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: December 31, 2014

¨

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

 

95,722,127

Class

 

Outstanding as of February 2, 2015

 

 

 

 

 


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

40

 

 

 

 

Item 4.

  

Controls and Procedures

40

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

Item 1.

  

Legal Proceedings

41

 

 

 

 

Item 1A.

  

Risk Factors

43

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

 

Item 3.

  

Defaults Upon Senior Securities

43

 

 

 

 

Item 4.

  

Mine Safety Disclosure

43

 

 

 

 

Item 5.

  

Other Information

44

 

 

 

 

Item 6.

  

Exhibits

44

 

 

Signature

45

 

 

 

2


AMERICAN SUPERCONDUCTOR CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

December 31,

 

 

March 31,

 

 

2014

 

 

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

     Cash and cash equivalents

$

35,983

 

 

$

43,114

 

     Accounts receivable, net

 

10,778

 

 

 

7,556

 

     Inventory

 

26,536

 

 

 

20,694

 

     Prepaid expenses and other current assets

 

11,705

 

 

 

9,004

 

     Restricted cash

 

1,508

 

 

 

2,913

 

          Total current assets

 

86,510

 

 

 

83,281

 

 

 

 

 

 

 

 

 

     Property, plant and equipment, net

 

58,257

 

 

 

64,574

 

     Intangibles, net

 

1,565

 

 

 

1,995

 

     Restricted cash

 

100

 

 

 

3,394

 

     Deferred tax assets

 

7,724

 

 

 

7,724

 

     Other assets

 

2,833

 

 

 

7,541

 

 

 

 

 

 

 

 

 

          Total assets

$

156,989

 

 

$

168,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

24,805

 

 

$

21,764

 

Accrued arbitration liability

 

10,323

 

 

 

-

 

Note payable, current portion, net of discount of $306 as of December 31, 2014 and $555 as of March 31, 2014

 

3,694

 

 

 

6,240

 

Derivative liabilities

 

3,914

 

 

 

2,601

 

Deferred revenue

 

15,385

 

 

 

9,456

 

Deferred tax liabilities

 

7,724

 

 

 

7,761

 

          Total current liabilities

 

65,845

 

 

 

47,822

 

 

 

 

 

 

 

 

 

Note payable, net of discount of $298 as of December 31, 2014 and $287 as of March 31, 2014

 

4,868

 

 

 

6,380

 

Deferred revenue

 

2,906

 

 

 

990

 

Other liabilities

 

895

 

 

 

1,058

 

          Total liabilities

 

74,514

 

 

 

56,250

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock

 

961

 

 

 

789

 

Additional paid-in capital

 

983,406

 

 

 

966,390

 

Treasury stock

 

(771

)

 

 

(370

)

Accumulated other comprehensive income

 

560

 

 

 

1,839

 

Accumulated deficit

 

(901,681

)

 

 

(856,389

)

           Total stockholders' equity

 

82,475

 

 

 

112,259

 

 

 

 

 

 

 

 

 

           Total liabilities and stockholders' equity

$

156,989

 

 

$

168,509

 

 

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 December 31,

 

 

 

Nine months ended December 31,

 

 

2014

 

 

2013

 

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

21,250

 

 

$

20,563

 

 

 

$

45,401

 

 

$

67,830

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Cost of revenues

 

18,094

 

 

 

15,863

 

 

 

 

43,953

 

 

 

56,461

 

   Research and development

 

2,795

 

 

 

2,951

 

 

 

 

8,993

 

 

 

9,061

 

   Selling, general and administrative

 

7,550

 

 

 

8,232

 

 

 

 

23,534

 

 

 

27,741

 

   Arbitration award expense

 

-

 

 

 

-

 

 

 

 

10,188

 

 

 

-

 

   Restructuring and impairments

 

507

 

 

 

108

 

 

 

 

5,416

 

 

 

872

 

   Amortization of acquisition related intangibles

 

39

 

 

 

