UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | |
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended: December 31, 2017
☐ | |
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from
_____ to _____.Commission File Number: 0-19672
American Superconductor Corporation
(Exact name of registrant as specified in its charter)
Delaware | 04-2959321 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
114 East Main St. Ayer, Massachusetts | 01432 |
(Address of principal executive offices) | (Zip Code) |
(978) 842-3000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, | AMSC | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |||||
Non-accelerated filer | Smaller reporting company | |||||
Emerging growth company | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Shares outstanding of the Registrant’s common stock:
Common Stock, par value $0.01 per share | 21,566,610 | |
Class | Outstanding as of |
INDEX Page No. Item 1. 3 Item 2. 23 Item 3. 30 Item 4. 30 Item 1. 31 Item 1A. 31 Item 2. 31 Item 3. 31 Item 4. 31 Item 5. 31 Item 6. 32 33Page No.
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 2019 | March 31, 2019 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 73,952 | $ | 77,483 | ||||
Accounts receivable, net | 10,736 | 7,855 | ||||||
Inventory | 11,924 | 12,119 | ||||||
Note receivable, current portion | 0 | 2,888 | ||||||
Prepaid expenses and other current assets | 4,102 | 3,053 | ||||||
Total current assets | 100,714 | 103,398 | ||||||
Property, plant and equipment, net | 8,747 | 8,972 | ||||||
Intangibles, net | 2,805 | 2,890 | ||||||
Goodwill | 1,719 | 1,719 | ||||||
Restricted cash | 715 | 715 | ||||||
| Right-of-use asset | 3,733 | 0 | ||||||
Deferred tax assets | 1,411 | 1,357 | ||||||
Other assets | 306 | 279 | ||||||
Total assets | $ | 120,150 | $ | 119,330 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 15,819 | $ | 15,885 | ||||
| Lease liability, current portion | 416 | 0 | ||||||
Derivative liabilities | 1,702 | 4,942 | ||||||
Deferred revenue, current portion | 10,806 | 7,557 | ||||||
Total current liabilities | 28,743 | 28,384 | ||||||
Deferred revenue, long term portion | 7,883 | 7,962 | ||||||
| Lease liability, long term portion | 3,357 | 0 | ||||||
Deferred tax liabilities | 1,703 | 1,698 | ||||||
Other liabilities | 51 | 93 | ||||||
Total liabilities | 41,737 | 38,137 | ||||||
Commitments and contingencies (Note 15) | ||||||||
Stockholders' equity: | ||||||||
Common stock | 218 | 216 | ||||||
Additional paid-in capital | 1,045,244 | 1,044,622 | ||||||
Treasury stock | (2,384 | ) | (2,101 | ) | ||||
Accumulated other comprehensive (loss) income | 413 | (5 | ) | |||||
Accumulated deficit | (965,078 | ) | (961,539 | ) | ||||
Total stockholders' equity | 78,413 | 81,193 | ||||||
Total liabilities and stockholders' equity | $ | 120,150 | $ | 119,330 | ||||
| December 31, 2017 | March 31, 2017 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 22,113 | $ | 26,784 | |||
| Accounts receivable, net | 12,052 | 7,956 | |||||
| Inventory | 17,129 | 17,462 | |||||
| Prepaid expenses and other current assets | 2,822 | 2,703 | |||||
| Restricted cash | — | 795 | |||||
| Total current assets | 54,116 | 55,700 | |||||
| Property, plant and equipment, net | 36,684 | 43,438 | |||||
| Intangibles, net | 3,315 | 301 | |||||
| Goodwill | 1,719 | — | |||||
| Restricted cash | 165 | 165 | |||||
| Deferred tax assets | 545 | 407 | |||||
| Other assets | 227 | 233 | |||||
| Total assets | $ | 96,771 | $ | 100,244 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable and accrued expenses | $ | 15,486 | $ | 14,490 | |||
| Note payable, current portion, net of discount of $19 as of March 31, 2017 | — | 1,481 | |||||
| Derivative liabilities | 1,142 | 1,923 | |||||
| Deferred revenue | 14,194 | 14,323 | |||||
| Total current liabilities | 30,822 | 32,217 | |||||
| Deferred revenue | 8,425 | 7,631 | |||||
| Deferred tax liabilities | 125 | 125 | |||||
| Other liabilities | 54 | 45 | |||||
| Total liabilities | 39,426 | 40,018 | |||||
| Commitments and contingencies (Note 14) | |||||||
| Stockholders' equity: | |||||||
| Common stock | 211 | 147 | |||||
| Additional paid-in capital | 1,040,348 | 1,017,510 | |||||
| Treasury stock | (1,645 | ) | (1,371 | ) | |||
| Accumulated other comprehensive income (loss) | 770 | (503 | ) | ||||
| Accumulated deficit | (982,339 | ) | (955,557 | ) | |||
| Total stockholders' equity | 57,345 | 60,226 | |||||
| Total liabilities and stockholders' equity | $ | 96,771 | $ | 100,244 | |||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
AMERICAN SUPERCONDUCTOR CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
Revenues | $ | 13,770 | $ | 12,607 | ||||
Cost of revenues | 12,193 | 8,714 | ||||||
Gross margin | 1,577 | 3,893 | ||||||
Operating expenses: | ||||||||
Research and development | 2,473 | 2,840 | ||||||
Selling, general and administrative | 5,255 | 5,786 | ||||||
Amortization of acquisition-related intangibles | 85 | 85 | ||||||
Restructuring | 0 | 310 | ||||||
Total operating expenses | 7,813 | 9,021 | ||||||
Operating loss | (6,236 | ) | (5,128 | ) | ||||
Change in fair value of warrants | 2,946 | (464 | ) | |||||
Interest income, net | 505 | 201 | ||||||
Other income (expense), net | (543 | ) | 609 | |||||
Loss before income tax expense | (3,328 | ) | (4,782 | ) | ||||
Income tax expense (benefit) | 211 | (45 | ) | |||||
Net loss | $ | (3,539 | ) | $ | (4,737 | ) | ||
Net loss per common share | ||||||||
Basic | $ | (0.17 | ) | $ | (0.23 | ) | ||
Diluted | $ | (0.17 | ) | $ | (0.23 | ) | ||
Weighted average number of common shares outstanding | ||||||||
Basic | 20,514 | 20,167 | ||||||
Diluted | 20,514 | 20,167 | ||||||
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Revenues | $ | 14,933 | $ | 27,148 | $ | 34,904 | $ | 59,000 | |||||||
| Cost of revenues | 9,917 | 22,107 | 34,103 | 50,992 | |||||||||||
| Gross margin | 5,016 | 5,041 | 801 | 8,008 | |||||||||||
| Operating expenses: | |||||||||||||||
| Research and development | 3,023 | 2,985 | 8,690 | 8,804 | |||||||||||
| Selling, general and administrative | 5,486 | 6,077 | 16,964 | 19,640 | |||||||||||
| Amortization of acquisition-related intangibles | 85 | 39 | 98 | 118 | |||||||||||
| Change in fair value of contingent consideration | 272 | — | 71 | — | |||||||||||
| Restructuring | 1 | — | 1,328 | — | |||||||||||
| Total operating expenses | 8,867 | 9,101 | 27,151 | 28,562 | |||||||||||
| Operating loss | (3,851 | ) | (4,060 | ) | (26,350 | ) | (20,554 | ) | |||||||
| Change in fair value of warrants | 399 | 101 | 1,468 | 667 | |||||||||||
| Gain on sale of minority interest | — | 325 | 951 | 325 | |||||||||||
| Interest income (expense), net | 49 | (89 | ) | 94 | (331 | ) | |||||||||
| Other (expense)/income, net | (279 | ) | 873 | (2,449 | ) | 481 | |||||||||
| Loss before income tax (benefit) expense | (3,682 | ) | (2,850 | ) | (26,286 | ) | (19,412 | ) | |||||||
| Income tax (benefit) expense | 566 | (82 | ) | 496 | 1,036 | ||||||||||
| Net loss | $ | (4,248 | ) | $ | (2,768 | ) | $ | (26,782 | ) | $ | (20,448 | ) | |||
| Net loss per common share | |||||||||||||||
| Basic | $ | (0.21 | ) | $ | (0.20 | ) | $ | (1.44 | ) | $ | (1.49 | ) | |||
| Diluted | $ | (0.21 | ) | $ | (0.20 | ) | $ | (1.44 | ) | $ | (1.49 | ) | |||
| Weighted average number of common shares outstanding | |||||||||||||||
| Basic | 19,949 | 13,792 | 18,614 | 13,746 | |||||||||||
| Diluted | 19,949 | 13,792 | 18,614 | 13,746 | |||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
AMERICAN SUPERCONDUCTOR CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Three Months Ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
Net loss | $ | (3,539 | ) | $ | (4,737 | ) | ||
Other comprehensive gain (loss), net of tax: | ||||||||
Foreign currency translation gain (loss) | 418 | (216 | ) | |||||
Total other comprehensive gain (loss), net of tax | 418 | (216 | ) | |||||
Comprehensive loss | $ | (3,121 | ) | $ | (4,953 | ) | ||
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net loss | $ | (4,248 | ) | $ | (2,768 | ) | $ | (26,782 | ) | $ | (20,448 | ) | |||
| Other comprehensive gain (loss), net of tax: | |||||||||||||||
| Foreign currency translation gain (loss) | 52 | (831 | ) | 1,273 | (1,372 | ) | |||||||||
| Total other comprehensive gain (loss), net of tax | 52 | (831 | ) | 1,273 | (1,372 | ) | |||||||||
| Comprehensive loss | $ | (4,196 | ) | $ | (3,599 | ) | $ | (25,509 | ) | $ | (21,820 | ) | |||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
AMERICAN SUPERCONDUCTOR CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Common Stock | Additional | Accumulated Other | Total | |||||||||||||||||||||||||
Number of Shares | Par | Paid-in | Treasury | Comprehensive Income (Loss) | Accumulated Deficit | Stockholders' Equity | ||||||||||||||||||||||
Balance at March 31, 2018 | 21,139 | $ | 211 | $ | 1,041,113 | $ | (1,645 | ) | $ | 883 | $ | (988,333 | ) | $ | 52,229 | |||||||||||||
Issuance of common stock - restricted shares | 276 | 3 | (3 | ) | — | — | — | — | ||||||||||||||||||||
Stock-based compensation expense | — | — | 785 | — | — | — | 785 | |||||||||||||||||||||
Issuance of stock for 401(k) match | 14 | — | 85 | — | — | — | 85 | |||||||||||||||||||||
Repurchase of treasury stock | — | — | — | (239 | ) | — | — | (239 | ) | |||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | (216 | ) | — | (216 | ) | |||||||||||||||||||
| Cumulative impact of adoption of ASU No. 2014-09 | — | — | — | — | — | 33 | 33 | |||||||||||||||||||||
| Net loss | — | — | — | — | — | (4,737 | ) | (4,737 | ) | |||||||||||||||||||
Balance at June 30, 2018 | 21,429 | $ | 214 | $ | 1,041,980 | $ | (1,884 | ) | $ | 667 | $ | (993,037 | ) | $ | 47,940 | |||||||||||||
| ||||||||||||||||||||||||||||
Balance at March 31, 2019 | 21,652 | $ | 216 | $ | 1,044,622 | $ | (2,101 | ) | $ | (5 | ) | $ | (961,539 | ) | $ | 81,193 | ||||||||||||
Issuance of common stock - restricted shares | 174 | 2 | (2 | ) | — | — | — | — | ||||||||||||||||||||
Stock-based compensation expense | — | — | 249 | — | — | — | 249 | |||||||||||||||||||||
Issuance of stock for 401(k) match | 8 | — | 81 | — | — | — | 81 | |||||||||||||||||||||
Issuance of common stock - warrant exercise | 23 | — | 294 | — | — | — | 294 | |||||||||||||||||||||
Repurchase of treasury stock | — | — | — | (283 | ) | — | — | (283 | ) | |||||||||||||||||||
Cumulative translation adjustment | — | — | — | — | 418 | — | 418 | |||||||||||||||||||||
Net loss | — | — | — | — | — | (3,539 | ) | (3,539 | ) | |||||||||||||||||||
| Balance at June 30, 2019 | 21,857 | $ | 218 | $ | 1,045,244 | $ | (2,384 | ) | $ | 413 | $ | (965,078 | ) | $ | 78,413 | |||||||||||||
| Nine months ended December 31, | |||||||
| 2017 | 2016 | ||||||
| Cash flows from operating activities: | |||||||
| Net loss | $ | (26,782 | ) | $ | (20,448 | ) | |
| Adjustments to reconcile net loss to net cash used in operations: | |||||||
| Depreciation and amortization | 9,239 | 5,606 | |||||
| Stock-based compensation expense | 2,115 | 2,266 | |||||
| Provision for excess and obsolete inventory | 415 | 1,074 | |||||
| Gain on sale of minority interest | (951 | ) | (325 | ) | |||
| Change in fair value of warrants and contingent consideration | (1,397 | ) | (667 | ) | |||
