10-Q 1 cpst-20170630x10q.htm 10-Q cpst_Current Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

or

 

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: 001-15957

 


 

Capstone Turbine Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-4180883

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

21211 Nordhoff Street,
Chatsworth, California
(Address of principal executive offices)

 

91311
(Zip Code)

 

818-734-5300

(Registrant’s telephone number, including area code)

 


 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

Non‑accelerated filer ☐

Smaller reporting company ☒

Emerging growth company ☐

 

(Do not check if a smaller reporting 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 ☒

 

The number of shares outstanding of the registrant’s common stock as of August 4, 2017 was 42,615,940.

 

 

 


 

CAPSTONE TURBINE CORPORATION

INDEX

 

 

    

 

    

Page
Number

PART I — FINANCIAL INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and March 31, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2017 and 2016

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2017 and 2016

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2. 

 

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

 

22

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

34

 

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

36

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

36

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

36

 

 

 

 

 

Item 5. 

 

Other Information

 

36

 

 

 

 

 

Item 6. 

 

Exhibits

 

37

 

 

 

 

 

Signatures 

 

38

 

 

2


 

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

 

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

    

March 31,

 

 

    

2017

    

2017

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,139

 

$

14,191

 

Restricted cash

 

 

5,000

 

 

5,514

 

Accounts receivable, net of allowances of $6,804 at June 30, 2017 and $6,845 at March 31, 2017

 

 

12,231

 

 

17,003

 

Inventories

 

 

15,438

 

 

14,538

 

Prepaid expenses and other current assets

 

 

2,583

 

 

3,073

 

Total current assets

 

 

49,391

 

 

54,319

 

Property, plant and equipment, net

 

 

2,007

 

 

2,115

 

Non-current portion of inventories

 

 

887

 

 

961

 

Intangible assets, net

 

 

583

 

 

651

 

Other assets

 

 

302

 

 

225

 

Total assets

 

$

53,170

 

$

58,271

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

13,590

 

$

14,719

 

Accrued salaries and wages

 

 

1,374

 

 

1,819

 

Accrued warranty reserve

 

 

3,073

 

 

3,766

 

Deferred revenue

 

 

5,877

 

 

5,050

 

Revolving credit facility

 

 

9,484

 

 

11,533

 

Current portion of notes payable and capital lease obligations

 

 

128

 

 

302

 

Total current liabilities

 

 

33,526

 

 

37,189

 

Long-term portion of notes payable and capital lease obligations

 

 

23

 

 

26

 

Other long-term liabilities

 

 

147

 

 

158

 

Total liabilities

 

 

33,696

 

 

37,373

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued

 

 

 —

 

 

 —

 

Common stock, $.001 par value; 515,000,000 shares authorized, 42,388,199 shares issued and 42,268,594 shares outstanding at June 30, 2017; 38,920,174 shares issued and 38,803,630 shares outstanding at March 31, 2017

 

 

42

 

 

39

 

Additional paid-in capital

 

 

877,364

 

 

874,697

 

Accumulated deficit

 

 

(856,291)

 

 

(852,199)

 

Treasury stock, at cost; 119,605 shares at June 30, 2017 and 116,544 shares at March 31, 2017

 

 

(1,641)

 

 

(1,639)

 

Total stockholders’ equity

 

 

19,474

 

 

20,898

 

Total liabilities and stockholders' equity

 

$

53,170

 

$

58,271

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

    

2017

    

2016

 

Revenue:

 

 

 

    

 

 

 

Product, accessories and parts

 

$

15,491

 

$

15,783

 

Service

 

 

3,749

 

 

3,282

 

Total revenue

 

 

19,240

 

 

19,065

 

Cost of goods sold:

 

 

 

 

 

 

 

Product, accessories and parts

 

 

14,037

 

 

13,637

 

Service

 

 

2,964

 

 

2,429

 

Total cost of goods sold

 

 

17,001

 

 

16,066

 

Gross margin

 

 

2,239

 

 

2,999

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

1,149

 

 

1,621

 

Selling, general and administrative

 

 

4,960

 

 

5,746

 

Total operating expenses

 

 

6,109

 

 

7,367

 

Loss from operations

 

 

(3,870)

 

 

(4,368)

 

Other expense

 

 

(10)

 

 

(16)

 

Interest income

 

 

 9

 

 

 5

 

Interest expense

 

 

(221)

