UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

      

FORM 10-Q

      

 

x

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2013

 

¨

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.)

   

   

   

64 Jackson Road, Devens, Massachusetts

   

01434

(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)

      

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 x No ¨

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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

   

 

Large accelerated filer ¨

      

Accelerated filer x

      

Non-accelerated filer ¨

      

Smaller reporting company ¨

   

      

   

      

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

Shares outstanding of the Registrant’s common stock:

   

 

Common Stock, par value $0.01 per share

   

64,886,548

Class

   

Outstanding as of November 7, 2013

   

      

      

   

   

   


AMERICAN SUPERCONDUCTOR CORPORATION

INDEX

   

 

   

Page No.

PART I—FINANCIAL INFORMATION

   

   

   

   

   

Item 1.

      

Financial Statements  

 

 3

   

   

   

   

Item 2.

      

Management’s Discussion and Analysis of Financial Condition and Results of Operations  

 

 29

   

   

   

   

Item 3.

      

Quantitative and Qualitative Disclosures About Market Risk  

 

 42

   

   

   

   

Item 4.

      

Controls and Procedures  

 

 43

   

   

PART II—OTHER INFORMATION

   

   

   

   

   

Item 1.

      

Legal Proceedings  

 

 44

   

   

   

   

Item 1A.

      

Risk Factors  

 

 46

   

   

   

   

Item 2.

      

Unregistered Sales of Equity Securities and Use of Proceeds  

 

 47

   

   

   

   

Item 3.

      

Defaults Upon Senior Securities  

 

 47

   

   

   

   

Item 4.

      

Mine Safety Disclosure  

 

 47

   

   

   

   

Item 5.

      

Other Information  

 

 47

   

   

   

   

Item 6.

      

Exhibits  

 

 47

   

   

Signature  

 

 48

   

   

 

 2 


AMERICAN SUPERCONDUCTOR CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

   

 

   

September 30,

   

   

March 31,

   

   

2013

   

   

2013

   

ASSETS

   

   

   

   

   

Current assets:

   

   

   

   

   

   

   

Cash and cash equivalents

$

25,867

   

   

$

39,243

      

Accounts receivable, net

   

9,289

   

   

   

18,864

      

Inventory

   

24,474

   

   

   

33,473

      

Prepaid expenses and other current assets

   

19,337

   

   

   

22,469

      

Restricted cash

   

2,021

   

   

   

6,136

      

Total current assets

   

80,988

   

   

   

120,185

      

Property, plant and equipment, net

   

69,584

      

   

   

74,626

      

Intangibles, net

   

2,348

   

   

   

2,749

      

Restricted cash

   

4,901

      

   

   

4,820

      

Deferred tax assets

   

5,421

   

   

   

5,354

      

Other assets

   

9,283

      

   

   

9,020

      

Total assets

$

172,525

      

   

$

216,754

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

   

   

   

   

   

   

   

Current liabilities:

   

   

   

   

   

   

   

Accounts payable and accrued expenses

$

22,724

      

   

$

30,138

      

Note payable, current portion, net of discount of $260 as of September 30, 2013 and $458 as of March 31, 2013

   

4,355

   

   

   

4,158

      

Convertible note, current portion, net of discount of $2,230 as of September 30, 2013 and $4,289 as of March 31, 2013

   

7,255

      

   

   

4,610

      

Derivative liability

   

2,807

   

   

   

4,162

      

Adverse purchase commitments

   

962

   

   

   

1,440

      

Deferred revenue, current portion

   

11,490

   

   

   

29,805

      

Deferred tax liabilities

   

5,452

   

   

   

5,444

      

Total current liabilities

   

55,045

   

   

   

79,757

      

Note payable, net of discount of $16 as of September 30, 2013 and $95 as of March 31, 2013

   

1,138

   

   

   

3,367

      

Convertible note, net of discount of $0 as of September 30, 2013 and $600 as of March 31, 2013

   

926

   

   

   

5,881

      

Deferred revenue

   

1,374

   

   

   

1,340

      

Other liabilities

   

1,184

   

   

   

1,291

      

Total liabilities

   

59,667

   

   

   

91,636

      

Commitments and contingencies (Note 12)

   

   

   

   

   

   

   

Stockholders’ equity:

   

   

   

   

   

   

   

Common stock

   

640

   

   

   

603

      

Additional paid-in capital

   

936,086

   

   

   

923,847

      

Treasury stock

   

(370

)

   

   

(313

Accumulated other comprehensive income

   

1,768

   

   

   

1,112

      

Accumulated deficit

   

(825,266

)

   

   

(800,131

Total stockholders’ equity

   

112,858

   

   

   

125,118

      

Total liabilities and stockholders’ equity

$

172,525

   

   

$

216,754

      

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

   

   

 

 3 


AMERICAN SUPERCONDUCTOR CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

   

 

   

Three months ended
September 30,

   

   

Six months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Revenues

$

24,181

      

   

$

20,867

      

   

$

47,267

      

   

$

49,583

      

Cost and operating expenses:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Cost of revenues

   

22,611

      

   

   

20,384

   

   

   

40,598

      

   

   

37,310

      

Research and development

   

3,083

      

   

   

3,621

      

   

   

6,110

      

   

   

7,532

      

Selling, general and administrative

   

8,682

      

   

   

11,736

   

   

   

19,508

      

   

   

25,535

      

Restructuring and impairments

   

751

      

   

   

16

      

   

   

764

      

   

   

143

      

Amortization of acquisition related intangibles

   

82

      

   

   

80

      

   

   

164

      

   

   

161

      

Total cost and operating expenses

   

35,209

      

   

   

35,837

   

   

   

67,144

      

   

   

70,681

      

Operating loss

   

(11,028

   

   

(14,970

)

   

   