| Non-cash interest expense | 19 | 127 | |||||
| Other non-cash items | 81 | (937 | ) | ||||
| Changes in operating asset and liability accounts: | |||||||
| Accounts receivable | (3,576 | ) | 3,213 | ||||
| Inventory | 180 | (2,294 | ) | ||||
| Prepaid expenses and other current assets | 647 | 2,283 | |||||
| Accounts payable and accrued expenses | 638 | (4,031 | ) | ||||
| Deferred revenue | (862 | ) | 3,598 | ||||
| Net cash used in operating activities | (20,234 | ) | (10,535 | ) | |||
| Cash flows from investing activities: | |||||||
| Purchase of property, plant and equipment | (2,125 | ) | (557 | ) | |||
| Proceeds from the sale of property, plant and equipment | 18 | 15 | |||||
| Change in restricted cash | 795 | 457 | |||||
| Cash paid for acquisition, net of cash acquired | 74 | — | |||||
| Proceeds from sale of minority interest | 951 | 325 | |||||
| Change in other assets | 26 | 117 | |||||
| Net cash (used in)/provided by investing activities | (261 | ) | 357 | ||||
| Cash flows from financing activities: | |||||||
| Employee taxes paid related to net settlement of equity awards | (274 | ) | (490 | ) | |||
| Repayment of debt | (1,575 | ) | (3,167 | ) | |||
| Proceeds from public equity offering, net | 16,952 | — | |||||
| Proceeds from exercise of employee stock options and ESPP | 85 | — | |||||
| Net cash provided by/(used in) financing activities | 15,188 | (3,657 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | 636 | (432 | ) | ||||
| Net decrease in cash and cash equivalents | (4,671 | ) | (14,267 | ) | |||
| Cash and cash equivalents at beginning of year | 26,784 | 39,330 | |||||
| Cash and cash equivalents at end of year | $ | 22,113 | $ | 25,063 | |||
| Supplemental schedule of cash flow information: | |||||||
| Issuance of common stock in connection with the purchase of Infinia Technology Corporation | $ | 3,498 | $ | — | |||
| Cash paid for income taxes, net of refunds | 1,012 | 920 | |||||
| Issuance of common stock to settle liabilities | 252 | 289 | |||||
| Cash paid for interest | 42 | 238 | |||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
AMERICAN SUPERCONDUCTOR CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (3,539 | ) | $ | (4,737 | ) | ||
Adjustments to reconcile net loss to net cash used in operations: | ||||||||
Depreciation and amortization | 1,149 | 1,150 | ||||||
Stock-based compensation expense | 249 | 785 | ||||||
Provision for excess and obsolete inventory | 89 | 144 | ||||||
Change in fair value of warrants | (2,946 | ) | 464 | |||||
Non-cash interest income | (112 | ) | (56 | ) | ||||
Other non-cash items | 100 | (394 | ) | |||||
Changes in operating asset and liability accounts: | ||||||||
Accounts receivable | (2,874 | ) | (4,192 | ) | ||||
Inventory | 108 | (459 | ) | |||||
Prepaid expenses and other assets | (1,002 | ) | (332 | ) | ||||
Accounts payable and accrued expenses | (181 | ) | 75 | |||||
Deferred revenue | 3,093 | 666 | ||||||
Net cash used in operating activities | (5,866 | ) | (6,886 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchase of property, plant and equipment | (836 | ) | (115 | ) | ||||
Proceeds from the sale of property, plant and equipment | 3,001 | — | ||||||
Change in other assets | 94 | (51 | ) | |||||
Net cash provided by/(used in) investing activities | 2,259 | (166 | ) | |||||
Cash flows from financing activities: | ||||||||
Employee taxes paid related to net settlement of equity awards | (283 | ) | (238 | ) | ||||
Net cash used in financing activities | (283 | ) | (238 | ) | ||||
Effect of exchange rate changes on cash | 359 | (44 | ) | |||||
Net decrease in cash, cash equivalents and restricted cash | (3,531 | ) | (7,334 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 78,198 | 34,249 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 74,667 | $ | 26,915 | ||||
Supplemental schedule of cash flow information: | ||||||||
Cash paid for income taxes, net of refunds | $ | 128 | $ | 176 | ||||
Issuance of common stock to Hercules to settle warrant liability | 294 | — | ||||||
Issuance of common stock to settle liabilities | 81 | 85 | ||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
AMERICAN SUPERCONDUCTOR CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business and Operations and Liquidity
Nature of the Business and Operations
American Superconductor Corporation (“AMSC” (together with its subsidiaries, “AMSC®”or the “Company”) was founded on April 9, 1987. The Company is a leading system provider of megawatt-scale power solutions that lower the cost of wind power and enhance the performance of the power grid. Ingrid, protect the Navy’s fleet, and lower the cost of 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.power. The Company’s windsystem level products leverage its proprietary “smart materials” and “smart software and controls” to provide enhanced resiliency and improved performance of megawatt-scale power grid products and services provide exceptional reliability, security, efficiency and affordability to its customers.
These unaudited condensed consolidated financial statements of the Company 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-Q. 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. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those instructions. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results for the interim periods ended December 31, 2017June 30, 2019 and 20162018 and the financial position at December 31, 2017;June 30, 2019; however, these results are not necessarily indicative of results which may be expected for the full year. The interim condensed consolidated financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2017,2019, and notes thereto, included in the Company’s annual report on Form 10-K for the year ended March 31, 20172019 filed with the Securities and Exchange Commission on May 25, 2017.
Liquidity
The Company has historically experienced recurring operating losses and as of December 31, 2017,June 30, 2019, the Company had an accumulated deficit of $982.3$965.1 million. In addition, the Company has historically experienced recurring negative operating cash flows. At December 31, 2017,June 30, 2019, the Company had cash and cash equivalents of $22.1$74.0 million, with no outstanding debt other than ordinary trade payables. Cash used in operations for the ninethree months ended December 31, 2017June 30, 2019 was $20.2$5.9 million.
On July 3, 2018, the Company has reducedand its global workforce substantially, includingwholly-owned subsidiaries Suzhou AMSC Superconductor Co. Ltd. (“AMSC China”) and AMSC Austria GMBH (“AMSC Austria”) entered into a restructuring action announcedsettlement agreement (the “Settlement Agreement”) with Sinovel Wind Group Co., Ltd. (“Sinovel”). The Settlement Agreement settles the litigation and arbitration proceedings between the Company and Sinovel. Under the terms of the Settlement Agreement, Sinovel agreed to pay AMSC China an aggregate cash amount in Renminbi (“RMB”) equivalent to $57.5 million, consisting of two installments. Sinovel paid the first installment of the RMB equivalent of $32.5 million on AprilJuly 4, 20172018, which ledwas repatriated to a $1.3 million restructuring charge inthe Company during the nine months ended December 31, 2017. See2018, and paid the second installment of the RMB equivalent of $25.0 million on December 27, 2018. The Company’s fiscal 2018 results included the net gain received from the settlement with Sinovel of $52.7 million.
On February 1, 2018, ASC Devens LLC (the “Seller”), a wholly-owned subsidiary of the Company, entered into a Purchase and Sale Agreement (the “PSA”) with 64 Jackson, LLC (the “Purchaser”) and Stewart Title Guaranty Company (“Escrow Agent”), to effectuate the sale of certain real property located at 64 Jackson Road, Devens, Massachusetts, including the building that had served as the Company’s headquarters (collectively, the “Property”), in exchange for total consideration of $23.0 million, composed of (i) cash consideration of $17.0 million, and (ii) a $6.0 million subordinated secured commercial promissory note payable to the Company (the “Seller Note”). Subsequently, the Seller, the Purchaser and Jackson 64 MGI, LLC (“Assignee”) entered into an Assignment of Purchase and Sale Agreement (the “Assignment Agreement”), pursuant to which the Purchaser assigned all of its rights and interests in the PSA to the Assignee and the Assignee agreed to assume all of the Purchaser’s obligations and liabilities under the PSA. The transaction closed on March 28, 2018, at which time the Company received, from the Assignee, cash consideration, net of certain agreed upon closing costs, of $16.9 million, and the Seller Note 15 "Restructuring" for further discussionat an interest rate of this action.1.96%. The Seller Note was secured by a subordinated second mortgage on the Property and a subordinated second assignment of leases and rents. The Company has taken actionsreceived the first $3.0 million payment due pursuant to consolidate certain business operations to reduce facility costs. As of December 31, 2017, the Company had a global workforce of 275 persons. The Company plans to closely monitor its expensesSeller Note on March 28, 2019 and if required, expects to further reduce operating costs and capital spending to enhance liquidity.
In December 2015, the Company entered into a set of strategic agreements valued at approximately $210.0 million with Inox Wind Ltd. (“Inox” or "Inox Wind"“Inox Wind”), which includes a multi-year supply contract pursuant to which the Company will supply electricelectrical control systems to Inox and a license agreement allowing Inox to manufacture a limited number of electrical control systems. After Inox purchases the specified number of electrical control systems required under the terms of the supply contract, 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 electricelectrical control systems requirements for an additional three-year period.
The Company believes that based on the information presented above and its quarterly management assessment, it has sufficient liquidity to fund its operations and capital expenditures for the next twelve months following the issuance of the financial statements for the ninethree months ended December 31, 2017.June 30, 2019. The Company’s liquidity is highly dependent on its ability to increase revenues, including its ability to collect revenues under its agreements with Inox, its ability to control its operating costs, and its ability to raise additional capital, if necessary. 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. Revenue Recognition
On April 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, and all the related amendments and applied it to all contracts that were not completed as of April 1, 2018 using the modified retrospective method.
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 June 30, 2019, 78% 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 represent 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 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 three months ended June 30, 2019, the Company recorded $0.4 million in grant revenue, which is included in the Company’s Grid Revenue. There was no grant revenue in the prior year.