 

 

(134)

 

Loss before income taxes

 

 

(4,092)

 

 

(4,513)

 

Provision for income taxes

 

 

 —

 

 

 3

 

Net loss

 

$

(4,092)

 

$

(4,516)

 

 

 

 

 

 

 

 

 

Net loss per common share—basic and diluted

 

$

(0.10)

 

$

(0.17)

 

Weighted average shares used to calculate basic and diluted net loss per common share

 

 

41,081

 

 

27,171

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

    

2017

    

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(4,092)

 

$

(4,516)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

304

 

 

407

 

Amortization of deferred financing costs

 

 

105

 

 

44

 

Reduction in accounts receivable allowances

 

 

(13)

 

 

(904)

 

Inventory provision

 

 

183

 

 

208

 

Provision for warranty expenses

 

 

779

 

 

142

 

Loss on disposal of equipment

 

 

23

 

 

171

 

Stock-based compensation

 

 

154

 

 

238

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

4,786

 

 

(1,254)

 

Inventories

 

 

(1,010)

 

 

1,935

 

Prepaid expenses and other current assets

 

 

296

 

 

230

 

Accounts payable and accrued expenses

 

 

(1,147)

 

 

(32)

 

Accrued salaries and wages and long term liabilities

 

 

(455)

 

 

(359)

 

Accrued warranty reserve

 

 

(1,472)

 

 

(377)

 

Deferred revenue

 

 

827

 

 

1,863

 

Net cash used in operating activities

 

 

(732)

 

 

(2,204)

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(178)

 

 

(9)

 

Net cash used in investing activities

 

 

(178)

 

 

(9)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net repayments of revolving credit facility

 

 

(2,049)

 

 

(3,382)

 

Repayment of notes payable and capital lease obligations

 

 

(122)

 

 

(194)

 

Cash used in employee stock-based transactions

 

 

(5)

 

 

(2)

 

Net proceeds from issuance of common stock and warrants

 

 

2,520

 

 

13,128

 

Net cash provided by financing activities

 

 

344

 

 

9,550

 

Net increase (decrease) in Cash, Cash Equivalents and Restricted Cash

 

 

(566)

 

 

7,337

 

Cash, Cash Equivalents and Restricted Cash, Beginning of Period

 

 

19,705

 

 

16,706

 

Cash, Cash Equivalents and Restricted Cash, End of Period

 

$

19,139

 

$

24,043

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

108

 

$

136

 

Income taxes

 

$

 —

 

$

 3

 

Supplemental Disclosures of Non-Cash Information:

 

 

 

 

 

 

 

Acquisition of property and equipment through accounts payable

 

$

 7

 

$

53

 

 

See accompanying notes to condensed consolidated financial statements.

5


 

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Business and Organization

Capstone Turbine Corporation (the “Company”) develops, manufactures, markets and services microturbine technology solutions for use in stationary distributed power generation applications, including cogeneration (combined heat and power (“CHP”), integrated combined heat and power (“ICHP”), and combined cooling, heat and power (“CCHP”)), renewable energy, natural resources, critical power supply, transportation and marine. In addition, the Company’s microturbines can be used as battery charging generators for hybrid electric vehicle applications. The Company was organized in 1988 and has been commercially producing its microturbine generators since 1998.

 

2.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The condensed consolidated balance sheet at March 31, 2017 was derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2017. In the opinion of management, the interim condensed consolidated financial statements include all adjustments (including normal recurring adjustments) necessary for a fair presentation of the financial condition, results of operations and cash flows for such periods. Results of operations for any interim period are not necessarily indicative of results for any other interim period or for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2017. This Quarterly Report on Form 10-Q (this “Form 10-Q”) refers to the Company’s fiscal years ending March 31 as its “Fiscal” years.

Evaluation of Ability to Maintain Current Level of Operations In connection with preparing the consolidated financial statements for the first quarter of Fiscal 2018, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to meet its obligations as they became due for the next twelve months from the date of issuance of its first quarter of Fiscal 2018 financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, negative cash flows from operating activities, the continued negative impact caused by the volatility of the global oil and gas markets, a strong U.S. dollar (making our products more expensive overseas) and ongoing geopolitical tensions in Russia, North Africa and the Middle East. Cash provided by working capital during the first quarter of Fiscal 2018 were higher than planned, primarily because of cash provided by the collection of accounts receivable. However, the Company did not fully achieve its planned number of product shipments during the first quarter of Fiscal 2018, resulting in lower than expected revenue. The Company incurred a net loss of $4.1 million and used cash in operating activities of $0.7 million for the first quarter of Fiscal 2018. In addition, as of June 30, 2017, the Company had cash, cash equivalents and restricted cash of $19.1 million, and outstanding borrowings under its credit facility of $9.5 million.