(19,877

   

   

(21,098

Change in fair value of derivatives and warrants

   

886

      

   

   

3,285

   

   

   

1,355

      

   

   

897

      

Interest expense, net

   

(3,505

   

   

(2,919

)

   

   

(5,617

   

   

(5,637

Other expense, net

   

(635

   

   

(1,266

)

   

   

(566

   

   

(1,143

Loss before income tax (benefit) expense

   

(14,282

   

   

(15,870

)

   

   

(24,705

   

   

(26,981

Income tax (benefit) expense

   

341

      

   

   

79

   

   

   

430

   

   

   

(757

Net loss

$

(14,623

   

$

(15,949

)

   

$

(25,135

   

$

(26,224

Net loss per common share

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

$

(0.24

   

$

(0.31

)

   

$

(0.42

   

$

(0.51

Diluted

$

(0.24

   

$

(0.31

)

   

$

(0.42

   

$

(0.51

Weighted average number of common shares outstanding

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

   

61,116

      

   

   

51,907

   

   

   

59,712

      

   

   

51,551

      

Diluted

   

61,116

      

   

   

51,907

   

   

   

59,712

      

   

   

51,551

      

   

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

   

   

 

 4 


AMERICAN SUPERCONDUCTOR CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

   

 

   

Three months ended
September 30,

   

   

Six months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

      

2012

   

Net loss

$

(14,623

)

   

$

(15,949

)

   

$

(25,135

)  

      

$

(26,224

Other comprehensive (loss) income, net of tax:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

      

Foreign currency translation (losses) gains

   

691

   

   

   

439

   

   

   

656

   

      

   

(729

Unrealized losses on investments

   

—  

   

   

   

(5

)

   

   

—  

   

      

   

(1

Total other comprehensive (loss) income, net of tax

   

691

   

   

   

434

   

   

   

656

   

      

   

(730

Comprehensive loss

$

(13,932

)

   

$

(15,515

)

   

$

(24,479

)  

      

$

(26,954

   

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

   

   

 

 5 


AMERICAN SUPERCONDUCTOR CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

   

 

   

Six months ended
September 30,

   

   

2013

   

      

2012

   

Cash flows from operating activities:

   

   

   

      

   

   

   

Net loss

$

(25,135

)  

      

$

(26,224

Adjustments to reconcile net loss to net cash used in operations:

   

   

   

      

   

   

   

Depreciation and amortization

   

5,343

      

      

   

6,628

      

Stock-based compensation expense

   

4,287

      

      

   

4,039

      

Restructuring charges, net of payments

   

161

      

      

   

(49

Provision for excess and obsolete inventory

   

192

      

      

   

421

      

Adverse purchase commitment recoveries, net

   

—  

      

      

   

(8,309

Loss on minority interest investments

   

499

   

   

   

1,490

   

Change in fair value of derivatives and warrants

   

(1,355

)  

      

   

(897

)  

Non-cash interest expense

   

4,765

      

      

   

4,443

      

Other non-cash items

   

892

      

      

   

350

      

Changes in operating asset and liability accounts:

   

   

   

      

   

   

   

Accounts receivable

   

10,704

      

      

   

2,856

      

Inventory

   

9,315

      

      

   

(971

Prepaid expenses and other current assets

   

3,531

      

      

   

8,394

      

Accounts payable and accrued expenses

   

(9,105

)  

      

   

(14,900

Deferred revenue

   

(18,873

)  

      

   

(2,236

Net cash used in operating activities

   

(14,779

)  

      

   

(24,965

Cash flows from investing activities:

   

   

   

      

   

   

   

Purchase of property, plant and equipment

   

(115

)  

      

   

(903

Proceeds from the maturity of marketable securities

   

—  

      

      

   

84

      

Change in restricted cash

   

4,053

      

      

   

(4,116

Change in other assets

   

(495

)

   

   

—  

   

Net cash provided by (used in) investing activities

   

3,443

      

      

   

(4,935

Cash flows from financing activities:

   

   

   

      

   

   

   

Employee taxes paid related to net settlement of equity awards

   

(57

)  

      

   

(36

Proceeds from the issuance of debt, net of expenses

   

—  

      

      

   

32,895

      

Repayment of debt

   

(2,308

)  

      

   

—  

      

Proceeds from exercise of employee stock options and ESPP

   

99

      

      

   

178

      

Net cash (used in) provided by financing activities

   

(2,266

)  

      

   

33,037

      

Effect of exchange rate changes on cash and cash equivalents

   

226

      

      

   

(280

Net (decrease) increase in cash and cash equivalents

   

(13,376

)  

      

   

2,857

      

Cash and cash equivalents at beginning of year

   

39,243

      

      

   

46,279

      

Cash and cash equivalents at end of period

$

25,867

      

      

$

49,136

      

Supplemental schedule of cash flow information:

   

   

   

      

   

   

   

Cash paid for income taxes, net of refunds

$

—  

      

      

$

(752

Issuance of common stock to settle liabilities

   

7,831

      

      

   

2,676

      

Cash paid for interest

   

400

      

      

   

269

      

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

   

   

 

 6 


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” or the “Company”) was founded on April 9, 1987. The Company is a leading provider of megawatt-scale solutions that lower the cost of wind power and enhance the performance of the power grid. In the wind power market, the Company enables manufacturers to field wind turbines through its advanced engineering, support services and power electronics products. In the power grid market, the Company enables electric utilities and renewable energy project developers to connect, transmit and distribute power through its transmission planning services and power electronics and superconductor-based products. The Company’s wind and power grid products and services provide exceptional reliability, security, efficiency and affordability to its customers.

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 September 30, 2013 and 2012 and the financial position at September 30, 2013. Certain reclassifications of prior years’ amounts have been made to conform to the current year presentation. These reclassifications, reflected on the consolidated statements of cash flows, are immaterial and had no impact on net income or stockholders’ equity.

