | | | Proceeds from sale of minority interests | | 3,092 | | | | - | | | | - | | | | Cash paid for acquisition, net of cash received | | | — | | | (11,479 | ) | Proceeds from the maturity of marketable securities | | | — | | | 5,189 | | Change in other assets | | 266 | | | | 280 | | | | (436 | ) | | | | (281 | ) | | | 65 | | Net cash provided by investing activities | | 4,873 | | | | 1,809 | | | | 4,009 | | | | Net cash used in investing activities | | | | (1,517 | ) | | | (7,163 | ) | | | | | | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | | | | | | Employee taxes paid related to net settlement of equity awards | | (110 | ) | | | (401 | ) | | | (57 | ) | | | Proceeds from the issuance of debt, net of expenses | | - | | | | 1,422 | | | | 9,842 | | | | Repurchase of treasury stock | | | — | | | (46 | ) | Repayment of debt | | (4,000 | ) | | | (7,295 | ) | | | (4,615 | ) | | | (73 | ) | | (53 | ) | Proceeds from public equity offering, net | | 22,282 | | | | 14,933 | | | | 7,458 | | | | Proceeds from exercise of employee stock options and ESPP | | 30 | | | | 124 | | | | 168 | | | | | 235 | | | | 241 | | Net cash provided by financing activities | | 18,202 | | | | 8,783 | | | | 12,796 | | | | | 162 | | | | 142 | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash and cash equivalents | | 324 | | | | (540 | ) | | | 333 | | | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | | 29 | | | | (55 | ) | | | | | | | | | | | | | | | Net increase/(decrease) in cash and cash equivalents | | 18,840 | | | | (22,624 | ) | | | 3,871 | | | | Cash and cash equivalents at beginning of year | | 20,490 | | | | 43,114 | | | | 39,243 | | | | Cash and cash equivalents at end of year | $ | 39,330 | | | $ | 20,490 | | | $ | 43,114 | | | | Net decrease in cash, cash equivalents and restricted cash | | | (23,811 | ) | | (26,053 | ) | Cash, cash equivalents and restricted cash at beginning of year | | | | 49,486 | | | | 75,539 | | Cash, cash equivalents and restricted cash at end of year | | | $ | 25,675 | | | $ | 49,486 | | | | | | | | | | | | | | | | Supplemental schedule of cash flow information: | | | | | | | | | | | | | | Cash paid for income taxes, net of refunds | $ | 1,723 | | | $ | 362 | | | $ | 864 | | | | 350 | | | $ | 531 | | Non-cash investing and financing activities | | | Issuance of common stock in connection with the purchase of Neeltran, Inc. | | | — | | | 4,387 | | Issuance of common stock to settle liabilities | | 377 | | | | 1,715 | | | | 24,407 | | | | 623 | | | 2,761 | | Cash paid for interest | | 709 | | | | 1,362 | | | | 990 | | | |
The accompanying notes are an integral part of the consolidated financial statements. 54
1. Nature Nature of the Business and Operations and Liquidity Nature of the Business and Operations American Superconductor Corporation (together with its subsidiaries, “AMSC”“AMSC®” or the “Company”) was founded on April 9,1987. The Company is a leading system provider of megawatt-scale power resiliency solutions that lowerOrchestrate the costRhythm and Harmony of wind powerPower on the Grid™ and enhanceprotect and expand the capability of the Navy's fleet. The Company’s products leverage its proprietary “smart materials” and “smart software and controls” to provide enhanced resiliency and improved performance of themegawatt-scale power grid. In the wind power market, the Company enables manufacturers to field wind turbines through its advanced engineering, support services and power electronics products. In the power grid market, the Company enables electric utilities and renewable energy project developers to connect, transmit and distribute power through its transmission planning services and power electronics and superconductor-based products. The Company’s wind and power grid products and services provide exceptional reliability, security, efficiency and affordability to its customers.flow. The Company’s consolidated financial statements have been prepared on a going concern basis in accordance with United States generally accepted accounting principles (“GAAP”) and the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-K.10-K. The going concern basis of presentation assumes that the Company will continue operations and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. On March 24, 2015, the Company effected a 1-for-10 reverse stock split of its common stock. Trading of the Company’s common stock reflected the reverse stock split beginning on March 25, 2015. Unless otherwise indicated, all historical references to shares of common stock, shares of restricted stock, restricted stock units, shares underlying options, warrants or calculations that use common stock for per share financial reporting have been adjusted for comparative purposes to reflect the impact of the 1-for-10 reverse stock split as if it had occurred at the beginning of the earliest period presented.
Liquidity The Company has historically experienced recurring operating losses and as of March 31, 2016,2023, the Company had an accumulated deficit of $928.2$1,055.5 million. In addition, the Company has historically experienced recurring negative operating cash flows. At March 31, 2016,2023, the Company had cash and cash equivalents of $39.3$23.4 million. Cash used in operations for the year ended March 31, 20162023 was $4.6$22.5 million. From April 1, 2011 through the date of this filing,
In February 2021, the Company has reduced its global workforce substantially.filed a shelf registration statement on Form S-3 that will expire in February 2024 (the “Form S-3”). The Company has taken actions to consolidate certain business operations to reduce facility costs. As of March 31, 2016,Form S-3 allows the Company had a global workforceto offer and sell from time-to-time up to $250 million of 369 persons.common stock, debt securities, warrants or units comprised of any combination of these securities. The Company plansForm S-3 is intended to closely monitor its expenses and, if required, expects to further reduce operating costs and capital spending to enhance liquidity. Over the last several years,provide the Company has entered into several debt and equity financing arrangementsflexibility to conduct registered sales of the Company's securities, subject to market conditions, in order to enhance liquidity. Since April 1, 2012,fund the Company's future capital needs. The terms of any future offering under the Form S-3 will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering.
The Company is experiencing substantial inflationary pressure in its supply chain and some delays in sourcing materials needed for its products resulting in some disruption, both of which have increased the Company's cost of revenues and decreased gross margin. Changes in macroeconomic conditions arising from the COVID-19 pandemic or for other reasons, such as ongoing war between Russia and Ukraine, inflation, rising interest rates, instability of financial institutions and political instability in the United States, including failure to raise the federal debt ceiling, labor force availability, sourcing, material delays and global supply chain disruptions could have a material adverse effect on the Company's business, financial condition and results of operation. From time-to-time the Company has generated aggregatemay undertake restructuring activities in order to align the global organization in a manner that the Company believes will better position it to achieve its long-term goals. In January 2023, the Company undertook a reduction in force that involved approximately 5% of the global workforce. This restructuring will cause the Company to incur $1.0 million of cash flows from financing activities of $71.0 million. This amount includes proceeds from an April 2015 equity offering, which generated net proceedsexpense and is expected to result in annualized cost savings of approximately $22.3$5 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. See Note 9, “Debt”, and Note 12 “Stockholders’ Equity” for further discussion of these financing arrangements. beginning in fiscal 2023.