84

 

 

 

 

118

 

 

 

247

 

      Total cost and operating expenses

 

28,985

 

 

 

27,238

 

 

 

 

92,202

 

 

 

94,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(7,735

)

 

 

(6,675

)

 

 

 

(46,801

)

 

 

(26,552

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives and warrants

 

2,288

 

 

 

535

 

 

 

 

3,048

 

 

 

1,890

 

Interest expense, net

 

(525

)

 

 

(1,634

)

 

 

 

(1,555

)

 

 

(7,250

)

Other (expense) income, net

 

(209

)

 

 

(341

)

 

 

 

379

 

 

 

(908

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax expense

 

(6,181

)

 

 

(8,115

)

 

 

 

(44,929

)

 

 

(32,820

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

172

 

 

 

302

 

 

 

 

363

 

 

 

733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(6,353

)

 

$

(8,417

)

 

 

$

(45,292

)

 

$

(33,553

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

$

(0.07

)

 

$

(0.14

)

 

 

$

(0.55

)

 

$

(0.55

)

   Diluted

$

(0.07

)

 

$

(0.14

)

 

 

$

(0.55

)

 

$

(0.55

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Basic

 

87,645

 

 

 

62,309

 

 

 

 

82,284

 

 

 

60,578

 

   Diluted

 

87,645

 

 

 

62,309

 

 

 

 

82,284

 

 

 

60,578

 

 

  

 

 

 

 

 

 

 

 

 

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 December 31,

 

 

Nine months ended December 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(6,353

)

 

$

(8,417

)

 

$

(45,292

)

 

$

(33,553

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Foreign currency translation (losses) gains

 

(188

)

 

 

358

 

 

 

(1,279

)

 

 

1,015

 

Total other comprehensive (loss) income, net of tax

 

(188

)

 

 

358

 

 

 

(1,279

)

 

 

1,015

 

Comprehensive loss

$

(6,541

)

 

$

(8,059

)

 

$

(46,571

)

 

$

(32,538

)

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

Nine months ended December 31,

 

 

 

2014

 

 

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

   Net loss

$

(45,292

)

 

$

(33,553

)

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

 

 

 

 

 

 

 

      Depreciation and amortization

 

7,298

 

 

 

8,052

 

      Stock-based compensation expense

 

4,620

 

 

 

7,328

 

      Impairment of long-lived and intangible assets

 

3,464

 

 

 

-

 

      Provision for excess and obsolete inventory

 

1,401

 

 

 

287

 

Loss on minority interest investments

 

644

 

 

 

789

 

Change in fair value of derivatives and warrants

 

(3,048

)

 

 

(1,890

)

Non-cash interest expense

 

490

 

 

 

5,902

 

Other non-cash items

 

(838

)

 

 

1,181

 

Changes in operating asset and liability accounts:

 

 

 

 

 

 

 

         Accounts receivable

 

(3,434

)

 

 

10,414

 

         Inventory

 

(7,598

)

 

 

8,682

 

         Prepaid expenses and other current assets

 

(3,072

)

 

 

3,462

 

         Accounts payable and accrued expenses

 

5,694

 

 

 

(8,445

)

         Accrued arbitration liability

 

10,328

 

 

 

-

 

         Deferred revenue

 

8,409

 

 

 

(20,575

)

   Net cash used in operating activities

 

(20,934

)

 

 

(18,366

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

      Purchase of property, plant and equipment

 

(681

)

 

 

(223

)

      Proceeds from the sale of property, plant and equipment

 

20

 

 

 

60

 

      Change in restricted cash

 

4,700

 

 

 

4,670

 

      Change in other assets

 

316

 

 

 

(109

)

   Net cash provided by investing activities

 

4,355

 

 

 

4,398

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

      Employee taxes paid related to net settlement of equity awards

 

(400

)

 

 

(57

)

      Proceeds from the issuance of debt, net of expenses

 

1,429

 

 

 