Liquidity

The Company has experienced recurring operating losses and as of September 30, 2013, the Company had an accumulated deficit of $825.3 million. In addition, the Company has experienced recurring negative operating cash flows, which has resulted in a decrease in its cash balance. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. At September 30, 2013, the Company had cash and cash equivalents of $25.9 million. Cash used in operations for the six months ended September 30, 2013 was $14.8 million.

The Company is currently in the process of consolidating certain business operations to reduce facility costs. The Company expects that its cost reduction efforts and anticipated revenue growth will result in a reduction of cash used for operations during the fiscal year ending March 31, 2014, compared to the prior year. In July 2013, the Company reduced its workforce by approximately 7% and recorded a restructuring charge for severance and other costs of approximately $0.8 million in the quarter ended September 30, 2013. The Company plans to closely monitor its expenses and, if required, expects to further reduce operating costs and capital spending to enhance liquidity.

On April 4, 2012, the Company completed a private placement of $25.0 million aggregate principal amount of a 7% senior unsecured convertible note (the “Initial Note”). On December 20, 2012, the Company agreed to exchange the Initial Note for a new unsecured, senior convertible note (the “Exchanged Note”), which had the same principal amount and accrued interest as the Initial Note at the time of the exchange. (See Note 10, “Debt”, for further information regarding these debt arrangements, including the covenants, restrictions and events of default under the agreements.)

 

 7 


On June 5, 2012, the Company entered into a Loan and Security Agreement (the “Term Loan”), under which the Company borrowed $10.0 million. The Term Loan contains certain covenants and restrictions including, among others, a requirement to maintain a minimum unrestricted cash balance in the U.S. equal to the remaining principal balance. (See Note 10, “Debt”, for further information regarding these debt arrangements, including the covenants, restrictions and events of default under the agreements.) The Company believes that it is in compliance with the covenants and restrictions included in the agreements governing these debt arrangements as of the date of this Quarterly Report on Form 10-Q.

In order for the Company to continue operations beyond the next twelve months and be able to discharge its liabilities and commitments in the normal course of business, the Company needs to increase sales through executing its strategy to broaden its customer base, enter new markets, and commercialize its superconductor product line. In addition, the Company may need to further reduce operating expenses in line with business conditions in order to decrease the amount of cash used in operations.  The Company also intends to seek new financing arrangements, including, but not limited to, new debt and/or equity financing, and continue to work with the holder of its convertible note in order to maintain the ability to make monthly amortization payments on the convertible note in shares of common stock.  In addition, the Company is actively seeking to sell its minority investments in Tres Amigas and Blade Dynamics and has recently engaged a financial advisor to assist with that effort. (See Note 13, “Minority Investments”, for further information about such investments.) There can be no assurance that the Company will be able to raise additional capital or sell one or both of these investments on commercially reasonable terms or at all.

The Company must successfully execute on its plans to improve operating performance discussed above and raise additional capital through financings or other means to ensure it has sufficient cash to fund its operations, capital expenditures and scheduled cash payments under its debt obligations through September 30, 2014. The Company’s ability to pay required monthly installment payments under the Exchanged Note in equity instead of cash is based on certain stock price and trading volume conditions that are outside of the Company’s control. If one or both of these equity conditions are not met (absent a waiver from the lender), the Company may be required to make required monthly installment payments in cash. As of the filing date of this Form 10-Q, the Company has only made payments to the lender in shares of common stock and as a result, the principal balance has been reduced by $14.6 million through September 30, 2013. If the Company fails one or both of the equity conditions, the Company can still make required payments in its common stock with a waiver from the lender, which has been provided in the past. There is no assurance that the lender will provide any waivers in the future. The Company’s liquidity is highly dependent on its ability to profitably grow revenues through both the acquisition of new customers and growth from its existing customers, manage its operating expenses, continue to make amortization payments under the Exchanged Note in shares of the Company’s common stock, maintain compliance with the covenants and restrictions on its debt obligations (or obtain waivers from our lenders in the event of non-compliance), and raise additional capital through new financing arrangements or the sale of its minority investments in Tres Amigas and Blade Dynamics.  (See Note 13, “Minority Investments”, for further information about such investments).  There can be no assurance that he Company will be able to raise additional capital or be able to sell one or both of these investments on commercially reasonable terms or at all.

The results of operations for an interim period are not necessarily indicative of the results of operations to be expected for the fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended March 31, 2013 (fiscal 2012) which are contained in the Company’s Annual Report on Form 10-K.

   

 

 8 


2. Stock-Based Compensation

The Company accounts for its stock-based compensation at fair value. The following table summarizes stock-based compensation expense by financial statement line item for the three and six months ended September 30, 2013 and 2012 (in thousands):

   

 

   

Three months ended
September 30,

   

      

Six months ended
September 30,

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

Cost of revenues

$

224

   

   

$

213

   

   

$

429

   

   

$

383

   

Research and development

   

585

   

   

   

591

   

   

   

1,159

   

   

   

1,154

   

Selling, general and administrative

   

1,343

   

   

   

1,240

   

   

   

2,699

   

   

   

2,502

   

Total

$

2,152

   

   

$

2,044

   

   

$

4,287

   

   

$

4,039

   

During the six months ended September 30, 2013, the Company granted approximately 831,000 stock options, 400,000 restricted stock awards, 362,000 shares of performance-based restricted stock awards and issued 212,000 shares of common stock in-lieu of cash bonuses and severance payments to employees under the 2007 Stock Incentive Plan. The shares issued in-lieu of cash bonuses vest immediately. The shares issued in lieu of severance vested on the eighth day after receipt of an irrevocable release.  The options and restricted stock awards granted vest upon the passage of time, generally 3 years. For options and awards that vest upon the passage of time, expense is being recorded over the vesting period. Performance-based restricted stock awards are expensed over the requisite service period.