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 two 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’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:
| Three Months Ended June 30, 2019 | ||||||||
Product Line: | Grid | Wind | ||||||
Equipment and systems | $ | 8,354 | $ | 3,505 | ||||
Services and technology development | 1,501 | 410 | ||||||
Total | $ | 9,855 | $ | 3,915 | ||||
Region: | ||||||||
Americas | $ | 7,801 | $ | 46 | ||||
Asia Pacific | 1,827 | 3,856 | ||||||
EMEA | 227 | 13 | ||||||
Total | $ | 9,855 | $ | 3,915 | ||||
Three Months Ended June 30, 2018 | ||||||||
| Product Line: | Grid | Wind | ||||||
| Equipment and systems | $ | 7,462 | $ | 3,492 | ||||
| Services and technology development | 1,467 | 186 | ||||||
| Total | $ | 8,929 | $ | 3,678 | ||||
| Region: | ||||||||
| Americas | $ | 7,496 | $ | 23 | ||||
| Asia Pacific | 808 | 3,595 | ||||||
| EMEA | 625 | 60 | ||||||
| Total | $ | 8,929 | $ | 3,678 | ||||
As of June 30, 2019 and June 30, 2018 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 sheets) 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 Accounts Receivable | Deferred Program Costs | Contract Liabilities | ||||||||||
Beginning balance as of March 31, 2018 | $ | 3,016 | $ | 2,567 | $ | 21,937 | ||||||
Impact of adoption of ASC 606 | — | (1,599 | ) | (2,657 | ) | |||||||
Increases for costs incurred to fulfill performance obligations | — | 1,132 | — | |||||||||
Increase (decrease) due to customer billings | (3,221 | ) | — | 4,281 | ||||||||
Decrease due to cost recognition on completed performance obligations | — | (48 | ) | — | ||||||||
Increase (decrease) due to recognition of revenue based on transfer of control of performance obligations | 4,824 | (9 | ) | (3,324 | ) | |||||||
Other changes and FX impact | (16 | ) | 34 | (764 | ) | |||||||
| Ending balance as of June 30, 2018 | $ | 4,603 | $ | 2,077 | $ | 19,473 | ||||||
| ||||||||||||
| Unbilled Accounts Receivable | Deferred Program Costs | Contract Liabilities | ||||||||||
| Beginning balance as of March 31, 2019 | $ | 2,213 | $ | 318 | $ | 15,521 | ||||||
| Increases for costs incurred to fulfill performance obligations | 0 | 771 | 0 | |||||||||
| Increase (decrease) due to customer billings | (1,584 | ) | 0 | 10,857 | ||||||||
| Decrease due to cost recognition on completed performance obligations | 0 | (4 | ) | 0 | ||||||||
| Increase (decrease) due to recognition of revenue based on transfer of control of performance obligations | 1,467 | 0 | (7,761 | ) | ||||||||
| Other changes and FX impact | (3 | ) | 3 | 73 | ||||||||
| Ending balance as of June 30, 2019 | $ | 2,093 | $ | 1,088 | $ | 18,690 | ||||||
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 June 30, 2019, the Company had outstanding performance obligations on existing contracts under ASC 606 to be recognized in the next twelve months of approximately $54.7 million. There are also approximately $9.8 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 twelve month performance obligations include anticipated shipments to Inox based on the twelve month rolling forecast provided by Inox on the multi-year supply contract. The quantities specified in any forecast provided by Inox related to the multi-year supply contract are firm and irrevocable for the first three months of a twelve month rolling forecast. The timing of the performance obligations beyond the twelve month forecast provided by Inox are not determinable and therefore are not included in the total remaining performance obligations.
The following table sets forth customers who represented 10% or more of the Company’s total revenues for the three months ended June 30, 2019 and 2018:
Three Months Ended | |||||||
Reportable | June 30, 2019 | ||||||
Segment | 2019 | 2018 | |||||
Inox Wind Limited | Wind | 27% | 25% | ||||
| Vestas | Grid | <10% | 36% | ||||
| Micron Technology | Grid | 25% | <10% | ||||
|
| ||||||
3. Stock-Based Compensation
The Company accounts for its stock-based compensation at fair value. The following table summarizes stock-based compensation expense by financial statement line item for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (in thousands):
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Cost of revenues | $ | 3 | $ | 40 | ||||
Research and development | 10 | 51 | ||||||
Selling, general and administrative | 236 | 694 | ||||||
Total | $ | 249 | $ | 785 | ||||
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Cost of revenues | $ | 39 | $ | 40 | $ | 98 | $ | 139 | |||||||
| Research and development | 184 | 61 | 294 | 153 | |||||||||||
| Selling, general and administrative | 660 | 512 | 1,723 | 1,974 | |||||||||||
| Total | $ | 883 | $ | 613 | $ | 2,115 | $ | 2,266 | |||||||
The Company issued 37,14013,174 shares of immediately vested common stock and 800,500160,500 shares of restricted stock awards during the ninethree months ended December 31, 2017,June 30, 2019, and issued 35,00034,480 shares of immediately vested common stock and granted 126,000276,000 shares of restricted stock awards during the ninethree months ended December 31, 2016.June 30, 2018. These restricted stock awards generally vest over 2-3 years. Awards for restricted stock include both time-based and performance-based awards. For options and restricted stock awards that vest upon the passage of time, expense is being recorded over the vesting period. Performance-based awards are expensed over the requisite service period based on probability of achievement. In addition, the Company issued 16,667 restricted stock units under the 2007 Stock Incentive Plan during the nine months ended December 31, 2017, each of which represents the right to receive one share of common stock in connection with a severance agreement entered into with one of the Company's former executive officers. These restricted stock units vested and were settled in shares of common stock on the eighth day after receipt of an irrevocable release.
The estimated fair value of the Company’s stock-based awards, less expected annual forfeitures, is amortized over the awards’ service period. The total unrecognized compensation cost for unvested outstanding stock options was $0.3less than $0.1 million at December 31, 2017.June 30, 2019. This expense will be recognized over a weighted average expense period of approximately 1.21.9 years. The total unrecognized compensation cost for unvested outstanding restricted stock was $2.8$3.4 million at December 31, 2017.June 30, 2019. This expense will be recognized over a weighted-average expense period of approximately 2.01.5 years.
The Company granted 5,939 stock options during the three months ended June 30, 2019. The Company did not grant any stock options during the three and nine months ended December 31, 2017. DuringJune 30, 2018. The stock options granted during the ninethree months ended December 31, 2016, the Company granted 9,703 stock options. These optionsJune 30, 2019 will vest over 2 years.years. The weighted average assumptions used in the Black Scholes valuation model for stock options granted during the ninethree months ended December 31, 2016June 30, 2019 are as follows:
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Expected volatility | 66.5 | % | N/A | |||||
Risk-free interest rate | 1.8 | % | N/A | |||||
Expected life (years) | 5.91 | N/A | ||||||
Dividend yield | None | N/A | ||||||
4. 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. Where applicable, 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
The following table reconciles the numerators and denominators of the earnings per share calculation for the three and nine months ended December 31, 2017June 30, 2019 and 20162018 (in thousands, except per share data):
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Numerator: | ||||||||
Net loss | $ | (3,539 | ) | $ | (4,737 | ) | ||
Denominator: | ||||||||
Weighted-average shares of common stock outstanding | 21,499 | 20,999 | ||||||
Weighted-average shares subject to repurchase | (985 | ) | (832 | ) | ||||
Shares used in per-share calculation — basic | 20,514 | 20,167 | ||||||
Shares used in per-share calculation — diluted | 20,514 | 20,167 | ||||||
Net loss per share — basic | $ | (0.17 | ) | $ | (0.23 | ) | ||
Net loss per share — diluted | $ | (0.17 | ) | $ | (0.23 | ) | ||
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Numerator: | |||||||||||||||
| Net loss | $ | (4,248 | ) | $ | (2,768 | ) | $ | (26,782 | ) | $ | (20,448 | ) | |||
| Denominator: | |||||||||||||||
| Weighted-average shares of common stock outstanding | 20,889 | 14,203 | 19,189 | 14,175 | |||||||||||
| Weighted-average shares subject to repurchase | (940 | ) | (411 | ) | (575 | ) | (429 | ) | |||||||
| Shares used in per-share calculation ― basic | 19,949 | 13,792 | 18,614 | 13,746 | |||||||||||
| Shares used in per-share calculation ― diluted | 19,949 | 13,792 | 18,614 | 13,746 | |||||||||||
| Net loss per share ― basic | $ | (0.21 | ) | $ | (0.20 | ) | $ | (1.44 | ) | $ | (1.49 | ) | |||
| Net loss per share ― diluted | $ | (0.21 | ) | $ | (0.20 | ) | $ | (1.44 | ) | $ | (1.49 | ) | |||
5. Goodwill
| September 25, 2017 | |||
| Consideration | |||
| Cash | $ | 0.1 | |
| Equity (884,890 shares of common stock at $4.02 per share) | 3.6 | ||
| Contingent consideration | 0.6 | ||
| Total Consideration | $ | 4.3 | |
| Recognized amounts of identifiable assets acquired and liabilities assumed | |||
| Core technology and know-how | $ | 3.4 | |
| Working capital | 0.2 | ||
| Property, plant and equipment | 0.0 | ||
| Total identifiable net assets | $ | 3.6 | |
| Long-term deferred tax liability | 1.1 | ||
| Goodwill allocated | $ | 1.7 | |
The Company did not identify any triggering events in the period between the date of Acquisition and December 31, 2017, whichthree months ended June 30, 2019, that would require subsequent interim impairment testing of goodwill. As such, the Company expects to perform its annual goodwill impairment test during the fourth quarter of fiscal 2017. The Company will compare the fair value of its reporting unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company would record an impairment loss equal to the difference.
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 | - | 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. |
The Company provides a gross presentation of activity within Level 3 measurement roll-forward and details of transfers in and out of Level 1 and 2 measurements. A change in the hierarchy of an investment from its current level is reflected in the period during which the pricing methodology of such investment changes. Disclosure of the transfer of securities from Level 1 to Level 2 or Level 3 is made in the event that the related security is significant to total cash and investments. The Company did not have any transfers of assets and liabilities from Level 1, but did transfer $0.7 million related to the contingent liability fromLevel 2 or Level 3 to Level 2 of the fair value measurement hierarchy during the three and nine months ended December 31, 2017. The fair value calculation at December 31, 2017 was based on actual observable stock price inputs following the sale of all of the related shares, in place of the Company's assumptions which had been used in the prior period.
A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair value on a recurring basis, measured as of December 31, 2017June 30, 2019 and March 31, 20172019 (in thousands):
Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs | |||||||||||||
June 30, 2019: | ||||||||||||||||
Assets: | ||||||||||||||||
Cash equivalents | $ | 67,222 | $ | 67,222 | $ | — | $ | — | ||||||||
Derivative liabilities: | ||||||||||||||||
Warrants | $ | 1,702 | $ | — | $ | — | $ | 1,702 | ||||||||
Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs | |||||||||||||
March 31, 2019: | ||||||||||||||||
Assets: | ||||||||||||||||
Cash equivalents | $ | 41,839 | $ | 41,839 | $ | — | $ | — | ||||||||
Derivative liabilities: | ||||||||||||||||
Warrants | $ | 4,942 | $ | — | $ | — | $ | 4,942 | ||||||||
Total Carrying Value | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| December 31, 2017: | |||||||||||||||
| Assets: | |||||||||||||||
| Cash equivalents | $ | 17,944 | $ | 17,944 | $ | — | $ | — | |||||||
| Derivative liabilities: | |||||||||||||||
| Acquisition contingent consideration | $ | 687 | $ | — | $ | 687 | $ | — | |||||||
| Warrants | 455 | — | — | 455 | |||||||||||
| Total derivative liabilities | $ | 1,142 | $ | — | $ | 687 | $ | 455 | |||||||
| Total Carrying Value | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| March 31, 2017: | |||||||||||||||
| Assets: | |||||||||||||||
| Cash equivalents | $ | 14,105 | $ | 14,105 | $ | — | $ | — | |||||||
| Derivative liabilities: | |||||||||||||||
| Warrants | $ | 1,923 | $ | — | $ | — | $ | 1,923 | |||||||
The table below reflects the activity for the Company’s major classes of liabilities measured at fair value on a recurring basis (in thousands):
Warrants | ||||
April 1, 2019 | $ | 4,942 | ||
Mark to market adjustment | (2,946 | ) | ||
| Warrant exercise | (294 | ) | ||
Balance at June 30, 2019 | $ | 1,702 | ||
Warrants | ||||
April 1, 2018 | $ | 1,217 | ||
Mark to market adjustment | 464 | |||
Balance at June 30, 2018 | $ | 1,681 | ||
| Warrants | Acquisition Contingent Consideration | ||||||
| April 1, 2017 | $ | 1,923 | $ | — | |||
| Issuance of contingent consideration | — | 571 | |||||
| Mark to market adjustment | (1,468 | ) | 71 | ||||
| Settlement fees | — | 45 | |||||
| Balance at December 31, 2017 | $ | 455 | $ | 687 | |||
| Warrants | |||
| April 1, 2016 | $ | 3,227 | |
| Mark to market adjustment | (1,304 | ) | |
| Balance at March 31, 2017 | $ | 1,923 | |
Valuation Techniques
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.
