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: ended June 30, 2018
☐ | |
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. 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 | ||||
| June 30, 2018 | March 31, 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 26,750 | $ | 34,084 | |||
| Accounts receivable, net | 11,532 | 7,365 | |||||
| Inventory | 18,353 | 19,780 | |||||
| Note receivable, current portion | 3,000 | 3,000 | |||||
| Prepaid expenses and other current assets | 4,709 | 2,947 | |||||
| Total current assets | 64,344 | 67,176 | |||||
| Property, plant and equipment, net | 11,554 | 12,513 | |||||
| Intangibles, net | 3,145 | 3,230 | |||||
| Note receivable, long term portion, net of discount of $280 as of June 30, 2018 and net of discount of $336 and deferred gain of $105 as of March 31, 2018 | 2,720 | 2,559 | |||||
| Goodwill | 1,719 | 1,719 | |||||
| Restricted cash | 165 | 165 | |||||
| Deferred tax assets | 516 | 542 | |||||
| Other assets | 283 | 271 | |||||
| Total assets | $ | 84,446 | $ | 88,175 | |||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable and accrued expenses | $ | 15,144 | $ | 12,625 | |||
| Derivative liabilities | 1,681 | 1,217 | |||||
| Deferred revenue, current portion | 11,433 | 13,483 | |||||
| Total current liabilities | 28,258 | 27,325 | |||||
| Deferred revenue, long term portion | 8,040 | 8,454 | |||||
| Deferred tax liabilities | 110 | 110 | |||||
| Other liabilities | 98 | 57 | |||||
| Total liabilities | 36,506 | 35,946 | |||||
| Commitments and contingencies (Note 15) | |||||||
| Stockholders' equity: | |||||||
| Common stock | 214 | 211 | |||||
| Additional paid-in capital | 1,041,980 | 1,041,113 | |||||
| Treasury stock | (1,884 | ) | (1,645 | ) | |||
| Accumulated other comprehensive income | 667 | 883 | |||||
| Accumulated deficit | (993,037 | ) | (988,333 | ) | |||
| Total stockholders' equity | 47,940 | 52,229 | |||||
| Total liabilities and stockholders' equity | $ | 84,446 | $ | 88,175 | |||
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 June 30, | |||||||
| 2018 | 2017 | ||||||
| Revenues | $ | 12,607 | $ | 8,923 | |||
| Cost of revenues | 8,714 | 13,409 | |||||
| Gross margin | 3,893 | (4,486 | ) | ||||
| Operating expenses: | |||||||
| Research and development | 2,840 | 2,717 | |||||
| Selling, general and administrative | 5,786 | 6,138 | |||||
| Amortization of acquisition-related intangibles | 85 | 13 | |||||
| Restructuring | 310 | 1,339 | |||||
| Total operating expenses | 9,021 | 10,207 | |||||
| Operating loss | (5,128 | ) | (14,693 | ) | |||
| Change in fair value of warrants | (464 | ) | 925 | ||||
| Interest income (expense), net | 201 | (10 | ) | ||||
| Other income (expense), net | 609 | (1,374 | ) | ||||
| Loss before income tax (benefit) expense | (4,782 | ) | (15,152 | ) | |||
| Income tax (benefit) expense | (45 | ) | 100 | ||||
| Net loss | $ | (4,737 | ) | $ | (15,252 | ) | |
| Net loss per common share | |||||||
| Basic | $ | (0.23 | ) | $ | (0.91 | ) | |
| Diluted | $ | (0.23 | ) | $ | (0.91 | ) | |
| Weighted average number of common shares outstanding | |||||||
| Basic | 20,167 | 16,778 | |||||
| Diluted | 20,167 | 16,778 | |||||
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 June 30, | |||||||
| 2018 | 2017 | ||||||
| Net loss | $ | (4,737 | ) | $ | (15,252 | ) | |
| Other comprehensive gain (loss), net of tax: | |||||||
| Foreign currency translation gain (loss) | (216 | ) | 820 | ||||
| Total other comprehensive gain (loss), net of tax | (216 | ) | 820 | ||||
| Comprehensive loss | $ | (4,953 | ) | $ | (14,432 | ) | |
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 | |||||||||||||
| Three months ended June 30, | |||||||
| 2018 | 2017 | ||||||
| Cash flows from operating activities: | |||||||
| Net loss | $ | (4,737 | ) | $ | (15,252 | ) | |
| Adjustments to reconcile net loss to net cash used in operations: | |||||||
| Depreciation and amortization | 1,150 | 4,345 | |||||
| Stock-based compensation expense | 785 | 754 | |||||
| Provision for excess and obsolete inventory | 144 | 250 | |||||
| Change in fair value of warrants | 464 | (925 | ) | ||||
| Non-cash interest expense | (56 | ) | 19 | ||||
| Other non-cash items | (394 | ) | 718 | ||||
| Changes in operating asset and liability accounts: | |||||||
| Accounts receivable | (4,192 | ) | 319 | ||||
| Inventory | (459 | ) | 1,719 | ||||
| Prepaid expenses and other current assets | (332 | ) | (273 | ) | |||
| Accounts payable and accrued expenses | 75 | (404 | ) | ||||
| Deferred revenue | 666 | 3,300 | |||||
| Net cash used in operating activities | (6,886 | ) | (5,430 | ) | |||
| Cash flows from investing activities: | |||||||
| Purchase of property, plant and equipment | (115 | ) | (76 | ) | |||
| Proceeds from the sale of property, plant and equipment | — | 10 | |||||
| Change in other assets | (51 | ) | (23 | ) | |||
| Net cash used in investing activities | (166 | ) | (89 | ) | |||
| Cash flows from financing activities: | |||||||
| Employee taxes paid related to net settlement of equity awards | (238 | ) | (274 | ) | |||
| Repayment of debt | — | (1,575 | ) | ||||
| Proceeds from public equity offering, net | — | 16,954 | |||||
| Net cash provided by/(used in) financing activities | (238 | ) | 15,105 | ||||
| Effect of exchange rate changes on cash | (44 | ) | 412 | ||||
| Net increase/(decrease) in cash, cash equivalents and restricted cash | (7,334 | ) | 9,998 | ||||
| Cash, cash equivalents and restricted cash at beginning of period | 34,249 | 27,744 | |||||
| Cash, cash equivalents and restricted cash at end of period | $ | 26,915 | $ | 37,742 | |||
| Supplemental schedule of cash flow information: | |||||||
| Cash paid for income taxes, net of refunds | 176 | 96 | |||||
| Issuance of common stock to settle liabilities | 85 | 90 | |||||
| Cash paid for interest | — | 42 | |||||
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 June 30, 20182019 and 20172018 and the financial position at June 30, 2018;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, 2018,2019, and notes thereto, included in the Company’s annual report on Form 10-K for the year ended March 31, 20182019 filed with the Securities and Exchange Commission on June 6, 2018.