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 $3.2 million at September 30, 2013. This expense will be recognized over a weighted average expense period of approximately 2.0 years. The total unrecognized compensation cost for unvested outstanding restricted stock was $4.6 million at September 30, 2013. This expense will be recognized over a weighted-average expense period of approximately 1.3 years.

The weighted-average assumptions used in the Black-Scholes valuation model for stock options granted during the three and six months ended September 30, 2013 and 2012 are as follows:

   

 

   

Three months ended
September 30,

   

   

Six months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Expected volatility

   

75.4

%

   

   

71.9

%

   

   

75.1

%

   

   

71.9

%

Risk-free interest rate

   

1.7

%

   

   

0.8

%

   

   

1.7

%

   

   

0.9

%

Expected life (years)

   

5.8

   

   

   

5.9

   

   

   

5.9

   

   

   

5.9

   

Dividend yield

   

None

   

   

   

None

   

   

   

None

   

   

   

None

   

The expected volatility rate was estimated based on an equal weighting of the historical volatility of the Company’s common stock and the implied volatility of the Company’s traded options. The expected term was estimated based on an analysis of the Company’s historical experience of exercise, cancellation, and expiration patterns. The risk-free interest rate is based on the average of the five and seven year United States Treasury rates.

   

 

 9 


3. 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. For each of the three and six months ended September 30, 2013, 9.7 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 3.2 million relate to unvested stock options, 3.2 million relate to the issuance of warrants, and 3.3 million shares relate to the convertible feature of the Company’s Exchanged Note. For the three and six months ended September 30, 2012, 8.8 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 3.0 million relate to unvested stock options, 3.2 million relate to the issue of warrants and 2.6 million shares related to the convertible feature of the Company’s Exchanged Note.

The following table reconciles the numerators and denominators of the earnings per share calculation for the three and six months ended September 30, 2013 and 2012 (in thousands, except per share data):

   

 

   

Three months ended
September 30,

   

   

   

Six months ended
September 30,

   

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Numerator:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Net loss

$

(14,623

)

   

$

(15,949

)

   

   

(25,135

)

   

   

(26,224

)

Denominator:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Weighted-average shares of common stock outstanding

   

62,787

      

   

   

52,606

      

   

   

61,583

      

   

   

52,202

      

Weighted-average shares subject to repurchase

   

(1,671

)

   

   

(699

)

   

   

(1,871

)

   

   

(651

)

Shares used in per-share calculation — basic

   

61,116

      

   

   

51,907

      

   

   

59,712

      

   

   

51,551

      

Shares used in per-share calculation — diluted

   

61,116

      

   

   

51,907

      

   

   

59,712

      

   

   

51,551

      

Net loss per share — basic

$

(0.24

)

   

$

(0.31

)

   

$

(0.42

)

   

$

(0.51

)

Net loss per share — diluted

$

(0.24

)

   

$

(0.31

)

   

$

(0.42

)

   

$

(0.51

)

   

4. Fair Value Measurements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance related to disclosures of fair value measurements. The guidance requires gross presentation of activity within the Level 3 measurement roll-forward and details of transfers in and out of Level 1 and 2 measurements. It also clarifies two existing disclosure requirements on the level of disaggregation of fair value measurements and disclosures on inputs and valuation techniques. A change in the hierarchy of an investment from its current level will be 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 will be 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 between Level 1, Level 2 and Level 3 of the fair value measurement hierarchy during the three months ended September 30, 2013.

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.

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.

 

 10 


The following table provides the assets carried at fair value, measured as of September 30, 2013 and March 31, 2013 (in thousands):

   

 

   

Total
Carrying
Value

   

      

Quoted Prices in
Active Markets
(Level 1)

   

      

Significant Other
Observable Inputs
(Level 2)

   

      

Significant
Unobservable Inputs
(Level 3)

   

September 30, 2013:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Assets:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Cash equivalents

$

15,666

      

      

$

15,666

      

      

$

—  

   

      

$

—  

   

Liabilities:

   

   

      

      

   

   

      

      

   

   

   

      

   

   

      

Derivative liability

$

181

   

   

$

—  

   

   

$

—  

   

   

$

181

   

Warrants

$

2,626

      

      

$

—  

   

      

$

—  

      

      

$

2,626

      

   

 

   

Total

Carrying
Value

   

      

Quoted Prices in
Active Markets
(Level 1)

   

      

Using Significant Other
Observable Inputs
(Level 2)

   

      

Using Significant
Unobservable Inputs
(Level 3)

   

March 31, 2013:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Assets:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Cash equivalents

$

18,649

      

      

$

18,649

      

      

$

—  

   

      

$

—  

   

Liabilities:

   

   

      

      

   

   

      

      

   

   

   

      

   

   

      

Derivative liability

$

529

   

   

$

—  

   

   

$

—  

   

   

$

529

   

Warrants

$

3,633

      

      

$

—  

   

      

$

—  

      

      

$

3,633

   

The table below reflects the activity for the Company’s major classes of liabilities measured at fair value (in thousands).

   

 

   

Derivative Liability

   

   

Warrants

   

April 1, 2013

$

529

      

   

$

3,633

      

Mark to market adjustment

   

(348

   

   

(1,007

Balance at September 30, 2013

$

181

      

   

$

2,626

      

   

 

   

Derivative Liability

   

   

Warrants

   

April 1, 2012

$

—  

      

   

$

—  

      

Valuation of derivative liability

   

3,779

      

   

   

—  

      

Warrant issuance with Senior Convertible Notes

   

—  

      

   

   

7,018

      

Warrant issuance with Senior Secured Term Loan

   

—  

      

   

   

380

      

Mark to market adjustment

   

(1,016

)

   

   

119

   

Balance at September 30, 2012

   

2,763

   

   

   

7,517

   

Valuation of derivative liability attributable to modification

   

542

      

   

   

—  

      

Mark to market adjustment

   

(2,776

   

   

(3,884

Balance at March 31, 2013

$

529

      

   

$

3,633

      

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.