Warrants
Warrants were issued in conjunction with a Securities Purchase Agreement (the “Purchase Agreement”) with Capital Ventures International (“CVI”) in April 2012, an equity offering to Hudson Bay Capital in November 2014 and a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (“Hercules”) in June 2012 and through subsequent amendments. See Note 11, “Debt,” and Note 12 “Warrants and Derivative Liabilities,” for additional information. These. The warrants issued to Hercules were exercised on April 8, 2019. Outstanding 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 derivatives and warrants until the earlier of their exercise or expiration.
The Company relies on various assumptions in a lattice model to determine the fair value of warrants. The Company has valued the warrants within Level 3 of the valuation hierarchy. See Note 12,13, “Warrants and Derivative Liabilities,” for additional information including a discussion of the warrants and the valuation assumptions used.
7. Accounts Receivable
Accounts receivable at December 31, 2017June 30, 2019 and March 31, 20172019 consisted of the following (in thousands):
June 30, 2019 | March 31, 2019 | |||||||
Accounts receivable (billed) | $ | 8,643 | $ | 5,642 | ||||
Accounts receivable (unbilled) | 2,093 | 2,213 | ||||||
Accounts receivable, net | $ | 10,736 | $ | 7,855 | ||||
| December 31, 2017 | March 31, 2017 | ||||||
| Accounts receivable (billed) | $ | 10,379 | $ | 7,436 | |||
| Accounts receivable (unbilled) | 1,727 | 574 | |||||
| Less: Allowance for doubtful accounts | (54 | ) | (54 | ) | |||
| Accounts receivable, net | $ | 12,052 | $ | 7,956 | |||
8. Inventory
Inventory, net of reserves, at December 31, 2017June 30, 2019 and March 31, 20172019 consisted of the following (in thousands):
June 30, 2019 | March 31, 2019 | |||||||
Raw materials | $ | 6,604 | $ | 5,474 | ||||
Work-in-process | 1,039 | 1,922 | ||||||
Finished goods | 3,193 | 4,405 | ||||||
Deferred program costs | 1,088 | 318 | ||||||
Net inventory | $ | 11,924 | $ | 12,119 | ||||
| December 31, 2017 | March 31, 2017 | ||||||
| Raw materials | $ | 5,544 | $ | 4,263 | |||
| Work-in-process | 1,626 | 426 | |||||
| Finished goods | 7,931 | 8,016 | |||||
| Deferred program costs | 2,028 | 4,757 | |||||
| Net inventory | $ | 17,129 | $ | 17,462 | |||
The Company recorded inventory write-downs of $0.1$0.1 million and $0.4$0.1 million for the three and nine months ended December 31, 2017. The Company recorded inventoryJune 30, 2019 and 2018, respectively. These write-downs of $0.4 million and $1.1 million for the three and nine months ended December 31, 2016. These write downs were based on evaluatingthe Company's evaluation of its inventory on hand for excess quantities and obsolescence.
Deferred program costs as of December 31, 2017June 30, 2019 and March 31, 20172019 primarily represent costs incurred on programs accounted for under contract accounting where the Company needs to complete development milestonesperformance obligations before the related revenue and costs will be recognized.
9. Note Receivable
The Company entered into the PSA dated February 1, 2018, for the sale of the Devens facility (including land, building and building improvements) located at 64 Jackson Road, Devens, Massachusetts to 64 Jackson, LLC, a limited liability company (subsequently assigned to Jackson 64 MGI, LLC) in the amount of $23.0 million. The terms for payment included a $1.0 million security deposit, and a note receivable for $6.0 million payable to the Company with the remaining cash net of certain adjustments for closing costs at the date of settlement. The note receivable was due in two $3.0 million installments plus accrued interest at a rate of 1.96% on March 31, 2019 and March 31, 2020. The note was subordinate to East Boston Savings Bank's mortgage on the Devens property. The first installment was paid on March 28, 2019 and the second installment was paid on May 23, 2019.
The note receivable was discounted to its present value of $5.7 million utilizing a discount rate of 6%, which was based on management’s assessment of what an appropriate loan at current market rates would be. The $0.3 million discount was recorded as an offset to the long term portion of the note receivable. In addition, the resulting gain of $0.1 million from the sale of the Devens property which was deferred previously was recorded as a component of the cumulative effect of an accounting change upon the adoption of Accounting Standards Update ("ASU") 2017-05 Other Income - Gains and Losses from the Derecognition of Non-financial Assets (Subtopic 610-20) which was issued as a part of ASU 2014-09 Revenue from Contracts with Customers (Topic 606). This gain was recorded as an offset to the opening accumulated deficit in the three months ended June 30, 2018.
Note receivable as of June 30, 2019 and March 31, 2019 consisted of the following (in thousands):
Current assets | June 30, 2019 | March 31, 2019 | ||||||
Note receivable, current | $ | - | $ | 3,000 | ||||
Note receivable discount | — | (112 | ) | |||||
Total current note receivable | $ | - | $ | 2,888 | ||||
10. Property, Plant and Equipment
The cost and accumulated depreciation of property and equipment at December 31, 2017June 30, 2019 and March 31, 20172019 are as follows (in thousands):
June 30, 2019 | March 31, 2019 | |||||||
Construction in progress - equipment | $ | 1,336 | $ | 603 | ||||
Equipment and software | 45,791 | 45,705 | ||||||
Furniture and fixtures | 1,271 | 1,269 | ||||||
Leasehold improvements | 1,983 | 1,955 | ||||||
Property, plant and equipment, gross | 50,380 | 49,532 | ||||||
Less accumulated depreciation | (41,633 | ) | (40,560 | ) | ||||
Property, plant and equipment, net | $ | 8,747 | $ | 8,972 | ||||
| December 31, 2017 | March 31, 2017 | ||||||
| Land | $ | 3,643 | $ | 3,643 | |||
| Construction in progress - equipment | 2,160 | 601 | |||||
| Buildings | 34,549 | 34,549 | |||||
| Equipment and software | 72,566 | 73,445 | |||||
| Furniture and fixtures | 1,048 | 1,201 | |||||
| Leasehold improvements | 498 | 2,442 | |||||
| Property, plant and equipment, gross | 114,464 | 115,881 | |||||
| Less accumulated depreciation | (77,780 | ) | (72,443 | ) | |||
| Property, plant and equipment, net | $ | 36,684 | $ | 43,438 | |||
Depreciation expense was $1.4$1.1 million and $8.9$1.1 million for the three and nine months ended December 31, 2017. Depreciation expense was $1.7 millionJune 30, 2019 and $5.2 million for the three and nine months ended December 31, 2016. Included in depreciation expense for the nine months ended December 31, 2017 is $4.1 million of accelerated depreciation recorded to cost of revenues related to revised estimates of the remaining useful lives of certain pieces of manufacturing equipment.2018, respectively. Construction in progress - equipment primarily includes capital investments and leasehold improvements in the Company's newly leased facility in Ayer, Massachusetts.
11. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2017June 30, 2019 and March 31, 20172019 consisted of the following (in thousands):
June 30, 2019 | March 31, 2019 | |||||||
Accounts payable | $ | 4,088 | $ | 2,939 | ||||
Accrued inventories in-transit | 307 | 244 | ||||||
Accrued other miscellaneous expenses | 1,794 | 1,759 | ||||||
Advanced deposits | 745 | 631 | ||||||
Accrued compensation | 3,678 | 5,404 | ||||||
Income taxes payable | 3,601 | 3,363 | ||||||
Accrued warranty | 1,606 | 1,545 | ||||||
Total | $ | 15,819 | $ | 15,885 | ||||
| December 31, 2017 | March 31, 2017 | ||||||
| Accounts payable | $ | 5,626 | $ | 3,207 | |||
| Accrued inventories in-transit | 505 | 313 | |||||
| Accrued other miscellaneous expenses | 2,326 | 2,240 | |||||
| Accrued restructuring | 394 | — | |||||
| Accrued compensation | 3,792 | 5,042 | |||||
| Income taxes payable | 1,372 | 1,344 | |||||
| Accrued warranty | 1,471 | 2,344 | |||||
| Total | $ | 15,486 | $ | 14,490 | |||
The Company generally provides a one to three year warranty on its products, commencing upon installation.delivery or installation where applicable. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience.
Product warranty activity was as follows (in thousands):
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Balance at beginning of period | $ | 1,545 | $ | 1,769 | ||||
Change in accruals for warranties during the period | 85 | 104 | ||||||
Settlements during the period | (24 | ) | (121 | ) | ||||
Balance at end of period | $ | 1,606 | $ | 1,752 | ||||
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Balance at beginning of period | $ | 1,852 | $ | 2,694 | $ | 2,344 | $ | 3,601 | |||||||
| Change in accruals for warranties during the period | 25 | 591 | 152 | 1,009 | |||||||||||
| Settlements during the period | (406 | ) | (608 | ) | (1,025 | ) | (1,933 | ) | |||||||
| Balance at end of period | $ | 1,471 | $ | 2,677 | $ | 1,471 | $ | 2,677 | |||||||
12. Income Taxes
The Company recorded an income tax expensesexpense of $0.6$0.2 million and $0.5 million in the three and nine months ended December 31, 2017, respectively. The Company recordedan income tax benefit of less than $0.1 million and expense of $1.0 million in the three and nine months ended December 31, 2016,June 30, 2019 and 2018, respectively.
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 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 to be realized upon ultimate settlement. The Company re-evaluates these uncertain tax positions on a quarterly basis. The 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 did not identify any uncertain tax positions in the ninethree months ended December 31, 2017June 30, 2019 and did not have any gross unrecognized tax benefits as of March 31, 2017.2019.