Liquidity
The Company has historically experienced recurring operating losses and as of June 30, 2018,2019, the Company had an accumulated deficit of $993.0$965.1 million. In addition, the Company has historically experienced recurring negative operating cash flows. At June 30, 2018,2019, the Company had cash and cash equivalents of $26.8$74.0 million, with no outstanding debt other than ordinary trade payables. Cash used in operations for the three months ended June 30, 20182019 was $6.9$5.9 million.
On July 3, 2018, the Company and its wholly-owned subsidiaries Suzhou AMSC Superconductor Co. Ltd. (“AMSC China”) and AMSC Austria GMBH (“AMSC Austria”) entered into a settlement 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, as further described in Note 15 “Commitments and Contingencies".Sinovel. Under the terms of the Settlement Agreement, Sinovel has agreed to pay AMSC China an aggregate cash amount in Renminbi (RMB)(“RMB”) equivalent to $57.5 million, consisting of two installments. Sinovel paid the first installment of the RMB equivalent of $32.5 million on July 4, 2018, which was repatriated to the Company during the nine months ended December 31, 2018, and has agreed to paypaid the second installment of the RMB equivalent of $25.0 million (the “Second Payment”) within ten (10) months afteron December 27, 2018. The Company’s fiscal 2018 results included the U.S. District Court fornet gain received from the Western Districtsettlement with Sinovel of Wisconsin (the “District Court”) delivers the first sentence against Sinovel in the criminal case entitled United States v. Sinovel Wind Co., Ltd., Case Number 3:13-cr-00084-jdp. On July 6, 2018, the District Court delivered such sentence, and therefore the Second Payment is due by May 6, 2019 (the “Second Payment Due Date”). On July 24, 2018, AMSC China paid $30.7 million to AMSC Austria to settle outstanding inter-company balances.
On February 5,1, 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"“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 at an interest rate of 1.96%. The Seller Note iswas secured by a subordinated second mortgage on the Property and a subordinated second assignment of leases and rents.
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 three months ended June 30, 2018.2019. The Company’s liquidity is highly dependent on its ability to increase revenues, including its ability to collect revenues under ourits 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 ASCAccounting 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 recognized the cumulative effect of initially applying the new revenue standard as an adjustment of less than $0.1 million to the opening balance of accumulated deficit. Prior period amounts have not been restated and continue to be reported under the accounting standards in effect for those periods.
| March 31, 2018 | Opening Adjustment | April 1, 2018 | |||||||||
| Assets: | |||||||||||
| Inventory | $ | 19,780 | $ | (1,599 | ) | $ | 18,181 | ||||
| Prepaid expenses and other current assets | 2,947 | 1,599 | 4,546 | ||||||||
| Notes receivable, long term portion | 2,559 | 105 | 2,664 | ||||||||
| Liabilities and Stockholders' Equity: | |||||||||||
| Accounts payable and accrued expenses | $ | (12,625 | ) | $ | (2,729 | ) | $ | (15,354 | ) | ||
| Deferred revenue | (13,483 | ) | 2,657 | (10,826 | ) | ||||||
| Accumulated deficit | $ | (988,333 | ) | $ | (33 | ) | $ | (988,366 | ) | ||
The Company’s revenues in its Grid segment are derived primarily through transmittingenabling the transmission and distributingdistribution of power, providing planning services that allow it to identify power grid needs and risks, and developing ship protection systems for the USU.S. Navy. The Company’s revenues in its Wind segment are derived primarily through supplying advanced power electronics and control systems, licensing ourits 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, 2018, 82%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 contracts'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 products are transferredtitle and risk transfer to the freight forwarder,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 multipleseveral different types of transactions butand each of them 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 | ||||
| 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 and March 31, 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 AR”Accounts Receivable” and "Deferred“Deferred program costs"costs” (see Note 7, “Accounts Receivable” and Note 8, "Inventory"“Inventory” for a reconciliation to the condensed consolidated balance sheet)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 | ||||||
| Unbilled AR | 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 | |||||
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, 2018,2019, the Company had outstanding performance obligations on existing contracts under ASC 606 to be recognized in the next twelve months of approximately $50.6$54.7 million. There isare also approximately $8.1$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 Inox twelve month forecast provided forecastby 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, 20182019 and 2017:2018:
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% | ||||
|
| ||||||
| Reportable Segment | June 30, 2018 | June 30, 2017 | |||||
| Inox Wind Limited | Wind | 25 | % | 22 | % | ||
| Vestas | Grid | 36 | % | — | % | ||
| U.S. Navy | Grid | <10% | 35 | % | |||
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 months ended June 30, 20182019 and 20172018 (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 June 30, | |||||||
| 2018 | 2017 | ||||||
| Cost of revenues | $ | 40 | $ | 36 | |||
| Research and development | 51 | 49 | |||||
| Selling, general and administrative | 694 | 669 | |||||
| Total | $ | 785 | $ | 754 | |||