 

 11 


Derivative Liability

The Company has identified all of the derivatives (“Derivative Liability”) associated with the Exchanged Note which include put rights to require the investor to acquire an additional $15.0 million convertible note and additional warrants, holder change of control redemption rights, issuer optional redemption rights, sale redemption rights and a right to make payment in the form of stock rather than cash if certain equity conditions are met. The Derivative Liability is subject to revaluation at each balance sheet date, and any change in fair value will be recorded as a change in fair value in other income (expense) until the earlier of its exercise or expiration. The Company relies on assumptions in a lattice model to determine the fair value of Derivative Liability. The Company has appropriately valued the Derivative Liability within Level 3 of the valuation hierarchy. (See Note 10, “Debt”, for discussion on the Exchanged Note, Derivative Liability and valuation assumptions used.)

Warrants

Warrants were issued in conjunction with the Initial Note and the Term Loan. (See Note 10, “Debt”, for additional information on warrants.) These warrants are subject to revaluation at each balance sheet date, and any change in fair value will be recorded as a change in fair value in other income (expense) until the earlier of their exercise or expiration.

The Company relies on assumptions used in a lattice model to determine the fair value of warrants. The Company has appropriately valued the warrants within Level 3 of the valuation hierarchy. (See Note 11, “Warrants and Derivative Liabilities”, for a discussion of the warrants and the valuation assumptions used.)

   

5. Accounts Receivable

Accounts receivable at September 30, 2013 and March 31, 2013 consisted of the following (in thousands):

   

 

   

September 30,
2013

   

      

March 31,
2013

   

Accounts receivable (billed)

$

8,592

      

      

$

17,222

      

Accounts receivable (unbilled)

   

713

      

      

   

1,642

      

Less: Allowance for doubtful accounts

   

(16

)  

      

   

—  

      

Accounts receivable, net

$

9,289

      

      

$

18,864

      

   

6. Inventory

The components of inventory at September 30, 2013 and March 31, 2013 are as follows (in thousands):

   

 

   

September 30,
2013

   

      

March 31,
2013

   

Raw materials

$

7,183

      

      

$

5,966

      

Work-in-process

   

3,530

      

      

   

3,427

      

Finished goods

   

10,689

      

      

   

21,655

      

Deferred program costs

   

3,072

      

      

   

2,425

      

Net inventory

$

24,474

      

      

$

33,473

      

The Company recorded inventory write-downs of less than $0.1 million and $0.2 million for the three months ended September 30, 2013 and 2012, respectively. The Company recorded inventory write-downs of $0.2 million and $0.4 million for the six months ended September 30, 2013 and 2012, respectively. These write downs were based on evaluating its ending inventory on hand for excess quantities and obsolescence.

Deferred program costs as of September 30, 2013 and March 31, 2013 primarily represent costs incurred on programs accounted for under contract accounting where the Company needs to complete development programs before revenue and costs will be recognized, respectively.

   

 

 12 


7. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following (in thousands):

   

 

   

September 30,
2013

   

      

March 31,
2013

   

Accounts payable

$

3,105

      

      

$

7,146

      

Accrued miscellaneous expenses

   

7,195

      

      

   

9,172

      

Accrued inventories in transit

   

1,442

      

      

   

779

      

Accrued outside services

   

2,763

      

      

   

2,251

      

Accrued subcontractor program costs

   

556

      

      

   

2,442

      

Accrued compensation

   

4,447

      

      

   

5,506

      

Income taxes payable

   

147

      

      

   

133

      

Accrued warranty

   

3,069

      

      

   

2,709

      

Total

$

22,724

      

      

$

30,138

      

The Company generally provides a one to three year warranty on its products, commencing upon installation. 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
September 30,

   

   

Six months ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Balance at beginning of period

$

2,787

      

   

$

5,500

      

   

$

2,709

      

   

$

5,896

      

Change in accruals for warranties during the period

   

342

      

   

   

(384

   

   

493

      

   

   

(551

Settlements during the period

   

(60

)

   

   

(324

   

   

(133

   

   

(553

Balance at end of period

$

3,069

      

   

$

4,792

      

   

$

3,069

      

   

$

4,792

      

   

   

8. Income Taxes

For the three and six months ended September 30, 2013, the Company recorded income tax expense of $0.3 million and $0.4 million, respectively. For the three and six months ended September 30, 2012, the Company recorded income tax expense of $0.1 million and an income tax benefit of $0.8 million, respectively. The income tax expense for the three and six months ended September 30, 2013 was primarily due to withholding taxes for repatriation of funds from certain foreign jurisdictions, and for these periods, as well as the three months ended September 30, 2012, income taxes in the Company’s foreign jurisdictions. The income tax benefit for the six months ended September 30, 2012, was primarily due to a refund of Chinese income taxes of $0.9 million.

   

9. 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.

 

 13 


During the years ended March 31, 2013 and March 31, 2012, the Company undertook restructuring activities, approved by the Board of Directors, in order to reorganize its global operations, streamline various functions of the business, and reduce its global workforce to better reflect the demand for its products. The Company undertook an additional workforce reduction in July 2013, reducing its workforce by approximately 7%, impacting primarily selling, engineering and general and administrative functions. The Company recorded a restructuring charge for severance and other costs of approximately $0.8 million during the three months ended September 30, 2013. From April 1, 2011 through September 30, 2013, these activities resulted in a substantial reduction of its global workforce. During the six months ended September 30, 2013 and 2012, the Company incurred restructuring costs of $0.8 million and $0.1 million, respectively. The remaining balance of accrued restructuring is expected to be paid through February 2014.