The Company believes that it is in compliance withbased on the covenantsinformation presented above and restrictions included in the agreements governing its debt arrangements as of March 31, 2016.In December 2015, the Company entered into a set of strategic agreements valued at approximately $210.0 million with Inox, which includes a multi-year supply contract pursuant to which the Company will supply electric control systems to Inox Wind Ltd. (“Inox”) and a license agreement allowing Inox to manufacture a limited number of electrical control systems over the next three to four years. After this initial three to four year period, Inox agreed that the Company will continue as Inox’s preferred supplier and Inox will be required to purchase from the Company a majority of its electric control systems requirements for an additional three-year period. During the fourth quarter of fiscal 2015, Inox made the upfront payment of $6.0 million required under the license agreement, but as of the date of this Annual Report it has not made the $2.0 million advance payment required under the supply contract. These agreements are expected to provide a foundation for the business as the Company pursues its longer-term objectives.
On October 6, 2015, 100% of the outstanding common stock of Blade Dynamics Limited (“Blade Dynamics”) was acquired by a subsidiary of General Electric Company. After deducting transaction expenses, the Company received net proceeds of $2.8 million from the sale, which was recorded as a gain in the fiscal year ended March 31, 2016. Additionally, under the terms of the purchase agreement, the Company may be entitled to receive up to an additional $1.2 million in proceeds, upon the successful achievement of certain milestones by Blade Dynamics over the next three years.
On March 11, 2016, the Company sold 100% of its minority share investment in Tres Amigas LLC (“Tres Amigas”) to an investor for $0.6 million. The Company received $0.3 million according to the terms of the purchase agreement upon closing, which was recorded as a gain during the three months ended March 31, 2016. The final $0.3 million is to be paid when Tres Amigas achieves the earlier of certain agreed-upon financing conditions, which is expected to occur during the first half of fiscal 2016. See Note 15, “Minority Investments”, for further information about such investment.
55
The Company believesannual management assessment, it has sufficient liquidity to fund its operations and capital expenditures and scheduled cash payments under its debt obligations for the next twelve months. months following the issuance of the financial statements for the year ended March 31, 2023. The Company’s liquidity is highly dependent on its ability to increase revenues, its ability to control its operating costs, its ability to maintain compliance with the covenants and restrictions on its debt obligations (or obtain waivers from the lender in the event of non-compliance), and its ability to raise additional capital, if necessary. The impact of the COVID- 19 pandemic and other sources of instability, including the war between Russia and Ukraine, instability of financial institutions and political instability in the United States on the global financing markets may reduce the Company's ability to raise additional capital, if necessary, which could negatively impact the Company's liquidity. There can be no assurance that the Company will be able to continue to raise additional capital, on favorable terms or at all, from other sources or execute on any other means of improving liquidity described above.
2. Summary of Significant Accounting Policies Basis of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated. Certain reclassifications of prior years’ amounts have been made to conform to the current year presentation. These reclassifications had no effect on net income, cash flows from operating activities or stockholders’ equity. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, collectability of receivables, realizability of inventory, goodwill and intangible assets, contingent consideration, warranty provisions, stock-based compensation, valuation of warrant and derivative liabilities, tax reserves, and deferred tax assets. Provisions for depreciation are based on their estimated useful lives using the straight-line method. Some of these estimates can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by the Company’s management there may be other estimates or assumptions that are reasonable, the Company believes that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements. Cash Equivalents Cash equivalents consist of highly liquid instruments with maturities of three months or less that are regarded as high quality, low risk investments and are measured using such inputs as quoted prices, and are classified within Level 1 of the valuation hierarchy. Cash equivalents consist principally of certificates of deposits and money market accounts. Accounts Receivable Accounts receivable consist of amounts owed by commercial companies and government agencies. Accounts receivable are stated net of allowances for doubtful accounts. The Company’s accounts receivable relate principally to a limited number of customers. As of March 31, 2016, Inox,2023, Anovion LLC and Fuji Bridex PTE Ltd accounted for approximately 84%21% and 15% of the Company’s totalCompany's accounts receivable balance, respectively, with no other customercustomers accounting for greater than 10% of the balance. As of March 31, 2015, Inox,2022, Fuji Bridex PTE Ltd accounted for approximately 56%31% of the Company’s totalCompany's accounts receivable balance, with no other customercustomers accounting for greater than 10% of the balance. Changes in the financial condition or operations of the Company’s customers may result in delayed payments or non-payments which would adversely impact its cash flows from operating activities and/or its results of operations. As such, the Company may require collateral, advanced payment or other security based upon the customer history and/or creditworthiness. In determining the allowance for doubtful accounts, the Company evaluates the collectability of accounts receivable based primarily on the probability of recoverability based on historical collection and write-off experience, the age of past due receivables, specific customer circumstances, and current economic trends. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances may be required. Failure to accurately estimate the losses for doubtful accounts and ensure that payments are received on a timely basis could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows. Inventory Inventories include material, direct labor and related manufacturing overhead, and are stated at the lower of cost, or market determined on a first-in, first-out basis.first-in, first-out basis, or net realizable value determined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company records inventory when it takes delivery and title to the product according to the terms of each supply contract. 56
Program costs may be deferred and recorded as inventory on contracts on which costs are incurred in excess of approved contractual amounts and/or funding, if future recovery of the costs is deemed probable.