The Company issued 34,48013,174 shares of immediately vested common stock and 276,000160,500 shares of restricted stock awards during the three months ended June 30, 2018,2019, and issued 33,48734,480 shares of immediately vested common stock and 276,000 shares of restricted stock awards during the three months ended June 30, 2017.2018. 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 three months ended June 30, 2017, each of which represents the right to receive one share of common stock in connection with a
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 $0.2less than $0.1 million at June 30, 2018.2019. This expense will be recognized over a weighted average expense period of approximately 0.71.9 years. The total unrecognized compensation cost for unvested outstanding restricted stock was $3.5$3.4 million at June 30, 2018.2019. This expense will be recognized over a weighted-average expense period of approximately 2.11.5 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 months ended June 30, 2018 or 2017.. The stock options granted during the three months ended June 30, 2019 will vest over 2 years. The weighted average assumptions used in the Black Scholes valuation model for stock options granted during the three months ended June 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 issuable shares. Stock options and warrants that are out-of-the-money with exercise prices greater than the average market price of the underlying Common Shares and shares of performance based restricted stock where the contingency was not met are excluded from the computation of diluted EPS as the effect of their inclusion would be anti-dilutive. For the three months ended June 30, 2019, 1.0 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 0.2 million shares relate to outstanding stock options, and 0.8 million shares relate to outstanding warrants. For the three months ended June 30, 2018, 1.1 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 0.2 million shares relate to outstanding stock options, and 0.9 million shares relate to outstanding warrants. For the three months ended June 30, 2017, 1.5 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 0.3 million relate to outstanding stock options, and 1.2 million relate to outstanding warrants.
The following table reconciles the numerators and denominators of the earnings per share calculation for the three months ended June 30, 20182019 and 20172018 (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 June 30, | |||||||
| 2018 | 2017 | ||||||
| Numerator: | |||||||
| Net loss | $ | (4,737 | ) | $ | (15,252 | ) | |
| Denominator: | |||||||
| Weighted-average shares of common stock outstanding | 20,999 | 17,089 | |||||
| Weighted-average shares subject to repurchase | (832 | ) | (311 | ) | |||
| Shares used in per-share calculation ― basic | 20,167 | 16,778 | |||||
| Shares used in per-share calculation ― diluted | 20,167 | 16,778 | |||||
| Net loss per share ― basic | $ | (0.23 | ) | $ | (0.91 | ) | |
| Net loss per share ― diluted | $ | (0.23 | ) | $ | (0.91 | ) | |
5. Acquisition and Related Goodwill
The Company did not identify any triggering events in the three months ended June 30, 2018,2019, that would require interim impairment testing of goodwill.
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, Level 2 or Level 3 of the fair value measurement hierarchy during the three months ended June 30, 2018.
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 June 30, 20182019 and March 31, 20182019 (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) | ||||||||||||
| June 30, 2018: | |||||||||||||||
| Assets: | |||||||||||||||
| Cash equivalents | $ | 24,704 | $ | 24,704 | $ | — | $ | — | |||||||
| Derivative liabilities: | |||||||||||||||
| Warrants | 1,681 | — | — | 1,681 | |||||||||||
| Total Carrying Value | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| March 31, 2018: | |||||||||||||||
| Assets: | |||||||||||||||
| Cash equivalents | $ | 32,589 | $ | 32,589 | $ | — | $ | — | |||||||
| Derivative liabilities: | |||||||||||||||
| Warrants | $ | 1,217 | $ | — | $ | — | $ | 1,217 | |||||||
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 | |||
| April 1, 2018 | $ | 1,217 | |
| Mark to market adjustment | 464 | ||
| Balance at June 30, 2018 | $ | 1,681 | |
| Warrants | |||
| April 1, 2017 | $ | 1,923 | |
| Mark to market adjustment | (925 | ) | |
| Balance at June 30, 2017 | $ | 998 | |
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”), an equity offering to Hudson Bay Capital in November 2014 and a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (“Hercules”). TheseThe warrants issued to CVI expiredHercules were exercised on October 4, 2017. See Note 13 “Warrants and Derivative Liabilities,” for additional information.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 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 June 30, 20182019 and March 31, 20182019 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 | ||||
| June 30, 2018 | March 31, 2018 | ||||||
| Accounts receivable (billed) | $ | 6,983 | $ | 4,403 | |||
| Accounts receivable (unbilled) | 4,603 | 3,016 | |||||
| Less: Allowance for doubtful accounts | (54 | ) | (54 | ) | |||
| Accounts receivable, net | $ | 11,532 | $ | 7,365 | |||
8. Inventory
Inventory, net of reserves, at June 30, 20182019 and March 31, 20182019 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 | ||||
| June 30, 2018 | March 31, 2018 | ||||||
| Raw materials | $ | 6,316 | $ | 7,526 | |||
| Work-in-process | 1,327 | 920 | |||||
| Finished goods | 8,633 | 8,767 | |||||
| Deferred program costs | 2,077 | 2,567 | |||||
| Net inventory | $ | 18,353 | $ | 19,780 | |||
The Company recorded inventory write-downs of $0.1$0.1 million and $0.3$0.1 million for the three months ended June 30, 20182019 and 2017,2018, respectively. These write downswrite-downs were based on evaluatingthe Company's evaluation of its inventory on hand for excess quantities and obsolescence.
Deferred program costs as of June 30, 20182019 and March 31, 20182019 primarily represent costs incurred on programs where the Company needs to complete performance obligations before the related revenue and costs will be recognized.
