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, 2020

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

 

27,581,625

Class

 

Outstanding as of February 1, 2021

 



 

 

 

 

 
 

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

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

29

 

 

 

Item 1A.

Risk Factors

29

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 3.

Defaults Upon Senior Securities

29

 

 

 

Item 4.

Mine Safety Disclosure

29

 

 

 

Item 5.

Other Information

29

 

 

 

Item 6.

Exhibits

30

 

 

 

Signature

 

31

 

2

 

 

AMERICAN SUPERCONDUCTOR CORPORATION

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

   

December 31, 2020

   

March 31, 2020

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 67,909     $ 24,699  

Marketable securities

    10,239       30,149  

Accounts receivable, net

    12,083       16,987  

Inventory, net

    14,176       18,975  

Prepaid expenses and other current assets

    4,634       2,959  

Restricted cash

    629       508  

Total current assets

    109,670       94,277  
                 

Marketable securities

          5,046  

Property, plant and equipment, net

    9,547       8,565  

Intangibles, net

    9,964       3,550  

Right-of-use assets

    3,806       3,359  

Goodwill

    34,659       1,719  

Restricted cash

    5,604       5,657  

Deferred tax assets

    1,386       1,551  

Other assets

    411       385  

Total assets

  $ 175,047     $ 124,109  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

Current liabilities:

               

Accounts payable and accrued expenses

  $ 17,015     $ 22,091  

Lease liability, current portion

    581       439  

Derivative liabilities

    6,730        

Deferred revenue, current portion

    15,683       18,430  

Total current liabilities

    40,009       40,960  
                 

Deferred revenue, long term portion

    8,695       7,712  

Lease liability, long term portion

    3,329       3,000  

Deferred tax liabilities

    70       180  

Other liabilities

    26       38  

Total liabilities

    52,129       51,890  
                 

Commitments and Contingencies (Note 15)

               
                 

Stockholders' equity:

               

Common stock

    280       229  

Additional paid-in capital

    1,120,333       1,053,507  

Treasury stock

    (3,593 )     (2,666 )

Accumulated other comprehensive loss

    (405 )     (216 )

Accumulated deficit

    (993,697 )     (978,635 )

Total stockholders' equity

    122,918       72,219  

Total liabilities and stockholders' equity

  $ 175,047     $ 124,109  

 

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,

 
     

2020

   

2019

   

2020

   

2019

 

Revenues

    $ 23,632     $ 17,915     $ 65,961     $ 45,697  
                                   

Cost of revenues

      19,676       16,329       51,444       38,770  
                                   

Gross margin

      3,956       1,586       14,517       6,927  
                                   

Operating expenses:

                                 

Research and development

      3,029       2,049       8,248       6,920  

Selling, general and administrative

      7,085       6,071       18,609       16,726  

Amortization of acquisition-related intangibles

      360       85       601       255  

Change in fair value of contingent consideration

      2,740             2,740        

Total operating expenses

      13,214       8,205       30,198       23,901  
                                   
Operating loss       (9,258 )     (6,619 )     (15,681 )     (16,974 )
                                   

Change in fair value of warrants

            556             4,648  

Interest income, net

      53       262       373       1,101  

Other (expense)/income, net

      (274 )     (932 )     (920 )     45  

Loss before income tax expense (benefit)

      (9,479 )     (6,733 )     (16,228 )     (11,180 )
                                   

Income tax expense (benefit)

      (1,546 )     112       (1,166 )     29  
                                   

Net loss

    $ (7,933 )   $ (6,845 )   $ (15,062 )   $ (11,209 )
                                   

Net loss per common share

                                 

Basic

    $ (0.31 )   $ (0.32 )   $ (0.65 )   $ (0.54 )

Diluted

    $ (0.31 )   $ (0.35 )   $ (0.65 )   $ (0.75 )
                                   

Weighted average number of common shares outstanding

                                 

Basic

      25,470       21,185       23,011       20,786  

Diluted

      25,470       21,203       23,011       20,894  

 

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

 

(In thousands)

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2020

   

2019

   

2020

   

2019

 

Net loss

  $ (7,933 )   $ (6,845 )   $ (15,062 )   $ (11,209 )

Other comprehensive (loss) income, net of tax:

                               

Foreign currency translation (loss) gain

    (142 )     609       (189 )     (242 )

Total other comprehensive (loss) income, net of tax

    (142 )     609       (189 )     (242 )

Comprehensive loss

  $ (8,075 )   $ (6,236 )   $ (15,251 )   $ (11,451 )

 

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, 2020 AND 2019

 

(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, 2020

    22,902     $ 229     $ 1,053,507     $ (2,666 )   $ (216 )   $ (978,635 )   $ 72,219  

Issuance of common stock - restricted shares, net of forfeitures

    493       5       (5 )                        

Stock-based compensation expense

                909                         909  

Issuance of stock for 401(k) match

    13             88                         88  

Repurchase of treasury stock

                      (377 )                 (377 )

Cumulative translation adjustment

                            (3 )           (3 )

Net loss

                                  (3,417 )     (3,417 )

