amsc20190617_10q.htm
 

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

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

For the quarterly period ended December 31, 2019

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

For the transition period from _____ to _____.

Commission File Number: 0-19672

 


American Superconductor Corporation

(Exact name of registrant as specified in its charter)

 


 

Delaware

04-2959321

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

114 East Main St. Ayer, Massachusetts

01432

(Address of principal executive offices)

(Zip Code)

 

(978) 842-3000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock,
$0.01 par value per share

AMSC

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes  ☒    No  ☐

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

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

Smaller reporting company ☒

 

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Shares outstanding of the Registrant’s common stock:

 

Common Stock, par value $0.01 per share

 

22,556,538

Class

 

Outstanding as of January 31, 2020

 



 

 

 

 

 

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

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 3.

Defaults Upon Senior Securities

31

 

 

 

Item 4.

Mine Safety Disclosure

31

 

 

 

Item 5.

Other Information

31

 

 

 

Item 6.

Exhibits

32

 

 

 

Signature

 

33

 

2

 

 

 

AMERICAN SUPERCONDUCTOR CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

   

December 31, 2019

   

March 31, 2019

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 25,481     $ 77,483  
Marketable securities     25,000       0  

Accounts receivable, net

    16,491       7,855  

Inventory

    18,591       12,119  

Note receivable, current portion

    0       2,888  

Prepaid expenses and other current assets

    3,704       3,053  

Total current assets

    89,267       103,398  
                 
Marketable securities     10,047       0  

Property, plant and equipment, net

    8,840       8,972  

Intangibles, net

    2,635       2,890  
Right-of-use asset     3,495       0  

Goodwill

    1,719       1,719  

Restricted cash

    5,754       715  

Deferred tax assets

    1,373       1,357  

Other assets

    361       279  

Total assets

  $ 123,491     $ 119,330  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable and accrued expenses

  $ 19,379     $ 15,885  
Lease liability, current portion     436       0  

Derivative liabilities

    (0 )     4,942  

Deferred revenue, current portion

    15,220       7,557  

Total current liabilities

    35,035       28,384  
                 

Deferred revenue, long term portion

    7,923       7,962  
Lease liability, long term portion     3,128       0  

Deferred tax liabilities

    175       1,698  

Other liabilities

    42       93  

Total liabilities

    46,303       38,137  
                 

Commitments and contingencies (Note 15)

               
                 

Stockholders' equity:

               

Common stock

    228       216  

Additional paid-in capital

    1,052,621       1,044,622  

Treasury stock

    (2,666 )     (2,101 )

Accumulated other comprehensive loss

    (247 )     (5 )

Accumulated deficit

    (972,748 )     (961,539 )

Total stockholders' equity

    77,188       81,193  

Total liabilities and stockholders' equity

  $ 123,491     $ 119,330  

 

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

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2019

   

2018

   

2019

   

2018

 

Revenues

  $ 17,915     $ 14,134     $ 45,697     $ 41,618  
                                 

Cost of revenues

    16,329       10,398       38,770       30,364  
                                 

Gross margin

    1,586       3,736       6,927       11,254  
                                 

Operating expenses:

                               

Research and development

    2,049       2,470       6,920       7,573  

Selling, general and administrative

    6,071       5,347       16,726       16,308  

Amortization of acquisition-related intangibles

    85       85       255       255  

Restructuring

    0       47       0       450  

Gain on Sinovel settlement, net

    0       (24,978 )     0       (53,698 )

Total operating expenses

    8,205       (17,029 )     23,901       (29,112 )
                                 

Operating (loss) income

    (6,619 )     20,765       (16,974 )     40,366  
                                 

Change in fair value of warrants

    556       (2,475 )     4,648       (2,658 )
Gain on sale of minority interest     0       127       0       127  

Interest income, net

    262       336       1,101       769  

Other (expense) income, net

    (932 )     124       45       1,058  

(Loss) income before income tax expense

    (6,733 )     18,877       (11,180 )     39,662  
                                 

Income tax expense

    112       1,584       29       4,548  
                                 

Net (loss) income

  $ (6,845 )   $ 17,293     $ (11,209 )   $ 35,114  
                                 

Net (loss) income per common share

                               

Basic

  $ (0.32 )   $ 0.85     $ (0.54 )   $ 1.73  

Diluted

  $ (0.35 )   $ 0.83     $ (0.75 )   $ 1.71  
                                 

Weighted average number of common shares outstanding

                               

Basic

    21,185       20,419       20,786       20,300  

Diluted

    21,203       20,864       20,894       20,538  

 

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

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2019

   

2018

   

2019

   

2018

 

Net (loss) income

  $ (6,845 )   $ 17,293     $ (11,209 )   $ 35,114  

Other comprehensive loss, net of tax:

                               

Foreign currency translation (loss) gain

    609       (54 )     (242 )     (948 )

Total other comprehensive (loss) income, net of tax

    609       (54 )     (242 )     (948 )

Comprehensive (loss) income

  $ (6,236 )   $ 17,239     $ (11,451 )   $ 34,166  

 

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

 

5

 

 

 

AMERICAN SUPERCONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2019 AND 2018

 

(In thousands)

 

   

Common Stock

   

Additional

           

Accumulated Other

           

Total

 
   

Number of Shares

   

Par Value

   

Paid-in Capital

   

Treasury Stock

   

Comprehensive Income (Loss)

   

Accumulated Deficit

   

Stockholders' Equity

 

Balance at March 31, 2019

    21,652     $ 216     $ 1,044,622     $ (2,101 )   $ (5 )   $ (961,539 )   $ 81,193  

Issuance of common stock - restricted shares

    174       2       (2 )                        

Stock-based compensation expense

                249                         249  

Issuance of stock for 401(k) match

    8             81                         81  

Issuance of common stock - warrant exercise

    23             294                         294  

Repurchase of treasury stock

                      (283 )                 (283 )

Cumulative translation adjustment

                            418             418  

Net loss

                                  (3,539 )     (3,539 )

Balance at June 30, 2019

    21,857     $ 218     $ 1,045,244     $ (2,384 )   $ 413     $ (965,078 )   $ 78,413  

Issuance of common stock - ESPP

    15             100                         100  

Issuance of common stock - restricted shares

    10                                      

Stock-based compensation expense

                397                         397  

Issuance of stock for 401(k) match

    12             92                         92  

Issuance of common stock - warrant exercise

                                        0  

Repurchase of treasury stock

                      (222 )                 (222 )

Cumulative translation adjustment

                            (1,269 )           (1,269 )

Net loss

                                  (825 )     (825 )

Balance at September 30, 2019

    21,894     $ 218     $ 1,045,833     $ (2,606 )   $ (856 )   $ (965,903 )   $ 76,686  

Issuance of common stock - restricted shares

    167       2       (2 )                        

Stock-based compensation expense

                590                         590  

Issuance of stock for 401(k) match

    8             69                         69  

Issuance of common stock - warrant exercise

    786       8       6,131                         6,139  

Repurchase of treasury stock

                      (60 )                 (60 )