9. Note Receivable
The Company entered into a purchase and sale agreementthe 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, Road, 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 iswas 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 iswas subordinate to East Boston Savings Bank's mortgage on the Devens property.
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, and is being amortized to interest income over the term 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 ASUAccounting 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 2014-09.2014-09 Revenue from Contracts with Customers (Topic 606). This gain was recorded as an offset to the opening accumulated deficit.
Note receivable as of June 30, 20182019 and March 31, 20182019 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 | ||||
| Current assets | June 30, 2018 | March 31, 2018 | |||||
| Note receivable, current | $ | 3,000 | $ | 3,000 | |||
| Total current note receivable | $ | 3,000 | $ | 3,000 | |||
| Long term assets | |||||||
| Note receivable, long term | $ | 3,000 | $ | 3,000 | |||
| Note receivable discount | (280 | ) | (336 | ) | |||
| Deferred gain on sale | — | (105 | ) | ||||
| Total long term note receivable | $ | 2,720 | $ | 2,559 | |||
10. Property, Plant and Equipment
The cost and accumulated depreciation of property and equipment at June 30, 20182019 and March 31, 20182019 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 | ||||
| June 30, 2018 | March 31, 2018 | ||||||
| Construction in progress - equipment | 528 | 654 | |||||
| Equipment and software | 72,466 | 72,760 | |||||
| Furniture and fixtures | 1,890 | 1,878 | |||||
| Leasehold improvements | 1,632 | 1,426 | |||||
| Property, plant and equipment, gross | 76,516 | 76,718 | |||||
| Less accumulated depreciation | (64,962 | ) | (64,205 | ) | |||
| Property, plant and equipment, net | $ | 11,554 | $ | 12,513 | |||
Depreciation expense was $1.1$1.1 million and $4.2$1.1 million for the three months ended June 30, 20182019 and 2017,2018, respectively. Included in depreciation expense for the three months ended June 30, 2017 is $2.5 million of accelerated depreciation recorded to cost of revenues related to revised estimates of the remaining useful lives of certain pieces of manufacturing equipment. 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 June 30, 20182019 and March 31, 20182019 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 | ||||
| June 30, 2018 | March 31, 2018 | ||||||
| Accounts payable | $ | 3,863 | $ | 3,096 | |||
| Accrued inventories in-transit | 144 | 1,207 | |||||
| Accrued other miscellaneous expenses | 1,999 | 2,412 | |||||
| Advanced deposits | 2,729 | — | |||||
| Accrued compensation | 4,348 | 3,605 | |||||
| Income taxes payable | 309 | 536 | |||||
| Accrued warranty | 1,752 | 1,769 | |||||
| Total | $ | 15,144 | $ | 12,625 | |||
The Company generally provides a one to twothree year warranty on its products, commencing upon 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 June 30, | |||||||
| 2018 | 2017 | ||||||
| Balance at beginning of period | $ | 1,769 | $ | 2,344 | |||
| Change in accruals for warranties during the period | 104 | 41 | |||||
| Settlements during the period | (121 | ) | (359 | ) | |||
| Balance at end of period | $ | 1,752 | $ | 2,026 | |||
12. Income Taxes
The Company recorded an income tax expense of $0.2 million and an income tax benefit of less than $0.1 million in the three months ended June 30, 2018. The Company recorded income tax expense of $0.1 million in the three months ended June 30, 2017.
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
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. See Note 6, "Fair Value Measurements", for further discussion.
Hercules Warrants
On December 19, 2014, the Company entered into a second amendment to the Loan and Security Agreement with Hercules (the "Hercules Second Amendment.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 sales of common stock under the ATM entered into in January 2017, and expires on June 30, 2020.2017. This warrant had a fair value of $0.1$0.4 million as of March 31, 2019. On April 8, 2019 Hercules notified the Company of its intent to exercise this warrant on a cashless basis. Hercules received 22,821 shares of the Company's common stock on April 17, 2019. As a result of this exercise the Company recorded a net gain of $0.1 million to change in fair value of warrants, resulting from the decrease in the fair value upon exercise of the Hercules Warrant during the three months ended June 30, 2018 and March 31, 2018.
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 Warrant is exercisable at any time, at an exercise price equal to $7.81 per share, subject to certain price-based and other anti-dilution adjustments including those noted above, and expires on November 13, 2019.
Following is a summary of the key assumptions used to calculate the fair value of the November 2014 Warrant:
Fiscal Year | June 30, | ||
Risk-free interest rate | 2.11% | ||
Expected annual dividend yield | — | ||
Expected volatility | 60.58% | ||
Term (years) | 0.37 | ||
Fair value | $ |
March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||||
| Fiscal Year 17 | March 31, 2018 | December 31, 2017 | September 30, 2017 | June 30, 2017 | |||||||||||||
Fiscal Year 2018 | 2019 | 2018 | 2018 | 2018 | 2018 | ||||||||||||
| Risk-free interest rate | 2.20% | 1.87% | 1.49% | 1.44% | 2.43% | 2.61% | 2.62% | 2.40% | 2.20% | ||||||||
| Expected annual dividend yield | — | — | — | — | — | — | — | — | — | ||||||||
| Expected volatility | 65.86% | 65.86% | 65.64% | 67.21% | 75.61% | 70.29% | 63.66% | 67.40% | 65.86% | ||||||||
| Term (years) | 1.62 | 1.87 | 2.12 | 2.37 | 0.62 | 0.87 | 1.12 | 1.37 | 1.62 | ||||||||
| Fair value | $1.1 million | $0.4 million | $0.8 million | $0.9 million | $4.6 million | $3.6 million | $1.3 million | $1.6 million | $1.1 million | ||||||||
The Company recorded a net loss of $0.5 million and a net gain of $0.9$2.9 million resulting from an increase and the decrease in the fair value of the November 2014 Warrant during the three months ended June 30, 2019. The Company recorded a net loss of $0.5 million resulting from the increase 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 standard and as a result, did not reassess the lease classification of existing contracts or leases or the initial direct costs associated with existing leases. The Company did not elect the hindsight practical expedient, and evaluated lease terms for existing leases. The Company has also elected the practical expedient to not separate lease components and non-lease components and will account for the leases as a single lease component for all classes of leases.