Balance at June 30, 2020

    23,408     $ 234     $ 1,054,499     $ (3,043 )   $ (219 )   $ (982,052 )   $ 69,419  
Issuance of common stock - ESPP     8             99                         99  
Issuance of common stock - restricted shares, net of forfeitures     33                                      
Stock-based compensation expense                 849                         849  
Issuance of stock for 401(k) match     9             101                         101  
Repurchase of treasury stock                       (293 )                 (293 )
Cumulative translation adjustment                             (43 )           (43 )
Net loss                                   (3,712 )     (3,712 )
Balance at September 30, 2020     23,458     $ 234     $ 1,055,548     $ (3,336 )   $ (262 )   $ (985,764 )   $ 66,420  
Issuance of common stock - restricted shares, net of forfeitures     (32 )                                    
Stock-based compensation expense                 839                         839  
Issuance of stock for 401(k) match     5             82                         82  
Issuance of common stock - stock offering     3,670       37       51,440                         51,477  
Issuance of common stock - NEPSI acquisition     874       9       12,424                         12,433  
Repurchase of treasury stock                       (257 )                 (257 )
Cumulative translation adjustment                             (143 )           (143 )
Net loss                                   (7,933 )     (7,933 )
Balance at December 31, 2020     27,975     $ 280     $ 1,120,333     $ (3,593 )   $ (405 )   $ (993,697 )   $ 122,918  

 

   

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  
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  

 

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,

 
   

2020

   

2019

 

Cash flows from operating activities:

               
                 

Net loss

  $ (15,062 )   $ (11,209 )

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

               

Depreciation and amortization

    3,811       3,312  

Stock-based compensation expense

    2,597       1,236  

Provision for excess and obsolete inventory

    1,610       491  

Deferred income taxes

    (1,828 )     (1,069 )

Change in fair value of contingent consideration

    2,740        
Change in fair value of warrants           (4,648 )

Non-cash interest income

    (48 )      

Other non-cash items

    291       (22 )

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

    366       (209 )

Changes in operating asset and liability accounts:

               

Accounts receivable

    6,376       (8,661 )

Inventory

    7,419       (6,968 )

Prepaid expenses and other assets

    6       (332 )

Accounts payable and accrued expenses

    (7,894 )     2,648  

Deferred revenue

    (5,255 )     7,652  

Net cash used in operating activities

    (4,871 )     (17,779 )
                 

Cash flows from investing activities:

               

Purchase of property, plant and equipment

    (1,574 )     (2,926 )

Proceeds from the sale of property, plant and equipment

    1       3,001  

Purchase of marketable securities

          (35,000 )
Sale of marketable securities     25,006        

Cash paid for acquisition

    (26,000 )      

Change in other assets

    (6 )     37  

Net cash used in investing activities

    (2,573 )     (34,888 )
                 

Cash flows from financing activities:

               

Employee taxes paid related to net settlement of equity awards

    (927 )     (565 )

Proceeds from exercise of warrants

          6,139  

Proceeds from public equity offering, net

    51,477        

Proceeds from exercise of employee stock options and ESPP

    99       100  

Net cash provided by financing activities

    50,649       5,674  
                 

Effect of exchange rate changes on cash

    73       30  
                 

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

    43,278       (46,963 )

Cash, cash equivalents and restricted cash at beginning of period

    30,864       78,198  

Cash, cash equivalents and restricted cash at end of period

  $ 74,142     $ 31,235  
                 

Supplemental schedule of cash flow information:

               

Cash paid for income taxes, net of refunds

  $ 630     $ 3,520  

Non-cash investing and financing activities

               

Issuance of common stock in connection with the purchase of Northeast Power Systems, Inc.

  $ 12,433     $  

Issuance of common stock to Hercules to settle warrant liability

          294  

Issuance of common stock to settle liabilities

    271       242  

 

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 resiliency solutions that Orchestrate the Rhythm and Harmony of Power on the Grid and that protect and expand the capability of the Navy’s fleet. 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, 2020 and 2019 and the financial position at December 31, 2020; 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, 2020, and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020 filed with the SEC on June 2, 2020.

 

Liquidity

 

The Company has historically experienced recurring operating losses and as of December 31, 2020, the Company had an accumulated deficit of $993.7 million. In addition, the Company has historically experienced recurring negative operating cash flows.  At December 31, 2020, the Company had cash, cash equivalents, and marketable securities of $78.1 million. Marketable securities include certificate of deposits with maturities between three and nine months.  Cash used in operations for the nine months ended December 31, 2020 was $4.9 million.

 

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 had been 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.  On May 29, 2020, the Company sent written notice to Inox notifying Inox of its default under the supply contract due to Inox’s failure to post letters of credit in the amount of €6.0 million for the payment of ECS that Inox is obligated to purchase under the terms of the supply contract.  If Inox failed to post letters of credit in the amount of €6.0 million in accordance with the terms of the supply contract within the ninety day cure period after receipt of the default notice, then the Company could have terminated the supply contract by providing written notice of such termination to Inox.  On September 2, 2020, Inox delivered approved letters of credit in the amount of €1.3 million for the payment of a portion of the ECS that Inox was obligated to purchase under the terms of the supply contract.  On September 11, 2020, the Company notified Inox that due to (i) the Company’s business relationship with Inox, and (ii) Inox’s delivery of approved letters of credit in the amount of €1.3 million as described above, the Company gave Inox until October 5, 2020 to regain compliance with the terms of the supply contract by providing approved letters of credit in the amount of €4.7 million for payment of the remaining ECS that Inox currently was obligated to purchase under the terms of the supply contract.  On October 1, 2020, Inox delivered approved letters of credit for payment of the remaining ECS that Inox was obligated to purchase under the terms of the supply contract and cured the default set forth in the May 29, 2020 default notice.