9,838

 

      Repayment of debt

 

(6,295

)

 

 

(3,462

)

      Proceeds from ATM sales, net

 

5,839

 

 

 

3,332

 

      Proceeds from stock offering

 

9,114

 

 

 

-

 

      Proceeds from exercise of employee stock options and ESPP

 

60

 

 

 

99

 

   Net cash provided by financing activities

 

9,747

 

 

 

9,750

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(299

)

 

 

369

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(7,131

)

 

 

(3,849

)

Cash and cash equivalents at beginning of year

 

43,114

 

 

 

39,243

 

Cash and cash equivalents at end of year

$

35,983

 

 

$

35,394

 

 

 

 

 

 

 

 

 

Supplemental schedule of cash flow information:

 

 

 

 

 

 

 

      Cash paid for income taxes, net of refunds

$

362

 

 

$

-

 

      Issuance of common stock to settle liabilities

 

1,623

 

 

 

7,931

 

     Cash paid for interest

 

937

 

 

 

599

 

 

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 December 31, 2014 and 2013 and the financial position at December 31, 2014.

Liquidity

The Company has experienced recurring operating losses and as of December 31, 2014, the Company had an accumulated deficit of $901.7 million. In addition, the Company has experienced recurring negative operating cash flows.  At December 31, 2014, the Company had cash and cash equivalents of $36.0 million. Cash used in operations for the nine months ended December 31, 2014 was $20.9 million.  

On August 29, 2014, the Arbitration Tribunal for the ICC International Court of Arbitration (the “ICC Court”) found the Company’s wholly-owned Austrian subsidiary, AMSC Austria GmbH (“AMSC Austria”) liable for damages in its breach of contract proceeding against Ghodawat Energy Pvt Ltd (“Ghodawat”) and awarded Ghodawat approximately €8.3 million (approximately $10.1 million) plus interest of 5.33%, which accrues from the date of award.  On February 4, 2015, AMSC Austria entered into a Settlement Agreement with Ghodawat, which provided for, among other things, (i) a payment by AMSC Austria to Ghodawat of €7.45 million (approximately $8.5 million), and (ii) upon payment by AMSC Austria to Ghodawat, the full settlement of any and all disputes and claims between the parties (including their respective parent and affiliated companies), in particular related to or arising out of the award.  As of the date of this filing, the Company has not paid this award, but expects to pay the settlement amount during the fourth quarter of fiscal 2014.  See Note 13, “Commitments and Contingencies” for further information.

From April 1, 2011 through the date of this filing, the Company has reduced its global workforce substantially.  The Company is currently in the process of consolidating certain business operations to reduce facility costs.  As of December 31, 2014, the Company had a global workforce of approximately 303 persons.  The Company plans to closely monitor its expenses and if required, expects to further reduce operating costs and capital spending to enhance liquidity.

On June 5, 2012, the Company entered into a Loan and Security Agreement (the “Term Loan”) with Hercules Technology Growth Capital, Inc (“Hercules”), under which the Company borrowed $10.0 million.  As of December 31, 2014, this loan was repaid in full.  On November 15, 2013, the Company entered into an amendment of the Term Loan (the “New Term Loan B”, under which the Company borrowed an additional $10.0 million.  On December 19, 2014, the Company entered into a second amendment of the Term Loan, (the “New Term Loan C”) and together with the Term Loan and the New Term Loan B, the “Term Loans”), under which the Company borrowed an additional $1.5 million.  As of December 31, 2014, the outstanding principal balance of the Term Loans is approximately $9.2 million.  The Term Loans contain certain covenants and restrictions including, among others, a requirement to maintain a minimum unrestricted cash balance in the U.S. equal to the lesser of a minimum threshold or the remaining principal balance of the Term Loans.  (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 December 31, 2014.