Cumulative translation adjustment

                            609             609  

Net loss

                                  (6,845 )     (6,845 )

Balance at December 31, 2019

    22,855       228       1,052,621       (2,666 )     (247 )     (972,748 )     77,188  

 

   

Common Stock

   

Additional

           

Accumulated Other

           

Total

 
   

Number of Shares

   

Par Value

   

Paid-in Capital

   

Treasury Stock

   

Comprehensive Income (Loss)

   

Accumulated Deficit

   

Stockholders' Equity

 

Balance at March 31, 2018

    21,139     $ 211     $ 1,041,113     $ (1,645 )   $ 883     $ (988,333 )   $ 52,229  

Issuance of common stock - restricted shares

    276       3       (3 )                       0  

Stock-based compensation expense

                785                         785  

Issuance of stock for 401(k) match

    14             85                         85  

Repurchase of treasury stock

                      (239 )                 (239 )

Cumulative translation adjustment

                            (216 )           (216 )

Cumulative impact of adoption of ASU No. 2014-09

                                  33       33  

Net income

                                  (4,737 )     (4,737 )

Balance at June 30, 2018

    21,429     $ 214     $ 1,041,980     $ (1,884 )   $ 667     $ (993,037 )   $ 47,940  

Issuance of common stock - ESPP

    12             71                         71  

Issuance of common stock - restricted shares

    140       1       (1 )                        

Stock-based compensation expense

                825                         825  

Issuance of stock for 401(k) match

    13             87                         87  

Repurchase of treasury stock

                      (157 )                 (157 )

Cumulative translation adjustment

                            (678 )           (678 )

Net loss

                                  22,558       22,558  

Balance at September 30, 2018

    21,594     $ 215     $ 1,042,962     $ (2,041 )   $ (11 )   $ (970,479 )   $ 70,646  

Issuance of common stock - restricted shares

    328       1       (1 )                        

Stock-based compensation expense

                792                         792  

Issuance of stock for 401(k) match

    8             63                         63  

Repurchase of treasury stock

                      (60 )                 (60 )

Cumulative translation adjustment

                            (54 )           (54 )

Net loss

                                  17,293       17,293  

Balance at December 31, 2018

    21,930     $ 216     $ 1,043,816     $ (2,101 )   $ (65 )   $ (953,186 )   $ 88,680  

 

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

 

6

 

 

 

AMERICAN SUPERCONDUCTOR CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

   

Nine Months Ended December 31,

 
   

2019

   

2018

 

Cash flows from operating activities:

               
                 

Net (loss) income

  $ (11,209 )   $ 35,114  

Adjustments to reconcile net (loss) income to net cash (used in)/provided by operations:

               

Depreciation and amortization

    3,312       3,455  

Stock-based compensation expense

    1,236       2,402  

Provision for excess and obsolete inventory

    491       686  
Gain on sale of minority interest     0       (127 )
Deferred income taxes     (1,069 )     (940 )

Change in fair value of warrants

    (4,648 )     2,658  

Non-cash interest income

    0       (168 )

Other non-cash items

    (22 )     (752 )
Unrealized foreign exchange (gain)/loss on cash and cash equivalents     (209 )      

Changes in operating asset and liability accounts:

               

Accounts receivable

    (8,661 )     (724 )

Inventory

    (6,968 )     3,320  

Prepaid expenses and other assets

    (332 )     (1,380 )

Accounts payable and accrued expenses

    2,648       4,603  

Deferred revenue

    7,652       (361 )

Net cash (used in)/provided by operating activities

    (17,779 )     47,786  
                 

Cash flows from investing activities:

               

Purchase of property, plant and equipment

    (2,926 )     (709 )

Proceeds from the sale of property, plant and equipment

    3,001       138  
Purchase of marketable securities     (35,000 )      
Proceeds from sale of minority interest     0       127  

Change in other assets

    37       (206 )

Net cash used in investing activities

    (34,888 )     (650 )
                 

Cash flows from financing activities:

               

Employee taxes paid related to net settlement of equity awards

    (565 )     (456 )
Proceeds from exercise of warrants     6,139        
Proceeds from exercise of employee stock options and ESPP     100       71  

Net cash (used in)/provided by financing activities

    5,674       (385 )
                 

Effect of exchange rate changes on cash

    30       (792 )
                 

Net (decrease)/increase in cash, cash equivalents and restricted cash

    (46,963 )     45,959  

Cash, cash equivalents and restricted cash at beginning of period

    78,198       34,248  

Cash, cash equivalents and restricted cash at end of period

  $ 31,235     $ 80,207  
                 

Supplemental schedule of cash flow information:

               

Cash paid for income taxes, net of refunds

  $ 3,520     $ 2,792  
Non-cash investing and financing activities                

Issuance of common stock to Hercules to settle warrant liability

    294       0  

Issuance of common stock to settle liabilities

    242       235  

 

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

 

7

 

 

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 (together with its subsidiaries, “AMSC®” or the “Company”) was founded on April 9, 1987. The Company is a leading system provider of megawatt-scale power solutions that enhance the performance of the power grid, protect the Navy’s fleet, and lower the cost of wind power. The Company’s system level products leverage its proprietary “smart materials” and “smart software and controls” to provide enhanced resiliency and improved performance of megawatt-scale power flow.

 

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, 2019 and 2018 and the financial position at December 31, 2019; however, these results are not necessarily indicative of results which may be expected for the full year. The interim condensed consolidated financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2019, and notes thereto, included in the Company’s annual report on Form 10-K for the year ended March 31, 2019 filed with the Securities and Exchange Commission on June 5, 2019.

 

Liquidity

 

The Company has historically experienced recurring operating losses and as of December 31, 2019, the Company had an accumulated deficit of $972.7 million. In addition, the Company has historically experienced recurring negative operating cash flows.  At December 31, 2019, the Company had cash, cash equivalents, and marketable securities of $60.5 million, with no outstanding debt other than ordinary trade payables. Marketable securities include certificate of deposits with maturities between eleven and twenty-four months.  Cash used in operations for the nine months ended December 31, 2019 was $17.8 million.

 

On July 3, 2018, the Company and its wholly-owned subsidiaries Suzhou AMSC Superconductor Co. Ltd. (“AMSC China”) and AMSC Austria GMBH (“AMSC Austria”) entered into a settlement agreement (the “Settlement Agreement”) with Sinovel Wind Group Co., Ltd. (“Sinovel”). The Settlement Agreement settles the litigation and arbitration proceedings between the Company and Sinovel. Under the terms of the Settlement Agreement, Sinovel agreed to pay AMSC China an aggregate cash amount in Renminbi (“RMB”) equivalent to $57.5 million, consisting of two installments. Sinovel paid the first installment of the RMB equivalent of $32.5 million on July 4, 2018, which was repatriated to the Company during the nine months ended December 31, 2018 and paid the second installment of the RMB equivalent of $25.0 million on December 27, 2018.  The Company’s fiscal 2018 results included the net gain received from the settlement with Sinovel of $52.7 million.