 

On October 1, 2020 (the "Acquisition Date"), the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with the selling stockholders named therein.  Pursuant to the terms of the Stock Purchase Agreement and concurrently with entering into such agreement, the Company acquired all of the issued and outstanding (i) shares of capital stock of Northeast Power Systems, Inc., a New York corporation (“NEPSI”), and (ii) membership interests of Northeast Power Realty, LLC, a New York limited liability company, which holds the real property that serves as NEPSI’s headquarters (the "Acquisition"). NEPSI is a U.S.-based global provider of medium-voltage metal-enclosed power capacitor banks and harmonic filter banks for use on electric power systems. NEPSI is now a wholly-owned subsidiary of the Company and is operated by its Grid business unit. The purchase price was $26.0 million in cash and 873,657 restricted shares of common stock of the Company.  As part of the transaction, the selling stockholders may receive up to an additional 1,000,000 shares of common stock of the Company upon the achievement of certain specified revenue objectives in the future.

 

On October 22, 2020, the Company entered into an underwriting agreement with Oppenheimer & Co. Inc., as representative of the several underwriters named therein, relating to the issuance and sale (the “Offering”) of 3,670,000 shares of the Company’s common stock at a public offering price of $15.00 per share. The net proceeds to the Company from the Offering were approximately $51.5 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company. The Offering closed on October 26, 2020. In addition, the Company had granted the underwriters a 30-day option to purchase up to an additional 550,500 shares of common stock at the public offering price which was not exercised.

 

In March 2020, the World Health Organization declared the disease caused by the novel coronavirus, COVID-19, to be a pandemic. COVID-19 has spread throughout the globe, including in the Commonwealth of Massachusetts where the Company’s headquarters are located, and in other areas where the Company has business operations. In response to the outbreak, the Company has followed the guidelines of the U.S. Centers for Disease Control and Prevention and applicable state government authorities to protect the health and safety of the Company’s employees, families, suppliers, customers and communities. While these existing measures and, COVID-19 generally, have not materially disrupted the Company’s business to date, any future actions necessitated by the COVID-19 pandemic may result in disruption to the Company’s business.

 

While the COVID-19 pandemic continues to rapidly evolve, the Company continues to assess the impact of the COVID-19 pandemic to best mitigate risk and continue the operations of the Company’s business. The extent to which the outbreak impacts the Company’s business, liquidity, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including new information that may emerge concerning the severity of the COVID-19 pandemic and the actions to contain it or treat its impact, among others.  If the Company, its customers or suppliers experience prolonged shutdowns or other business disruptions, the Company’s business, liquidity, results of operations and financial condition are likely to be materially adversely affected, and the Company’s ability to access the capital markets may be limited. 

 

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, 2020. 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.  The impact of the COVID-19 pandemic on the global financing markets may reduce the Company's ability to raise additional capital, if necessary, which could negatively impact the Company's liquidity.  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. NEPSI Acquisition

 

Acquisition of NEPSI

 

As described in Note 1, Nature of the Business and Operations and Liquidity, on the Acquisition Date, the Company acquired all of the issued and outstanding shares of capital stock of NEPSI and membership interests of Northeast Power Realty, LLC, a New York limited liability company, which holds the real property that serves as NEPSI’s headquarters. NEPSI is a U.S.-based global provider of medium-voltage metal-enclosed power capacitor banks and harmonic filter banks for use on electric power systems. Prior to the Acquisition, the Company had purchased $0.4 million of products from NEPSI in fiscal year 2019 for which NEPSI was paid and had recorded revenue.

 

Pursuant to the Stock Purchase Agreement, the Company acquired all of the issued and outstanding shares of NEPSI, and membership interest in the realty entity, for which the Company paid $26.0 million in cash and issued 873,657 restricted shares of the Company’s common stock. Additionally, the Company may issue to the selling stockholders up to an additional 1,000,000 shares of common stock upon NEPSI’s achievement of specified revenue objectives during varying periods of up to four years following closing of the Acquisition. This contingent consideration is recorded as a derivative liability based on a Monte Carlo simulation to determine fair value at the time of issuance. NEPSI is now a wholly-owned subsidiary of the Company and is operated and reported as a component of its Grid business unit.

 

The Acquisition completed by the Company during the nine months ended December 31, 2020 has been accounted for under the purchase method of accounting in accordance with ASC 805, Business Combinations. The Company allocated the purchase price to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition. The excess of the purchase price paid by the Company over the estimated fair value of net assets acquired has been recorded as goodwill.  As NEPSI was previously a private company, the adoption of Accounting Standards Codification ("ASC 606") was completed as part of the Acquisition.  See Note 3 "Revenue Recognition" for further details.  There were no leases acquired and the Acquisition had no impact to the Company's reporting under ASC 842.