As a result of the adoption 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 no 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 payment of real estate taxes and insurance. Many of these leases have one or more 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 calculated using an incremental borrowing rate based on an assessment prepared by the Company through the use of Company credit ratings, consideration of its lease populations potential risk to its total capital structure, and a market rate for a collateralized loan for its risk profile, calculated by a third party. The Company elected to apply the discount rate using the remaining lease term at the date of adoption.
The Company did not identify any leases that are classified as financing leases.
Supplemental balance sheet information related to leases 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 Company's leases for the three months ended June 30, 2018 and 2017, respectively.
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. In conjunction with the equity offering, the Company terminated a previous At Market Issuance Sales Agreement ("ATM) with FBR Capital Markets & Co. where the Company could, at its discretion, sell up to $10.0 million of the Company's common stock.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 June 30, 2018,2019, 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 $0.3 million charged to operations in the three months ended June 30, 2018 is related to exit costs incurred forin connection with the move of the Company's corporate office.
The following table presents restructuring charges and cash payments for the three months ended June 30, 2018 and 2017(in (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 | Facility exit and | ||||||||||
| and benefits | Relocation costs | Total | |||||||||
| Accrued restructuring balance at April 1, 2018 | $ | 262 | $ | 173 | $ | 435 | |||||
| Charges to operations | — | 310 | 310 | ||||||||
| Cash payments | (97 | ) | (483 | ) | (580 | ) | |||||
| Accrued restructuring balance at June 30, 2018 | $ | 165 | $ | — | $ | 165 | |||||
| Severance pay | Facility exit and | ||||||||||
| and benefits | Relocation costs | Total | |||||||||
| Accrued restructuring balance at April 1, 2017 | $ | — | $ | — | $ | — | |||||
| Charges to operations | 1,339 | — | 1,339 | ||||||||
| Cash payments | (423 | ) | — | (423 | ) | ||||||
| Accrued restructuring balance at June 30, 2017 | $ | 916 | $ | — | $ | 916 | |||||
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 June 30, | |||||||
| 2018 | 2017 | ||||||
Revenues: | |||||||
| Wind | $ | 3,678 | $ | 2,278 | |||
| Grid | 8,929 | 6,645 | |||||
| Total | $ | 12,607 | $ | 8,923 | |||
| Three months ended June 30, | |||||||
| 2018 | 2017 | ||||||
| Operating loss: | |||||||
| Wind | $ | (1,367 | ) | $ | (4,433 | ) | |
| Grid | (2,666 | ) | (8,167 | ) | |||
| Unallocated corporate expenses | (1,095 | ) | (2,093 | ) | |||
| Total | $ | (5,128 | ) | $ | (14,693 | ) | |
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 $0.8$0.2 million and $0.8 million in the three months ended June 30, 20182019 and 2017, respectively. Additionally,2018, respectively, and restructuring charges of $0.3 million and $1.3 million are included in the three months ended June 30, 2018 and 2017, respectively.
Total assets for the two business segments as of June 30, 20182019 and March 31, 20182019 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 | ||||
| June 30, 2018 | March 31, 2018 | ||||||
| Wind | $ | 14,830 | $ | 16,790 | |||
| Grid | 42,701 | 37,012 | |||||
| Corporate assets | 26,915 | 34,373 | |||||
| Total | $ | 84,446 | $ | 88,175 | |||
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 theIn 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 2018-07,
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 2018-072018-13 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 apart from the Settlement Agreement with Sinovel described in Note 15, "Commitments and Contingencies," the Company has determined that 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, our prospective results of operations or financial position and anticipated payments from Sinoveladoption 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: Sinovel may not make the Second Payment (as defined herein) in the timeframe expected, or at all, and the guarantor may also fail to make the Second Payment; The relevant Chinese courts and the Beijing Arbitration Commission may not accept any re-filing by us of any proceeding with Sinovel; A significant portion of our revenues are derived from a single customer, Inox, and we cannot predict if and when Inox’s demand dislocation will be resolved, and to the extent resolved, how successful Inox will be in executing on Solar Energy Corporation of India ("SECI") orders under India’sthe new central and state auction regime;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; Lower prices forOur contracts with the U.S. government are subject to audit, modification or termination by the U.S. government and include certain other fuel sourcesprovisions in favor of the government, and additional funding of such contracts may reduce the demand for wind energy development, which could have a material adverse effect on our ability to grow our Wind business.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 may experience difficulties re-establishing our HTS wire production capability in our Ayer, Massachusetts 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 sub-assembliessubassemblies of many of our Wind and Grid products, making us vulnerable to supply shortages and price fluctuations, which could harm our business; Failure to successfully execute the moveMany of our former Devens, Massachusetts manufacturing facility or achieve expected savings following the move could adversely impactrevenue opportunities are dependent upon subcontractors and other business collaborators; If we fail to implement our business strategy successfully, our financial performance; 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 notacquire additional complementary businesses or technologies, which may require us to incur substantial costs for which we may never realize all of the sales expected from our backlog of orders and contracts; 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 relatingrelated to our settlement with Sinovel;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, 2018, Part II. Item 1A of this Quarterly Report on Form 10-Q2019 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, 2018 and under Part II. Item IA of this Quarterly Report on Form 10-Q 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 power electronics products, engineering, and support services.power. In the power grid market, we enable electric utilities, industrial facilities, and renewable energy project developers to connect, transmit and distribute power through our transmission planning services and power electronics and superconductor-based products.systems. In the wind power market, we enable manufacturers to field highly competitive wind turbines through our advanced power electronics and control system products, engineering, and support services. Our windpower grid and power gridwind products and services provide exceptional reliability, security, efficiency and affordability to our customers.