At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. Inventories that management considers excess or obsolete are reserved. Management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. Once inventory is written down and a new cost basis is established, it is not written back up if demand increases. For the fiscal years ended March 31, 20162023 and 2015,2022, the Company recorded inventory reserves of approximately $2.7$1.5 million and $1.4$1.9 million, respectively, based on evaluating its ending inventory on hand for excess quantities and obsolescence. For the fiscal years ended March 31, 2016, 2015, and 2014,
Leases Leases include all agreements in which the Company obtains control of a physical asset. Leases are captured on the balance sheet as both a right of use asset and associated lease liability and are valued based on the commencement of the Company's control of the asset, after being discounted by its incremental borrowing rate. The Company's lease portfolio is made up primarily of real estate leases for its various offices, but also include items such as vehicles, IT equipment and other miscellaneous tools and equipment needed for manufacturing. The Company's incremental borrowing rate was determined through an analysis to identify what rates it could obtain if the Company were to secure external financing for similar transactions, and includes considerations of both the market and its current credit ratings. An analysis is performed annually, or upon execution of any individually material agreement, to ensure that the rates being applied to newly acquired leases are still accurate. The majority of the Company's leases are classified as operating leases, and therefore the expense is captured in income from operations each period. We have elected to exclude all leases of less than twelve months from the balance sheet presentation. We have also elected a policy in which we will not segregate lease components from non-lease components, so in the event we execute an agreement which includes a non-lease component our asset and liability recorded benefitsto the balance sheet will include the value of $5.0 million, $8.0 million, and $4.3 million, respectively, for the usagethat non-lease component as well. This policy will be applied to all classifications of inventories previously reserved.leases. Property, Plant and Equipment Property, plant and equipment are carried at cost less accumulated depreciation and amortization. The Company accounts for depreciation and amortization using the straight-line method to allocate the cost of property, plant and equipment over their estimated useful lives as follows: Asset Classification | | Estimated Useful Life in Years | Building
| | 40
| Process upgrades to the building
| | 10-40
| Machinery and equipment | | 3-10 | | Furniture and fixtures | | 3-5 | | Leasehold improvements | | Shorter of the estimated useful life or the remaining lease term | |
Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or other disposition of assets, the costs and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in operating expenses. Valuation of Long-Lived Assets The Company periodically evaluates its long-lived assets, consisting principally of fixed assets and amortizable intangible assets, for potential impairment. In accordance with the applicable accounting guidance for the treatment of long-lived assets, the Company reviews the carrying value of its long-lived assets or asset group that is held and used, including intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Under the held and used approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The Company evaluates its long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable from the estimated undiscounted future cash flows. Equity Method Investments
There were no indicators requiring impairment testing on the Company's long-lived assets during the fiscal years ended March 31, 2023 and 2022. Goodwill Goodwill represents the excess of cost over net assets of acquired businesses that are consolidated. The Company usesperforms its annual assessment of goodwill on February 28th of each fiscal year and whenever events or changes in circumstances or a triggering event indicate that the equity method of accounting for investments in entities in whichcarrying amount may not be recoverable. Determining whether a triggering event has occurred often involves significant judgment from management. An entity is permitted to first assess qualitatively whether it has an ownership interest, but does not exerciseis necessary to perform a controlling interest ingoodwill impairment test. The quantitative impairment test is required only if the operating and financial policies of an investee. Under this method, an investmententity concludes that it is carried at the acquisition cost, plus the Company’s equity in undistributed earnings or losses since acquisition. more likely than not that a reporting unit’s fair value is less than its carrying amount. The Company periodically tests its investments for potential impairment whenever events and circumstances indicate a loss indetermines the fair value of a reporting unit, using a methodology which combines an income approach, using a discounted cash flow method, with a market approach. In evaluating whether it is more likely than not that the investments may be otherfair value of a reporting unit is less than temporary. Duringits carrying amount, an entity should consider the year ended March 31, 2016,totality of all relevant events or circumstances that affect the Company recordedfair value or carrying amount of a reporting unit. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, then an impairment charge is recognized reducing the goodwill by the excess of $0.7 millionthe carrying amount over the fair value, not to exceed the total amount of the goodwill allocated to the that reporting unit. See Note 5, "Goodwill" for further information and discussion. The Company performed its annual assessment of goodwill on its investment in Tres Amigas. DuringFebruary 28, 2023 and noted no triggering events from the analysis date to March 31, 2023 and determined that there was no impairment to goodwill. Additionally, there was no impairment identified for the fiscal yearsyear ended March 31, 20152022 based on the assessment performed in the prior fiscal year. 42
Revenue Recognition Revenue contracts are defined as an arrangement that creates enforceable rights and 2014,obligations of both parties where collection of the Company recorded impairment charges of $3.5 and $1.3 million, respectively, on its investment in Blade Dynamics. Both of these minority investments have been sold as of March 31, 2016. See Note 15, “Minority Investments”, for further discussion. 57
Revenue Recognition
contract price is deemed probable. The Company recognizesrecords revenue for product sales upon customer acceptance,based on a five-step model which includes confirmation of contract existence, identifying the performance obligations, determining the transaction price, allocating the contract transaction price to the performance obligations, and recognizing the revenue when (or as) control of goods or services is transferred to the customer. The transfer of control can occur at the time of delivery, installation or post-installation where applicable, provided persuasive evidenceapplicable. The Company's equipment and system product line includes certain contracts which do not meet the requirements of an arrangement exists, delivery has occurred,exchange transaction and therefore do not fall within the sales price is fixed or determinablescope of ASC 606. As these non-exchange transaction contracts are considered grant revenue and the collectability is reasonably assured. Existing customers are subject to ongoing credit evaluations based on payment history and other factors. If it is determined during the arrangement that collectability is do not reasonably assured, revenue is recognized on a cash basis of accounting. Certain of the Company’s contracts involve retention amounts which are contingent upon meeting certain performance requirements through the expiration of the contract warranty periods. For contractual arrangements that involve retention, fall within any specific accounting literature, the Company recognizesfollows guidance within ASC 606 by analogy to recognize grant revenue for these amounts upon the expiration of the warranty period, meeting the performance requirements and when collection of the fee is reasonably assured.over time. During the year ended March 31, 2011, the Company determined that revenues from certain of its customers in China could not be recorded for shipments made according to the delivery terms, as the fee was not fixed or determinable or collectability was not reasonably assured. For these customers, the Company is utilizing a cash basis of accounting with cash applied first against accounts receivable balances, then costs of shipments (inventory and value added taxes) before recognizing any gross margin. Payments of $3.7 million were received from these customers during the fiscal year ended March 31, 2014, for past shipments and recorded as revenue. There were no payments received for past shipments in the fiscal years ended March 31, 2016 and 2015.
For certain arrangements, such as contracts to perform research and development, prototype development contracts and certain customized product sales, the Company records revenues using the percentage-of-completionover-time method, measured by the relationship of costs incurred to total estimated contract costs. Percentage-of-completionOver-time revenue recognition accounting is predominantly used on certain turnkey power systems installations for electric utilities and long-term prototype development contracts with the U.S. government. The Company follows this method since reasonably dependable estimateswhen any of the revenuesthree following criteria are met: when the customer receives the benefits as they are performed, control transfers to the customer as the work is performed, or there is no alternative use to the Company and costs applicablethere is an enforceable right to various stagespayment through the life of a contract can be made.the contract. However, the ability to reliably estimate total costs at completion is challenging, especially on long-term prototype development contracts, and could result in future changes in contract estimates. For contracts where reasonably dependable estimates of the revenues and costs cannot be made, the Company follows the completed-contractpoint in time method. The Company enters into sales arrangements that may provide for multiple deliverablesperformance obligations to a customer. Sales of certain products may include extended warranty and support or service packages, and at times include performance bonds. As these contracts progress, the Company continually assesses the probability of a payout from the performance bond. Should the Company determine that such a payout is likely;likely, the Company would record a liability. The Company would reduce revenue to the extent a liability is recorded. In addition, the Company enters into licensing arrangements that include training services. Deliverables