 

The total purchase price of approximately $42.4 million includes the fair value of shares of the Company’s common stock issued at closing, cash paid, and contingent consideration as follows (in millions):

 

Cash payment

  $ 26.0  

Issuance of 873,657 shares of Company’s common stock

    12.4  

Contingent consideration

    4.0  

Total consideration

    42.4  

 

At the Acquisition Date, in addition to the $26.0 million cash, the Company valued the Company’s common stock, using $14.23 per share, which was the closing price on the day that the Company acquired NEPSI and $4.0 million of contingent consideration for the earnout liability valued as of the Acquisition Date. Acquisition costs of $0.3 million were recorded in selling, general and administrative ("SG&A") costs for the three and nine months ended December 31, 2020.

 

The fair value of the contingent consideration was determined using a Monte Carlo model and is accounted for as a derivative liability which is revalued at the fair value determined at each subsequent balance sheet date until the contingencies are resolved and the shares to be issued are determined, with the change in fair value recorded in the current period operating loss or (income).  See Note 13, "Warrants and Derivative Liabilities" for further details and a summary of key assumptions used to determine fair value in each period.

 

The following table summarizes the allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed and related deferred income taxes in connection with the Acquisition (in millions):

 

Net working capital (excluding inventory and deferred revenue)

  $ 0.1  

Inventory

    4.2  

Property, plant and equipment

    2.3  

Deferred revenue

    (2.7 )

Deferred tax liability

    (1.7 )

Net tangible assets/(liabilities)

    2.2  
         

Backlog

    0.6  

Trade names and trademarks

    0.6  

Customer relationships

    6.1  

Net identifiable intangible assets/(liabilities)

    7.3  
         

Goodwill

    32.9  
         

Total purchase consideration

  $ 42.4  

 

Inventory includes a $1.0 million adjustment to step up the inventory balance to fair value consistent with the purchase price allocation.  The fair value was determined based on the estimated selling price of the inventory, less the remaining manufacturing and selling cost and a normal profit margin on those manufacturing and selling efforts. The $1.0 million step up adjustment increased cost of revenue in the three and nine months periods ended December 31, 2020 as the inventory was sold.  This increase is not reflected in the pro forma condensed combined statements of operations because it does not have a continuing impact beyond the first year.

 

Backlog of $0.6 million was evaluated using the multi period excess earnings method under the income approach. The contracts with customers do not provide for any guarantees to source all future requirements from the Company. The amortization method being utilized is economic consumption estimated over a two year period with the expense being allocated to cost of revenues.

 

Customer relationships of $6.1 million relates to customers currently under contract and was determined based on a multi period excess earnings method under the income approach.   The method of amortization being utilized is the economic consumption over 7 years with the expense being allocated to SG&A.

 

Trade names and trademarks of $0.6 million were reviewed, using the assumption that the Company would continue to utilize the NEPSI trade name indefinitely. The relief from royalty method was utilized using an 8% royalty rate on revenues with a 13% discount rate over 8 years. 

 

Goodwill represents the value associated with the acquired workforce and expected synergies related to the business combination of the two companies. Goodwill resulting from the Acquisition was assigned to the Company’s Grid segment.  Goodwill recognized in the Acquisition is not deductible for tax purposes. This purchase price allocation is preliminary and has not been finalized as the analysis on the assets and liabilities acquired, primarily the tax related liability may require further adjustments to our purchase accounting that could result in a measurement period adjustment that would impact our reported net assets and goodwill as of October 1, 2020. Material changes, if any, to the preliminary allocation summarized above will be reported once the related uncertainties are resolved, but no later than October 1, 2021. The $1.7 million of deferred tax liability is primarily related to inventory step up and intangibles. 

 

Unaudited Pro Forma Operating Results

 

The unaudited pro forma condensed consolidated statement of operations for the three and nine months ended December 31, 2020 and 2019 is presented as if the Acquisition had occurred on April 1, 2019.

 

   

Three Months Ended December 31,

   

Nine Months Ended December 31,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues

  $ 23,632     $ 22,412     $ 78,298     $ 66,135  

Operating loss

    (8,769 )     (6,988 )     (15,016 )     (15,469 )

Net loss

  $ (9,169 )   $ (7,117 )   $ (15,775 )   $ (7,879 )
                                 

Net loss per common share

                               

Basic

  $ (0.36 )   $ (0.32 )   $ (0.67 )   $ (0.36 )

Diluted

  $ (0.36 )   $ (0.35 )   $ (0.67 )   $ (0.57 )

Shares - basic

    25,470       22,059       23,594       21,660  
Shares - diluted     25,470       22,077       23,594       21,768  

 

The pro forma amounts include the historical operating results of the Company and NEPSI with appropriate adjustments that give effect to acquisition related costs, income taxes, intangible amortization resulting from the Acquisition and certain conforming accounting policies of the Company.  The three and nine month periods ended December 31, 2020 include $2.7 million decrease in operating loss and net loss for the change in fair value on the contingent consideration.  The pro forma amounts are not necessarily indicative of the operating results that would have occurred if the Acquisition and related transactions had been completed at the beginning of the applicable periods presented. In addition, the pro forma amounts are not necessarily indicative of operating results in future periods.
 