Management evaluated these conditions in relation to the Company’s ability to meet its obligations as they become due. The Company’s ability to continue current operations and to execute on management’s plans is dependent on its ability to generate cash flows from operations. Management believes that the Company will continue to make progress on its path to profitability by continuing to lower its operating costs and to develop its geographical and vertical markets.  The Company may seek to raise funds by selling additional securities (through the at-the-market offering or otherwise) to the public or to selected investors or by obtaining additional debt financing. There is no assurance that the Company will be able to obtain additional funds on commercially favorable terms or at all. If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity or debt securities that the Company would issue may have rights, preferences or privileges senior to those of the holders of its common stock. 

6


 

On June 2, 2017, the Company, entered into two secured credit facilities (the “Bridge Bank Credit Agreements”) with Western Alliance Bank through its Bridge Bank division (“Bridge Bank”), with credit support provided by the Export-Import Bank of the United States through its working capital guarantee program. Under the terms of the Bridge Bank Credit Agreements, the Company may borrow up to $12.0 million on a revolving basis depending on, among other factors, the amount of its eligible inventory and accounts receivable. The Bridge Bank Credit Agreements are for a two-year period ending June 2, 2019. See Note 11—Revolving Credit Facility, for discussion of the credit facilities with Bridge Bank.

The Company maintained two Credit and Security Agreements, with Wells Fargo Bank, National Association (“Wells Fargo”), which provided the Company with a credit facility up to $20.0 million in the aggregate. Upon closing with Bridge Bank the Company’s existing credit facilities with Wells Fargo, were paid off in full.

Based on the Company’s current operating plan, management anticipates that, given current working capital levels, current financial projections, the ability to borrow under its credit facility with Bridge Bank and the funds raised by selling additional securities through the at-the-market offering as of the date of issuance of its first quarter of Fiscal 2018 financial statements, the Company will be able to meet its financial obligations as they become due over the next twelve months from the date of issuance of its first quarter of Fiscal 2018 financial statements. 

The consolidated financial statements include the accounts of the Company, Capstone Turbine International, Inc., its wholly owned subsidiary that was formed in June 2004 and Capstone Turbine Financial Services, LLC, its wholly owned subsidiary that was formed in October 2015, after elimination of inter-company transactions.

 

3.  Recently Issued Accounting Standards

 

In July 2017, the Financial Accounting Standards Board (“FASB”) issued a two-part Accounting Standards Update (“ASU”) No. 2017-11, I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception (“ASU 2017-11”). ASU 2017-11 amends guidance in FASB ASC 260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. ASU 2017-11 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company adopted ASU 2017-11 for the three months ended June 30, 2017, and retrospectively applied ASU 2017-11 as required. See Note 10—Fair Value Measurements for further discussion on changes as a result of the adoption of ASU 2017-11.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), (“ASU 2016-02”). The purpose of ASU 2016-02 is to provide financial statement users a better understanding of the amount, timing, and uncertainty of cash flows arising from leases. The adoption of ASU 2016-02 will result in the recognition of a right-of-use asset and a lease liability for most operating leases. New disclosure requirements include qualitative and quantitative information about the amounts recorded in the financial statements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. ASU 2016-02 requires a modified retrospective transition by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective with the option to elect certain practical expedients. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-02 on its consolidated financial position and results of operations.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires inventory that is recorded using the first-in, first-out method to be measured at the lower of cost or net realizable value. ASU 2015-11 is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company adopted ASU 2015-11 with no impact on its consolidated financial position or results of operations.

Revenue Recognition Related ASUs:

7


 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes nearly all existing revenue recognition guidance under GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.

In August 2015, the FASB issued FASB ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date (“ASU 2014-09”), which deferred the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using one of two retrospective application methods. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.

In March 2016, the FASB issued FASB ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (“ASU 2016-08”). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 clarifies the implementation guidance for identifying performance obligations and determining when to recognize revenue on licensing agreements for intellectual property.