13. Warrants and Derivative Liabilities
The Company accounts for its warrants and contingent consideration as liabilities due to certain adjustment provisions within the instruments, which require that they be recorded at fair value. The warrants are subject to revaluation at each balance sheet date and any change in fair value is recorded as a change in fair value of warrants until the earlier of its expiration or its exercise at which time the warrant liability will be reclassified to equity. The Company calculated the fair value of the warrants utilizing an integrated lattice model. The contingent consideration is subject to revaluation at each balance sheet date and any change in fair value is recorded as a change in fair value of contingent consideration until the earlier of its settlement or expiration. The Company determined the fair value of the contingent consideration utilizing a Black Scholes option pricing method upon acquisition and as of September 30, 2017. As of December 31, 2017, the actual amount due for the contingent consideration was determined according to the stated formula in the agreement. See Note 5,6, "Fair Value Measurements", for further discussion.
| Fiscal Year 17 | September 30, 2017 | June 30, 2017 | |
| Risk-free interest rate | 1.05% | 1.05% | |
| Expected annual dividend yield | — | — | |
| Expected volatility | 77.95% | 78.25% | |
| Term (years) | 0.01 | 0.26 | |
| Fair value | $— | $— | |
| Fiscal Year 16 | March 31, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | ||||
| Risk-free interest rate | 0.91% | 0.56% | 0.59% | 0.48% | 0.66% | ||||
| Expected annual dividend yield | — | — | — | — | — | ||||
| Expected volatility | 44.12% | 58.04% | 70.50% | 76.30% | 76.76% | ||||
| Term (years) | 0.51 | 0.76 | 1.01 | 1.26 | 1.51 | ||||
| Fair value | $— | $0.1 million | $0.2 million | $0.4 million | $0.4 million | ||||
Hercules Warrant
On December 19, 2014, the Company entered into a second amendment to the Loan and Security Agreement with Hercules (the "Hercules Second Amendment. See Note 11, “Debt” for additional information.Amendment"). In conjunction with the agreement,Hercules Second Amendment, the Company issued the Hercules Warranta warrant to purchase 58,823 shares of the Company’s common stock.stock (the "Hercules Warrant") which replaced the First Warrant and the Second Warrant. The Hercules Warrant iswas exercisable at any time after its issuance at an exercise price of $7.85 per share, subject to certain price-based and other anti-dilution adjustments, including the equity offering in May 2017, the acquisition of ITC with common stock in September 2017 and expires on June 30, 2020.
| Fiscal Year 17 | December 31, 2017 | September 30, 2017 | June 30, 2017 | ||
| Risk-free interest rate | 1.98% | 1.56% | 1.58% | ||
| Expected annual dividend yield | — | — | — | ||
| Expected volatility | 69.11% | 63.97% | 67.76% | ||
| Term (years) | 2.46 | 2.72 | 2.97 | ||
| Fair value | $0.1 million | $0.1 million | $0.1 million | ||
| Fiscal Year 16 | March 31, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | ||||
| Risk-free interest rate | 1.55% | 1.57% | 0.97% | 0.86% | 1.08% | ||||
| Expected annual dividend yield | — | — | — | — | — | ||||
| Expected volatility | 66.51% | 67.28% | 67.98% | 68.34% | 70.25% | ||||
| Term (years) | 3.25 | 3.50 | 3.75 | 4.00 | 4.25 | ||||
| Fair value | $0.2 million | $0.2 million | $0.2 million | $0.3 million | $0.2 million | ||||
November 2014 Warrant
On November 13, 2014, the Company completed an offering of 909,090 units of the Company’s common stock with Hudson Bay Capital. Each unit consisted of one share of the Company’s common stock and 0.9 of a warrant to purchase one share of common stock, or a warrant to purchase in the aggregate 818,181 shares (the “November 2014 Warrant”). The November 2014
Following is a summary of the key assumptions used to calculate the fair value of the November 2014 Warrant:
Fiscal Year 2019 | June 30, 2019 | ||
Risk-free interest rate | 2.11% | ||
Expected annual dividend yield | — | ||
Expected volatility | 60.58% | ||
Term (years) | 0.37 | ||
Fair value | $1.7 million |
March 31, | December 31, | September 30, | June 30, | March 31, | ||||||
Fiscal Year 2018 | 2019 | 2018 | 2018 | 2018 | 2018 | |||||
Risk-free interest rate | 2.43% | 2.61% | 2.62% | 2.40% | 2.20% | |||||
Expected annual dividend yield | — | — | — | — | — | |||||
Expected volatility | 75.61% | 70.29% | 63.66% | 67.40% | 65.86% | |||||
Term (years) | 0.62 | 0.87 | 1.12 | 1.37 | 1.62 | |||||
Fair value | $4.6 million | $3.6 million | $1.3 million | $1.6 million | $1.1 million |
| Fiscal Year 17 | December 31, 2017 | September 30, 2017 | June 30, 2017 | ||
| Risk-free interest rate | 1.87% | 1.49% | 1.44% | ||
| Expected annual dividend yield | — | — | — | ||
| Expected volatility | 65.86% | 65.64% | 67.21% | ||
| Term (years) | 1.87 | 2.12 | 2.37 | ||
| Fair value | $0.4 million | $0.8 million | $0.9 million | ||
| Fiscal Year 16 | March 31, 2017 | December 31, 2016 | September 30, 2016 | June 30, 2016 | March 31, 2016 | ||||
| Risk-free interest rate | 1.41% | 1.43% | 0.93% | 0.77% | 0.98% | ||||
| Expected annual dividend yield | — | — | — | — | — | ||||
| Expected volatility | 66.53% | 69.31% | 68.96% | 70.01% | 69.88% | ||||
| Term (years) | 2.62 | 2.87 | 3.12 | 3.37 | 3.62 | ||||
| Fair value | $1.8 million | $2.3 million | $2.3 million | $3.2 million | $2.6 million | ||||
The Company recorded a net gainsgain of $0.4 million and $1.4$2.9 million resulting from decreasesthe decrease in the fair value of the November 2014 Warrant during the three and nine months ended December 31, 2017, respectively.June 30, 2019. The Company recorded no change and a net gainloss of $0.3$0.5 million resulting from the decreaseincrease in the fair value of the November 2014 Warrant during the three months ended June 30, 2018.
14. Leases
On April 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) ("ASC 842"), using the modified retrospective approach. The Company elected the package of practical expedients available in the threestandard and nine months ended December 31, 2016, respectively.
As a result for each period the fair value of the contingent considerationadoption of ASC 842, the Company recognized lease right-of-use assets of $3.8 million, and operating lease liabilities of $3.8 million. There was remeasuredno impact to the condensed consolidated statements of operations or stockholders' equity for the adoption of ASC 842. No impairment was recognized on the right-of-use asset upon adoption. These adjustments are detailed as follows:
March 31, 2019 | ASC 842 Adjustment | April 1, 2019 | ||||||||||
Operating Leases: | ||||||||||||
Right of use asset | $ | - | $ | 3,795 | $ | 3,795 | ||||||
Total operating lease right-of-use asset | 0 | 3,795 | 3,795 | |||||||||
Operating lease liabilities – ST | $ | - | $ | 309 | $ | 309 | ||||||
Operating lease liabilities – LT | 0 | 3,512 | 3,512 | |||||||||
Total operating lease liabilities | 0 | 3,821 | 3,821 | |||||||||
Weighted-average remaining lease term | 7.69 years | |||||||||||
Weighted-average discount rate | 7.06 | % | ||||||||||
All significant lease arrangements are recognized at lease commencement. Operating lease right–of-use assets and lease liabilities are recognized at commencement. The operating lease right-of-use asset includes any lease payments related to initial direct cost and prepayments and excludes any lease incentives. Lease expense is recognized on a straight-line basis over the lease term. The Company enters into a variety of operating lease agreements through the normal course of its business, but primarily real estate leases to support its operations. The agreements generally provide for fixed minimum rental payments and the resulting gainpayment of real estate taxes and insurance. Many of these leases have one or lossmore renewal options that allow the Company, at its discretion, to renew the lease for varying periods up to five years or to terminate the lease. Only renewal options or termination rights that the Company believed were likely to be exercised were included in the lease calculations.
The Company also enters into leases for vehicles, IT equipment and service agreements, and other leases related to its manufacturing operations that are also included in the right-of-use asset and lease liability accounts if they are for a term of longer than twelve months. However, many of these leases are either short-term in nature or immaterial. The Company has made the policy election to exclude short term leases from the balance sheet.
The discount rate was recognized in operating expenses.
The Company did not identify any leases that are classified as financing leases.
Supplemental balance sheet information related to calculate the fair value of the contingent considerationleases at June 30, 2019 are as follows:
June 30, 2019 | ||||
Operating Leases: | ||||
Right-of-use assets | $ | 3,733 | ||
Total right-of-use assets | 3,733 | |||
Lease liabilities - ST | $ | 416 | ||
Lease liabilities - LT | 3,357 | |||
Total operating lease liabilities | 3,773 | |||
Weighted-average remaining lease term | 7.55 years | |||
Weighted-average discount rate | 7.06 | % | ||
The costs related to the ITC acquisition:
| Fiscal Year 17 | September 30, 2017 | September 25, 2017 | |
| Risk-free interest rate | 1.09% | 1.09% | |
| Expected annual dividend yield | — | — | |
| Expected volatility | 66.54% | 65.71% | |
| Term (years) | 0.31 | 0.32 | |
| Fair value | $0.4 million | $0.6 million | |
June 30, 2019 | ||||
Operating Lease: | ||||
Operating lease costs - fixed | $ | 178 | ||
| Operating lease costs - variable | 21 | |||
Short-term lease costs | 233 | |||
Total lease costs | 432 | |||
The Company’s estimated minimum future lease obligations under the Company's common stock at a public offering price of $4.00 per share. The net proceeds to the Company from the Offering were approximately $14.7 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company. The Offering closed on May 10, 2017. In addition, the Company granted the underwriters a 30-day option (the “Option”) to purchase up to an additional 600,000 shares of common stock at the public offering price. On May 24, 2017, the underwriters notified the Company that they had exercised their Option in full. The net proceeds to the Company from the Option were approximately $2.3 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company. The total net proceeds to the Company from the Offering and the Option were approximately $17.0 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company. The Option closed on May 26, 2017.leases are as follows:
Operating Leases | ||||
Year ended March 31, | ||||
2020 | $ | 496 | ||
2021 | 673 | |||
2022 | 653 | |||
2023 | 627 | |||
2024 | 564 | |||
Thereafter | 1,896 | |||
Total minimum lease payments | 4,909 | |||
| Less: interest | (1,136 | ) | ||
| Present value of lease liabilities | 3,773 | |||
15. Commitments and Contingencies
Legal Contingencies
From time to time, the Company is 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. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses 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 its consolidated financial statements.
Other
The Company enters into long-term construction contracts with customers that require the Company to obtain performance bonds. The Company is required to deposit an amount equivalent to some or all the face amount of the performance bonds into an escrow account until the termination of the bond. When the performance conditions are met, amounts deposited as collateral for the performance bonds are returned to the Company. In addition, the Company has various contractual arrangements in which minimum quantities of goods or services have been committed to be purchased on an annual basis.
As of December 31, 2017,June 30, 2019, the Company had $0.2$0.7 million of restricted cash included in long-term assets. These amounts included in restricted cash primarily represent deposits to secure letters of credit for various supply contracts. These deposits are held in interest bearing accounts.
16. Restructuring
The Company accounts for charges resulting from operational restructuring actions in accordance with ASC Topic 420,
Exit or Disposal Cost Obligations (“ASC 420”) and ASC Topic 712, Compensation—Nonretirement Postemployment Benefits (“ASC 712”). In accounting for these obligations, the Company is required to make assumptions related to the amounts of employee severance, benefits, and related costs and the time period over which leased facilities will remain vacant, sublease terms, sublease rates and discount rates. Estimates and assumptions are based on the best information available at the time the obligation arises. These estimates are reviewed and revised as facts and circumstances dictate; changes in these estimates could have a material effect on the amount accrued on the consolidated balance sheet.The purpose of the workforce reduction was to reduce operating expenses to better align with the Company’s current revenues. Included in the $1.3$0.3 million severance pay, charged to operations in the ninethree months ended December 31, 2017,June 30, 2018 is $0.5 million of severance pay for onerelated to exit costs incurred in connection with the move of the Company's former executive officers pursuant to the terms of a severance agreement dated June 30, 2017. Under the terms of the severance agreement, the Company's former executive officer is entitled to 18 months of his base salary, which is expected to be paid by December 31, 2018. From and after January 1, 2018, the Company, at its discretion, may settle any remaining unpaid cash severance owed to its former executive officer through the issuance of a number of immediately vested shares of the Company’s common stock, determined by multiplying the remaining unpaid cash severance owed by 120%, and then dividing by the closing stock price per share of the Company's common stock as of the last business day prior to the issuance of the shares.
The following table presents restructuring charges and cash payments for the ninethree months ended December 31, 2017June 30, 2018 (in thousands):
Severance pay | Facility exit and | |||||||||||
and benefits | Relocation costs | Total | ||||||||||
Accrued restructuring balance at April 1, 2018 | $ | 262 | $ | 173 | $ | 435 | ||||||
Charges to operations | 0 | 310 | 310 | |||||||||
Cash payments | (97 | ) | (483 | ) | (580 | ) | ||||||
Accrued restructuring balance at June 30, 2018 | $ | 165 | $ | — | $ | 165 | ||||||
| Severance pay | |||
| and benefits | |||
| Accrued restructuring balance at April 1, 2017 | $ | — | |
| Charges to operations | 1,328 | ||
| Cash payments | (934 | ) | |
| Accrued restructuring balance at December 31, 2017 | $ | 394 | |
All restructuring charges discussed above are included within restructuring in the Company’s unaudited condensed consolidated statements of operations. The Company includes accrued restructuring within accounts payable and accrued expenses.