 

On February 1, 2018, ASC Devens LLC (the “Seller”), a wholly-owned subsidiary of the Company, entered into a Purchase and Sale Agreement (the “PSA”) with 64 Jackson, LLC (the “Purchaser”) and Stewart Title Guaranty Company (“Escrow Agent”), to effectuate the sale of certain real property located at 64 Jackson Road, Devens, Massachusetts, including the building that had served as the Company’s headquarters (collectively, the “Property”), in exchange for total consideration of $23.0 million, composed of (i) cash consideration of $17.0 million, and (ii) a $6.0 million subordinated secured commercial promissory note payable to the Company (the “Seller Note”). Subsequently, the Seller, the Purchaser and Jackson 64 MGI, LLC (“Assignee”) entered into an Assignment of Purchase and Sale Agreement (the “Assignment Agreement”), pursuant to which the Purchaser assigned all of its rights and interests in the PSA to the Assignee and the Assignee agreed to assume all of the Purchaser’s obligations and liabilities under the PSA. The transaction closed on March 28, 2018, at which time the Company received, from the Assignee, cash consideration, net of certain agreed upon closing costs, of $16.9 million, and the Seller Note at an interest rate of 1.96%. The Seller Note was secured by a subordinated second mortgage on the Property and a subordinated second assignment of leases and rents.  The Company received the first $3.0 million payment due pursuant to the Seller Note on March 28, 2019 and the second $3.0 million payment plus interest on May 23, 2019.

 

In December 2015, the Company entered into a set of strategic agreements valued at approximately $210.0 million with Inox Wind Ltd. (“Inox” or “Inox Wind”), which includes a multi-year supply contract pursuant to which the Company will supply electrical control systems ("ECS") to Inox and a license agreement allowing Inox to manufacture a limited number of ECS. After Inox purchases the specified number of ECS required under the terms of the supply contract, Inox agreed that the Company will continue as Inox’s preferred supplier and Inox will be required to purchase from the Company a majority of its ECS requirements for an additional three-year period. Pursuant to these strategic agreements, Inox must forecast future purchase orders of sets of ECS which become firm orders three months prior to shipment, and Inox must post letters of credit before the Company will ship such orders. Inox is currently delinquent on its obligation to post letters of credit for sets of ECS that Inox forecasted to purchase under the terms of the supply contract.  We cannot predict if and when Inox will post letters of credit consistent with the forecasted ECS quantities. Inox’s failure to post letters of credit and take delivery of forecasted ECS quantities would impact the Company’s revenues and liquidity.

 

The Company issued warrants in conjunction with an equity offering to Hudson Bay Capital ("Hudson") in November 2014 (the "Hudson Warrant").  The Hudson Warrant was partially exercised on November 13, 2019 with an exercise price of $7.81. The Company received $6.1 million in cash for the exercise of 786,000 warrants. The remaining 32,181 warrants expired on November 13, 2019.

 

The Company believes that based on the information presented above and its quarterly management assessment, it has sufficient liquidity to fund its operations and capital expenditures for the next twelve months following the issuance of the financial statements for the nine months ended December 31, 2019. The Company’s liquidity is highly dependent on its ability to increase revenues, including its ability to collect revenues under its agreements with Inox, its ability to control its operating costs, and its ability to raise additional capital, if necessary. There can be no assurance that the Company will be able to continue to raise additional capital, on favorable terms or at all, from other sources or execute on any other means of improving liquidity described above.

 

8

 

 

 

2. Revenue Recognition

 

On April 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, and all the related amendments and applied it to all contracts that were not completed as of April 1, 2018 using the modified retrospective method.

 

The Company’s revenues in its Grid segment are derived primarily through enabling the transmission and distribution of power, providing planning services that allow it to identify power grid needs and risks, and developing ship protection systems for the U.S. Navy. The Company’s revenues in its Wind segment are derived primarily through supplying advanced power electronics and control systems, licensing its highly engineered wind turbine designs, and providing extensive customer support services to wind turbine manufacturers. The Company records revenue based on a five-step model in accordance with ASC 606. For its customer contracts, the Company identifies the performance obligations, determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) control of goods or services is transferred to the customer. In the three and nine months ended December 31, 2019, 57% and 69% of revenue, respectively, was recognized at the point in time when control transferred to the customer, with the remainder being recognized over time.

 

In the Company's equipment and system product line, each contract with a customer summarizes each product sold to a customer, which typically represents distinct performance obligations. A contract's transaction price is allocated to each distinct performance obligation using the respective standalone selling price which is determined primarily using the cost-plus expected margin approach and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s product sales transfer control to the customer in line with the contracted delivery terms and revenue is recorded at the point in time when title and risk transfer to the customer, as the Company has determined that this is the point in time that control transfers to the customer.

 

The Company's equipment and system product line includes certain contracts which do not meet the requirements of an exchange transaction and therefore do not fall within the scope of ASC 606.  As these non-exchange transaction contracts are considered grant revenue and do not fall within any specific accounting literature, the Company follows guidance within ASC 606 by analogy to recognize grant revenue over time.  In the three and nine months ended December 31, 2019, the Company recorded $3.9 million and $5.3 million in grant revenue, respectively, which is included in the Company’s Grid revenue. There was no grant revenue in the three and nine months ended December 31, 2018.

 

In the Company's service and technology development product line, there are several different types of transactions and each begins with a contract with a customer that summarizes each product sold to a customer, which typically represents distinct performance obligations. The technology development transactions are primarily for activities that have no alternative use and for which a profit can be expected throughout the life of the contract. In these cases, the revenue is recognized over time, but in the instances where the profit cannot be assured throughout the entire contract, the revenue is recognized at a point in time. Each contract's transaction price is allocated to each distinct performance obligation using the respective standalone selling price which is determined primarily using the cost-plus expected margin approach. The ongoing service transactions are for service contracts that provide benefit to the customer simultaneously as the Company performs its obligations, and therefore this revenue is recognized ratably over time throughout the effective period of these contracts. The transaction prices on these contracts are allocated based on an adjusted market approach which is re-assessed annually for reasonableness. The field service transactions include contracts for delivery of goods and completion of services made at the customer's requests, which are not deemed satisfied until the work has been completed and/or the requested goods have been delivered, so all of this revenue is recognized at the point in time when the control changes, and at allocated prices based on the adjusted market approach driven by standard price lists. The royalty transactions are related to certain contract terms on transactions in the Company's equipment and systems product line based on activity as specified in the contracts. The transaction prices of these agreements are calculated based on an adjusted market approach as specified in the contract. The Company reports royalty revenue for usage-based royalties when the sales have occurred. In circumstances when collectability is not assured and a contract does not exist under ASC 606, revenue is deferred until a non-refundable payment has been received for substantially all the amount that is due and there are no further remaining performance obligations.