In May 2016, the FASB issued ASU No. 2016-11, Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of ASU 2014-09 and ASU 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (“ASU 2016-11”). ASU 2016-11 rescinds certain SEC staff comments previously made in regard to these ASU’s.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”) that provide guidance on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to ASU 2014-09. The amendments in ASU 2014-09 affect narrow aspects of the guidance in ASU 2014-09, which is not yet effective. The amendments in ASU 2014-09 address loan guarantee fees, impairment testing of contract costs, provisions for losses on construction-type and production-type contracts, and various disclosures.

The Company is evaluating its existing revenue recognition policies and the impact of ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016- 10, ASU 2016-11, ASU 2016-12 and ASU 2016-20, if any, on its financial position and results of operations. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for ASU 2014-09. The Company will be required to adopt the revenue recognition standard in annual reporting periods beginning after December 15, 2017 (fiscal year ending March 31, 2019) and interim periods within those annual periods.

4.  Customer Concentrations and Accounts Receivable

 

Sales to Horizon Power Systems (“Horizon”) and E-Finity Distributed Generation, LLC (“E-Finity”), two of the Company’s domestic distributors, accounted for 21% and 15%, respectively, of revenue for the first quarter of Fiscal 2018. Sales to Regatta Solutions, Inc. (“Regatta”) and E-Finity, two of the Company’s domestic distributors, accounted for 17% and 10%, respectively, of revenue for the first quarter of Fiscal 2017. 

Additionally, E-Finity, Optimal Group Australia Pty Ltd, one of the Company’s Australian distributors and Dtc Soluciones Inmobiliarias S.A. de C.V. (“DTC”), one of the Company’s Mexican distributors accounted for 26%, 13%, and 10%, respectively, of net accounts receivable as of June 30, 2017. E-Finity, DTC and Reliable Secure Power Systems, one of the Company’s domestic distributors (“RSP”), accounted for 29%, 12% and 10%, respectively, of net accounts receivable as of March 31, 2017.

The Company recorded a net bad debt recovery of approximately $13,000 during the first quarter of Fiscal 2018. As of June 30, 2017, the Company collected approximately $1.7 million from BPC Engineering (“BPC”), one of its Russian distributors, on their combined balances of previously reserved receivable and deferred revenue totaling

8


 

approximately $8.1 million. The Company recorded a bad debt recovery of $0.9 million during the first quarter of Fiscal 2017.

 

5.  Inventories

 

Inventories are valued on a first in first out (“FIFO”) basis and lower of cost or net realizable value and consisted of the following as of June 30, 2017 and March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

 

    

2017

    

2017

 

Raw materials

 

$

14,921

 

$

15,035

 

Work in process

 

 

85

 

 

 —

 

Finished goods

 

 

1,319

 

 

464

 

Total

 

 

16,325

 

 

15,499

 

Less non-current portion

 

 

(887)

 

 

(961)

 

Current portion

 

$

15,438

 

$

14,538

 

 

The non-current portion of inventories represents the portion of the inventories in excess of amounts expected to be sold or used in the next twelve months. The non-current inventories are primarily comprised of repair parts for older generation products that are still in operation but are not technologically compatible with current configurations. The weighted average age of the non-current portion of inventories on hand as of June 30, 2017 is 1.7 years. The Company expects to use the non-current portion of the inventories on hand as of June 30, 2017 over the periods presented in the following table (in thousands):

 

 

 

 

 

 

 

 

 

Non-current Inventory

 

 

 

 

Balance Expected

 

Expected Period of Use

    

 

to be Used

 

13 to 24 months

 

$

455

 

25 to 36 months

 

 

432

 

Total

 

$

887

 

 

 

6.  Property, Plant and Equipment

 

Property, plant and equipment consisted of the following as of June 30, 2017 and March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

 

    

2017

    

2017

 

Machinery, rental equipment, equipment, automobiles and furniture

 

$

15,698

 

$

17,657

 

Leasehold improvements

 

 

9,822

 

 

9,870

 

Molds and tooling

 

 

2,856

 

 

2,866

 

 

 

 

28,376

 

 

30,393

 

Less, accumulated depreciation

 

 

(26,369)

 

 

(28,278)

 

Total property, plant and equipment, net

 

$

2,007

 

$

2,115

 

 

 

Depreciation expense for property and equipment was $0.2 million and $0.3 million for first quarter of Fiscal 2018 and Fiscal 2017, respectively.