17. Business Segments
The Company reports its financial results in two reportable business segments: WindGrid and Grid.
Through the Company’s Windtec Solutions, the Wind business segment enables manufacturers to field wind turbines with exceptional power output, reliability and affordability. The Company supplies advanced power electronics and control systems, licenses its highly engineered wind turbine designs, and provides extensive customer support services to wind turbine manufacturers. The Company’s design portfolio includes a broad range of drive trains and power ratings of 2 megawatts ("MWs") and higher. The Company provides a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility.
Through the Company’s wind power offerings, the Wind business segment enables manufacturers to field highly competitive wind turbines through our advanced power electronics and control system products, engineered designs, and support services. The Company supplies advanced power electronics and control systems, licenses its highly engineered wind turbine designs, and provides extensive customer support services to wind turbine manufacturers. The Company’s design portfolio includes a broad range of drive trains and power ratings of 2 megawatts ("MWs") and higher. The Company provides a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility.
The operating results for the two business segments are as follows (in thousands):
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
Grid | $ | 9,855 | $ | 8,929 | ||||
Wind | 3,915 | 3,678 | ||||||
Total | $ | 13,770 | $ | 12,607 | ||||
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Operating loss: | ||||||||
Grid | $ | (4,663 | ) | $ | (2,666 | ) | ||
Wind | (1,324 | ) | (1,367 | ) | ||||
Unallocated corporate expenses | (249 | ) | (1,095 | ) | ||||
Total | $ | (6,236 | ) | $ | (5,128 | ) | ||
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues: | |||||||||||||||
| Wind | $ | 2,633 | $ | 18,248 | $ | 10,465 | $ | 36,822 | |||||||
| Grid | 12,300 | 8,900 | 24,439 | 22,178 | |||||||||||
| Total | $ | 14,933 | $ | 27,148 | $ | 34,904 | $ | 59,000 | |||||||
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Operating loss: | |||||||||||||||
| Wind | $ | (1,684 | ) | $ | 1,044 | $ | (7,557 | ) | $ | (3,220 | ) | ||||
| Grid | (1,011 | ) | (4,491 | ) | (15,279 | ) | (15,068 | ) | |||||||
| Unallocated corporate expenses | (1,156 | ) | (613 | ) | (3,514 | ) | (2,266 | ) | |||||||
| Total | $ | (3,851 | ) | $ | (4,060 | ) | $ | (26,350 | ) | $ | (20,554 | ) | |||
The accounting policies of the business segments are the same as those for the consolidated Company. The Company’s business segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measures are segment revenues and segment operating loss. The disaggregated financial results of the segments reflect allocation of certain functional expense categories consistent with the basis and manner in which Company management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. In addition, certain corporate expenses which the Company does not believe are specifically attributable or allocable to either of the two business segments have been excluded from the segment operating loss.
Unallocated corporate expenses primarily consist of stock-based compensation expense of $0.9$0.2 million and $0.6$0.8 million in the three months ended December 31, 2017June 30, 2019 and 2016, respectively. Unallocated corporate expenses primarily consist2018, respectively, and restructuring charges of stock-based compensation expense of $2.1 million and $2.3$0.3 million in the ninethree months ended December 31, 2017 and 2016, respectively. Additionally, a restructuring charge of $1.3 million is included in the nine months ended December 31, 2017, as well as losses for the change in fair value of the contingent consideration of $0.3 million and $0.1 million in the three and nine months ended December 31, 2017.
Total assets for the two business segments as of December 31, 2017June 30, 2019 and March 31, 20172019 are as follows (in thousands):
June 30, 2019 | March 31, 2019 | |||||||
Grid | $ | 32,169 | $ | 31,075 | ||||
Wind | 11,416 | 8,167 | ||||||
Corporate assets | 76,565 | 80,088 | ||||||
Total | $ | 120,150 | $ | 119,330 | ||||
| December 31, 2017 | March 31, 2017 | ||||||
| Wind | $ | 15,303 | $ | 18,346 | |||
| Grid | 36,165 | 31,060 | |||||
| Corporate assets | 45,303 | 50,838 | |||||
| Total | $ | 96,771 | $ | 100,244 | |||
| Three months ended December 31, | Nine months ended December 31, | ||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||
| Inox Wind Limited | 15 | % | 66 | % | 27 | % | 58 | % | |||
| Vestas Middle East S.L.U. | 27 | % | — | % | 11 | % | — | % | |||
| SSE Generation Ltd. | 17 | % | — | % | <10% | — | % | ||||
| Hidalgo Wind Farm LLC | <10% | 17 | % | <10% | <10% | ||||||
18. Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840,• | In July 2018, the FASB issued ASU 2018-10, Codification improvements to Topic 842, Leases. The amendments in ASU 2018-10 provide more clarification in regards to the application and requirements of ASU 2016-02. |
• | In July 2018, the FASB issued ASU 2018-11, Topic 842, Leases - Targeted improvements. The amendments in ASU 2018-11 provide for the option to adopt the standard prospectively and recognize a cumulative-effect adjustment to the opening balance of retained earnings as well as offer a new practical expedient that will allow the Company to elect, by class of underlying asset, to not separate non-lease and lease components in certain circumstances and instead to account for those components as a single item. |
ASU 2016-02 became effective on April 1, 2019, and the Company adopted the standard using the modified retrospective transition approach is required for lessees for capital and operatingmethod, which impacted all leases existing at, or entered into after, the beginningperiod of adoption. For all leases existing at the earliest comparative period presented intime of adoption the financial statements, with certain practical expedients available. The Company is currently evaluatingrecognized a right-of-use asset and lease liability on the effects adoption of this guidance will have on its consolidated financial statements.
In June 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 will provide more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that year. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-13 may have on its consolidated financial statements.In July 2017, the FASB issued ASU 2017-11,
Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). The amendments in ASU 2017-11 provide guidance for freestanding equity-linked financial instruments, such as warrants and conversion options in convertible debt or preferred stock, and should no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods.In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in ASU 2017-12 provide improved financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance. The ASU is effectiveIn June 2018, the FASB issued ASU 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The amendments in ASU 2018-08 assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) determining whether a contribution is conditional. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods. As of April 1, 2019, the Company has adopted ASU 2018-08 and noted additional disclosures within its revenue footnote to appropriately present the revenue related to its grant revenue.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 provide for increased effectiveness of the disclosures made around fair value measurements while including consideration for costs and benefits. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those periods. The Company is currently evaluating the impact the adoption of ASU 2017-122018-13 may have on its consolidated financial statements.
19. Subsequent Events
The Company has performed an evaluation of subsequent events through the time of filing this Quarterly Report on Form 10-Q with the SEC and has determined that other than those disclosed above, there are no such events to report.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For this purpose, any statements contained herein that relate to future events or conditions, including without limitation, the statements in Part II, “Item 1A. Risk Factors” and in Part I under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding industry prospects, or our prospective results of operations or financial position and adoption of accounting changes may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements represent management’s current expectations and are inherently uncertain. There are a number of important factors that could materially impact the value of our common stock or cause actual results to differ materially from those indicated by such forward-looking statements. These important factors include, but are not limited to: A significant portion of our revenues are derived from a single customer, Inox, and we cannot predict if and how successful Inox will be in executing on Solar Energy Corporation of India ("SECI") orders under the new central and state auction regime, and any related failure by Inox to succeed under this regime, or any delay in Inox’s ability to deliver its wind turbines, could result in fewer electric control systems shipments to Inox; We have a history of operating losses and negative operating cash flows, which may continue in the future and require us to secure additional financing in the future; Our operating results may fluctuate significantly from quarter to quarter and may fall below expectations in any particular fiscal quarter; 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; Changes in exchange rates could adversely affect our results of operations; 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; Our financial condition may have an adverse effect on our customer and supplier relationships; 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, and additional funding of such contracts may not be approved by U.S. Congress; Our success in addressing the wind energy market is dependent on the manufacturers that license our designs; Our success is dependent upon attracting and retaining qualified personnel and our inability to do so could significantly damage our business and prospects; We rely upon third-party suppliers for the components and sub-assemblies of many ofmay experience difficulties re-establishing our Wind and Grid products, making us vulnerable to supply shortages and price fluctuations; Failure to successfully execute any move ofHTS wire production capability in our Devens,Ayer, Massachusetts manufacturing facility or achieve expected savings or other anticipated benefits following any move could adversely impact our financial performance;facility; We may not realize all of the sales expected from our backlog of orders and contracts; Our business and operations would be adversely impacted in the event of a failure or security breach of our information technology infrastructure; 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 rely upon third-party suppliers for the components and subassemblies of many of our Wind and Grid products, making us vulnerable to supply shortages and price fluctuations, which could harm our business; Many of our revenue opportunities are dependent upon subcontractors and other business collaborators; If we fail to implement our business strategy successfully, our financial performance could be harmed; 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;Many of our customers outside of the United States may 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; 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;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 success depends upon the commercial useadoption of high temperature superconductor products,the Resilient Electric Grid ("REG") system, which is currently limited, and a widespread commercial market for our products may not develop; 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; 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, and additional funding of such contracts may not be approved by the U.S. Congress; Tax reform in the U.S. may negatively affect our operating results; We have operations in, and depend on sales in, emerging markets, including India, and global conditions could negatively affect our operating results or limit our ability to expand our operations outside of these markets; Changes in India’s political, social, regulatory and economic environment may affect our financial performance; Our business and operations would be adversely impacted in the event of a failure or security breach of our information technology infrastructure; If we fail to maintain proper and effective internal control over financial reporting,products face intense competition, which could limit our ability to produce accurateacquire or retain customers; 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; Lower prices for other fuel sources may reduce the demand for wind energy development, which could have a material adverse effect on our ability to grow our Wind business; Adverse changes in domestic and timely financial statementsglobal economic conditions could be impaired and may lead investors and other users to lose confidence inadversely affect our financial data;operating results; We face risks related to our intellectual property; We face risks related to our technologies; We face risks related to our legal proceedings; We face risks related to our common stock; and the important factors discussed under the caption "Risk Factors" in Part 1. Item 1A of our Form 10-K for the fiscal year ended March 31, 2017,2019 and our other reports filed with the SEC. These and the important factors, discussed under the caption “Risk Factors” in Part 1. Item 1A of our Form 10-K for the fiscal year ended March 31, 2017 among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Any such forward-looking statements represent management’s estimates as of the date of this Quarterly Report on Form 10-Q. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
American Superconductor
Executive Overview
We are a leading provider of megawatt-scale solutions that lower the cost of wind power and enhance the performance of the power grid. Ingrid, protect our Navy's fleet, and lower the cost of wind power market, we enable manufacturers to field highly competitive wind turbines through our advanced
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”) 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,electric utilities, power generation project developers and electric utilities.
• | Grid. Through our Gridtec Solutions™, 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. |
• | 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 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. |
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 20172019 refers to the fiscal year beginning on April 1, 2017.2019. Other fiscal years follow similarly.
On September 25, 2017,July 3, 2018, we acquired Infinia Technology Corporationand our wholly-owned subsidiaries Suzhou AMSC Superconductor Co. Ltd. (“ITC”AMSC China”) for approximately $3.8 million as described below (the “Acquisition”and AMSC Austria GmbH (“AMSC Austria”). Located in Richmond, Washington, ITC is entered into a technology firm founded in 2009 specializing in the design, development and commercialization of cryo-coolers for a wide range of applications.