Our wind and power gridsystem solutions help to improve energy efficiency, alleviate power grid capacity constraints, improve system resiliency, and increase the adoption of renewable energy generation. Demand for our solutions is driven by the growing needs for modernized smart grids that improve power reliability, security and quality, the U.S. Navy's effort to upgrade in-board power systems to support fleet electrification, and the need for increased renewable sources of electricity, such as wind and solar energy, and for modernized smart grids that improve power reliability, security and quality.energy. Concerns about these factors have led to increased spending by corporations and the military, as well as supportive government regulations and initiatives on local, state, national and globalnational levels, including renewable portfolio standards, tax incentives and international treaties.
We manufacture products using two proprietary core technologies: PowerModulePowerModule™ programmable power electronic converters and our AmperiumAmperium® high temperature superconductor (“HTS”) 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 20182019 refers to the fiscal year beginning on April 1, 2018.2019. Other fiscal years follow similarly.
On July 3, 2018, we and our wholly-owned subsidiaries Suzhou AMSC Superconductor Co. Ltd. (“AMSC China”) and AMSC Austria GMBHGmbH (“AMSC Austria”) entered into a settlement agreement (the “Settlement Agreement”) with Sinovel Wind Group Co., Ltd. (“Sinovel”). The Settlement Agreement settles the litigation and arbitration proceedings between us and Sinovel listed on Schedule 2 of the Settlement Agreement (the “Proceedings”), and any other civil claims, counterclaims, causes of action, rights and obligations directly or indirectly relating to the subject matters of the Proceedings and the contracts between us and Sinovel listed on Schedules 1 and 4 of the Settlement Agreement (the “Contracts”), subject to the exception described in Section 1.1 of the Settlement Agreement. The Settlement Agreement was filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 9, 2018. Under the terms of the Settlement Agreement, Sinovel agreed to pay AMSC China an aggregate cash amount in Renminbi (RMB)(“RMB”) equivalent to $57.5 million, consisting of two installments. Sinovel paid the first installment of the RMB equivalent of $32.5 million on July 4, 2018, and has agreed to paypaid the second installment of the RMB equivalent of $25.0 million (the “Second Payment”) within ten (10) months after the U.S. District Court for the Western District of Wisconsin (the “District Court”) delivers the first sentence against Sinovel in the criminal case entitled United States v. Sinovel Wind Co., Ltd., Case Number 3:13-cr-00084-jdp. On July 6, 2018, the District Court delivered such sentence, and therefore the Second Payment is due by May 6, 2019. Mr.
In addition, pursuant to the terms of the Settlement Agreement, we and AMSC Austria have granted Sinovel a non-exclusive license for certain of our 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 technology covered by the License. In
On October 31, 2018, we entered into a Subcontract Agreement with Commonwealth Edison Company (“ComEd”) (the “Subcontract Agreement”) for the event that Sinovel or Mr. Wei does not make the Second Payment by the Second Payment Due Date, the Settlement Agreement provides that the License will terminate. See Note 15 “Commitmentsmanufacture and Contingencies” for additional information on the termsinstallation of the Settlement Agreement.
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 three months ended June 30, 2018,Effective April, 1 2019, we adopted ASU 2014-09,2016-02, which provides for new requirements in regards to revenue recognition.leases. See Note 2, "Revenue Recognition"14, "Leases" for further details. Aside from the adoption of ASU 2014-09,2016-02, there were no significant changes in the critical accounting policies that were disclosed in our Form 10-K for fiscal 2017,2018, which ended on March 31, 2018.
Results of Operations
Three months ended June 30, 20182019 compared to the three months ended June 30, 2017
Revenues
Total revenues increased 41%9% to $13.8 million for the three months ended June 30, 2019, compared to $12.6 million for the three months ended June 30, 2018 compared to $8.9 million for the three months ended June 30, 2017.. Our revenues are summarized as follows (in thousands):
| Three months ended June 30, | |||||||
| 2018 | 2017 | ||||||
Revenues: | |||||||
| Wind | $ | 3,678 | $ | 2,278 | |||
| Grid | 8,929 | 6,645 | |||||
| Total | $ | 12,607 | $ | 8,923 | |||
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 29%28% of total revenues for the three months ended June 30, 2019, compared to 29% for the three months ended June 30, 2018 compared to 26% for the three months ended June 30, 2017.. Revenues in the Wind business unitunit increased 61%6% to $3.9 million in the three months ended June 30, 2019, from $3.7 million in the three months ended June 30, 2018 from $2.3 million. The increase over the prior year period was driven by increased development revenue for the 3MW wind turbine platform with Inox. Inox has been active in the three months ended June 30, 2017. Wind business unit revenues increased due to increased ECS shipments to Inox during the period. Although shipments to Inox increased during the three months ended June 30, 2018 compared to the three months ended June 30, 2017, Inox has experienced a reduction in demand for the past several quarters that we believe has been caused by the transition in India from a local fixed tariff policy regime to anew central and state government auction regime whichin India and has had an adverse impact onover 900 MW of orders from the Wind industry in India. Wefirst four SECI central government auctions, and 50 MW from the Maharashtra state government auction. However, we cannot predict if and when this demand dislocation will be fully resolved, and to the extent resolved, how successful Inox will be in executing on these orders or in obtaining new orders under the new central and state auction regime.