 

 

 

 

 

9


 

7.  Intangible Assets

 

Intangible assets consisted of the following as of June 30, 2017 and March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

Intangible

 

 

 

 

 

 

 

 

 

Amortization

 

Assets,

 

Accumulated

 

Intangible

 

 

 

Period

 

Gross

 

Amortization

 

Assets, Net

 

Manufacturing license

    

17 years

    

$

3,700

    

$

3,696

    

$

 4

 

Technology

 

10 years

 

 

2,240

 

 

1,661

 

 

579

 

Trade name & parts, service and TA100 customer relationships

 

1.2 to 5 years

 

 

1,766

 

 

1,766

 

 

 —

 

Total

 

 

 

$

7,706

 

$

7,123

 

$

583

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

Intangible

 

 

 

 

 

 

 

 

 

Amortization

 

Assets,

 

Accumulated

 

Intangible

 

 

 

Period

 

Gross

 

Amortization

 

Assets, Net

 

Manufacturing license

    

17 years

    

$

3,700

    

$

3,684

    

$

16

 

Technology

 

10 years

 

 

2,240

 

 

1,605

 

 

635

 

Trade name & parts, service and TA100 customer relationships

 

1.2 to 5 years

 

 

1,766

 

 

1,766

 

 

 —

 

Total

 

 

 

$

7,706

 

$

7,055

 

$

651

 

 

Amortization expense for the intangible assets was $0.1 million during the first quarter of each of Fiscal 2018 and Fiscal 2017.

 

Expected future amortization expense of intangible assets as of June 30, 2017 is as follows (in thousands):

 

 

 

 

 

 

 

 

Amortization

 

Year Ending March 31,

    

Expense

 

2018 (remainder of fiscal year)

 

 

172

 

2019

 

 

224

 

2020

 

 

187

 

Thereafter

 

 

 —

 

Total expected future amortization

 

$

583

 

 

The manufacturing license provides the Company with the ability to manufacture recuperator cores previously purchased from Solar Turbines Incorporated (“Solar”). The Company is required to pay a per-unit royalty fee over a seventeen-year period for cores manufactured and sold by the Company using the technology. Royalties of approximately $6,500 and $8,300 were earned by Solar for the first quarter of Fiscal 2018 and 2017, respectively. Earned royalties of approximately $16,500 and $10,000 were unpaid as of June 30, 2017 and March 31, 2017, respectively, and are included in accounts payable and accrued expenses in the accompanying balance sheets.

 

8.  Stock-Based Compensation

The following table summarizes, by statement of operations line item, stock-based compensation expense for the Company’s first quarter of Fiscal 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

June 30,

 

 

 

2017

    

2016

 

Cost of goods sold

 

$

20

    

$

15

 

Research and development

 

 

 7

 

 

 3

 

Selling, general and administrative

 

 

127

 

 

220

 

Stock-based compensation expense

 

$

154

 

$

238

 

 

10


 

Stock Plans

 

2000 Equity Incentive Plan

 

In June 2000, the Company adopted the 2000 Equity Incentive Plan (“2000 Plan”). The 2000 Plan provides for a total maximum aggregate number of shares which may be issued of 1,849,000 shares.

 

Stock Options

 

The Company issues stock options under the 2000 Plan to employees, non-employee directors and consultants that vest and become exercisable over a four-year period and expire 10 years after the grant date. The Company uses a Black-Scholes valuation model to estimate the fair value of the options at the grant date, and compensation cost is recorded on a straight-line basis over the vesting period. During the year ended March 31, 2017, the Company established an accounting policy election to assume zero forfeiture for stock options and account for forfeitures when they occur. All options are subject to the following vesting provisions: one-fourth vest one year after the issuance date and 1/48th vest on the first day of each full month thereafter, so that all options will be vested on the first day of the 48th month after the grant date. Information relating to stock options for the Company’s first quarter of Fiscal 2018 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

Aggregate

 

 

 

 

 

Average

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Exercise Price

 

Term

 

Value

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

Options outstanding at March 31, 2017

    

314,537

    

$

15.48

    

 

    

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

 

Exercised

 

 —

 

$

 —

 

 

 

 

 

 

Forfeited, cancelled or expired

 

(2,500)

 

$

26.92

 

 

 

 

 

 

Options outstanding at June 30, 2017

 