Performance obligations are separated into more than one unit of accounting when (1)(1) the delivered element(s) have value to the customer on a stand-alone basis, and (2) delivery of(2) the undelivered element(s)Company's promise to transfer the goods or services to the customer is probable and substantiallyseparately identifiable from other promises in the control of the Company.contract. In general, revenues are separated between the different product shipments which have stand-alone value, and the various services to be provided. Revenue for product shipments is generally recognized at a point in accordance withtime where control of the Company’s policy for product sales,is transferred to the customer, while revenues for the services are generally recognized over the period of performance. The Company identifies all goods and/or services that are to be delivered separately under a sales arrangement and allocates revenuethe transaction price to each deliverable based ondistinct performance obligation using the element’s fair value as determined by vendor-specific objective evidence (“VSOE”respective standalone selling price ("SSP"), which is determined primarily using the price charged when that element is sold separately, or third-party evidence (“TPE”). When VSOE and TPE are unavailable, fair value is based on the Company’s best estimate of selling price utilizing a cost plus reasonableexpected margin consistent with how the Company has set pricing historicallyapproach for similar products and services. Whena relief from royalty method for licenses. Revenue allocated to each performance obligation is recognized when, or as, the Company’s estimates are used to determine fair value, management makes its estimates using reasonable and objective evidence to determine the price. performance obligation is satisfied. The Company reviews VSOESSP and TPEthe related margins at least annually. If the Company concludes it is unable to establish fair values for one or more undelivered elements within a multiple-element arrangement using VSOE then the Company uses TPE or the best estimate of the selling price for that unit of accounting, being the price at which the vendor would transact if the unit of accounting were sold by the vendor regularly on a standalone basis. 43
The Company’s license agreements provide either for the payment of contractually determined paid-up front license fees or milestone based payments in consideration for the grant of rights to manufacture and and/or sell products using ourits patented technologies or know-how. Some of these agreements provide for the release of the licensee from intellectual property infringements past and future intellectual property infringement claims. When the Company can determine that it has no further obligations other than the grant of the license and that the Company has fully transferred the technology knowhow,know-how, the Company recognizes the revenue under a completed contractpoint in time model. In other license arrangements, the Company may also agree to provide training services to transfer the technology know-how. In these arrangements, the Company has determined that the licenses have no standalone value to the customer and are not separable from training services as the Company can only fully transfer the technology knowhowknow-how through the training component.component. Accordingly, the Company accounts for these arrangements as a single unit of accounting, and recognizes revenue over the period of its performance and milestones that have been achieved.using the over-time method. Costs for these arrangements are expensed as incurred. 58
In December 2015,Existing customers are subject to ongoing credit evaluations based on payment history and other factors. If it is determined that collectability of any portion of the contract value is not probable, an analysis of variable consideration will be performed using either the most likely amount or expected value method to determine the amount of revenue that must be constrained until the scenario causing the variability has been resolved. For contractual arrangements that involve variable consideration, the Company entered intorecognizes revenue for these amounts upon reaching the constraining event successfully. The Company does not generally provide for extended payment terms or provide its customers with a setright of strategic agreements valued at approximately $210.0 million with Inox, which includes a multi-year supply contract pursuant to whichreturn.
Infrequently, the Company will supply electric control systemsreceives requests from customers to Inox andhold product being purchased from us for a license agreement allowing Inox to manufacturevalid business purpose. The Company recognizes revenues for such arrangements provided the transaction meets, at a limited numberminimum, the following criteria: a valid business purpose for the arrangement exists; risk of electrical control systems overownership of the next three to four years. We determined this licensepurchased product has standalone valuebeen transferred to the customerbuyer; there is a fixed delivery date that is reasonable and can be separatedconsistent with the buyer’s business purpose; the product is ready for shipment; there are no continuing performance obligation in regards to the purchased product and these products have been segregated from the supply contract. The license agreement includes customer acceptance criteriaCompany's inventories and cannot be used to demonstrate the know-how to manufacture the electrical control systems has been fully transferred. The Company will defer recognition of the revenue allocable to the license until this acceptance criteria has been met. In March 2016, the Company entered into a set of agreements to jointly develop an advanced low cost manufacturing processfill other orders received. Revenue for second generation high temperature superconductor wire with BASF. Under the joint development agreement, the Company’s manufacturing know-how for its Amperium® superconductor wire and BASF's chemical solution deposition production technology will be combined. As part of the agreements, the Company also entered into a royalty-bearing, non-exclusive license under which the Company agreed to provide BASF a specified portion of its second generation (2G) high temperature superconductor (HTS) wire manufacturing technology. The Company determined that the license rights it provides to BASF have standalone value from the ongoing joint development effort. We transferred the license rights to BASF in March 2016 recording $3.0M of license revenue in the fiscal year ended March 31, 2016 as there were no remaining obligations associated with these rights. Any newly developed intellectual property as a result of the joint development will be owned by BASF. Should this development effort be successful, the Company has the right to incorporate this new technology into its manufacturing process on a royalty-free basis. BASF has also agreed to make guaranteed annual payments to the Company through 2017 and has an option to continue the joint development through 2018. The Company will record revenue2023 included $0.6 million from such held transactions. Revenues for the research and development services being provided over the term of the arrangement.fiscal year ended March 31, 2022 included $1.2 million from such held transactions.
The Company has elected to record taxes collected from customers on a net basis and does not include tax amounts in revenue or costs of revenue. Customer deposits
The Company’s contract assets and liabilities primarily relate to the timing differences between cash received from a customer in advanceconnection with contractual rights to invoicing and the timing of revenue recognition following completion of performance obligations. The Company's accounts receivable balance is made up entirely of customer contract related balances.
Business Acquisitions The Company accounts for acquisitions using the purchase method of accounting in accordance with ASC 805,Business Combinations. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Intangible assets, if identified, are also recorded at fair value. The excess purchase price over the estimated fair value of the net assets acquired is recorded as deferredgoodwill. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions as well as the use of specialists as needed. The consideration for its acquisitions may include future payments that are contingent upon the occurrence of a particular event. The Company records a contingent consideration obligation for such contingent consideration payments at fair value on the acquisition date. The Company estimates the fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and the likelihood of making related payments. Each period the Company revalues the contingent consideration obligations associated with the acquisition to fair value and records changes in the fair value within the operating expenses in its consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in assumed revenue until customer acceptancerisk premium and volatility, as well as changes in the stock price and assumed probability with respect to the attainment of certain financial and operational metrics, among others. Significant judgment is received. Deferred revenue also representsemployed in determining these assumptions as of the amount billed to and/or collected from commercialacquisition date and government customers on contracts which permit billings to occurfor each subsequent period. Accordingly, future business and economic conditions, as well as changes in advanceany of contract performance/revenue recognition.the assumptions described above, can materially impact the fair value of contingent consideration recorded at each reporting period. See Note 3, "Acquisitions," for additional information. Product Warranty Warranty obligations are incurred in connection with the sale of the Company’s products. The Company generally provides assurance-type warranties on all product sales for a term of typically one to three year years, and extended service-type warranties at the customers’ option for an additional term ranging up to four additional years. The Company accrues for the estimated warranty costs for assurance warranties at the time of sale based on its products, commencing upon installation.historical warranty experience plus any known or expected changes in warranty exposure. For all extended service-type warranties, the Company recognizes the revenue ratably over time during the effective period of the service. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. Future warranty costs are estimated based on historical performance rates and related costs to repair given products. The accounting estimate related to product warranty involves judgment in determining future estimated warranty costs. Should actual performance rates or repair costs differ from estimates, revision to the estimated warranty liability would be required. Research and Development Costs Research and development costs are expensed as incurred. 44
Income Taxes The Company’s provision for income taxes is composedcomprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current fiscal year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carry-forwards using expected tax rates in effect in the years during which the differences are expected to reverse. During November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The Company early-adopted ASU 2015-17 effective January 1, 2016 on a prospective basis. Adoption of this ASU resulted in all deferred tax assets and liabilities being presented as non-current in the Consolidated Balance Sheet as of January 1, 2016. No prior periods were retrospectively adjusted.