 

9

 

 

The Company's service contracts can include a purchase order from a customer for specific goods in which each item is a distinct performance obligation satisfied at a point in time at which control of the goods is transferred to the customer.  This transfer occurs based on the contracted delivery terms or when the requested service work has been completed. The transaction price for these goods is allocated based on the adjusted market approach considering similar transactions under similar circumstances. Service contracts are also derived from ongoing maintenance contracts and extended service-type warranty contracts. In these transactions, the Company is contracted to provide an ongoing service over a specified period of time. As the customer is consuming the benefits as the service is being provided, the revenue is recognized over time ratably.

 

The Company’s policy is to not accept volume discounts, product returns, or rebates and allowances within its contracts. In the event a contract was approved with any of these terms, it would be evaluated for variable consideration, estimated and recorded as a reduction of revenue in the same period the related product revenue was recorded.

 

The Company provides assurance-type warranties on all product sales for a term of typically one to two years, and extended service-type warranties at the customer's option for an additional term ranging up to four additional years. The Company accrues for the estimated warranty costs for assurance warranties at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure. For all extended service-type warranties, the Company recognizes the revenue ratably over time during the effective period of the services.

 

The Company records revenue net of sales tax, value added tax, excise tax and other taxes collected concurrent with revenue-producing activities. The Company has elected to recognize the cost for freight and shipping when control over the products sold passes to customers and revenue is recognized. The Company has elected to recognize incremental costs of obtaining a contract as expense when incurred except in contracts where the amortization period would exceed twelve months; in such cases the long-term amount will be assessed for materiality. The Company has elected not to adjust the promised amount of consideration for the effects of a significant financing component if the period of financing is twelve months or less.

 

The Company’s contracts with customers do not typically include extended payment terms and may include milestone billing over the life of the contract. Payment terms vary by contract type and type of customer and generally range from 30 to 60 days from delivery.

 

The following tables disaggregate the Company’s revenue by product line and by shipment destination:

 

   

Three Months Ended December 31, 2019

   

Nine Months Ended December 31, 2019

 

Product Line:

 

Grid

   

Wind

   

Grid

   

Wind

 

Equipment and systems

  $ 14,040     $ 2,160     $ 32,438     $ 7,742  

Services and technology development

    1,192       523       4,139       1,379  

Total

  $ 15,232     $ 2,683     $ 36,577     $ 9,120  
                                 

Region:

                               

Americas

  $ 10,164     $ 2     $ 28,663     $ 49  

Asia Pacific

    330       2,647       2,550       8,968  

EMEA

    4,738       34       5,364       104  

Total

  $ 15,232     $ 2,683     $ 36,577     $ 9,120  

 

   

Three Months Ended December 31, 2018

   

Nine Months Ended December 31, 2018

 

Product Line:

 

Grid

   

Wind

   

Grid

   

Wind

 

Equipment and systems

  $ 4,614     $ 7,215     $ 17,571     $ 17,925  

Services and technology development

    2,212       93       5,754       368  

Total

  $ 6,826     $ 7,308     $ 23,325     $ 18,293  
                                 

Region:

                               

Americas

  $ 3,771     $ 36     $ 16,319     $ 82  

Asia Pacific

    2,815       7,263       5,930       18,136  

EMEA

    240       9       1,076       75  

Total

  $ 6,826     $ 7,308     $ 23,325     $ 18,293  

 

As of December 31, 2019, and December 31, 2018, the Company’s contract assets and liabilities primarily relate to the timing differences between cash received from a customer in connection with contractual rights to invoicing and the timing of revenue recognition following completion of performance obligations. The Company's accounts receivable balance is made up entirely of customer contract related balances. Changes in the Company’s contract assets, which are included in “Accounts Receivable (unbilled)” and “Deferred program costs” (see Note 7, “Accounts Receivable” and Note 8, “Inventory” for a reconciliation to the condensed consolidated balance sheets) and contract liabilities, which are included in the current portion and long term portion of deferred revenue in the Company’s condensed consolidated balance sheets, are as follows:

 

   

Unbilled Accounts Receivable

   

Deferred Program Costs

   

Contract Liabilities

 

Beginning balance as of March 31, 2019

  $ 2,213     $ 318     $ 15,519  

Increases for costs incurred to fulfill performance obligations

          3,001        

Increase (decrease) due to customer billings

    (7,417 )           36,461  

Decrease due to cost recognition on completed performance obligations

          (2,221 )      

Increase (decrease) due to recognition of revenue based on transfer of control of performance obligations

    9,820             (28,768 )

Other changes and FX impact

    (3 )     (1 )     (69 )

Ending balance as of December 31, 2019

  $ 4,613     $ 1,097     $ 23,143  

 

 

   

Unbilled Accounts Receivable

   

Deferred Program Costs

   

Contract Liabilities

 

Beginning balance as of March 31, 2018

  $ 3,016     $ 2,567     $ 21,937  

Impact of adoption of ASC 606

          (1,599 )     (2,657 )

Increases for costs incurred to fulfill performance obligations

          1,461        

Increase (decrease) due to customer billings

    (11,063 )           11,167  

Decrease due to cost recognition on completed performance obligations

          (1,132 )      

Increase (decrease) due to recognition of revenue based on transfer of control of performance obligations

    9,722       (9 )     (11,345 )

Other changes and FX impact

    (53 )     8       (1,040 )

Ending balance as of December 31, 2018

  $ 1,622     $ 1,296     $ 18,062  

 

10

 

 

The Company’s remaining performance obligations represent the unrecognized revenue value of the Company’s contractual commitments. The Company’s performance obligations may vary significantly each reporting period based on the timing of major new contractual commitments. As of December 31, 2019, the Company had outstanding performance obligations on existing contracts under ASC 606 to be recognized in the next twelve months of approximately $76.2 million. There are also approximately $7.0 million of outstanding performance obligations to be recognized over a period of thirteen to sixty months. The remaining performance obligations are subject to customer actions and therefore the timing of revenue recognition cannot be reasonably estimated. The twelve-month performance obligations include anticipated shipments to Inox based on the twelve-month rolling forecast provided by Inox on the multi-year supply contract. The quantities specified in any forecast provided by Inox related to the multi-year supply contract are firm and irrevocable for the first three months of a twelve-month rolling forecast. The timing of the performance obligations beyond the twelve-month forecast provided by Inox are not determinable and therefore are not included in the total remaining performance obligations.

 

The following table sets forth customers who represented 10% or more of the Company’s total revenues for three and nine months ended December 31, 2019 and 2018:

 

     

Three Months Ended

   

Nine Months Ended

 
 

Reportable

 

December 31,

   

December 31,

 
 

Segment

 

2019

   

2018

   

2019

   

2018

 

Inox Wind Limited

Wind

    <10%       47 %     11 %     40 %
Department of Homeland Security Grid     22 %     <10%       12 %     <10%  

Vestas

Grid

    25 %     <10%       10 %     15 %
Fuji Bridex Pte. Ltd. Grid     <10%       17 %     <10%       <10%  
 

3. Stock-Based Compensation

 

The Company accounts for its stock-based compensation at fair value. The following table summarizes stock-based compensation expense by financial statement line item for the three and nine months ended December 31, 2019 and 2018 (in thousands):

 

   

Three Months Ended December 31,

   

Nine Months Ended December 31,

 
   

2019

   

2018

   

2019

   

2018

 

Cost of revenues

  $ 21     $ 42     $ 45     $ 132  

Research and development

    117       168       219       289  

Selling, general and administrative

    452       582       971       1,981  

Total

  $ 590     $ 792     $ 1,236     $ 2,402  

 

The Company issued 13,174 shares of immediately vested common stock and 366,000 shares of restricted stock awards during the nine months ended December 31, 2019 and issued 47,075 shares of immediately vested common stock and 463,000 shares of restricted stock awards during the nine months ended December 31, 2018.  These restricted stock awards generally vest over 2-3 years.  Awards for restricted stock include both time-based and performance-based awards.  For options and restricted stock awards that vest upon the passage of time, expense is being recorded over the vesting period.  Performance-based awards are expensed over the requisite service period based on probability of achievement.