312,037

 

$

15.39

 

5.2

 

 

 —

 

Options fully vested at June 30, 2017 and those expected to vest beyond June 30, 2017

 

312,037

 

$

15.39

 

5.2

 

 

 —

 

Options exercisable at June 30, 2017

 

223,107

 

$

20.85

 

3.6

 

 

 —

 

 

Black-Scholes Model Valuation Assumptions

 

There were no stock options granted during either of the first quarter of Fiscal 2018 or 2017. The Company recorded expense of approximately $8,000 associated with its stock options during the first quarter of Fiscal 2018. There was no expense associated with stock options during the first quarter of Fiscal 2017. As of June 30, 2017, there was approximately $0.1 million of total compensation cost related to unvested stock option awards that is expected to be recognized as expense over a weighted average period of 3.2 years.

 

Restricted Stock Units and Performance Restricted Stock Units

 

The Company issues restricted stock units under the 2000 Plan to employees, non-employee directors and consultants. The restricted stock units are valued based on the closing price of the Company’s common stock on the date of issuance, and compensation cost is recorded on a straight-line basis over the vesting period. During the fiscal year ended March 31, 2017, the Company established an accounting policy election to assume zero forfeiture for restricted stock units and account for forfeitures when they occur. The restricted stock units vest in equal installments over a period of four years. For restricted stock units with four year vesting, one-fourth vest annually beginning one year after the issuance date. The restricted stock units issued to non-employee directors vest one year after the issuance date. The following table outlines the restricted stock unit and performance restricted stock unit (“PRSU”) activity:

 

 

11


 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Average Grant

 

 

 

 

 

Date Fair

 

Restricted Stock and Performance Restricted Stock Units

 

Shares

 

Value

 

Nonvested restricted stock units outstanding at March 31, 2017

    

316,709

    

$

2.85

 

Granted

 

29,540

 

 

0.67

 

Vested and issued

 

(9,191)

 

 

20.22

 

Forfeited

 

(2,255)

 

 

2.97

 

Nonvested restricted stock units outstanding at June 30, 2017

 

334,803

 

 

2.18

 

Restricted stock units expected to vest beyond June 30, 2017

 

334,780

 

$

2.18

 

 

The following table provides additional information on restricted stock units for the Company’s first quarter of Fiscal 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

June 30,

 

 

    

2017

    

2016

 

Restricted stock compensation expense (in thousands)

 

$

139

    

$

188

 

Aggregate fair value of restricted stock units vested and issued (in thousands)

 

$

 7

 

$

22

 

Weighted average grant date fair value of restricted stock units granted during the period

 

$

0.67

 

$

 —

 

 

As of June 30, 2017, there was approximately $0.4 million of total compensation cost related to unvested restricted stock units that is expected to be recognized as expense over a weighted average period of 1.2 years.

 

Restricted Stock Awards

The Company issues restricted stock awards under the 2000 Plan to employees and non-employee directors. During the first quarter of Fiscal 2018 and 2017 the Company granted stock awards to non-employee directors who elected to take payment of all or any part of the directors’ fees in stock in lieu of cash. The following table outlines the restricted stock award activity for the first quarter of Fiscal 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

    

2017

    

2016

 

Restricted stock awards compensation expense (in thousands)

 

$

 7

    

$

50

 

Restricted stock awards granted

 

 

2,016

 

 

32,201

 

Weighted average grant date fair value of restricted stock awards granted during the period

 

$

0.62

 

$

1.57

 

 

For each term of the Board of Directors (beginning on the date of an annual meeting of stockholders and ending on the date immediately preceding the next annual meeting of stockholders), a non-employee director may elect to receive a stock award in lieu of all or any portion of their annual retainer or committee fee cash payment. The shares of stock were valued based on the closing price of the Company’s common stock on the date of grant.

Grants outside of 2000 Plan

As of June 30, 2017, the Company had outstanding 88,930 non-qualified common stock options and 14,820 restricted stock units issued outside of the 2000 Plan. The Company granted these stock options and restricted stock units during the three months ended September 30, 2016 as inducement grants to the new Vice President, Manufacturing of the Company, with exercise prices or values, as applicable, based on the fair market value of the Company’s common stock on the grant date.