| Reportable | Three months ended June 30, | |||||
| Segment | 2018 | 2017 | ||||
| Inox Wind Limited | Wind | 25 | % | 22 | % | |
| Vestas | Grid | 36 | % | — | % | |
| U.S. Navy | Grid | <10% | 35 | % | ||
Cost of Revenues and Gross Margin
Cost of revenues decreased by 35% increased by 40% to $12.2 million for the three months ended June 30, 2019, compared to $8.7 million for the three months ended June 30, 2018 compared to $13.4 million for the three months ended June 30, 2017.. Gross margin was 11% for the three months ended June 30, 2019, compared to 31% for the three months ended June 30, 2018 compared to (50)% for the three months ended June 30, 2017. The increase. The decrease in gross margin in the gross marginthree month period was due to increased revenue atdriven by a moreless favorable product mix in both business units compared to the prior year period along with accelerated depreciationthan in the prior year period, related to revised estimates ofprimarily driven by the remaining lives on certain pieces of manufacturing equipment, as well as reduced fixed factory overhead as a result of the factory move to our newly leased Ayer facility.
Operating Expenses
Research and development
R&D expenses increasedexpenses decreased in the three months ended June 30, 20182019 by 5%13% to $2.8$2.5 million from $2.7$2.8 million for the three months ended June 30, 2017.2018. The increasedecrease in R&D expensesexpense was due primarily due to higherdecreased compensation expense.
Selling, general, and administrative
SG&A expensesexpenses decreased by 6%9% to $5.3 million in the three months ended June 30, 2019, from $5.8 million in the three months ended June 30, 2018 from $6.1 million in the three months ended June 30, 2017.. The decrease in SG&A expensesexpense was due primarily to reduced overalldecreased compensation expense.
Amortization of acquisition related intangibles
We recorded amortization expense related to our core technology and know-how, trade names and trademark intangible assets of less than $0.1$0.1 million in eachboth of the three months month periods ended June 30, 20182019, and 2017.
Restructuring
We recorded less than $0.3 million for facility exit costs in the three months ended June 30, 2018 as a result of the move of the corporate office that was announced as part of our April 4, 2017 approved restructuring plan. We recorded aThere was no restructuring charge of $1.3 million for severance costsactivity in the three months ended June 30, 2017 as a result of the reduction in force also announced on April 4, 2017. Included in the $1.3 million severance pay charged to operations in the three months ended June 30, 2017, is $0.5 million of severance pay for one of our former executive officers pursuant to the terms of a severance agreement dated June 30, 2017. Under the terms of the severance agreement, our former executive officer is entitled to eighteen months of his base salary, which is expected to be paid by December 31, 2018. From and after January 1, 2018, at our discretion, we may settle any remaining unpaid cash severance owed to our former executive officer through the issuance of a number of immediately vested shares of our common stock, determined by multiplying the remaining unpaid cash severance owed by 120%, and then dividing by the closing stock price per share of our common stock as of the last business day prior to the issuance of the shares.
Operating loss
Our operating loss is summarized as follows (in thousands):
| Three months ended June 30, | |||||||
| 2018 | 2017 | ||||||
| Operating loss: | |||||||
| Wind | $ | (1,367 | ) | $ | (4,433 | ) | |
| Grid | (2,666 | ) | (8,167 | ) | |||
| Unallocated corporate expenses | (1,095 | ) | (2,093 | ) | |||
| Total | $ | (5,128 | ) | $ | (14,693 | ) | |
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 loss of $4.7 million in the three months ended June 30, 2019, compared to a loss of $2.7 million in the three months ended June 30, 2018. The increase in the Grid business unit operating loss in the three months ended June 30, 2019 was primarily due to a less favorable product mix and a higher cost of sales.
Our Wind segment generated an operating lossesloss 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 compared to $4.4 million in the three months ended June 30, 2017.. The slight decrease in the Wind business unit operating loss was due primarily to increased shipments of ECS to Inox.
Unallocated corporate expenses primarily consist of stock-based compensation expense of $0.2 million and $0.8 million, in the three months ended June 30, 2019 and 2018, respectively and restructuring charges of $0.3 million forin the three months ended June 30, 2018 and $0.8 million of stock based compensation expense and $1.3 million of restructuring charges, primarily for severance costs as a result of the restructuring action announced on April 4, 2017, in the three months ended June 30, 2017.
Change in fair value of warrants
The change in fair value of warrants resulted in a gain of $2.9 million in the three months ended June 30, 2019, compared to a loss of $0.5 million in the three months ended June 30, 2018 compared to a gain of $0.9 million in the three months ended June 30, 2017.. The change in the fair value was primarily driven by changes in stock price, which is a key valuation metric.
Interest income, (expense), net
Interest income, (expense), net, was income of less than$0.5 million in the three months ended June 30, 2019, compared to $0.2 million in the three months ended June 30, 2018 compared to expense of less than $0.1 million in the three months ended June 30, 2017.. The increase in interest income was primarily related to imputedhigher cash balances earning higher interest earnedrates than in relation toprior periods as well as the outstanding note receivable for the salenon-cash interest income recognized from receipt of the 64 Jackson Road building.
Other income (expense), net
Other income (expense), net, was expense of $0.5 million in the three months ended June 30, 2019, compared to income of $0.6 million in the three months ended June 30, 2018 compared to expense of $1.4 million in the three months ended June 30, 2017. The. The increase in other income,expense, net, during the three months ended June 30, 2018, was primarily driven by higher foreign currency gains.
Income Taxes
Income tax expense was $0.2 million in the three months ended June 30, 2019, compared to income tax benefit wasof less than $0.1 million in the three months ended June 30, 2018 compared to income tax expense of $0.1 million in the three months ended June 30, 2017.. The increase in income tax benefit wasexpense is due primarily due to taxes earnedtaxable income in our foreign locations.