In the unaudited consolidated results for the three and nine months ended December 31, 2020, NEPSI’s operations are included in the Company’s consolidated results from the date of Acquisition of October 1, 2020. NEPSI contributed $6.6 million of revenue and $0.1 million in net income for the Company for the three and nine month periods ended December 31, 2020.  Amortization expense of $0.5 million is included in the three and nine months ended December 31, 2020 as a result of the NEPSI acquired intangible assets.  In addition, $1.0 million for the step-up basis assigned to acquired inventory was charged to cost of revenues in the three and nine months ended December 31, 2020.

 

 

3. Revenue Recognition

 

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, Revenue from Contracts with Customers. 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, 202078% and 79% 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 three and nine months ended December 31, 2019, 57% and 69%, respectively, of revenue was recognized at the point in time when control transferred to the customer, with the remainder being recognized over time.

 

Following the Acquisition of NEPSI, the Company evaluated all open NEPSI contracts at the date of the Acquisition against a five-step model in accordance with ASC 606 as NEPSI, as a private company, had deferred adopting ASC606 prior to the Acquisition, as permitted.  The Company identified two NEPSI revenue streams which are (1) the sale of its major components which falls under the equipment and systems product line and (2) the sale of spare parts, which falls under the service product line.  Further details on each of these product lines can be found below.  The Company does not expect a material impact to its consolidated statements of operations on an ongoing basis resulting from the adoption of the ASC 606 standard for the NEPSI business, and NEPSI revenue streams will follow the existing policies noted below. 

 

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, which is primarily upon delivery, 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, 2020, the Company recorded $1.1 million and $1.8 million in grant revenue, respectively, which is included in the Company’s Grid segment revenue.  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 segment revenue.

 

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 represent 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 not to 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 three 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, 2020

   

Nine Months Ended December 31, 2020

 

Product Line:

 

Grid

   

Wind

   

Grid

   

Wind

 
Equipment and systems   $ 15,930     $ 6,153     $ 47,729     $ 12,828  
Services and technology development     1,156       393       3,420       1,984  

Total

  $ 17,086     $ 6,546     $ 51,149     $ 14,812  
                                 

Region:

                               
Americas   $ 13,394     $ 14     $ 39,626     $ 56  
Asia Pacific     351       6,461       6,736       14,463  
EMEA     3,341       71       4,787       293  

Total

  $ 17,086     $ 6,546     $ 51,149     $ 14,812  

 

   

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  

 

As of December 31, 2020, and 2019, the Company’s contract assets and liabilities primarily relate to the timing differences between cash received from a customer in connection with contractual rights to invoicing and the timing of revenue recognition following completion of performance obligations. The Company's accounts receivable balance is made up entirely of customer contract related balances. Changes in the Company’s contract assets, which are included in “Unbilled accounts receivable” and “Deferred program costs” (see Note 8, “Accounts Receivable” and Note 9, “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, 2020

  $ 5,711     $ 1,631     $ 26,142  

Increases for costs incurred to fulfill performance obligations

          6,635        
Increase for balances acquired     101             2,700  

Increase (decrease) due to customer billings

    (8,255 )           42,785  

Decrease due to cost recognition on completed performance obligations

          (6,969 )      

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

    6,644             (48,274 )

Other changes and FX impact

          33       1,025  

Ending balance as of December 31, 2020

  $ 4,201     $ 1,330     $ 24,378  

 

    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  

 

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, 2020, the Company had outstanding performance obligations on existing contracts under ASC 606 to be recognized in the next twelve months of approximately $51.1 million. There are also approximately $7.2 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 the three and nine months ended December 31, 2020 and 2019:

 

     

Three Months Ended

   

Nine Months Ended

 
 

Reportable

 

December 31,

   

December 31,

 
 

Segment

 

2020

   

2019

   

2020

   

2019

 

Inox Wind Limited

Wind

    24 %     <10%       12 %     11 %

Department of Homeland Security

Grid

    <10%       22 %     <10%       12 %

Vestas

Grid

    <10%       25 %     <10%       10 %

EPC Services

Grid

    14 %     <10%       17 %     <10%  

 

 

4. 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, 2020 and 2019 (in thousands):

 

   

Three Months Ended December 31,

   

Nine Months Ended December 31,

 
   

2020

   

2019

   

2020

   

2019

 
Cost of revenues   $ (23 )   $ 21     $ 35     $ 45  
Research and development     179       117       470       219  
Selling, general and administrative     683       452       2,092       971  

Total

  $ 839     $ 590     $ 2,597     $ 1,236  

 

The Company issued 27,341 shares of immediately vested common stock and 697,167 shares of restricted stock awards during the nine months ended December 31, 2020 and 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.  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, 2020. This expense will be recognized over a weighted average expense period of approximately 0.4 years. The total unrecognized compensation cost for unvested outstanding restricted stock was $5.2 million at December 31, 2020. This expense will be recognized over a weighted-average expense period of approximately 1.9 years.