 

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 less than $0.1 million at December 31, 2019. This expense will be recognized over a weighted average expense period of approximately 1.4 years. The total unrecognized compensation cost for unvested outstanding restricted stock was $3.9 million at December 31, 2019. This expense will be recognized over a weighted-average expense period of approximately 1.4 years.

 

The Company granted 5,939 stock options during the nine months ended December 31, 2019.  The Company did not grant any stock options during the three months ended December 31, 2019 or the three and nine months ended December 31, 2018.  The stock options granted during the nine months ended December 31, 2019 will vest over 2 years. The weighted average assumptions used in the Black Scholes valuation model for stock options granted during the nine months ended December 31, 2019 are as follows:

 

   

Three Months Ended December 31,

   

Nine Months Ended December 31,

 
   

2019

   

2018

   

2019

   

2018

 

Expected volatility

    N/A       N/A       66.5 %     N/A  

Risk-free interest rate

    N/A       N/A       1.8 %     N/A  

Expected life (years)

    N/A       N/A       5.91       N/A  

Dividend yield

 

N/A

      N/A    

None

      N/A  

 

11

 

 

 

4. Computation of Net Loss per Common Share

 

Basic net loss per share (“EPS”) is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Where applicable, diluted EPS is computed by dividing the net loss by the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period, calculated using the treasury stock method. Common equivalent shares include the effect of restricted stock, exercise of stock options and warrants and contingently issuable shares. Stock options and warrants that are out-of-the-money with exercise prices greater than the average market price of the underlying common shares and shares of performance based restricted stock where the contingency was not met are excluded from the computation of diluted EPS as the effect of their inclusion would be anti-dilutive.  For the three months ended December 31, 20190.1 million shares related to outstanding stock options were not included in the calculation of diluted EPS as they were considered anti-dilutive. For the nine months ended December 31, 20190.1 million shares related to outstanding stock options were not included in the calculation of diluted EPS as they were considered anti-dilutive. For the three months ended December 31, 2018, 0.5 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 0.3 million relate to outstanding stock options, and 0.2 million relate to outstanding unvested stock awards. For the nine months ended December 31, 2018, 1.1 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 0.3 million shares relate to outstanding stock options, 0.6 million shares relate to outstanding warrants and 0.2 million relate to outstanding unvested stock awards.

 

The following table reconciles the numerators and denominators of the earnings per share calculation for the three and nine months ended December 31, 2019 and 2018 (in thousands, except per share data):

 

   

Three Months Ended December 31,

   

Nine Months Ended December 31,

 
   

2019

   

2018

   

2019

   

2018

 

Numerator:

                               

Net (loss) income

  $ (6,845 )   $ 17,293     $ (11,209 )   $ 35,114  
Less: decrease in fair value of warrants, net of income tax     (556 )     0       (4,648 )     0  
Plus: change in fair value due to exercise of warrants     0       0       83       0  
Net income (loss) - diluted   $ (7,401 )   $ 17,293     $ (15,774 )   $ 35,114  

Denominator:

                               

Weighted-average shares of common stock outstanding

    22,110       21,396       21,729       21,216  

Weighted-average shares subject to repurchase

    (925 )     (977 )     (943 )     (916 )

Shares used in per-share calculation ― basic

    21,185       20,419       20,786       20,300  
Common stock awards     0       445       0       238  
Common stock warrants     18       0       108       0  

Shares used in per-share calculation ― diluted

    21,203       20,864       20,894       20,538  

Net (loss) income per share ― basic

  $ (0.32 )   $ 0.85     $ (0.54 )   $ 1.73  

Net (loss) income per share ― diluted

  $ (0.35 )   $ 0.83     $ (0.75 )   $ 1.71  

 

For the nine months ended December 31, 2019, the diluted net loss per common share amounts under the treasury stock method were calculated based on the dilutive effect of the total number of shares of common stock related to the Hudson Warrant of 818,181 shares with an exercise price of $7.81.  For the three and nine month periods ended December 31, 2019, the average stock price was $8.19 and $9.29 respectively through November 13, 2019 when the Hudson Warrant was partially exercised for 786,000 shares, providing 37,962 and 130,345 dilutive shares respectively. The increase of $0.6 million and the decrease of $4.6 million in the fair value of the warrant liability, respectively, is included in the net loss available to common shareholders for the diluted net loss per common share amount when the impact is dilutive. 

 

 

5. Goodwill

 

The Company did not identify any triggering events in the three and nine months ended December 31, 2019, that would require interim impairment testing of goodwill.

 

12

 

 

 

6. Fair Value Measurements

 

A valuation hierarchy for disclosure of the inputs to valuation used to measure fair value has been established. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1 

-

Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

 

 

Level 2 

-

Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

 

 

 

Level 3 

-

Unobservable inputs that reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.

 

The Company provides a gross presentation of activity within Level 3 measurement roll-forward and details of transfers in and out of Level 1 and 2 measurements.  A change in the hierarchy of an investment from its current level is reflected in the period during which the pricing methodology of such investment changes.  Disclosure of the transfer of securities from Level 1 to Level 2 or Level 3 is made in the event that the related security is significant to total cash and investments.  The Company did not have any transfers of assets and liabilities from Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the nine months ended December 31, 2019.

 

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

 

The following table provides the assets and liabilities carried at fair value on a recurring basis, measured as of December 31, 2019 and March 31, 2019 (in thousands):

 

   

Total Carrying Value

   

Quoted Prices in Active Markets (Level 1)

    Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)  

December 31, 2019:

                               

Assets:

                               

Cash equivalents

  $ 21,230     $ 21,230     $     $  
Marketable securities   $ 35,047     $ 35,047     $     $  

 

   

Total Carrying Value

   

Quoted Prices in Active Markets (Level 1)

    Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)  

March 31, 2019:

                               

Assets:

                               

Cash equivalents

  $ 41,839     $ 41,839     $     $  

Derivative liabilities:

                               

Warrants

  $ 4,942     $     $     $ 4,942  

 

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

 

   

Warrants

 

April 1, 2019

  $ 4,942  
Mark to market adjustment     (4,648 )
Exercise of in-the-money warrants     (294 )

Balance at December 31, 2019

  $ -  

 

   

Warrants

 

April 1, 2018

  $ 1,217  

Mark to market adjustment

    2,658  

Balance at December 31, 2018

  $ 3,875  

 

13

 

 

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, 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.