7


On November 15, 2013, the Company entered into an At Market Sales Arrangement (“ATM”) under which the Company could, at its discretion, sell up to $30.0 million of shares of its common stock (before expenses) through its sales agent, MLV & Co. LLC (“MLV”).  During the three months ended December 31, 2014, the Company received net proceeds of $1.0 million, including sales and commissions and offering expenses, from sales of approximately 0.8 million shares of its common stock at an average sales price of approximately $1.22 per share under the ATM. (See Note 12, “Stockholders’ Equity”, for further information regarding the ATM.)   On November 5, 2014, the Company terminated the ATM arrangement in connection with an equity offering (see further discussion below).

On November 13, 2014, the Company completed an offering of approximately 9.1 million units of its common stock to a single investor at a price of $1.10 per share.  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 8.2 million shares.  After deducting fees and expenses, the net proceeds from this offering were approximately $9.1 million.  (See Note 12, “Stockholders Equity” for further discussion regarding this offering.)

As a result of the financings completed during the three months ended December 31, 2014, the Company believes it has sufficient liquidity to fund its operations, including the Ghodawat arbitration award liability, capital expenditures and scheduled cash payments under its debt obligations through December 31, 2015. The Company’s liquidity is highly dependent on, its ability to increase revenues, its ability to control its operating costs, its ability to maintain compliance with the covenants and restrictions on its debt obligations (or obtain waivers from its lender in the event of non-compliance), 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 from other sources or execute on any other means of improving liquidity described above.

In addition, the Company is actively seeking to sell its minority investment in Tres Amigas, LLC, a Delaware limited liability Company (“Tres Amigas”).  The Company no longer believes its investment in Blade Dynamics is recoverable and fully impaired its remaining investment in Blade Dynamics Ltd. (“Blade Dynamics”) during the three months ended September 30, 2014. (See Note 14, “Minority Investments”, for further information about such investments.) There can be no assurance that the Company will be able to sell these investments on commercially reasonable terms or at all.

 

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 nine months ended December 31, 2014 and 2013 (in thousands):

 

 

Three months ended December 31,

 

 

Nine months ended December 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Cost of revenues

$

186

 

 

$

330

 

 

$

533

 

 

$

758

 

Research and development

 

419

 

 

 

913

 

 

 

1,418

 

 

 

2,073

 

Selling, general and administrative

 

916

 

 

 

1,797

 

 

 

2,669

 

 

 

4,497

 

Total

$

1,521

 

 

$

3,040

 

 

$

4,620

 

 

$

7,328

 

 

During the nine months ended December 31, 2014, the Company granted 1,000,000 stock options, and approximately 3,243,000 restricted stock awards. During the nine months ended December 31, 2013, the Company granted approximately 831,000 stock options, 1,307,000 time-based restricted stock awards, 362,000 performance-based restricted stock awards, and issued 212,000 shares of common stock in-lieu of cash bonuses and severance payments issued. The stock options vest generally over 3-5 years, and the time-based restricted stock awards vest generally over three 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 based on probability of achievement.

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 $1.5 million at December 31, 2014. This expense will be recognized over a weighted average expense period of approximately 3.0 years. The total unrecognized compensation cost for unvested outstanding restricted stock was $3.7 million at December 31, 2014. This expense will be recognized over a weighted-average expense period of approximately 1.4 years.

The weighted-average assumptions used in the Black-Scholes valuation model for stock options granted during the three and nine months ended December 31, 2014 and 2013 are as follows:

8


 

 

Three months ended December 31,

 

Nine months ended December 31,

 

 

2014

 

2013

 

2014

 

 

2013

 

Expected volatility

N/A

 

N/A

 

 

85.5

%

 

 

75.1

%

Risk-free interest rate

N/A

 

N/A

 

 

1.9

%

 

 

1.7

%

Expected life (years)

N/A

 

N/A

 

 

5.8

 

 

 

5.9

 

Dividend yield

N/A

 

N/A

 

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.  

