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 June 30, 2015 and 2014 and the financial position at June 30, 2015.

On March 24, 2015, the Company effected a 1-for-10 reverse stock split of its common stock. Trading of the Company’s common stock reflected the reverse stock split beginning on March 25, 2015. Unless otherwise indicated, all historical references to shares of common stock, shares of restricted stock, restricted units, shares underlying options, warrants or calculations that use common stock for per share financial reporting have been adjusted for comparative purposes to reflect the impact of the 1-for-10 reverse stock split as if it had occurred at the beginning of the earliest period presented.

Liquidity

The Company has experienced recurring operating losses and as of June 30, 2015, the Company had an accumulated deficit of $914.2 million. In addition, the Company has experienced recurring negative operating cash flows.  At June 30, 2015, the Company had cash and cash equivalents of $38.6 million. Cash used in operations for the three months ended June 30, 2015 was $3.0 million.

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 June 30, 2015, the Company had a global workforce of 308 persons.  The Company plans to closely monitor its expenses and if required, expects to further reduce operating costs and capital spending to enhance liquidity.

Over the last several years, the Company has entered into several debt and equity financing arrangements in order to enhance liquidity.  Since April 1, 2012, the Company has generated aggregate cash flows from financing activities of $74.0 million.  This amount includes proceeds from an April 2015 equity offering, which generated net proceeds of approximately $22.3 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.  See Note 10, “Debt”, and Note 12 “Stockholders Equity” for further discussion of these financing arrangements. The Company believes that it is in compliance with the covenants and restrictions included in the agreements governing its debt arrangements as of June 30, 2015.

The Company believes it has sufficient liquidity to fund its operations, capital expenditures and scheduled cash payments under its debt obligations for the next twelve months. 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.

The Company no longer believes its investments in Tres Amigas, LLC, a Delaware limited liability company (“Tres Amigas”) or Blade Dynamics Ltd. (“Blade Dynamics”) are recoverable.  The Company fully impaired its remaining investments in both, recording a charge of $0.7 million during the three months ended June 30, 2015 for Tres Amigas and $3.5 million in the three months ended September 30, 2014 for Blade Dynamics. (See Note 14, “Minority Investments”, for further information about such investments).

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 months ended June 30, 2015 and 2014 (in thousands):

During the three months ended June 30, 2015, the Company granted 364,695 restricted stock awards.  These awards generally vest over 3 years.  During the three months ended June 30, 2014, the Company granted approximately 100,000 stock options and 97,233 restricted stock awards.  The stock options vest over 5 years, and the restricted stock awards vest over one year. 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 $1.0 million at June 30, 2015. This expense will be recognized over a weighted average expense period of approximately 2.8 years. The total unrecognized compensation cost for unvested outstanding restricted stock was $3.9 million at June 30, 2015. This expense will be recognized over a weighted-average expense period of approximately 2.5 years.

The weighted-average assumptions used in the Black-Scholes valuation model for stock options granted during the three months ended June 30, 2015 and 2014 are as follows:

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 the three months ended June 30, 2015, 1.6 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 0.4 million relate to unexercised stock options, and 1.2 million relate to outstanding warrants. For the three months ended June 30, 2014, 0.7 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 0.4 million relate to unvested stock options, and 0.3 million relate to outstanding warrants.

The following table reconciles the numerators and denominators of the earnings per share calculation for the three months ended June 30, 2015 and 2014 (in thousands, except per share data):

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:

The Company provides a gross presentation of activity within Level 3 measurement roll-forward and details of transfers in and out of Level 1 and 2 measurements.  A change in the hierarchy of an investment from its current level is reflected in the period during which the pricing methodology of such investment changes.  Disclosure of the transfer of securities from Level 1 to Level 2 or Level 3 is made in the event that the related security is significant to total cash and investments.  The Company did not have any transfers of assets and liabilities from Level 1 and Level 2 to Level 3 of the fair value measurement hierarchy during the three months ended June 30, 2015.

A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value on a recurring basis, measured as of June 30, 2015 and March 31, 2015 (in thousands):

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

The following table provides the assets and liabilities measured at fair value on a non-recurring basis, as of June 30, 2015.  During the three months ended June 30, 2015 the Company’s investment in Tres Amigas was determined to be no longer recoverable and was fully impaired.  See note 14, “Minority Investments” for further details:

Valuation Techniques

Cash Equivalents

Cash equivalents consist of highly liquid instruments with maturities of three months or less that are regarded as high quality, low risk investments and are measured using such inputs as quoted prices, and are classified within Level 1 of the valuation hierarchy. Cash equivalents consist principally of certificates of deposits and money market accounts.

Warrants

Warrants were issued in conjunction with a Securities Purchase Agreement (the “Purchase Agreement”) with Capital Ventures International (“CVI”), an equity offering to Hudson Bay Capital in November 2014, and a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (“Hercules”). (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 Tres Amigas on the equity basis (See Note 14, “Minority Investments”).  During the three months ended June 30, 2015, the Company determined that as a result of delays in Tres Amigas securing financing for the project as well as the Company’s projected recovery of its investment based on recent adverse market indicators for potential sales of the Company’s share of the investment, that its investment in Tres Amigas was no longer recoverable and therefore recorded an impairment charge of $0.7 million.

5. Accounts Receivable

Accounts receivable at June 30, 2015 and March 31, 2015 consisted of the following (in thousands):

6. Inventory

Inventory at June 30, 2015 and March 31, 2015 consisted of the following (in thousands):

The Company recorded inventory write-downs of $0.6 million for each of the three months ended June 30, 2015 and 2014.  These write downs were based on evaluating its inventory on hand for excess quantities and obsolescence.

Deferred program costs as of June 30, 2015 and March 31, 2015 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 June 30, 2015 and March 31, 2015 consisted of the following (in thousands):

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):

8. Income Taxes

The Company recorded income tax expense of $0.6 million and $0.1 million for the three months ended June 30, 2015, and 2014, respectively.  Income tax expense was primarily due to income taxes in the Company’s foreign jurisdictions.