 

Marketable Securities

 

Marketable securities consist of certificates of deposit with maturities of greater than 12 months that are measured using such inputs as quoted prices and are classified within Level 1 of the valuation hierarchy. The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such classification as of each balance sheet date.  All marketable securities are considered available for sale and are carried at fair value.   Changes in fair value would be recorded to other income/expense, net.   The Company periodically reviews the realizability of each short and long term marketable security when impairment indicators exist with respect to the security.  If other than temporary impairment of value of the security exists, the carrying value of the security is written down to its estimated fair value.  

 

Warrants

 

The Company issued warrants in conjunction with an equity offering to Hudson Bay Capital in November 2014 and a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (“Hercules”). The warrants issued to Hercules were exercised on April 8, 2019.  The warrants issued to Hudson were partially exercised on November 13, 2019 and the remaining unexercised warrants expired on November 13, 2019.  As of December 31, 2019 the Company has no remaining outstanding warrants. 

 

The Company relied on various assumptions in a lattice model to determine the fair value of warrants. The Company had valued the warrants within Level 3 of the valuation hierarchy. See Note 13, “Warrants and Derivative Liabilities,” for additional information including a discussion of the warrants and the valuation assumptions used.

 

 

7. Accounts Receivable

 

Accounts receivable at December 31, 2019 and March 31, 2019 consisted of the following (in thousands):

 

   

December 31, 2019

   

March 31, 2019

 

Accounts receivable (billed)

  $ 11,878     $ 5,642  

Accounts receivable (unbilled)

    4,613       2,213  

Accounts receivable, net

  $ 16,491     $ 7,855  

 

14

 

 

 

8. Inventory

 

Inventory, net of reserves, at December 31, 2019 and March 31, 2019 consisted of the following (in thousands):

 

   

December 31, 2019

   

March 31, 2019

 

Raw materials

  $ 11,456     $ 5,474  

Work-in-process

    2,072       1,922  

Finished goods

    3,967       4,405  

Deferred program costs

    1,096       318  

Net inventory

  $ 18,591     $ 12,119  

 

The Company recorded inventory write-downs of $0.3 million and $0.2 million for the three months ended December 31, 2019 and 2018, respectively.  The Company recorded inventory write-downs of $0.5 million and $0.7 million for the nine months ended December 31, 2019 and 2018, respectively. These write-downs were based on the Company's evaluation of its inventory on hand for excess quantities and obsolescence.

 

Deferred program costs as of December 31, 2019 and March 31, 2019 primarily represent costs incurred on programs where the Company needs to complete performance obligations before the related revenue and costs will be recognized.

 

 

9. Note Receivable

 

The Company entered into the PSA dated February 1, 2018, for the sale of the Devens facility (including land, building and building improvements) located at 64 Jackson Road, Devens, Massachusetts to 64 Jackson, LLC, a limited liability company (subsequently assigned to Jackson 64 MGI, LLC) in the amount of $23.0 million. The terms for payment included a $1.0 million security deposit, and a note receivable for $6.0 million payable to the Company with the remaining cash, net of certain adjustments for closing costs, at the date of settlement. The note receivable was due in two $3.0 million installments plus accrued interest at a rate of 1.96% on March 31, 2019 and March 31, 2020. The note was subordinate to East Boston Savings Bank's mortgage on the Devens property.  The first installment was paid on March 28, 2019 and the second installment was paid on May 23, 2019.

 

The note receivable was discounted to its present value of $5.7 million utilizing a discount rate of 6%, which was based on management’s assessment of what an appropriate loan at current market rates would be. The $0.3 million discount was recorded as an offset to the long-term portion of the note receivable. In addition, the resulting gain of $0.1 million from the sale of the Devens property which was deferred previously was recorded as a component of the cumulative effect of an accounting change upon the adoption of Accounting Standards Update ("ASU") 2017-05 Other Income - Gains and Losses from the Derecognition of Non-financial Assets (Subtopic 610-20) which was issued as a part of ASU 2014-09 Revenue from Contracts with Customers (Topic 606). This gain was recorded as an offset to the opening accumulated deficit as of April 1, 2018.

 

Note receivable as of December 31, 2019 and March 31, 2019 consisted of the following (in thousands):

 

Current assets

 

December 31, 2019

   

March 31, 2019

 

Note receivable, current

  $     $ 3,000  

Note receivable discount

          (112 )

Total current note receivable

  $     $ 2,888  

 

15

 

 

 

10. Property, Plant and Equipment

 

The cost and accumulated depreciation of property, plant and equipment at December 31, 2019 and March 31, 2019 are as follows (in thousands):

 

   

December 31, 2019

   

March 31, 2019

 

Construction in progress - equipment

  $ 2,812     $ 603  

Equipment and software

    45,301       45,705  

Furniture and fixtures

    1,245       1,269  

Leasehold improvements

    2,485       1,955  

Property, plant and equipment, gross

    51,843       49,532  

Less accumulated depreciation

    (43,003 )     (40,560 )

Property, plant and equipment, net

  $ 8,840     $ 8,972  

 

Depreciation expense was $1.0 million and $1.1 million for the three months ended December 31, 2019 and 2018, respectively. Depreciation expense was $3.1 million and $3.2 million for the nine months ended December 31, 2019 and 2018, respectively. Construction in progress - equipment primarily includes capital investments in our HTS equipment and leasehold improvements in the Company's leased facility in Ayer, Massachusetts.

 

 

11. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses at December 31, 2019 and March 31, 2019 consisted of the following (in thousands):

 

   

December 31, 2019

   

March 31, 2019

 

Accounts payable

  $ 7,349     $ 2,939  

Accrued inventories in-transit

    894       244  

Accrued other miscellaneous expenses

    2,588       1,759  

Advanced deposits

    986       631  

Accrued compensation

    4,448       5,404  

Income taxes payable

    1,408       3,363  

Accrued product warranty

    1,706       1,545  

Total

  $ 19,379     $ 15,885  

 

The Company generally provides a one to two year warranty on its products, commencing upon delivery or installation where applicable. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience.

 

Product warranty activity was as follows (in thousands):

 

   

Three Months Ended December 31,

   

Nine Months Ended December 31,

 
   

2019

   

2018

   

2019

   

2018

 

Balance at beginning of period

  $ 1,641     $ 1,760     $ 1,545     $ 1,769  

Change in accruals for warranties during the period

    93       260       247       577  

Settlements during the period

    (28 )     (524 )     (86 )     (850 )

Balance at end of period

  $ 1,706     $ 1,496     $ 1,706     $ 1,496  

 

16

 

 

 

12. Income Taxes

 

The Company recorded an income tax expense of $0.1 million and $1.6 million in the three months ended December 31, 2019 and 2018, respectively.  The Company recorded an income tax expense of less than $0.1 million and $4.5 million in the nine months ended December 31, 2019 and 2018, respectively.  