In addition, pursuant to the terms of the SPA, multiplied by (ii) the numberSettlement Agreement, we and AMSC Austria have granted Sinovel a non-exclusive license for certain of AMSC Shares sold by Selling Stockholders during the first 90 days after the effectivenessour intellectual property to be used solely in Sinovel’s doubly fed wind turbines (the “License”). We have agreed not to sue Sinovel, Sinovel’s power converter suppliers or Sinovel’s customers for use of the Resale Registration Statement, minus (y) the aggregate sales proceeds receivedtechnology covered by the Selling Stockholders fromLicense.
On October 31, 2018, we entered into a Subcontract Agreement with Commonwealth Edison Company (“ComEd”) (the “Subcontract Agreement”) for the sale of any AMSC Shares during the first 90 days after the effectivenessmanufacture and installation of the Resale Registration Statement. The Resale Registration Statement was declaredCompany’s REG system within ComEd’s electric grid in Chicago, Illinois (the “Project”). As provided in the Subcontract Agreement, the Subcontract Agreement became effective on October 23, 2017. The contingent liability relatedupon the signing of an amendment by us and the U.S. Department of Homeland Security (“DHS”) to the Make Whole Payment was determined under a fair value option based pricing model to be $0.6 millionexisting contract (the “Prime Contract”) between us and DHS on September 25, 2017 and was subsequently reassessed at each period end until the final amount of $0.7 million as of December 31, 2017 was determinedJune 20, 2019. Unless terminated earlier by us or DHS according to the formula perterms of the agreement. See Note 5 "Fair Value Measurements"Subcontract Agreement, the term of the Subcontract Agreement will continue until we complete our warranty obligations under the Subcontract Agreement. Under the terms of the Subcontract Agreement, we have agreed, among other things, to provide the REG system and Note 12 "Warrantsto 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 expect funding provided by DHS in connection with the Subcontract Agreement to be between $9.0 to $11.0 million, which represents the total amount of revenue we are expected to recognize over the term of the Subcontract Agreement and Derivative Liabilities"includes up to $1.0 million that we have agreed to reimburse ComEd for further discussion regardingcosts incurred by ComEd while undertaking its tasks under the
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and 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. During the nine months ended December 31, 2017,Effective April, 1 2019, we adopted ASU 2017-04,2016-02, which provides for changesnew requirements in regards to the annual impairment testing of goodwill.leases. See Note 4, "Acquisition and Related Goodwill"14, "Leases" for further details. Aside from the adoption of ASU 2017-04,2016-02, there were no significant changes in the critical accounting policies that were disclosed in our Form 10-K for fiscal 2016,2018, which ended on March 31, 2017.
Results of Operations
Three and nine months ended December 31, 2017June 30, 2019 compared to the three and nine months ended December 31, 2016
Revenues
Total revenues decreased 45% and 41%increased 9% to $14.9 million and $34.9$13.8 million for the three and nine months ended December 31, 2017, respectively,June 30, 2019, compared to $27.1 million and $59.0$12.6 million for the three and nine months ended December 31, 2016, respectively.June 30, 2018. Our revenues are summarized as follows (in thousands):
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues: | |||||||||||||||
| Wind | $ | 2,633 | $ | 18,248 | $ | 10,465 | $ | 36,822 | |||||||
| Grid | 12,300 | 8,900 | 24,439 | 22,178 | |||||||||||
| Total | $ | 14,933 | $ | 27,148 | $ | 34,904 | $ | 59,000 | |||||||
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
Grid | $ | 9,855 | $ | 8,929 | ||||
Wind | 3,915 | 3,678 | ||||||
Total | $ | 13,770 | $ | 12,607 | ||||
Our Grid business unit accounted for 72% of total revenues for the three months ended June 30, 2019, compared to 71% for the three months ended June 30, 2018. Our Grid business unit revenues increased 10% to $9.9 million in the three months ended June 30, 2019, from $8.9 million in the three months ended June 30, 2018. Grid business unit revenue increased, primarily driven by higher D-VAR revenues and the commencement of the REG project with ComEd, partially offset by lower license revenue due to the joint venture agreement with BASF ending in fiscal 2018.
Our Wind business unit accounted for 18% and 30%28% of total revenues for the three and nine months ended December 31, 2017, respectively,June 30, 2019, compared to 67% and 62%29% for the three and nine months ended December 31, 2016, respectively.June 30, 2018. Revenues in the Wind business unit decreased 86% and 72%unit increased6% to $2.6 million and $10.5$3.9 million in the three and nine months ended December 31, 2017, respectively,June 30, 2019, from $18.2 million and $36.8$3.7 million in the three and nine months ended December 31, 2016, respectively.
| Three months ended December 31, | Nine months ended December 31, | ||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||
| Inox Wind Limited | 15 | % | 66 | % | 27 | % | 58 | % | |||
| Vestas Middle East S.L.U. | 27 | % | — | % | 11 | % | — | % | |||
| SSE Generation Ltd. | 17 | % | — | % | <10% | — | % | ||||
| Hidalgo Wind Farm LLC | <10% | 17 | % | <10% | <10% | ||||||
Cost of Revenues and Gross Margin
Cost of revenues decreased by 55% increased by 40% to $9.9$12.2 million for the three months ended December 31, 2017,June 30, 2019, compared to $22.1$8.7 million for the three months ended December 31, 2016.June 30, 2018. Gross margin was 34%11% for the three months ended December 31, 2017,June 30, 2019, compared to 19%31% for the three months ended December 31, 2016. The increaseJune 30, 2018. The decrease in gross margin in the gross margin for the three months ended December 31, 2017 month period was due to increased royalty revenue anddriven by a moreless favorable product mix than in the currentprior year period.period, primarily driven by the Grid business unit.
Operating Expenses
Research and development
R&D expenses decreased in the three months ended June 30, 2019by 33%13% to $34.1$2.5 million from $2.8 million for the ninethree months ended December 31, 2017, compared to $51.0 million for the nine months ended December 31, 2016. Gross margin was 2% for the nine months ended December 31, 2017, compared to 14% for the nine months ended December 31, 2016.June 30, 2018. The decrease in the gross margin for the nine months ended December 31, 2017R&D expense was due primarily to decreased compensation expense.
Selling, general, and administrative
SG&A expenses decreased by 9% to $5.3 million in the reduction in demand from Inox as discussed above.
Amortization of acquisition related intangibles
We recorded amortization expense related to our core technology and know-how, trade names and trademark intangible assets of $0.1 million in both of the three month periods ended June 30, 2019, and 2018, respectively.
Restructuring
We recorded less than $0.1 million in each of the three months ended December 31, 2017 and 2016. We recorded amortization expense related to our core technology and know-how, trade names and trademark intangible assets of less than $0.1 million and $0.1 million in the nine months ended December 31, 2017 and 2016, respectively.
Operating loss
Our operating loss is summarized as follows (in thousands):
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Operating loss: | |||||||||||||||
| Wind | $ | (1,684 | ) | $ | 1,044 | $ | (7,557 | ) | $ | (3,220 | ) | ||||
| Grid | (1,011 | ) | (4,491 | ) | (15,279 | ) | (15,068 | ) | |||||||
| Unallocated corporate expenses | (1,156 | ) | (613 | ) | (3,514 | ) | (2,266 | ) | |||||||
| Total | $ | (3,851 | ) | $ | (4,060 | ) | $ | (26,350 | ) | $ | (20,554 | ) | |||
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Operating loss: | ||||||||
Grid | $ | (4,663 | ) | $ | (2,666 | ) | ||
Wind | (1,324 | ) | (1,367 | ) | ||||
Unallocated corporate expenses | (249 | ) | (1,095 | ) | ||||
Total | $ | (6,236 | ) | $ | (5,128 | ) | ||
Our Grid segment generated an operating lossesloss of $1.0 million and $15.3$4.7 million in the three and nine months ended December 31, 2017, respectively,June 30, 2019, compared to $4.5 million and $15.1a loss of $2.7 million in the three and nine months ended December 31, 2016, respectively. June 30, 2018. The decreaseincrease in the Grid business unit operating loss in the three months ended December 31, 2017June 30, 2019 was primarily due to a less favorable product mix and a higher cost of sales.
Our Wind segment generated an operating loss of $1.3 million in the three months ended June 30, 2019, compared to a loss of $1.4 million in the three months ended June 30, 2018. The slight decrease in the Wind business unit operating loss was due primarily to increased D-VAR revenues comparedrevenue related to the prior year period. The increase in Grid business unit operating loss in the nine months ended December 31, 2017 was due primarily to $4.1 million of accelerated depreciation related to revised estimates of the useful lives of certain pieces of manufacturing equipment.
Unallocated corporate expenses primarily consist of stock-based compensation expense of $0.9$0.2 million and $2.1 million for the three and nine months ended December 31, 2017, respectively, and $0.6 million and $2.3$0.8 million, in the three and nine months ended December 31, 2016, respectively. Additionally, aJune 30, 2019 and 2018, respectively and restructuring charge of $1.3 million, primarily for severance costs as a result of the restructuring action announced on April 4, 2017, is included in unallocated corporate expenses for the nine months ended December 31, 2017, as well as lossescharges of $0.3 million and $0.1 million for the change in fair value of the contingent consideration in the three and nine months ended December 31, 2017, respectively.
Change in fair value of warrants
The change in fair value of warrants resulted in gainsa gain of $0.4 million and $1.5$2.9 million in the three and nine months ended December 31, 2017, respectively,June 30, 2019, compared to gainsa loss of $0.1 million and $0.7$0.5 million in the three and nine months ended
Other income (expense), net
Other income (expense), net, was income of less than $0.1 million in each of the three and nine months ended December 31, 2017, respectively, compared to expense of $0.1 million and $0.3$0.5 million in the three and nine months ended December 31, 2016, respectively. The decrease in interest expense was related to lower interest due to the maturity of both of our term loans with Hercules Technology Growth Capital, Inc. (“Hercules”). Our Term Loan B matured in November 2016, and our Term Loan C matured in June 2017.
Income Taxes
Income tax expense was $0.6 million and $0.5$0.2 million in the three and nine months ended December 31, 2017, respectively,June 30, 2019, compared to income tax benefit of less than $0.1 million and expense of $1.0 million in the three and nine months ended December 31, 2016, respectively.June 30, 2018. The decreaseincrease in income tax expense during the nine months ended December 31, 2017 wasis due primarily due to the release of valuation allowances of $1.1 milliontaxable income in the nine months ended December 31, 2017 as a result of the deferred tax liability purchase adjustment recorded as a result of the ITC Acquisition, for the difference in tax basis on the ITC net assets acquired.
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. The non-GAAP measures included in this Form 10-Q, however, should be considered in addition to, and not as a substitute for or superior to the comparable measure prepared in accordance with GAAP.