Deferred income taxes are recognized for the tax consequences in future fiscal years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each fiscal year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. The Company has provided a valuation allowance against its U.S. and foreignRomania deferred income tax assets since the Company believes that it is more likely than not that these deferred tax assets are not currently realizable due to uncertainty around profitability in the future. 59
Accounting for income taxes requires a two-steptwo-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. The Company includes interest and penalties related to gross unrecognized tax benefits within the provision for income taxes. See Note 11,14, “Income Taxes,” for further information regarding ourits income tax assumptions and expenses. The Company evaluates its permanent reinvestment assertions with respect to foreign earnings at each reporting period. The Company has not recorded a deferred tax asset for the temporary difference associated with the excess of the tax basis over its book basis in its Austrian and Chinese subsidiaries as the future tax benefit is not expected to reverse in the foreseeable future. The Company has recorded a deferred tax liability as of March 31, 2016 for the undistributed earnings of its remaining foreign subsidiaries for which it can no longer assert are permanently reinvested. The total amount of undistributed earnings available to be repatriated at March 31, 2016 was $1.2 million resulting in the recording of a $0.4 million net deferred federal and state income tax liability. See Note 11, “Income Taxes,” for further information regarding our income tax assumptions and expenses.
Stock-Based Compensation The Company accounts for stock-based payment transactions using a fair value-based method and recognizes the related expense in the results of operations. Stock-based compensation is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. The fair value of restricted stock awards is determined by reference to the fair market value of the Company’s common stock on the date of grant. The Company uses the Black-Scholes option pricing model to estimate the fair value of option awards with service and performance conditions. For awards with service conditions only, the Company recognizes compensation cost on a straight-line basis over the requisite service/vesting period. For awards with performance conditions, accrualsestimates of compensation cost are made based on the probable outcome of the performance conditions. The cumulative effect of changes in the probability outcomes are recorded in the period in which the changes occur. Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatilities of the Company’s common stock and expected terms. The expected volatility rates are estimated based on historical and implied volatilities of the Company’s common stock. The expected term represents the average time that the options that vest are expected to be outstanding based on the vesting provisions and the Company’s historical exercise, cancellation and expiration patterns. The Company estimates pre-vesting forfeitures when recognizing compensation expense based on historical and forward-looking factors. Changes in estimated forfeiture rates and differences between estimated forfeiture rates and actual experience may result in significant, unanticipated increases or decreases in stock-based compensation expense from period to period. The termination of employment of certain employees who hold large numbers of stock-based awards may also have a significant, unanticipated impact on forfeiture experience and, therefore, on stock-based compensation expense. The Company will update these assumptions on at least an annual basis and on an interim basis if significant changes to the assumptions are warranted. 60
The Company accounts for share-based payments made to non-employees in the same manner as other share-based payments for employees, with the measurement being based on the fair value at the grant date. The non-employee share based payments will be included within the Company's stock compensation currently reported. 45
Computation of Net Loss per Common Share Basic net loss per share (“EPS”) is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing the net loss by the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period, calculated using the treasury stock method. Common equivalent shares include the effect of restricted stock, exercise of stock options and warrants and contingently issuable shares. For the fiscal years ended March 31, 2016, 2015,2023 and 2014,2022, common equivalent shares of 1,552,959, 1,567,352, 1,421,771, and 643,158,1,495,402, respectively, were not included in the calculation of diluted EPS as they were considered antidilutive. Of these, 1.0 million relate to shares tied to the derivative liability for which the contingency has not yet been met. The following table reconciles the numerators and denominators of the EPS calculation for the fiscal years ended March 31, 2016, 2015,2023 and 20142022 (in thousands except per share amounts): | Fiscal year ended March 31, | | | | 2016 | | | 2015 | | | 2014 | | | Fiscal year ended March 31, | | | | | | | | | | | | | | | 2023 | | | 2022 | | Numerator: | | | | | | | | | | | | | Net loss | $ | (23,139 | ) | | $ | (48,656 | ) | | $ | (56,258 | ) | | $ | (35,041 | ) | | $ | (19,193 | ) | Denominator: | | | | | | | | | | | | | Weighted-average shares of common stock outstanding | | 13,295 | | | | 8,559 | | | | 6,411 | | | 29,038 | | | 28,293 | | Weighted-average shares subject to repurchase | | (117 | ) | | | (82 | ) | | | (149 | ) | | | (1,190 | ) | | | (1,090 | ) | Shares used in per-share calculation ― basic | | 13,178 | | | | 8,477 | | | | 6,262 | | | | 27,848 | | | | 27,203 | | Shares used in per-share calculation ― diluted | | 13,178 | | | | 8,477 | | | | 6,262 | | | | 27,848 | | | | 27,203 | | Net loss per share ― basic | $ | (1.76 | ) | | $ | (5.74 | ) | | $ | (8.98 | ) | | $ | (1.26 | ) | | $ | (0.71 | ) | Net loss per share ― diluted | $ | (1.76 | ) | | $ | (5.74 | ) | | $ | (8.98 | ) | | $ | (1.26 | ) | | $ | (0.71 | ) |
Foreign Currency Translation The functional currency of all the Company’s foreign subsidiaries is the U.S. dollar, except for AMSC Austria, for which the local currency (Euro) is the functional currency, and AMSC China, for which the local currency (Renminbi) is the functional currency. The assets and liabilities of AMSC Austria and AMSC China are translated into U.S. dollars at the exchange rate in effect at the balance sheet date and income and expense items are translated at average rates for the period. Cumulative translation adjustments are excluded from net loss and shown as a separate component of stockholders’ equity. Net foreign currency gains (losses)and losses are included in other income (expense), net loss and were ($2.3) million, $2.8on the consolidated statements of operations was $0.1 million and ($0.1)less than $0.1 million, for the fiscal years ended March 31, 2016, 20152023 and 2014,2022, respectively. The Company has no restrictions on the foreign exchange activities of its foreign subsidiaries, including the payment of dividends and other distributions. Risks and Uncertainties The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates and would impact future results of operations and cash flows. The Company invests its available cash in high credit, quality financial instruments and invests primarily in investment-grade marketable securities, including, but not limited to, government obligations, money market funds and corporate debt instruments. Several of the Company’s government contracts are being funded incrementally, and as such, are subject to the future authorization, appropriation, and availability of government funding. The Company has a history of successfully obtaining financing under incrementally-funded contracts with the U.S. government and it expects to continue to receiveobtain additional contract modifications in the year ending March 31, 20172024 and beyond as incremental funding is authorized and appropriated by the government. 61
Contingencies From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information is known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If, with respect to a matter, it is not both probable to result in liability and the amount of loss cannot be reasonably estimated, an estimate of possible loss or range of loss is disclosed unless such an estimate cannot be made. The Company does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred. See Note 13,17, “Commitments and Contingencies,” for further information regarding the Company’s pending litigation.information. Debt
For debt arrangements, the Company considers any embedded equity-linked components and accounts for the fair value of any embedded warrants and derivatives. The Company elects not to use the fair value option for recording debt arrangements and elects to record the debt at the stated value of the loan agreement on the date of issuance. Any other elements present are reviewed to determine if they are embedded derivatives requiring bifurcation and requiring valuation under the fair value option. Derivatives and warrants, which meet the condition to satisfy an obligation by issuing a variable number of equity shares, are recorded at fair value. The carrying value assigned to the host instrument will be the difference between the previous carrying value of the host instrument and the fair value of the warrants and derivatives. There is no immediate gain/loss from the initial recognition and measurement if the embedded derivative is accounted for separately from its host contract. There is an offsetting debt discount or premium as a result of the fair value assigned to the warrants and derivatives, as well as any debt issuance costs, which is amortized under the effective interest method over the term of the loan. Each reporting period, fair value is assessed for the warrants and derivatives with the change in value being recorded as other income/loss. See Note 9, “Debt,” and Note 10, “Warrants and Derivative Liabilities,” for a full discussion regarding the activity and financial impact for the Company’s debt, warrants and derivative liabilities.