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 stock-based compensation, amortization of acquisition-related intangibles, consumption of zero cost-basis inventory, changes in fair value of warrants, 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 June 30, | |||||||
| 2018 | 2017 | ||||||
| Net loss | $ | (4,737 | ) | $ | (15,252 | ) | |
| Stock-based compensation | 785 | 754 | |||||
| Amortization of acquisition-related intangibles | 85 | 13 | |||||
| Consumption of zero cost-basis inventory | (249 | ) | (57 | ) | |||
| Change in fair value of warrants | 464 | (925 | ) | ||||
| Non-cash interest expense | — | 19 | |||||
| Tax effect of adjustments | 40 | 9 | |||||
| Non-GAAP net loss | $ | (3,612 | ) | $ | (15,439 | ) | |
| Non-GAAP net loss per share | $ | (0.18 | ) | $ | (0.92 | ) | |
| Weighted average shares outstanding - basic and diluted | 20,167 | 16,778 | |||||
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 $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 for the three months ended June 30, 2018 compared to non-GAAP net losses of $15.4 million or $0.92 per share for the three months ended June 30, 2017.. The decreaseincrease in non-GAAP net loss was primarily due to the less favorable product mix compared to the prior year period, primarily driven primarily 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 comparing our operating cash flow across reporting periods on a decreaseconsistent basis by excluding these non-recurring cash items that it does not believe are indicative of our core operating cash flow. A reconciliation of GAAP to non-GAAP operating cash flow is set forth in net loss, as previously discussed.the 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 June 30, 20182019, had an accumulated deficit of $993.0 million. In addition, we have experienced recurring negative operating cash flows, which continued in the three months ended June 30, 2018. Although our sales to Inox increased in the three months ended June 30, 2018 compared to the three months ended June 30, 2017, we cannot predict if and when Inox's demand dislocation will be fully resolved and to the extent resolved, how successful Inox will be under the new central and state auction regime.
Our cash requirements depend on numerous factors, including if and when the Inox demand dislocation is fully resolved, whether Inox is successful in executing on SECI orders or in obtaining additional orders under the new central and state auction regime, our ability to collect the Second Payment from Sinovel, 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. We continue to closely monitor our expenses and, if required, expect to further reduce our operating and capital spending to enhance liquidity.
As of June 30, 2018,2019, we had cash, cash equivalents, and restricted cash of $26.9$74.7 million, compared to $34.2$78.2 million as of March 31, 2018,2019, a decrease of $7.3$3.5 million. On July 4, 2018, Sinovel paid AMSC China an aggregateAs of June 30, 2019, we had approximately $29.5 million of cash, amountcash equivalents, and restricted cash in Renminbi (RMB) equivalent to $32.5 million pursuant to the terms of the Settlement Agreement. On July 24, 2018, AMSC China paid $30.7 million to AMSC Austria to settle outstanding intercompany balances.Ourforeign bank accounts. Our cash and cash equivalents, and restricted cash are summarized as follows (in thousands):
| June 30, 2018 | March 31, 2018 | ||||||
| Cash and cash equivalents | $ | 26,750 | $ | 34,084 | |||
| Restricted cash | 165 | 165 | |||||
| Total cash, cash equivalents, and restricted cash | $ | 26,915 | $ | 34,249 | |||
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 three months ended June 30, 2018, we had approximately $0.8 million of cash, cash equivalents, and restricted cash in foreign bank accounts. As discussed above, the $30.7 million payment from AMSC China to AMSC Austria on July 24, 2018 is held in a foreign bank account.
For the three months ended June 30, 2019, net cash provided by investing activities was $2.3 million, compared to net cash used in investing activities of $0.2 million for the three months ended June 30, 2018. The increase in accounts receivablenet cash provided by investing activities was due primarily to the 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, 2018 compared2019 related to improvements to the prior year period.
For the three months ended June 30, 2018,2019, net cash used in investingfinancing activities was $0.2$0.3 million compared to $0.1net cash used in financing activities of $0.2 million forin the three months ended June 30, 2017.2018. The increase in net cash used in investingfinancing activities was due primarily to increased purchasesemployee taxes paid related to net settlement of property, plant and equipment compared to the prior year period.
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.In June 2018, the FASB issued ASU 2018-07,
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 2018-072018-13 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 June 30, 2018.2019. 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 Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation of our disclosure controls and procedures as of June 30, 2018,2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no other changes to our internal controlcontrols over financial reporting during the quarter ended June 30, 2018,2019, 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 three months ended June 30, 2018 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, 2018,2019, filed with the SEC on June 6, 2018.
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 | 8-K | 000-19672 | 10.1 | 7/3/18 | ||||||||
| 10.2 | 8-K | 000-19672 | 10.1 | 7/9/18 | ||||||||
| 10.3 | 8-K | 000-19672 | 10.2 | 7/9/18 | ||||||||
| 31.1 | * | |||||||||||
| 31.2 | * | |||||||||||
| 32.1 | ** | |||||||||||
| 32.2 | ** | |||||||||||
| 101.INS | XBRL Instance Document.*** | |||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. *** | |||||||||||
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document. *** | |||||||||||
| 101.DEF | XBRL Definition Linkbase Document. *** | |||||||||||
| 101.LAB | XBRL Taxonomy Label Linkbase Document. *** | |||||||||||
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document. *** | |||||||||||
| 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 June 30, 20182019 and March 31, 20182019 (ii) Condensed Statements of Operations and Income for the three months ended June 30, 20182019 and 2017,2018, (iii) Condensed Consolidated Statements of Comprehensive (Loss) Income for the three months ended June 30, 20182019 and 2017,2018, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 20182019 and 2017,2018, 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) | ||||
33