We define non-GAAP net loss as net loss before sale of minority investments, stock-based compensation, amortization of acquisition-related intangibles, consumption of zero cost-basis inventory, changes in fair value of warrants, and contingent consideration, non-cash interest expense, tax effect of adjustments, and the other non-cash or unusual charges, and the tax effect of those adjustments calculated at the relevant rate for our non-GAAP metric, indicated in the table below. 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 that we do not believe are indicative of our core operating performance. A reconciliation of GAAP to non-GAAP net loss is set forth in the table below (in thousands, except per share data):
| Three months ended December 31, | Nine months ended December 31, | ||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Net loss | $ | (4,248 | ) | $ | (2,768 | ) | $ | (26,782 | ) | $ | (20,448 | ) | |||
| Sale of minority investments | — | (325 | ) | (951 | ) | (325 | ) | ||||||||
| Stock-based compensation | 883 | 613 | 2,115 | 2,266 | |||||||||||
| Amortization of acquisition-related intangibles | 85 | 39 | 98 | 118 | |||||||||||
| Consumption of zero cost-basis inventory | (118 | ) | (478 | ) | (514 | ) | (1,118 | ) | |||||||
| Change in fair value of warrants and contingent consideration | (126 | ) | (101 | ) | (1,397 | ) | (667 | ) | |||||||
| Non-cash interest expense | — | 30 | 19 | 127 | |||||||||||
| Tax effect of adjustments | 19 | 77 | 142 | 179 | |||||||||||
| Non-GAAP net loss | $ | (3,505 | ) | $ | (2,913 | ) | $ | (27,270 | ) | $ | (19,868 | ) | |||
| Non-GAAP net loss per share | $ | (0.18 | ) | $ | (0.21 | ) | $ | (1.46 | ) | $ | (1.45 | ) | |||
| Weighted average shares outstanding - basic and diluted | 19,949 | 13,792 | 18,614 | 13,746 | |||||||||||
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Net loss | $ | (3,539 | ) | $ | (4,737 | ) | ||
Stock-based compensation | 249 | 785 | ||||||
Amortization of acquisition-related intangibles | 85 | 85 | ||||||
| Consumption of zero cost-basis inventory | 0 | (249 | ) | |||||
Changes in fair value of warrants | (2,946 | ) | 464 | |||||
Tax effect of adjustments for consumption of zero cost-basis inventory | 0 | 40 | ||||||
Non-GAAP net loss | $ | (6,151 | ) | $ | (3,612 | ) | ||
Non-GAAP net loss per share - basic | $ | (0.30 | ) | $ | (0.18 | ) | ||
Weighted average shares outstanding - basic | 20,514 | 20,167 | ||||||
We incurred non-GAAP net lossesloss of $3.5$6.2 million or $0.30 per share, for the three months ended June 30, 2019, compared to non-GAAP net loss of $3.6 million or $0.18 per share and $27.3 million or $1.46 per share, for the three and nine months ended December 31, 2017, compared to non-GAAP net losses of $2.9 million or $0.21 per share, and $19.9 million or $1.45 per share for the three and nine months ended December 31, 2016.June 30, 2018. The increasesincrease in non-GAAP net loss was primarily due to the less favorable product mix compared to the prior year period, primarily driven by the Grid business unit.
We define non-GAAP operating cash flow as operating cash flow before the Sinovel settlement (net of legal fees and expenses); tax effect of adjustments; and other unusual cash flows or items. We believe non-GAAP operating cash flow assists management and investors in both the three and nine month period ended December 31, 2017 were driven primarilycomparing our operating cash flow across reporting periods on a consistent basis by an increase in net loss, as previously discussed, and an adjustment for the saleexcluding these non-recurring cash items that it does not believe are indicative of our minority investment in Blade Dynamics Limited, partially offset by decreased consumptioncore operating cash flow. A reconciliation of zero cost basis inventory and the gain resulting from the decreased value of the warrants and contingent consideration on the ITC acquisitionGAAP to non-GAAP operating cash flow is set forth in the three and nine months ended December 31, 2017.table below (in thousands).
June 30, 2019 | March 31, 2019 | |||||||
Operating cash flow | $ | (5,866 | ) | $ | 42,714 | |||
Sinovel settlement (net of legal fees and expenses) | 1,000 | (52,740 | ) | |||||
Tax effect of adjustments | 0 | 2,377 | ||||||
Non-GAAP operating cash flow | $ | (4,866 | ) | $ | (7,649 | ) | ||
Liquidity and Capital Resources
We have experienced recurring operating losses, and as of December 31, 2017June 30, 2019, had an accumulated deficit of $982.3 million. In addition, we have experienced recurring negative operating cash flows and our Wind segment revenues decreased substantially in the nine months ended December 31, 2017 compared to the prior year period due to decreased demand from Inox. We cannot predict if and when this demand dislocation will be resolved. From April 1, 2011 through the date of this filing, we have reduced our global workforce substantially, including an 8% reduction in force, primarily affecting employees in our Devens, Massachusetts facility, effective April 4, 2017. We incurred restructuring charges of $1.3 million in cash severance expenses in the nine months ended December 31, 2017 in connection with the workforce reduction. We are currently moving our manufacturing and administrative operations from our facility in Devens, Massachusetts to a nearby, smaller-scale leased building in Ayer, Massachusetts, which is anticipated to reduce operating costs.
Our cash requirements depend on numerous factors, including ifwhether Inox is successful in executing on SECI orders or in obtaining additional orders under the new central and when the Inox demand dislocation is resolved,state auction regime, the successful completion of our product development activities, our ability to commercialize our Resilient Electric Grid (“REG”)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-basedsuperconductor-based products.
As of December 31, 2017,June 30, 2019, we had cash, cash equivalents, and restricted cash of $22.3$74.7 million, compared to $27.7$78.2 million as of March 31, 2017,2019, a decrease of $5.5$3.5 million. As of June 30, 2019, we had approximately $29.5 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):
| December 31, 2017 | March 31, 2017 | ||||||
| Cash and cash equivalents | $ | 22,113 | $ | 26,784 | |||
| Restricted cash | 165 | 960 | |||||
| Total cash, cash equivalents, and restricted cash | $ | 22,278 | $ | 27,744 | |||
June 30, 2019 | March 31, 2019 | |||||||
Cash and cash equivalents | $ | 73,952 | $ | 77,483 | ||||
Restricted cash | 715 | 715 | ||||||
Total cash, cash equivalents, and restricted cash | $ | 74,667 | $ | 78,198 | ||||
For the ninethree months ended December 31, 2017,June 30, 2019, net cash used in operating activities was $20.2$5.9 million compared to $10.5$6.9 million of net cash used for the ninethree months ended December 31, 2016. The increaseJune 30, 2018. The decrease in net cash used in operations was due primarily to an increased operating loss, and less cash collections from Inox, partially offset by usagethe timing of inventory.
For the ninethree months ended December 31, 2017,June 30, 2019, net cash provided by investing activities was $2.3 million, compared to net cash used in investing activities was $0.3of $0.2 million compared tofor the three months ended June 30, 2018. The increase in net cash provided by investing activities of $0.4 million for the nine months ended December 31, 2016. The increase in net cash used in investing activities was due primarily to increasedthe receipt of the second installment payment under the Notes Receivable from the Devens facility sale, partially offset by higher purchases of property, plant and equipment in the three months ended June 30, 2019 related to improvements to the DevensAyer facility move, partially offset by proceeds received fromand factory equipment to support the final payment due from Blade Dynamics as well as releases of restricted cash inNavy and REG projects.
For the ninethree months ended December 31, 2017.
As of December 31, 2017,June 30, 2019, we had $0.2$0.7 million of restricted cash included in long-term assets. These amounts included in restricted cash primarily represent deposits to secure letters of credit for various supply contracts. These deposits are held in interest bearing accounts.
We believe we have sufficient available liquidity to fund our operations and capital expenditures 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, including our ability to collect revenues under our agreements with Inox, control our operating costs, and our ability to raise additional capital, if necessary. There can be no assurance that we will be able to raise additional capital, on favorable terms or at all, or execute on any other means of improving our liquidity as described above.
Legal Proceedings
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 in which minimum quantities of goods or services have been committed to be purchased on an annual basis.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASUAccounting Standards Update ("ASU") 2016-02,
• | In July 2018, the FASB issued ASU 2018-10, Codification improvements to Topic 842, Leases. The amendments in ASU 2018-10 provide more clarification in regards to the application and requirements of ASU 2016-02. |
• | In July 2018, the FASB issued ASU 2018-11, Topic 842, Leases - Targeted improvements. The amendments in ASU 2018-11 provide for the option to adopt the standard prospectively and recognize a cumulative-effect adjustment to the opening balance of retained earnings as well as offer a new practical expedient that will allow us to elect, by class of underlying asset, to not separate non-lease and lease components in certain circumstances and instead to account for those components as a single item. |
ASU 2016-02 became effective on April 1, 2019, and we adopted the standard using the modified retrospective transition approach is required for lessees for capital and operatingmethod, which will impact all leases existing at, or entered into after, the beginningperiod of adoption. For all leases existing at the earliest comparative period presented intime of adoption we recognized a right-of-use asset and lease liability on 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 June 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 other commitments to extend credit held by a reporting entity at each reporting date. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that year. We are currently evaluating the impact, if any, the adoption of ASU 2016-13 may have on our consolidated financial statements.In July 2017, the FASB issued ASU 2017-11,
Earnings per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). The amendments in ASU 2017-11 provide guidance for freestanding equity-linked financial instruments, such as warrants and conversion options in convertible debt or preferred stock, and should no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods.In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in ASU 2017-12 provide improved financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods. As of April 1, 2019 we have adopted ASU 2017-12 and noted no significant impact on our consolidated financial statements, primarily due to the fact that there are no longer any hedging instruments included in our results.In June 2018, the FASB issued ASU 2018-08, Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The amendments in ASU 2018-08 assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) determining whether a contribution is conditional. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods. As of April 1, 2019, we have adopted ASU 2018-08 and noted additional disclosures within our revenue footnote to appropriately present the revenue related to our grant revenue.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 provide for increased effectiveness of the disclosures made around fair value measurements while including consideration for costs and benefits. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those periods. We are currently evaluating the impact the adoption of ASU 2017-122018-13 may have on our consolidated financial statements.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not Applicable
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2017.June 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the
Changes in Internal Control over Financial Reporting
There were no changes into our internal controlcontrols over financial reporting during the quarter ended December 31, 2017June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
LEGAL PROCEEDINGS |
None
RISK FACTORS |
There have been no material changes in the nine months ended December 31, 2017 to the risk factors described in Part I, Item IA of our Annual Report on Form 10-K for the fiscal year ended March 31, 2017,2019, filed with the SEC on May 25, 2017.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The Company’s stock repurchase activity during the three months ended June 30, 2019 was as follows:
Month | Total Number | Average | Total Number of | Approximate | ||||
April 1, 2019 - April 30, 2019 | 0 | $ - | — | — | ||||
May 1, 2019 - May 31, 2019 | 4,377 | 11.09 | — | — | ||||
June 1, 2019 - June 30, 2019 | 25,264 | 9.28 | — | — | ||||
Total | 29,641 | $9.55 | — | — |
(a) During the three months ended June 30, 2019, we purchased shares in connection with our stock-based compensation plans, whereby shares of our common stock were tendered by employees for payment of applicable statutory tax withholdings.
DEFAULTS UPON SENIOR SECURITIES |
None
MINE SAFETY DISCLOSURES |
Not Applicable
OTHER INFORMATION |
None
ITEM 6. | EXHIBITS |
EXHIBIT INDEX
| Incorporated by Reference | ||||||||||||
Exhibit Number |
| Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing Date |
| Filed/Furnished Herewith |
10.1 |
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| 8-K |
| 000-19672 |
| 10.1 |
| 6/5/2019 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
| XBRL Instance Document.*** |
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101.SCH |
| XBRL Taxonomy Extension Schema Document. *** |
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101.CAL |
| XBRL Taxonomy Calculation Linkbase Document. *** |
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101.DEF |
| XBRL Definition Linkbase Document. *** |
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101.LAB |
| XBRL Taxonomy Label Linkbase Document. *** |
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101.PRE |
| XBRL Taxonomy Presentation Linkbase Document. *** |
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_________________________
* | Filed herewith |
** | Furnished herewith |
*** | ||||||||||||
Submitted electronically herewith |
Attached as Exhibits 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheet as of December 31, 2017June 30, 2019 and March 31, 20172019 (ii) Condensed Statements of Operations and Income for the three and nine months ended December 31, 2017June 30, 2019 and 2016,2018, (iii) Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended December 31, 2017June 30, 2019 and 2016,2018, (iv) Condensed Consolidated Statements of Cash Flows for the ninethree months ended December 31, 2017June 30, 2019 and 2016,2018, and (v) Notes to Condensed Consolidated Financial Statements.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN SUPERCONDUCTOR CORPORATION | ||||
Date: | August 6, 2019 | By: | /s/ John W. Kosiba, Jr. | |
John W. Kosiba, Jr. | ||||
Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) | ||||
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