 

 

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 nine months ended December 31, 2014, 15.7 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 3.8 million relate to unexercised stock options, and 11.9 million relate to outstanding warrants. For each of the three and nine months ended December 31, 2013, 10.1 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, 3.5 million relate to outstanding warrants and 3.4 million shares relate to the number of shares underlying the Company’s unsecured, senior convertible note (the “Exchanged Note”).

The following table reconciles the numerators and denominators of the earnings per share calculation for the three and nine months ended December 31, 2014 and 2013 (in thousands, except per share data):

 

 

Three months ended December 31,

 

 

Nine months ended December 31,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Net loss

$

(6,353

)

 

$

(8,417

)

 

$

(45,292

)

 

$

(33,553

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock outstanding

 

91,054

 

 

 

64,442

 

 

 

83,263

 

 

 

62,256

 

Weighted-average shares subject to repurchase

 

(3,409

)

 

 

(2,133

)

 

 

(979

)

 

 

(1,678

)

Shares used in per-share calculation ― basic

 

87,645

 

 

 

62,309

 

 

 

82,284

 

 

 

60,578

 

Shares used in per-share calculation ― diluted

 

87,645

 

 

 

62,309

 

 

 

82,284

 

 

 

60,578

 

Net loss per share ― basic

$

(0.07

)

 

$

(0.14

)

 

$

(0.55

)

 

$

(0.55

)

Net loss per share ― diluted

$

(0.07

)

 

$

(0.14

)

 

$

(0.55

)

 

$

(0.55

)

 

4. 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.

9


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 between Level 1 and Level 3 of the fair value measurement hierarchy during the three or nine months ended December 31, 2014.

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, measured as of December 31, 2014 and March 31, 2014 (in thousands):

 

 

Total

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

Carrying

 

 

Active Markets

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

22,516

 

 

$

22,516

 

 

$

-

 

 

$

-

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

$

3,914

 

 

$

-

 

 

$

-

 

 

$

3,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

Carrying

 

 

Active Markets

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

$

17,675

 

 

$

17,675

 

 

$

-

 

 

$

-

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

$

2,601

 

 

$

-

 

 

$

-

 

 

$

2,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Warrants

 

April  1, 2014

 

 

 

 

$

2,601

 

Warrant issuance with Equity Raise

 

 

 

 

 

4,255

 

Warrant issuance with Senior Secured Term Loan

 

 

 

 

 

106

 

Mark to market adjustment

 

 

 

 

 

(3,048

)

Balance at December 31, 2014

 

 

 

 

$

3,914

 

 

 

 

 

 

 

 

 

 

Derivative

 

 

 

 

 

 

Liability

 

 

Warrants

 

April  1, 2013

$

529

 

 

$

3,633

 

Warrant issuance with Senior Secured Term Loan

 

-

 

 

 

315

 

Mark to market adjustment

 

(525

)

 

 

(1,347

)

Extinguishment of derivative liability

 

(4

)

 

 

-

 

Balance at March 31, 2014

$

-

 

 

$

2,601

 

 

10


The following table provides the assets and liabilities measured at fair value on a non-recurring basis, as of December 31, 2014 and March 31, 2014 (in thousands).  During the three months ended September 30, 2014 the following asset was determined to be no longer recoverable and was fully impaired.  See note 14, “Minority Investments” for further details:

 

 

Total

 

 

Quoted Prices in

 

 

Significant Other

 

 

Significant

 

 

Carrying

 

 

Active Markets

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in unconsolidated entity – Blade Dynamics

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in unconsolidated entity – Blade Dynamics

$

3,690

 

 

$

-

 

 

$

-

 

 

$

3,690

 

 

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.