Although the options and restricted stock units were not granted under the 2000 Plan, they are governed by terms and conditions identical to those under the 2000 Plan. All options are subject to the following vesting provisions: one-fourth vest one year after the issuance date and 1/48th vest on the first day of each full month thereafter, so that all

12


 

options will be vested on the first day of the 48th month after the grant date. All outstanding options have a contractual term of ten years. The restricted stock units vest in equal installments over a period of four years.

Stockholder Rights Plan

On May 6, 2016, the Company entered into Amendment No. 5 (the “Amendment”) to the Rights Agreement, dated as of July 7, 2005, as amended by Amendment No. 1, dated as of July 3, 2008, Amendment No. 2, dated as of June 9, 2011, Amendment No. 3, dated as of July 1, 2014 and Amendment No. 4, dated as of August 5, 2014, (the “Original Rights Agreement”) between the Company and Computershare Inc. 

The Amendment accelerated the expiration of the Company’s preferred share purchase rights (the “Original Rights”) from 5:00 p.m., California time, on the 30th day after the Company’s 2017 annual meeting of stockholders to 5:00 p.m., California time, on May 6, 2016, and had the effect of terminating the Original Rights Agreement on that date. At the time of the termination of the Original Rights Agreement, all of the Original Rights distributed to holders of the Company’s common stock pursuant to the Original Rights Agreement expired.

On May 6, 2016, the Company entered into a rights agreement (the “NOL Rights Agreement”) with Computershare Inc., as rights agent. In connection with the NOL Rights Agreement, the Company’s Board of Directors authorized and declared a dividend distribution of one preferred stock purchase right (a “New Right”) for each share of the Company’s common stock authorized and outstanding. Each New Right entitles the registered holder to purchase from the Company a unit consisting of one one-thousandth of a share of Series B Junior Participating Preferred Stock, par value $0.001 per share, at a purchase price of $8.76 per unit, subject to adjustment. The description and terms of the New Rights are set forth in the NOL Rights Agreement.

The purpose of the NOL Rights Agreement is to diminish the risk that the Company’s ability to use its net operating losses and certain other tax assets (collectively, “Tax Benefits”) to reduce potential future federal income tax obligations would become subject to limitations by reason of the Company’s experiencing an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986. A company generally experiences such an ownership change if the percentage of its stock owned by its “5-percent shareholders,” as defined in Section 382 of the Internal Revenue Code of 1986, increases by more than 50 percentage points over a rolling three-year period. The NOL Rights Agreement is designed to reduce the likelihood that the Company will experience an ownership change under Section 382 of the Internal Revenue Code of 1986 by (i) discouraging any person or group from becoming a 4.99% shareholder and (ii) discouraging any existing 4.99% shareholder from acquiring additional shares of the Company’s stock.

The New Rights will not be exercisable until the earlier to occur of (i) the close of business on the tenth business day after a public announcement or filing that a person has, or group of affiliated or associated persons or persons acting in concert have, become an “Acquiring Person,” which is defined as a person or group of affiliated or associated persons or persons acting in concert who, at any time after the date of the NOL Rights Agreement, have acquired, or obtained the right to acquire, beneficial ownership of 4.99% or more of the Company’s outstanding shares of common stock, subject to certain exceptions or (ii) the close of business on the tenth business day after the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person becoming an Acquiring Person (the earlier of such dates being called the “Distribution Date”). Certain synthetic interests in securities created by derivative positions, whether or not such interests are considered to be ownership of the underlying common stock or are reportable for purposes of Regulation 13D of the Exchange Act, are treated as beneficial ownership of the number of shares of common stock equivalent to the economic exposure created by the derivative position, to the extent actual shares of the common stock are directly or indirectly held by counterparties to the derivatives contracts.

The New Rights, which are not exercisable until the Distribution Date, will expire prior to the earliest of (i) May 6, 2019 or such later day as may be established by the Board of Directors prior to the expiration of the New Rights, provided that the extension is submitted to the Company’s stockholders for ratification at the next annual meeting of stockholders of the Company succeeding such extension; (ii) the time at which the New Rights are redeemed pursuant to the NOL Rights Agreement; (iii) the time at which the New Rights are exchanged pursuant to the NOL Rights Agreement; (iv) the time at which the New Rights are terminated upon the occurrence of certain transactions; (v) the close of business on the first day after the Company’s 2017 annual meeting of stockholders, if approval by the stockholders of the Company of the NOL Rights Agreement has not been obtained on or prior to the close of business on the first day after the Company’s 2017 annual meeting of stockholders; (vi) the close of business on the effective date of

13


 

the repeal of Section 382 of the Internal Revenue Code of 1986, if the Board of Directors determines that the NOL Rights Agreement is no longer necessary or desirable for the preservation of Tax Benefits; and (vii) the close of business on the first day of a taxable year of the Company to which the Board of Directors determines that no Tax Benefits are available to be carried forward.