Disclosure of Fair Value of Financial Instruments The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, warrants to purchase shares of common stock, derivatives, and a senior secured term loan.derivatives. The carrying amounts of cash and cash equivalents, accounts receivable, short-term debt, accounts payable, and accrued expenses due to their short nature approximate fair value at March 31, 20162023 and 2015.2022. The estimated fair values have been determined through information obtained from market sources and management estimates. Changes in fair value are recorded to other income (expense), net. The fair value for the debtcontingent consideration is estimated using a Monte Carlo simulation and subject to revaluation at each balance sheet date. The fair value for the warrant arrangements have beenwas historically estimated by management based on the terms that it believes it could obtainvarious assumptions in the current market for debt with the same termsa lattice model and similar maturities.was subject to revaluation at each balance sheet date. The Company classifies the estimates used to fair value these instruments as Level 3 inputs inputs. See Note 3,6, “Fair Value Measurements” for a full discussion on fair value measurements. 46
3. Acquisitions 3.
2021Acquisition of Neeltran On May 6, 2021, the Company entered into a Purchase and Sale Agreement (the "Real Property Purchase Agreement") and a Stock Purchase Agreement (the "Neeltran Stock Purchase Agreement") with the selling equity holders named therein. Pursuant to the terms of the Neeltran Stock Purchase Agreement, the Company purchased all of the issued and outstanding shares of capital stock of Neeltran, Inc., a Connecticut corporation ("Neeltran") and Neeltran International, Inc., a Connecticut corporation ("International") for $1.0 million in cash and 301,556 shares of the Company's common stock, $.01 par value per share ("AMSC Shares"), that were paid and issued, respectively, to the Neeltran selling stockholders (the "Neeltran Acquisition"). The Company also paid $1.1 million to International selling stockholders to pay off previous loans made by them to Neeltran. Also on May 6, 2021, pursuant to the terms of the Real Property Purchase Agreement, the Company's wholly-owned Connecticut limited liability company, AMSC Husky LLC ("AMSC Husky"), purchased the real property that serves as Neeltran's headquarters for $4.3 million, of which (a) $2.4 million was paid in immediately available funds by AMSC Husky to the owners of such real property, and (b) $1.9 million was paid directly to TD Bank as full payment for the outstanding indebtedness secured by the mortgage on such real property. Additionally, the Company paid approximately $7.6 million, including $1.9 million of indebtedness secured by the mortgage on the real property as described above, directly to Neeltran lenders at closing to extinguish outstanding Neeltran indebtedness to third parties. The total purchase price of $16.4 million includes cash paid, the fair value of the AMSC Shares issued at closing and the debt payoff on behalf of the sellers as follows (in millions): Cash payment | | $ | 4.4 | | Issuance of 301,556 shares of Company's common stock | | | 4.4 | | Debt payment to third party lenders on behalf of sellers | | | 7.6 | | Total consideration | | $ | 16.4 | |
The Neeltran Acquisition completed by the Company during the fiscal year ended March 31, 2022, has been accounted for under the purchase method of accounting in accordance with ASC 805,Business Combinations. The Company allocated the purchase price to the assets acquired and liabilities assumed at their estimated fair values as of the date of Neeltran Acquisition. The excess of the purchase price paid by the Company over the estimated fair value of net assets acquired has been recorded as goodwill. As Neeltran was previously a private company, the adoption of Accounting Standards Codification 842 ("ASC 842") was completed as part of the Neeltran Acquisition. See Note 16 "Leases" for further details. Neeltran had previously adopted Accounting Standards Codification 606,Revenue from Contracts with Customers ("ASC 606") as part of prior year audited financial statements. The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and liabilities assumed in connection with the Neeltran Acquisition (in millions): Cash and short-term investments | | $ | 0.5 | | Net working capital (excluding inventory and deferred revenue) | | | (0.9 | ) | Inventory | | | 9.0 | | Property, plant and equipment | | | 6.5 | | Deferred revenue | | | (10.0 | ) | Deferred tax liability | | | (2.3 | ) | Net tangible assets/(liabilities) | | | 2.8 | | | | | | | | Backlog | | | 0.1 | | Trade names and trademarks | | | 1.2 | | Customer relationships | | | 3.5 | | Net identifiable intangible assets/(liabilities) | | | 4.8 | | | | | | | | Goodwill | | | 8.8 | | | | | | | | Total purchase consideration | | $ | 16.4 | |
Inventory includes a $0.6 million adjustment to step up the inventory balance to fair value consistent with the purchase price allocation. The fair value was based on the estimated selling price of the inventory, less the remaining manufacturing and selling cost and a normal profit margin on those manufacturing and selling efforts. The inventory step up adjustment increased cost of revenue by $0.6 million in the twelve month period ended March 31, 2022 as the inventory was sold. This increase is not reflected in the pro forma condensed consolidated statements of operations because it does not have a continuing impact beyond the first year. Backlog of $0.1 million was evaluated using the multi period excess earnings method under the income approach. The contracts with customers do not provide for any guarantees to source all future requirements from the Company. The amortization method being utilized is economic consumption estimated over a two year period with the expense being allocated to cost of revenues. Customer relationships of $3.5 million relates to customers currently under contract and was determined based on a multi period excess earnings method under the income approach. The method of amortization being utilized is the economic consumption over 7 years with the expense being allocated to selling, general and administrative ("SG&A"). Trade names and trademarks of $1.2 million were reviewed using the assumption that the Company would continue to utilize the Neeltran trade name indefinitely. The relief from royalty method was utilized using a 1% royalty rate on revenues with a 24.5% discount rate over 15 years. The goodwill represents the value associated with the acquired workforce and expected synergies related to the Neeltran Acquisition. Goodwill resulting from the Neeltran Acquisition was assigned to the Company's Grid business segment. Goodwill recognized in the Neeltran Acquisition is not deductible for tax purposes. Unaudited Pro Forma Operating Results The unaudited pro forma condensed consolidated statement of operations for the years ended March 31, 2023 and 2022 are presented as if the Neeltran Acquisition had occurred on April 1, 2021. | | | Twelve Months Ended March 31, | | | | | 2023 | | | 2022 | | Revenues | | $ | 105,984 | | | $ | 111,265 | | Operating loss | | | (33,022 | ) | | | (20,975 | ) | Net loss | | $ | (35,056 | ) | | $ | (19,355 | ) | | | | | | | | | | | Net loss per common share | | | | | | | | | Basic | | $ | (1.26 | ) | | $ | (0.71 | ) | Diluted | | $ | (1.26 | ) | | $ | (0.71 | ) | Shares - basic | | | 27,848 | | | | 27,234 | | Shares - diluted | | | 27,848 | | | | 27,234 | |