The following table presents restructuring charges and cash payments (in thousands):

   

 

Six months ended September 30, 2013

Severance pay
and benefits

   

   

Facility
exit costs

   

   

Total

   

Accrued restructuring balance at April 1, 2013

$

145

   

   

   

54

      

   

$

199

      

Charges to operations

   

751

   

   

   

13

      

   

   

764

      

Cash payments

   

(599

)

   

   

(37

)  

   

   

(636

Other adjustments

   

(166

)

   

   

(30

)

   

   

(196

)

Accrued restructuring balance at September 30, 2013

$

131

   

   

$

—  

      

   

$

131

      

   

   

   

   

   

   

   

   

   

   

   

   

Six months ended September 30, 2012

   

   

   

   

   

   

   

   

   

   

   

Accrued restructuring balance at April 1, 2012

$

680

   

   

$

294

      

   

$

974

      

Charges to operations

   

182

   

   

   

(39

   

   

143

      

Cash payments

   

(560

)

   

   

(255

   

   

(815

Accrued restructuring balance at September 30, 2012

$

302

   

   

$

—  

      

   

$

302

      

All restructuring charges discussed above are included within restructuring and impairments in the Company’s unaudited condensed consolidated statements of operations. The Company includes accrued restructuring within accounts payable and accrued expenses in the unaudited condensed consolidated balance sheets.

   

10. Debt

Senior Convertible Note

On April 4, 2012, the Company entered into a Securities Purchase Agreement with Capital Ventures International (“CVI”), an affiliate of Heights Capital Management (the “Purchase Agreement”) and completed a private placement of the Initial Note, a 7% unsecured senior convertible note. After fees and expenses, the net proceeds of the Initial Note were $23.2 million. The Initial Note had an initial conversion price of $4.85 per share, representing a premium of approximately 20% over AMSC’s closing price on April 3, 2012. The Initial Note was payable in monthly installments beginning four months from issuance and ending on October 4, 2014. Monthly payments were payable in cash or the Company’s common stock at the option of the Company, subject to certain trading volume, stock price and other conditions. CVI could have also elected to defer receipt of monthly installment payments at its option. Any deferred installment payments would have continued to accrue interest. The Company registered 10,262,311 shares of common stock which may be used as payment for principal and interest in lieu of cash for resale under the Securities Act as required under a Registration Rights Agreement with CVI.

The Company accounted for the Initial Note as an instrument that has the characteristics of a debt host contract containing several embedded derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of ASC 815. The Company elected not to use the fair value option for the aggregate amount of the Exchanged Note and recorded the liability at its stated value on the date of issuance with no changes in fair value reported in subsequent periods.

The Company has identified the following derivatives associated with the Initial Note: holder change of control redemption rights; issuer optional redemption rights; sale redemption rights and a feature to convert the Initial Note into equity at the holder’s option. The Company valued these derivatives at $3.8 million upon issuance of the Initial Note. (See Note 11, “Warrants and Derivative Liabilities,” for additional information regarding derivative liabilities.)

 

 14 


In conjunction with the Initial Note, CVI received a warrant to purchase approximately 3.1 million additional shares of common stock exercisable at a strike price of $5.45 per share, subject to adjustment, until October 4, 2017. Due to certain adjustment provisions within the warrant, it qualified for liability accounting and had a fair value of $7.0 million upon issuance. The Company recorded the value as a debt discount and a warrant liability. (See Note 11, “Warrants and Derivative Liabilities,” for additional information regarding the warrant.)

The process of valuing financial and derivative instruments utilizes facts and circumstances as of the measurement date as well as certain inputs, assumptions, and judgments that may affect the estimated fair value of the instruments. Upon issuance of the Initial Note, the Company determined the initial carrying value of the Initial Note to be $25.0 million. In addition, the Company also incurred $1.8 million of legal and origination costs as of the year ended March 31, 2013, which have been recorded as a discount on the Initial Note.

On December 20, 2012, the Company entered into an Amendment and Exchange Agreement, (the “First Amendment”) with CVI, which amended the Purchase Agreement. Pursuant to the First Amendment, the Company and CVI exchanged the Initial Note for the Exchanged Note. At the time of the exchange, the Exchanged Note had the same principal amount and accrued interest as the Initial Note. The Exchanged Note is convertible into the Company’s common stock and has the same scheduled monthly installment payments as the Initial Note. The Exchanged Note provides the Company with additional flexibility to make monthly installment payments in shares of the Company’s common stock. The Company retains the ability to repay the Exchanged Note in cash. Specifically, the amendments to the Exchanged Note:

 

·

Allowed the Company to convert, subject to the satisfaction of certain conditions set forth in the Exchanged Note, (a) at least $2.5 million of the approximately $5.3 million installment amount payable with respect to the January 2013 installment date (including approximately $4.2 million of deferred installment amounts from the period September 4, 2012 to December 3, 2012) into shares of the Company’s common stock (on December 21, 2012 the Company converted $3.8 million in deferred installment amount principal and interest and issued 1,715,443 shares of common stock), and (b) the balance of the January 2013 installment amount in equal amounts on each of the February and March 2013 installment dates;

 

·

Reduced the price failure equity condition with respect to a particular date of determination from $2.50 to $1.00;

 

·

Reduced the aggregate daily dollar trading volume equity condition required for at least 25 of the 30 consecutive trading days immediately preceding a date of determination from $1,500,000 to $850,000 per trading day. In addition, if the aggregate daily dollar trading volume is between $50,000 and $850,000, the Company may still convert into common stock a portion of an installment amount payable with respect to an installment date equal to the quotient of (x) the aggregate daily dollar trading volume, divided by (y) $850,000;

 

·

Increased CVI’s beneficial ownership limitation under the Exchanged Note from 4.99% to 9.99%; and

 

·

Reduced the conversion price, from $4.85 per share of the Company’s common stock to $3.19 per share of the Company’s common stock, subject to certain price-based and other anti-dilution adjustments.