 

The Company did not grant any stock options during the nine months ended December 31, 2020.  The Company granted 5,939 stock options during the nine months ended December 31, 2019.  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,

 
   

2020

   

2019

   

2020

   

2019

 

Expected volatility

    N/A       N/A       N/A       66.5 %

Risk-free interest rate

    N/A       N/A       N/A       1.8 %

Expected life (years)

    N/A       N/A       N/A       5.91  

Dividend yield

    N/A       N/A       N/A    

None

 

 

11

 

 

 

5. 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 and nine months ended December 31, 20201.1 million shares were not included in the calculation of diluted EPS.  Of these, 1.0 million relate to shares tied to the derivative liability for which the contingency has not yet been met, and 0.1 million relate to outstanding stock options as they were considered anti-dilutive. For the three and nine months ended December 31, 2019, 0.1 million shares related to outstanding stock options were not included in the calculation of diluted EPS as they were considered anti-dilutive.

 

The following table reconciles the numerators and denominators of the earnings per share calculation for the three and nine months ended December 31, 2020 and 2019 (in thousands, except per share data):

 

   

Three Months Ended December 31,

   

Nine Months Ended December 31,

 
   

2020

   

2019

   

2020

   

2019

 

Numerator:

                               

Net loss

  $ (7,933 )   $ (6,845 )   $ (15,062 )   $ (11,209 )

Less: decrease in fair value of warrants, net of income tax

          (556 )           (4,648 )

Plus: change in fair value due to exercise of warrants

                      83  
Net loss - diluted   $ (7,933 )   $ (7,401 )   $ (15,062 )   $ (15,774 )

Denominator:

                               
Weighted-average shares of common stock outstanding     26,532       22,110       24,143       21,729  
Weighted-average shares subject to repurchase     (1,062 )     (925 )     (1,132 )     (943 )
Shares used in per-share calculation ― basic     25,470       21,185       23,011       20,786  
Common stock warrants           18             108  
Shares used in per-share calculation ― diluted     25,470       21,203       23,011       20,894  
Net loss per share ― basic   $ (0.31 )   $ (0.32 )   $ (0.65 )   $ (0.54 )
Net loss per share ― diluted   $ (0.31 )   $ (0.35 )   $ (0.65 )   $ (0.75 )

 

For the three and 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 warrants issued to Hudson Bay Capital (the “Hudson Warrants”) for 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. 

 

 

6. Goodwill and Other Intangibles

 

Goodwill

 

The guidance under ASC 805-30 provides for the recognition of goodwill on the Acquisition Date measured as the excess of the aggregate consideration transferred over the net of the Acquisition Date amounts of net assets acquired and liabilities assumed. The Company's goodwill balance relates to the Acquisition of NEPSI in the current year and ITC in fiscal 2017 and is reported in the Grid business segment.  The fair market value of the contingent consideration included in the total consideration transferred was determined using the Monte Carlo model, and all other consideration transferred was calculated using its observable fair market value. The tangible net assets acquired fair market value was based on observable market fair value. The acquired intangible asset fair value was determined using discounted cash flows under an excess in earnings model or relief in royalty method where appropriate.

 

Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized but reviewed for impairment. Goodwill is reviewed annually and whenever events or changes in circumstances indicate that the carrying value of the goodwill might not be recoverable.

 

The following table provides a roll forward of the changes in our Grid business segment goodwill balance:

 

   

Goodwill

 

March 31, 2020

  $ 1,719  

NEPSI Acquisition

    32,940  

Less impairment loss

    -  

December 31, 2020

  $ 34,659  

 

The Company did not identify any triggering events in the three and nine months ended December 31, 2020, that would require interim impairment testing of goodwill.

 

Other Intangibles

 

Intangible assets at December 31, 2020 and March 31, 2020 consisted of the following (in thousands):

 

   

December 31, 2020

   

March 31, 2020

         
   

Gross Amount

   

Accumulated Amortization

   

Net Book Value

   

Gross Amount

   

Accumulated Amortization

   

Net Book Value

   

Estimated Useful Life

 

Backlog

  $ 600     $ (285 )   $ 315     $     $     $       2  
Trade name     600             600                         Indefinite  

Customer relationships

    6,100       (239 )     5,861                         7  

Core technology and know-how

    5,970       (2,782 )     3,188       5,970       (2,420 )     3,550       5-10  

Intangible assets

  $ 13,270     $ (3,306 )   $ 9,964     $ 5,970     $ (2,420 )   $ 3,550          

 

The Company recorded intangible amortization expense related to customer relationship and core technology and know-how of $0.4 million and $0.6 million in the three and nine months ended December 31, 2020, respectively, and $0.1 and $0.3 million for the three and nine months ended December 31, 2019, respectively.  Additionally, in each of the three and nine months ended December 31, 2020 the Company recorded $0.3 million related to intangible amortization related to backlog that is reported in cost of revenues.

 

Expected future amortization expense related to intangible assets is as follows (in thousands):

 

Years ended March 31,

 

Total

 
2021     826  
2022     2,115  
2023     1,808  
2024     1,393  
2025     1,077  
Thereafter     2,145  

Total

  $ 9,364  

 

The Company's intangible assets relate entirely to the Grid business segment operations in the United States.

 

12

 

 

 

7. 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, 2020.

 

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.

 

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 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 are recorded to other income (expense), net.  The Company recognized no change in the three months ended December 31, 2020 and $0.2 million in unrealized losses on marketable securities, which is recorded in other income (expense), net, for the nine months ended December 31, 2020 and less than a $0.1 million gain which was recognized during the nine months ended December 31, 2020 upon the sale of one of the certificates of deposit.  The Company did not recognize any gains or losses on marketable securities in the three and nine months ended December 31, 2019 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.