The pro forma amounts include the historical operating results of the Company, and Neeltran, with appropriate adjustments that give effect to acquisition related costs, income taxes, intangible amortization resulting from the Neeltran Acquisition and certain conforming accounting policies of the Company. The pro forma amounts are not necessarily indicative of the operating results that would have occurred if the Neeltran Acquisition and related transactions had been completed at the beginning of the applicable periods presented. In addition, the pro forma amounts are not necessarily indicative of operating results in future periods. Acquisition of NEPSI On October 1, 2020 (the “NEPSI Acquisition Date”), the Company entered into a Stock Purchase Agreement (the “NEPSI Stock Purchase Agreement”) with the selling stockholders named therein. Pursuant to the terms of the Stock Purchase Agreement and concurrently with entering into such agreement, the Company acquired all of the issued and outstanding (i) shares of capital stock of Northeast Power Systems, Inc., a New York corporation (“NEPSI”), and (ii) membership interests of Northeast Power Realty, LLC, a New York limited liability company, which holds the real property that serves as NEPSI’s headquarters (the "NEPSI Acquisition"). NEPSI is a U.S.-based global provider of medium-voltage metal-enclosed power capacitor banks and harmonic filter banks for use on electric power systems. NEPSI is a wholly-owned subsidiary of the Company and is operated by its Grid business unit. The purchase price was $26.0 million in cash and 873,657 restricted shares of common stock of the Company. As part of the transaction, the selling stockholders may receive up to an additional 1,000,000 shares of common stock of the Company upon the achievement of certain specified revenue objectives during varying periods of up to four years following closing of the NEPSI Acquisition. 4. Revenue Recognition The Company’s revenues in its Grid segment are derived primarily through enabling the transmission and distribution of power, providing planning services that allow it to identify power grid needs and risks, and developing ship protection systems for the U.S. Navy. The Company’s revenues in its Wind segment are derived primarily through supplying advanced power electronics and control systems, licensing its highly engineered wind turbine designs, and providing extensive customer support services to wind turbine manufacturers. The Company records revenue based on a five-step model in accordance with ASC 606. For its customer contracts, the Company identifies the performance obligations, determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) control of goods or services is transferred to the customer. As of March 31, 2023, 80% of revenue was recognized at the point in time when control transferred to the customer, with the remainder being recognized over time. In the fiscal year ended March 31, 2022, 76% of revenue was recognized at the point in time when control transferred to the customer, with the remainder being recognized over time. In the Company's equipment and system product line, each contract with a customer summarizes each product sold to a customer, which typically represents distinct performance obligations. A contract's transaction price is allocated to each distinct performance obligation using the respective standalone selling price which is determined primarily using the cost plus expected margin approach and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s product sales transfer control to the customer in line with the contracted delivery terms and revenue is recorded at the point in time when title and risk transfer to the customer, as the Company has determined that this is the point in time that control transfers to the customer. The Company's equipment and system product line includes certain contracts which do not meet the requirements of an exchange transaction and therefore do not fall within the scope of ASC 606. As these non-exchange transaction contracts are considered grant revenue and do not fall within any specific accounting literature, the Company follows guidance within ASC 606 by analogy to recognize grant revenue over time. In the year ended March 31, 2023, the Company recorded no grant revenue. There was $1.1 million in grant revenue recorded in the year ended March 31, 2022, which is included in the Company's Grid revenue. 47
In the Company's service and technology development product line, there are several different types of transactions and each begins with a contract with a customer that summarizes each product sold to a customer, which typically represents distinct performance obligations. The technology development transactions are primarily for activities that have no alternative use and for which a profit can be expected throughout the life of the contract. In these cases, the revenue is recognized over time, but in the instances where the profit cannot be assured throughout the entire contract then the revenue is recognized at a point in time. Each contract's transaction price is allocated to each distinct performance obligation using the respective standalone selling price which is determined primarily using the cost plus expected margin approach. The ongoing service transactions are for service contracts that provide benefit to the customer simultaneously as the Company performs its obligations, and therefore this revenue is recognized ratably over time throughout the effective period of these contracts. The transaction prices on these contracts are allocated based on an adjusted market approach which is re-assessed annually for reasonableness. The field service transactions include contracts for delivery of goods and completion of services made at the customer's requests, which are not deemed satisfied until the work has been completed and/or the requested goods have been delivered, so all of this revenue is recognized at the point in time when the control changes, and at allocated prices based on the adjusted market approach driven by standard price lists. The royalty transactions are related to certain contract terms on transactions in the Company's equipment and systems product line based on activity as specified in the contracts. The transaction prices of these agreements are calculated based on an adjusted market approach as specified in the contract. The Company reports royalty revenue for usage-based royalties when the sales have occurred. In circumstances when collectability is not assured and a contract does not exist under ASC 606, revenue is deferred until a non-refundable payment has been received for substantially all the amount that is due and there are no further remaining performance obligations. The Company's service contracts can include a purchase order from a customer for specific goods in which each item is a distinct performance obligation satisfied at a point in time at which control of the goods is transferred to the customer which occurs based on the contracted delivery terms or when the requested service work has been completed. The transaction price for these goods is allocated based on the adjusted market approach considering similar transactions under similar circumstances. Service contracts are also derived from ongoing maintenance contracts and extended service-type warranty contracts. In these transactions, the Company is contracted to provide an ongoing service over a specified period of time. As the customer is consuming the benefits as the service is being provided the revenue is recognized over time ratably. The Company’s policy is to not accept volume discounts, product returns, or rebates and allowances within its contracts. In the event a contract was approved with any of these terms, it would be evaluated for variable consideration, estimated and recorded as a reduction of revenue in the same period the related product revenue was recorded. The Company provides assurance-type warranties on all product sales for a term of typically one to three years, and extended service-type warranties at the customers’ option for an additional term ranging up to four additional years. The Company accrues for the estimated warranty costs for assurance warranties at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure. For all extended service-type warranties, the Company recognizes the revenue ratably over time during the effective period of the services. The Company records revenue net of sales tax, value added tax, excise tax and other taxes collected concurrent with revenue-producing activities. The Company has elected to recognize the cost for freight and shipping when control