The Company assessed the changes in the Exchanged Note and accounted for it as a modification of the Initial Note. Therefore, the Company determined the incremental value of the derivative instruments, as a result of the Exchanged Note having a reduced conversion price. As a result of the re-valuation, the Company recorded a $0.5 million increase in the value of the derivative liability and additional debt discount. At the modification date, the value of the derivative liability was $1.5 million. The total debt discount, including the embedded derivatives in the Initial Note, the incremental value of embedded derivatives in the Exchanged Note, warrant and legal and origination costs of $13.1 million is being amortized into interest expense over the term of the Exchanged Note using the effective interest method. Under this method, interest expense is recognized each period until the debt instruments reach maturity. If the maturity of the Exchanged Note is accelerated because of prepayment, then the amortization will be accelerated. During the three and six months ended September 30, 2013, the Company recorded non-cash interest expense for amortization of the debt discount related to the convertible note of $1.2 million and $2.7 million, respectively. During the three and six months ended September 30, 2012, the Company recorded non-cash interest expense for amortization of the debt discount related to the convertible note of $2.1 million and $4.2 million, respectively.

 

 15 


On October 9, 2013, the Company entered into a Second Amendment and Warrant Exchange Agreement (the “Second Amendment”) with CVI. The Second Amendment further amended the Securities Purchase Agreement, as amended by the First Amendment (collectively, the “Amended Purchase Agreement”), that the Company previously entered into with CVI.

Pursuant to the Second Amendment, the Company and/or CVI waived certain provisions of the Amended Purchase Agreement and amended certain provisions of the Exchanged Note, specifically,

 

·

CVI waived its rights under the Amended Purchase Agreement to participate in (i) specific types of offerings that may be conducted by the Company with respect to the Company’s currently effective Registration Statement on Form S-3 (Registration No. 333-191153), and (ii) the issuance of shares of common stock in connection with any settlement of currently outstanding litigation involving the Company; and

 

·

the Company and CVI amended the Exchanged Note:

 

·

to increase the period during which CVI is allowed to accelerate payment in shares of common stock at the then current installment date conversion price from such installment date until the trading day before the next installment notice due date to the entire period from such installment date until the trading day before the next installment date; and

 

·

to increase the aggregate outstanding principal amount under the definition of “permitted senior indebtedness” from $10.0 million to $15.0 million.

   

Provided certain equity conditions are met, the Company may elect to repay principal and interest in shares of the Company’s common stock. If the Company elects to make a payment in shares of the Company’s common stock, the number of shares to be issued is determined by dividing the amount of such payment by 85% of the lessor of the average volume-weighted average price (“VWAP”) of the 10 consecutive days immediately preceding the payment date or the VWAP price on the day preceding the payment date (the “Market Price”). The Company records the difference between the closing price of its common stock on the day preceding the payment date and the Market Price as a discount on the fair value of its shares. During both the three and six months ended September 30, 2013, the Company recorded $1.8 million of non-cash interest expense related to installment payments made by issuing the Company’s common stock at a discount, compared to $0.2 million during both the three and six months ended September 30, 2012.

The Exchanged Note and the Amended Purchase Agreement contain certain covenants and restrictions, including, among others, that for so long as the Exchanged Note is outstanding, the Company will not incur any indebtedness (other than permitted indebtedness under the Exchanged Note), permit liens on its properties (other than permitted liens under the Exchanged Note), make payments on junior securities or declare dividends. The Exchanged Note also contains limitations on the transfer of certain assets. Events of default under the Exchanged Note include failure to pay principal or interest as due on the Exchanged Note, failure to deliver registered shares of common stock upon the holders request for conversion of part or all of the Exchanged Note, failure to maintain the Company’s common stock eligible for trading on defined markets, cross defaults to other material indebtedness, receipt of uninsured judgments against the Company in excess of defined limits and other administrative covenants, including the Term Loan discussed below, as defined in the Exchanged Note and related documentation. Upon an event of default, the holders may require the Company to redeem all or any portion of the outstanding principal amount of the Exchanged Note in cash plus a penalty as specified in the agreement. Also, if the Company fails to maintain an effective registration statement covering common stock to be used in settling obligations under the Exchanged Note, the Company will be required to pay a penalty as specified in the agreement.

 