 

Contingent Consideration

 

Contingent consideration relates to the earnout payment set forth in the Stock Purchase Agreement that provides that the selling stockholders may receive up to an additional 1,000,000 shares of common stock of the Company upon the achievement of certain specified revenue objectives over varying periods of up to four years following the Acquisition Date. See Note 13, "Warrants and Derivative Liabilities" and Note 2, “NEPSI Acquisition” for further discussion. The Company relied on a Monte Carlo method to determine the fair value of the contingent consideration on the Acquisition Date and will continue to revalue the fair value of the contingent consideration using the same method at each subsequent balance sheet date until the contingencies are resolved and the shares to be issued are determined, with the change in fair value recorded in the current period operating loss. 

 

Warrants

 

The Company issued the Hudson Warrants in conjunction with an equity offering to Hudson Bay Capital in November 2014 and issued warrants to purchase 58,823 shares of the Company's common stock in conjunction a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (“Hercules Warrants”). The Hercules Warrants were exercised on April 8, 2019.  The Hudson Warrants were partially exercised on November 13, 2019 and the remaining unexercised warrants expired on November 13, 2019.  As of December 31, 2020, the Company has no remaining outstanding warrants.

 

The Company historically 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 a discussion of the warrants and the valuation assumptions used.

 

The following table provides the assets and liabilities carried at fair value on a recurring basis, measured as of December 31, 2020 and March 31, 2020 (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, 2020:

                               

Assets:

                               

Cash equivalents

  $ 56,101     $ 56,101     $     $  

Marketable securities

  $ 10,239     $ 10,239     $     $  
Derivative liabilities:                                
Contingent consideration   $ 6,730     $     $     $ 6,730  

 

    Total Carrying Value     Quoted Prices in Active Markets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)  

March 31, 2020:

                               

Assets:

                               

Cash equivalents

  $ 19,394     $ 19,394     $     $  

Marketable securities

  $ 35,195     $ 35,195     $     $  

 

The table below reflects the activity for the Company’s derivative liability measured at fair value on a recurring basis (in thousands):

 

   

Acquisition Contingent Consideration

 

April 1, 2020

  $ -  

Issuance of contingent consideration

    3,990  

Mark to market adjustment

    2,740  

Balance at December 31, 2020

  $ 6,730  

 

13

 

 

 

 

8. Accounts Receivable

 

Accounts receivable at December 31, 2020 and March 31, 2020 consisted of the following (in thousands):

 

   

December 31, 2020

   

March 31, 2020

 
Accounts receivable (billed)   $ 7,897     $ 11,276  
Accounts receivable (unbilled)     4,201       5,711  
Less: Allowance for doubtful accounts     (15 )      

Accounts receivable, net

  $ 12,083     $ 16,987  

 

The Company recorded allowance for doubtful accounts of less than $0.1 million for the three and nine months ended December 31, 2020 and no allowance for the three and nine months ended December 31, 2019.  The allowances are based on evaluation of customer accounts that are past due.

 

14

 

 

 

9. Inventory

 

Inventory, net of reserves, at December 31, 2020 and March 31, 2020 consisted of the following (in thousands):

 

   

December 31, 2020

   

March 31, 2020

 
Raw materials   $ 7,651     $ 10,739  
Work-in-process     3,497       1,345  
Finished goods     1,698       5,260  
Deferred program costs     1,330       1,631  

Net inventory

  $ 14,176     $ 18,975  

 

The Company recorded inventory write-downs of $0.4 million and $0.3 million for the three months ended December 31, 2020 and 2019, respectively.  The Company recorded inventory write-downs of $1.6 million and $0.5 million for the nine months ended December 31, 2020 and 2019, 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, 2020 and March 31, 2020 primarily represent costs incurred on programs where the Company needs to complete performance obligations before the related revenue and costs will be recognized.

 

 

 

10. Property, Plant and Equipment

 

The cost and accumulated depreciation of property, plant and equipment at December 31, 2020 and March 31, 2020 are as follows (in thousands):

 

   

December 31, 2020

   

March 31, 2020

 
Construction in progress - equipment   $ 111     $ 3,130  
Land     270        
Building     1,630        
Equipment and software     41,743       41,737  
Furniture and fixtures     1,310       1,302  
Leasehold improvements     6,306       2,477  
Property, plant and equipment, gross     51,370       48,646  
Less accumulated depreciation     (41,823 )     (40,081 )

Property, plant and equipment, net

  $ 9,547     $ 8,565  

 

Depreciation expense was $1.2 million and $1.0 million for the three months ended December 31, 2020 and 2019, respectively. Depreciation expense was $2.9 million and $3.1 million for the nine months ended December 31, 2020 and 2019, respectively.  The decrease in construction in progress primarily relates to the completion of capital investments in the Company's HTS equipment and leasehold improvements in the Company's leased facilities in Westminster and Ayer, Massachusetts.  The increase in land and building relates to the property added as part of the NEPSI Acquisition.