Derivative Liability

In April 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Capital Ventures International (“CVI”), an affiliate of Heights Capital Management, under which the Company issued a $25.0 million, 7% convertible note (the “Initial Note”).  In December 2012, the Company entered into an agreement with CVI pursuant to which it exchanged the Initial Note for the Exchanged Note.  The Exchanged Note was extinguished as of March 31, 2014.  The Company had identified all of the derivatives (“Derivative Liability”) associated with the extinguished Exchanged Note which include holder change of control redemption rights, issuer optional redemption rights, sale redemption rights and a feature to convert the Exchanged Note into equity at the holder’s option.  The Derivative Liability was subject to revaluation at each balance sheet date, and any change in fair value was recorded as a change in fair value in derivatives and warrants until its expiration.  The Company relied on assumptions in a lattice model to determine the fair value of Derivative Liability.  The Company had valued the Derivative Liability within Level 3 of the valuation hierarchy.  (See Note 10, “Debt,” for further discussion of the Exchanged Note, Derivative Liability and valuation assumptions used.)

Warrants

Warrants were issued in conjunction with the Purchase Agreement with CVI, the equity offering to a single investor in November 2014, and the Term Loans. (See Note 10, “Debt,” and Note 11 “Warrants and Derivative Liabilities,” for additional information.) 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 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 11, “Warrants and Derivative Liabilities,” for a discussion of the warrants and the valuation assumptions used.)

Minority Investment

The Company accounts for the minority investment in Blade Dynamics on a cost basis (See Note 14, “Minority Investments”).  During the year ended March 31, 2014, the Company determined that as a result of its efforts to sell its investment in Blade Dynamics, certain indicators of impairment existed which required the Company to perform further analysis. Based on analysis which included potential sale scenarios of the investment, the Company recorded an impairment charge of approximately $1.3 million and reported the investment at its estimated fair value in the fourth quarter ended March 31, 2014.

During the three months ended September 30, 2014, the Company determined that as a result of a dilutive financing which resulted in the Company losing certain of its shareholder rights, as well as certain operational issues and adverse changes to the potential sale scenarios previously considered, its investment in Blade Dynamics was no longer recoverable and therefore recorded a charge of $3.5 million to fully impair the investment.

11


 

5. Accounts Receivable

Accounts receivable at December 31, 2014 and March 31, 2014 consisted of the following (in thousands):

 

 

December 31,

 

 

March 31,

 

 

2014

 

 

2014

 

Accounts receivable (billed)

$

10,401

 

 

$

6,113

 

Accounts receivable (unbilled)

 

393

 

 

 

1,459

 

Less: Allowance for doubtful accounts

 

(16

)

 

 

(16

)

   Accounts receivable, net

$

10,778

 

 

$

7,556

 

 

 

6. Inventory

Inventory at December 31, 2014 and March 31, 2014 consisted of the following (in thousands):

 

 

December 31,

 

 

March 31,

 

 

2014

 

 

2014

 

Raw materials

$

8,107

 

 

$

3,304

 

Work-in-process

 

6,344

 

 

 

4,047

 

Finished goods

 

9,450

 

 

 

10,275

 

Deferred program costs

 

2,635

 

 

 

3,068

 

   Net inventory

$

26,536

 

 

$

20,694

 

 

The Company recorded inventory write-downs of $0.1 million and less than $0.1 million for the three months ended December 31, 2014 and 2013, respectively.  The Company recorded inventory write-downs of $1.4 million and $0.3 million for the nine months ended December 31, 2014 and 2013, respectively.  These write downs were based on evaluating its inventory on hand for excess quantities and obsolescence.

Deferred program costs as of December 31, 2014 and March 31, 2014 primarily represent costs incurred on programs accounted for under contract accounting where the Company needs to complete development milestones before revenue and costs will be recognized.

 

7. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at December 31, 2014 and March 31, 2014 consisted of the following (in thousands):

 

 

December 31,

 

 

March 31,

 

 

2014

 

 

2014

 

Accounts payable

$

7,735

 

 

$

1,749

 

Accrued inventories in-transit

 

1,811

 

 

 

212

 

Accrued miscellaneous expenses

 

3,711

 

 

 

6,076

 

Accrued outside services

 

2,914

 

 

 

3,716

 

Accrued subcontractor program costs

 

60