over the products sold passes to customers and revenue is recognized. The Company has elected to recognize incremental costs of obtaining a contract as expense when incurred except in contracts where the amortization period would exceed twelve months; in such cases the long term amount will be assessed for materiality. The Company has elected to not adjust the promised amount of consideration for the effects of a significant financing component if the period of financing is twelve months or less. The Company monitors costs to meet its obligations on its customer contracts. When it is evident that there is a loss expected on a contract, a contract loss is accrued in the period. During the year ended March 31, 2023, several long-term contracts that were acquired from Neeltran were impacted by higher than planned costs due to required design changes and the impact of inflation on material costs, resulting in an increase to the contract loss accrual of $2.7 million in the year ended March 31, 2023 which negatively impacted the Company's gross margins. The Company’s contracts with customers do not typically include extended payment terms and may include milestone billing over the life of the contract. Payment terms vary by contract type and type of customer and generally range from 30 to 60 days from delivery. The following tables disaggregate the Company’s revenue by product line and by shipment destination: | | | Year Ended March 31, 2023 | | Product Line: | | Grid | | | Wind | | Equipment and systems | | $ | 88,311 | | | $ | 9,282 | | Services and technology development | | | 6,320 | | | | 2,071 | | Total | | $ | 94,631 | | | $ | 11,353 | | | | | | | | | | | | Region: | | | | | | | | | Americas | | $ | 67,664 | | | $ | 19 | | Asia Pacific | | | 20,326 | | | | 11,199 | | EMEA | | | 6,641 | | | | 135 | | Total | | $ | 94,631 | | | $ | 11,353 | |
| | | Year Ended March 31, 2022 | | Product Line: | | Grid | | | Wind | | Equipment and systems | | $ | 91,704 | | | $ | 6,169 | | Services and technology development | | | 7,172 | | | | 3,390 | | Total | | $ | 98,876 | | | $ | 9,559 | | | | | | | | | | | | Region: | | | | | | | | | Americas | | $ | 73,955 | | | $ | 145 | | Asia Pacific | | | 19,397 | | | | 9,346 | | EMEA | | | 5,524 | | | | 68 | | Total | | $ | 98,876 | | | $ | 9,559 | | | | | | | | | | | |
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In the fiscal years ended March 31, 2023, and 2022, 45% and 38% of the Company’s revenues, respectively, were recognized from sales outside the United States. The Company maintains operations in Austria and the United States and sales and service support centers around the world. As of March 31, 2023 and March 31, 2022, the Company’s contract assets and liabilities primarily relate to the timing differences between cash received from a customer in connection with contractual rights to invoicing and the timing of revenue recognition following completion of performance obligations. The Company's accounts receivable balance is made up entirely of customer contract related balances. Changes in the Company’s contract assets, which are included in “Unbilled Accounts Receivable” and “Deferred program costs” (see Note 7, “Accounts Receivable” and Note 8, “Inventory” for a reconciliation to the condensed consolidated balance sheet) and contract liabilities, which are included in the current portion and long term portion of “deferred revenue” in the Company’s condensed consolidated balance sheets, are as follows: | | | Unbilled AR | | | Deferred Program Costs | | | Contract Liabilities | | Beginning balance as of March 31, 2022 | | $ | 6,492 | | | $ | 858 | | | $ | 30,034 | | Increases for costs incurred to fulfill performance obligations | | | — | | | | 2,476 | | | | — | | Increase (decrease) due to customer billings | | | (14,373 | ) | | | — | | | | 77,489 | | Decrease due to cost recognition on completed performance obligations | | | — | | | | (1,189 | ) | | | — | | Increase (decrease) due to recognition of revenue based on transfer of control of performance obligations | | | 17,839 | | | | — | | | | (56,643 | ) | Other changes and foreign currency exchange impact | | | — | | | | (9 | ) | | | (120 | ) | Ending balance as of March 31, 2023 | | $ | 9,958 | | | $ | 2,136 | | | $ | 50,760 | |
| | | Unbilled AR | | | Deferred Program Costs | | | Contract Liabilities | | Beginning balance as of March 31, 2021 | | $ | 5,765 | | | $ | 977 | | | $ | 21,257 | | Increases for balances acquired | | | — | | | | 634 | | | | 10,048 | | Increases for costs incurred to fulfill performance obligations | | | — | | | | 4,814 | | | | — | | Increase (decrease) due to customer billings | | | (16,125 | ) | | | — | | | | 68,895 | | Decrease due to cost recognition on completed performance obligations | | | — | | | | (5,551 | ) | | | — | | Increase (decrease) due to recognition of revenue based on transfer of control of performance obligations | | | 16,852 | | | | — | | | | (70,141 | ) | Other changes and foreign currency exchange impact | | | — | | | | (16 | ) | | | (25 | ) | Ending balance as of March 31, 2022 | | $ | 6,492 | | | $ | 858 | | | $ | 30,034 | |
The Company’s remaining performance obligations represent the unrecognized revenue value of the Company’s contractual commitments. The Company’s performance obligations may vary significantly each reporting period based on the timing of major new contractual commitments. As of March 31, 2023, the Company had outstanding performance obligations on existing contracts under ASC 606 to be recognized in the next twelve months of approximately $125.7 million. There are also approximately $31.7 million of outstanding performance obligations to be recognized over a period of thirteen to sixty months. The remaining performance obligations are subject to customer actions and therefore the timing of revenue recognition cannot be reasonably estimated. The following table sets forth customers who represented 10% or more of the Company’s total revenues for the years ended March 31, 2023 and 2022: | | | | Year Ended | | | | Reportable | | March 31, | | | | Segment | | 2023 | | | 2022 | | Fuji Bridex Pte Ltd | Grid | | | 15 | % | | | 14 | % |
5. Goodwill The guidance under ASC 805-30 provides for the recognition of goodwill on the acquisition date measured as the excess of the aggregate consideration transferred over the net of the acquisition date amounts of net assets acquired and liabilities assumed. The Company's goodwill balance relates to the Neeltran Acquisition in fiscal 2021, the NEPSI Acquisition in fiscal 2020, and Infinia Technology Corporation in fiscal 2017 and is reported in the Grid business segment. Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized but reviewed for impairment. Goodwill is reviewed annually on February 28th and whenever events or changes in circumstances indicate that the carrying value of the goodwill might not be recoverable. The following table provides a roll forward of the changes in the Company's Grid business segment goodwill balance: | | | Goodwill | | | March 31, 2021 | | $ | 34,634 | | | Neeltran Acquisition | | | 8,837 | | March 31, 2022 | | $ | 43,471 | | Less impairment loss | | | - | | March 31, 2023 | | $ | 43,471 | |
The Company performed its annual assessment of goodwill on February 28, 2023 and noted no triggering events from the analysis date to March 31, 2023 and determined that there was no impairment to goodwill. Additionally, no impairment resulted from the assessment performed in the fiscal year ended March 31, 2022. 49
6. Fair Value Measurements A valuation hierarchy for disclosure of the inputs to valuation used to measure fair value has been established. This hierarchy prioritizes the inputs into three broad levels as follows: | Level 1 | - | Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. | | | | | | Level 2 | - | Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). | | | | | Level 3 | Level 3 -
| -Unobservable inputs that reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.
| Unobservable inputs that reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.
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