 

 

11. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses at December 31, 2020 and March 31, 2020 consisted of the following (in thousands):

 

   

December 31, 2020

   

March 31, 2020

 
Accounts payable   $ 3,664     $ 10,045  
Accrued inventories in-transit     1,131       763  
Accrued other miscellaneous expenses     2,397       1,986  
Advanced deposits     1,417       666  
Accrued compensation     5,751       5,683  
Income taxes payable     635       933  
Accrued product warranty     2,020       2,015  

Total

  $ 17,015     $ 22,091  

 

The Company generally provides a one to three 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,

 
   

2020

   

2019

   

2020

   

2019

 
Balance at beginning of period   $ 2,109     $ 1,641     $ 2,015     $ 1,545  
Acquired warranty obligations     147             147        
Change in accruals for warranties during the period     124       93       507       247  
Settlements during the period     (360 )     (28 )     (649 )     (86 )

Balance at end of period

  $ 2,020     $ 1,706     $ 2,020     $ 1,706  

 

15

 

 

 

12. Income Taxes

 

The Company recorded an income tax benefit of $1.5 million and $1.2 million in the three and nine month periods ended December 31, 2020, respectively. The Company recorded income tax expense of $0.1 million in the three months ended December 31, 2019, and less than $0.1 million in the nine months ended December 31, 2019.

 

As a result of a difference in book and tax basis related to the intangible assets acquired in the Acquisition (see Note 2, "NEPSI Acquisition"), the Company recorded a deferred tax liability of $1.7 million. As a result, the Company was able to benefit from additional deferred tax assets and therefore released a corresponding valuation allowance of $1.7 million during the three and nine months ended December 31, 2020.  The purchase price allocation is preliminary and has not been finalized as the analysis on the assets and liabilities acquired, primarily the tax related liability, may require further adjustments to the Company's purchase accounting that could result in measurement period adjustments that would impact the Company's reported net assets and goodwill as of October 1, 2020. Material changes, if any, to the preliminary allocation summarized in Note 2, "NEPSI Acquisition" will be reported once the related uncertainties are resolved, but no later than October 1, 2021.  Goodwill recognized in the Acquisition is not deductible for tax purposes.

 

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, 2020 and did not have any gross unrecognized tax benefits as of March 31, 2020.

 

 

13. Warrants and Derivative Liabilities

 

Contingent Consideration

 

The Company evaluated the Acquisition earnout payment set forth in the Stock Purchase Agreement (see Note 2, "NEPSI Acquisition" for further details), which may require settlement in the Company's common stock, and determined the contingent consideration qualified for liability classification and derivative treatment under ASC 815, Derivatives and Hedging. As a result, for each period, the fair value of the contingent consideration will be remeasured and the resulting gain or loss will be recognized in operating expenses until the share amount is fixed.

 

Following is a summary of the key assumptions used in a Monte Carlo simulation to calculate the fair value of the contingent consideration related to the Acquisition:

 

   

December 31,

   

October 1,

 

Fiscal Year 2020

 

2020

   

2020

 

Revenue risk premium

    6.90 %     7.10 %

Revenue volatility

    30 %     30 %

Stock Price

  $ 23.42     $ 14.23  

Payment delay (days)

    80        

Fair value

 

$6.7 million

   

$4.0 million

 

 

The Company recorded a net loss of $2.7 million resulting from the increase in the fair value of the contingent consideration in both the three and nine months ended December 31, 2020.

 

Warrants

 

The Company accounted for its warrants as liabilities due to certain adjustment provisions within the instruments, which required that they be recorded at fair value. The warrants were subject to revaluation at each balance sheet date and any change in fair value was recorded as a change in fair value of warrants until the earlier of its expiration or its exercise at which time the warrant liability was reclassified to equity. The Company calculated the fair value of the warrants utilizing an integrated lattice model. See Note 7, "Fair Value Measurements", for further discussion.  As of December 31, 2020, the Company had no remaining outstanding warrants.

 

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 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 Infinia Technology Corporation ("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.  

 

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 Hudson Warrants were 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 Hudson Warrants for 786,000 restricted shares of Company common stock at $7.81 per shareThe remaining 32,181 warrants expired on November 13, 2019. 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 Warrants during the three and nine months ended December 31, 2019, respectively. 

 

 

16

 

 

 

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.

 

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 real estate lease agreements generally provide for fixed minimum rental payments and the payment of real estate taxes and insurance. Many of these real estate 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 assets 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, 2020 and March 31, 2020 are as follows:

 

   

December 31, 2020

   

March 31, 2020

 

Operating Leases:

               

Right-of-use assets

  $ 3,806     $ 3,359  
Total right-of-use assets     3,806       3,359  
                 

Lease liabilities - ST

  $ 581     $ 439  

Lease liabilities - LT

    3,329       3,000  
Total operating lease liabilities     3,910       3,439  
                 
Weighted-average remaining lease term     6.04       6.91  
Weighted-average discount rate     6.76 %     7.08 %

 

The costs related to the Company's leases for the three and nine months ended December 31, 2020 and 2019 are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31, 2020

   

December 31, 2020

 

Operating Leases:

               
Operating lease costs - fixed   $ 226     $ 618  
Operating lease costs - variable     31       87  
Short-term lease costs     338       989  

Total lease costs

    595       1,694  

 

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31, 2019

   

December 31, 2019

 

Operating Leases:

               

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,

       
2021   $ 216  
2022     814