 

Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.  The Company re-evaluates these uncertain tax positions on a quarterly basis.  The evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity.  Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.  The Company did not identify any uncertain tax positions in the nine months ended December 31, 2019 and did not have any gross unrecognized tax benefits as of March 31, 2019.

 

 

13. Warrants and Derivative Liabilities

 

The Company accounts for its warrants and contingent consideration as liabilities due to certain adjustment provisions within the instruments, which require that they be recorded at fair value. The warrants are subject to revaluation at each balance sheet date and any change in fair value is recorded as a change in fair value of warrants until the earlier of its expiration or its exercise at which time the warrant liability will be reclassified to equity. The Company calculated the fair value of the warrants utilizing an integrated lattice model. See Note 6, "Fair Value Measurements", for further discussion.

 

Hercules Warrants

 

On December 19, 2014, the Company entered into a second amendment to the Loan and Security Agreement with Hercules (the "Hercules Second Amendment"). In conjunction with the Hercules Second Amendment, the Company issued Hercules a warrant to purchase 58,823 shares of the Company’s common stock (the "Hercules Warrant") which replaced the First Warrant and the Second Warrant.  The Hercules Warrant was exercisable at any time after its issuance at an exercise price of $7.85 per share, subject to certain price-based and other anti-dilution adjustments, including the equity offering in May 2017, the acquisition of ITC with common stock in September 2017 and sales of common stock under the ATM entered into in January 2017.  This warrant had a fair value of $0.4 million as of March 31, 2019.  On April 8, 2019, Hercules notified the Company of its intent to exercise this warrant on a cashless basis.  Hercules received 22,821 shares of the Company's common stock on April 17, 2019.  As a result of this exercise the Company recorded a net gain of $0.1 million to change in fair value of warrants, resulting from the decrease in the fair value of the Hercules Warrant during the nine months ended December 31, 2019.  The Company recorded a net loss of $0.2 million to change in fair value of warrants, resulting from the increase in the fair value of the Hercules Warrant during the nine months ended December 31, 2018.

 

November 2014 Warrant

 

On November 13, 2014, the Company completed an offering of 909,090 units of the Company’s common stock with Hudson Bay Capital. Each unit consisted of one share of the Company’s common stock and 0.9 of a warrant to purchase one share of common stock, or a warrant to purchase in the aggregate 818,181 shares (the “November 2014 Warrant”).  The November 2014 Warrant is exercisable at any time, at an exercise price equal to $7.81 per share, subject to certain price-based and other anti-dilution adjustments including those noted above.  On November 13, 2019, Hudson partially exercised the November 2014 Warrant for 786,000 restricted shares of Company common stock at $7.81 per shareThe remaining 32,181 warrants expired on November 13, 2019. As a result of this exercise the Company recorded net gains of $0.5 million and $4.6 million to change in fair value of warrants, resulting from the decrease in the fair value of the Hudson Warrant during the three and nine months ended December 31, 2019, respectively.  As of December 31, 2019, the Company has no remaining outstanding warrants

 

Following is a summary of the key assumptions used to calculate the fair value of the November 2014 Warrant:

 

   

September 30,

   

June 30,

 
Fiscal Year 2019     2019       2019  

Risk-free interest rate

    1.90 %     2.11 %

Expected annual dividend yield

           

Expected volatility

    62.84 %     60.58 %

Term (years)

    0.12       0.37  

Fair value

 

$0.6 million

   

$1.7 million

 

 

 

   

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

Fiscal Year 2018

 

2019

 

2018

 

2018

 

2018

 

2018

Risk-free interest rate

 

2.43%

 

2.61%

 

2.62%

 

2.40%

 

2.20%

Expected annual dividend yield

 

 

 

 

 

Expected volatility

 

75.61%

 

70.29%

 

63.66%

 

67.40%

 

65.86%

Term (years)

 

0.62

 

0.87

 

1.12

 

1.37

 

1.62

Fair value

 

$4.6 million

 

$3.6 million

 

$1.3 million

 

$1.6 million

 

$1.1 million

 

The Company recorded net gains of $0.6 million and $4.6 million resulting from the decreases in the fair value of the November 2014 Warrant during the three and nine months ended December 31, 2019, respectively. The Company recorded net losses of $2.3 million and $2.5 million resulting from the increase in the fair value of the November 2014 Warrant during the three and nine months ended December 31, 2018, respectively.

 

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14. Leases

 

On April 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) ("ASC 842"), using the modified retrospective approach. The Company elected the package of practical expedients available in the standard and as a result, did not reassess the lease classification of existing contracts or leases or the initial direct costs associated with existing leases. The Company did not elect the hindsight practical expedient and evaluated lease terms for existing leases. The Company has also elected the practical expedient to not separate lease components and non-lease components and will account for the leases as a single lease component for all classes of leases.

 

As a result of the adoption of ASC 842, the Company recognized lease right-of-use assets of $3.8 million, and operating lease liabilities of $3.8 million. There was no impact to the condensed consolidated statements of operations or stockholders' equity for the adoption of ASC 842. No impairment was recognized on the right-of-use asset upon adoption. These adjustments are detailed as follows:

 

   

March 31, 2019

   

ASC 842 Adjustment

   

April 1, 2019

 

Operating Leases:

                       

Right of use asset

  $     $ 3,795     $ 3,795  

Total operating lease right-of-use asset

          3,795       3,795  
                         

Operating lease liabilities – ST

  $     $ 309     $ 309  

Operating lease liabilities – LT

          3,512       3,512  

Total operating lease liabilities

          3,821       3,821  
                         

Weighted-average remaining lease term

                 

7.69 years

 

Weighted-average discount rate

                    7.06 %

 

All significant lease arrangements are recognized at lease commencement.  Operating lease right–of-use assets and lease liabilities are recognized at commencement. The operating lease right-of-use asset includes any lease payments related to initial direct cost and prepayments and excludes any lease incentives. Lease expense is recognized on a straight-line basis over the lease term.  The Company enters into a variety of operating lease agreements through the normal course of its business, but primarily real estate leases to support its operations. The agreements generally provide for fixed minimum rental payments and the payment of real estate taxes and insurance. Many of these leases have one or more renewal options that allow the Company, at its discretion, to renew the lease for varying periods up to five years or to terminate the lease. Only renewal options or termination rights that the Company believed were likely to be exercised were included in the lease calculations.

 

The Company also enters into leases for vehicles, IT equipment and service agreements, and other leases related to its manufacturing operations that are also included in the right-of-use asset and lease liability accounts if they are for a term of longer than twelve months. However, many of these leases are either short-term in nature or immaterial. The Company has made the policy election to exclude short term leases from the balance sheet. 

 

The discount rate was calculated using an incremental borrowing rate based on an assessment prepared by the Company through the use of Company credit ratings, consideration of its lease populations potential risk to its total capital structure, and a market rate for a collateralized loan for its risk profile, calculated by a third party. The Company elected to apply the discount rate using the remaining lease term at the date of adoption.