 16 


Senior Secured Term Loan

On June 5, 2012, the Company entered into a Term Loan with Hercules Technology Growth Capital, Inc. (“Hercules”), under which the Company borrowed $10.0 million (the “Term Loan”). After the closing fees and expenses, the net proceeds to the Company were $9.7 million. The Term Loan bears an interest rate equal to 11% plus the percentage, if any, by which the prime rate as reported by The Wall Street Journal exceeds 3.75%. The Company made interest-only payments from July 1, 2012 through October 31, 2012, after which the Company began repaying the Term Loan in equal monthly installments ending on December 1, 2014. The Term Loan is secured by substantially all of the Company’s existing and future assets, including a mortgage on real property owned by the Company’s wholly-owned subsidiary, ASC Devens LLC, and located at 64 Jackson Road, Devens, Massachusetts. In addition, Hercules received a warrant to purchase 139,276 shares of common stock, exercisable at an initial strike price of $3.59 per share, subject to adjustment, until December 5, 2017. Due to certain adjustment provisions within the warrant, it qualified for liability accounting and the fair value of $0.4 million was recorded upon issuance, which the Company recorded as a debt discount and a warrant liability. (See Note 11, “Warrants and Derivative Liabilities,” for a discussion on warrants and the valuation assumptions used.) The Company will pay an end of term fee of $0.5 million upon the earlier of maturity or prepayment of the loan. The Company has accrued the term fee and recorded a corresponding amount into the debt discount. In addition, the Company incurred $0.3 million of legal and origination costs in the year ended March 31, 2013, which have been recorded as a debt discount. The total debt discount including the warrant, end of term fee and legal and origination costs of $1.2 million is being amortized into interest expense over the term of the Term Loan using the effective interest method. Under this method, interest expense is recognized each period until the debt instrument reaches maturity. If the maturity of the Term Loan is accelerated because of prepayment, then the amortization will be accelerated. During the three and six months ended September 30, 2013, the Company recorded non-cash interest expense for amortization of the debt discount related to the Term Loan of $0.1 million and $0.3 million, respectively. During the three and six months ended September 30, 2012, the Company recorded non-cash interest expense for amortization of the debt discount related to the Term Loan of $0.2 million and $0.3 million, respectively.

The Term Loan contains certain covenants that restrict the Company’s ability to, among other things, incur or assume certain debt, merge or consolidate, materially change the nature of the Company’s business, make certain investments, acquire or dispose of certain assets, make guaranties or grant liens on its assets, make certain loans, advances or investments, declare dividends or make distributions or enter into transactions with affiliates. In addition, the Term Loan contains a covenant that requires the Company to maintain a minimum unrestricted cash balance in the United States of at least $10.0 million at the inception of the Term Loan, which decreased starting November 1, 2012 and monthly thereafter by the amount of principal paid. The events of default under the Term Loan include, but are not limited to, failure to pay amounts due, breaches of covenants, bankruptcy events, cross defaults under other material indebtedness and the occurrence of a material adverse effect and/or change in control. In the case of a continuing event of default, Hercules may, among other remedies, declare due all unpaid principal amounts outstanding and any accrued but unpaid interest and foreclose on all collateral granted to Hercules as security under the Term Loan.

Although the Company believes that it is in and expects to remain in compliance with the covenants and restrictions under the Exchanged Notes and Term Loan as of the date of this Quarterly Report on Form 10-Q, there can be no assurance that the Company will continue to be in compliance.

Interest expense on the Exchanged Note and Term Loan for the three and six months ended September 30, 2013 was $3.5 million and $5.6 million, respectively, which included $3.1 million and $4.8 million, respectively, of non-cash interest expense related to the amortization of the debt discount on the Exchanged Note and Term Loan and payment of the Exchanged Note in Company common stock at a discount. Interest expense on the Exchanged Note and Term Loan for the three and six months ended September 30, 2012 was $3.0 million, and $5.7 million, respectively, which included $2.3 million and $4.4 million, of non-cash interest expense related to the amortization of the debt discount on the Exchanged Note and Term Loan, respectively.

   

 

 17 


11. Warrants and Derivative Liabilities

Senior Convertible Note Warrant

On April 4, 2012, the Company entered into a Purchase Agreement for the Initial Note and on December 20, 2012, the Company entered into the Amendment pursuant to which it exchanged the Initial Note for the Exchanged Note, as described in Note 10. The Initial Note included a warrant to purchase 3,094,060 shares of the Company’s common stock. The warrant is exercisable at any time on or after the date that is six months after the issuance of the warrant and entitles CVI to purchase shares of the Company’s common stock for a period of five years from the initial date the warrant becomes exercisable at a price equal to $5.45 per share, subject to certain price-based and other anti-dilution adjustments. The warrant may not be exercised if, after giving effect to the conversion, CVI together with its affiliates would beneficially own in excess of 4.99% of the Company’s common stock. This percentage may be raised to any other percentage not in excess of 9.99% at the option of CVI, upon at least 61-days prior notice to the Company, or lowered to any other percentage, at the option of CVI, at any time.

The Company calculated the fair value of the derivative liabilities, as further described in Note 10 “Debt”, and warrants utilizing an integrated lattice model. The lattice model is an option pricing model that involves the construction of a binomial tree to show the different paths that the underlying asset may take over the option’s life. A lattice model can take into account expected changes in various parameters such as volatility over the life of the options, providing more accurate estimates of option prices than the Black-Scholes model.

The Company accounts for the warrant as a liability due to certain adjustment provisions within the warrant, which requires that it be recorded at fair value. The warrant is subject to revaluation at each balance sheet date and any change in fair value will be recorded as a change in fair value in other income (expense) until the earlier of expiration or its exercise at which time the warrant liability will be reclassified to equity.

Following is a summary of the key assumptions used to calculate the fair value of the warrant:

   

 

Fiscal Year 2013

September 30,
2013

   

   

June 30,
2013

   

Risk-free interest rate

   

1.02

   

   

1.13

Expected annual dividend yield

   

—  

   

   

—  

Expected volatility

   

72.0

   

   

71.9

Term (years)

   

4.01

      

   

   

4.27

      

Fair value

$

2.5 million

      

   

$

 3.0 million

      

   

 

Fiscal Year 2012

March 31,
2013

   

   

December 31,
2012

   

   

September 30,
2012

   

   

June 30,
2012

   

   

April 4,
2012

   

Risk-free interest rate

   

0.67

   

   

0.75

   

   

0.63

   

   

0.77

   

   

1.19

Expected annual dividend yield

   

—  

   

   

—  

   

   

—  

   

   

—  

   

   

—  

Expected volatility

   

71.7

   

   

80.6

   

   

80.9

   

   

80.8

   

   

80.0

Term (years)

   

4.51

      

   

   

4.76