 

The Company did not identify any leases that are classified as financing leases.

 

Supplemental balance sheet information related to leases at December 31, 2019 are as follows:

 

   

December 31, 2019

 

Operating Leases:

       

Right-of-use assets

  $ 3,495  

Total right-of-use assets

    3,495  
         

Lease liabilities - ST

  $ 436  

Lease liabilities - LT

    3,128  

Total operating lease liabilities

    3,564  
         
Weighted-average remaining lease term     7.1 years  

Weighted-average discount rate

    7.07 %

 

The costs related to the Company's leases for the three and nine months ended December 31, 2019 are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31, 2019

   

December 31, 2019

 

Operating Lease:

               

Operating lease costs - fixed

  $ 179     $ 535  

Operating lease costs - variable

    27       73  

Short-term lease costs

    164       378  

Total lease costs

    370       986  

 

The Company’s estimated minimum future lease obligations under the Company's leases are as follows: 

 

   

Operating Leases

 

Year ended March 31,

       

2020

  $ 167  

2021

    672  

2022

    651  

2023

    624  

2024

    562  

Thereafter

    1,896  

Total minimum lease payments

    4,572  
Less: interest     (1,008 )
Present value of lease liabilities     3,564  

 

 

15. Commitments and Contingencies

 

Legal Contingencies

 

From time to time, the Company is involved in legal and administrative proceedings and claims of various types. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary to make the consolidated financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in its consolidated financial statements.

 

Other

 

The Company enters into long-term construction contracts with customers that require the Company to obtain performance bonds. The Company is required to deposit an amount equivalent to some or all the face amount of the performance bonds into an escrow account until the termination of the bond. When the performance conditions are met, amounts deposited as collateral for the performance bonds are returned to the Company. In addition, the Company has various contractual arrangements in which minimum quantities of goods or services have been committed to be purchased on an annual basis.

 

As of December 31, 2019, the Company had $5.8 million of restricted cash included in long-term assets. These amounts included in restricted cash primarily represent deposits to secure letters of credit for various supply contracts. These deposits are held in interest bearing accounts.  As part of the agreement with Commonwealth Edison Company to install the Resilient Electric Grid ("REG") system in Chicago, the Company agreed to deliver an irrevocable letter of credit in the amount of $5.0 million to secure certain Company obligations under the Subcontract Agreement.  The funds to secure the $5.0 million letter of credit were deposited in an escrow account on July 1, 2019.

 

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16. Restructuring

 

The Company accounts for charges resulting from operational restructuring actions in accordance with ASC Topic 420, Exit or Disposal Cost Obligations (“ASC 420”) and ASC Topic 712, Compensation—Nonretirement Postemployment Benefits (“ASC 712”). In accounting for these obligations, the Company is required to make assumptions related to the amounts of employee severance, benefits, and related costs and the time period over which leased facilities will remain vacant, sublease terms, sublease rates and discount rates. Estimates and assumptions are based on the best information available at the time the obligation arises. These estimates are reviewed and revised as facts and circumstances dictate; changes in these estimates could have a material effect on the amount accrued on the consolidated balance sheet.

 

The $0.4 million charged to operations in the nine months ended December 31, 2018 is related to exit costs incurred in connection with the move of the Company's corporate office.

 

The following table presents restructuring charges and cash payments for the nine months ended December 31, 2018 (in thousands):

 

   

Severance pay

   

Facility exit and

         
   

and benefits

   

Relocation costs

   

Total

 

Accrued restructuring balance at April 1, 2018

  $ 262     $ 173     $ 435  

Charges to operations

          450       450  

Cash payments

    (262 )     (623 )     (885 )

Accrued restructuring balance at December 31, 2018

  $     $     $  

 

All restructuring charges discussed above are included within restructuring in the Company’s unaudited condensed consolidated statements of operations. The Company includes accrued restructuring within accounts payable and accrued expenses.  There was no restructuring activity in the nine months ending December 31, 2019 or any remaining accrued restructuring balance as of December 31, 2019.

 

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17. Business Segments

 

The Company reports its financial results in two reportable business segments: Grid and Wind.

 

Through the Company’s power grid offerings, the Grid business segment enables electric utilities, industrial facilities, and renewable energy project developers to connect, transmit and distribute power through our transmission planning services, power electronics, and superconductor-based systems. The sales process is enabled by transmission planning services that allow it to identify power grid congestion, poor power quality and other risks, which helps the Company determine how its solutions can improve network performance. These services often lead to sales of grid interconnection solutions for wind farms and solar power plants, power quality systems, and transmission and distribution cable systems.  The Company also sells ship protection products to the U.S. Navy through its Grid business segment.

 

Through the Company’s wind power offerings, the Wind business segment enables manufacturers to field highly competitive wind turbines through our advanced power electronics and control system products, engineered designs, and support services. The Company supplies advanced power electronics and control systems, licenses its highly engineered wind turbine designs, and provides extensive customer support services to wind turbine manufacturers. The Company’s design portfolio includes a broad range of drive trains and power ratings of 2 megawatts ("MWs") and higher. The Company provides a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility.

 

The operating results for the two business segments are as follows (in thousands):

 

   

Three Months Ended December 31,

   

Nine Months Ended December 31,

 
   

2019

   

2018

   

2019

   

2018

 

Revenues:

                               

Grid

  $ 15,232     $ 6,826     $ 36,577     $ 23,325  

Wind

    2,683       7,308       9,120       18,293  

Total

  $ 17,915     $ 14,134     $ 45,697     $ 41,618  

 

   

Three Months Ended December 31,

   

Nine Months Ended December 31,

 
   

2019

   

2018

   

2019

   

2018

 

Operating (loss) income:

                               

Grid

  $ (3,732 )   $ (2,665 )   $ (9,723 )   $ (8,202 )

Wind

    (2,297 )     24,269       (6,015 )     51,419  

Unallocated corporate expenses

    (590 )     (839 )     (1,236 )     (2,851 )

Total

  $ (6,619 )   $ 20,765     $ (16,974 )   $ 40,366  

 

The accounting policies of the business segments are the same as those for the consolidated Company. The Company’s business segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measures are segment revenues and segment operating loss. The disaggregated financial results of the segments reflect allocation of certain functional expense categories consistent with the basis and manner in which Company management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. In addition, certain corporate expenses which the Company does not believe are specifically attributable or allocable to either of the two business segments have been excluded from the segment operating loss.

 

Unallocated corporate expenses primarily consist of stock-based compensation expense of $0.6 million and $0.8 million in the three months ended December 31, 2019 and 2018, respectively, and restructuring charges of less than $0.1 million in the three months ended December 31, 2018.  Unallocated corporate expenses primarily consist of stock-based compensation expense of $1.2 million and $2.4 million in the nine months ended December 31, 2019 and 2018, respectively, and restructuring charges of $0.5 million in the nine months ended December 31, 2018.

 

Total assets for the two business segments as of December 31, 2019 and March 31, 2019 are as follows (in thousands):

 

   

December 31, 2019

   

March 31, 2019

 

Grid