Each share of Series B Junior Participating Preferred Stock will be entitled, when, as and if declared, to a preferential per share quarterly dividend payment equal to the greater of (i) $1.00 per share or (ii) an amount equal to 1,000 times the dividend declared per share of common stock. Each share of Series B Junior Participating Preferred Stock will entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Company. In the event of any merger, consolidation or other transaction in which shares of common stock are converted or exchanged, each share of Series B Junior Participating Preferred Stock will be entitled to receive 1,000 times the amount received per one share of common stock.

 

9.   Offerings of Common Stock and Warrants and At-the-Market Offering Program

 

On October 18, 2016, the Company entered into a securities purchase agreement with certain accredited investors, pursuant to which the Company agreed to sell 3.6 million shares of common stock, pre-funded Series B warrants to purchase up to 2.7 million shares of common stock, and Series A warrants to purchase up to 6.3 million shares of common stock. Pursuant to a placement agent agreement, dated as of October 18, 2016, the Company engaged Oppenheimer & Co. Inc. as the lead placement agent for the offering and ROTH Capital Partners, LLC as co-placement agent for the offering. Each share of common stock was sold at a price of $1.20. Each Series B warrant was issued with an exercise price of $1.20 per share of common stock, $1.19 of which was pre-funded at closing and $0.01 of which is payable upon exercise. Each Series A warrant was issued with an initial exercise price of $1.34 per share of common stock. These Series A warrants contain anti-dilution provisions that reduce the exercise price of the warrants if certain dilutive issuances occur. The anti-dilution provisions of the Series A warrants are subject to approval by the Company’s stockholders. The net proceeds to the Company from this offering, after deducting the placement agent fees and other estimated offering expenses, were approximately $6.8 million. The offering closed on October 21, 2016.

On April 19, 2016, the Company entered into an underwriting agreement with Oppenheimer & Co. Inc. as the sole book-running manager, and Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC, as the co-manager, related to the public offering of 2.7 million shares of our common stock and pre-funded Series B warrants to purchase up to 5.5 million shares of common stock, which were offered in lieu of common stock to those purchasers whose purchase of common stock in the offering otherwise would result in the purchaser beneficially owning more than 4.99% of the Company’s outstanding common stock following the completion of the offering. Also included in the offering were Series A warrants to purchase 4.1 million shares of common stock. Every two shares of common stock were sold with one Series A warrant to purchase one share of common stock at a collective negotiated price of $3.50. Every two Series B warrants were sold with one Series A warrant to purchase one share of common stock at a collective negotiated price of $3.48. The Series A warrants are exercisable, subject to certain limitations, during the period commencing six months after the date of the issuance and expire five years after the first day they are exercisable. The pre-funded Series B warrants were exercisable, subject to certain limitations, upon issuance and expire nine months from the date of issuance, subject to extension under certain circumstances. The net proceeds to the Company from the sale of the common stock and warrants, after deducting fees and other offering expenses, were approximately $13.1 million. The offering closed on April 22, 2016. 

During the three months ended June 30, 2017, there was no Series A warrant activity and 10,407,500 Series A warrants remained outstanding. During the Fiscal year ended March 31, 2017, all Series B warrants were exercised and there are no Series B warrants outstanding.

Effective August 28, 2015, the Company entered into a sales agreement with respect to an at-the-market offering program pursuant to which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $30.0 million. The Company will set the parameters for sales of the shares, including the number to be sold, the time period during which sales are requested to be made, any limitation on the number that may be sold in one trading day and any minimum price below which sales may not be made. During the three months ended June 30, 2017, we issued 3.5 million shares of the Company’s common stock under the at-the-market offering program and the net proceeds to the Company from the sale of the Company’s common stock were approximately $2.5 million after deducting commissions paid of approximately $37,700. As of June 30, 2017, 10.7 million shares of the Company’s common stock were sold pursuant to the at-the-market offering program and

14


 

the net proceeds to the Company from the sale of the common stock were approximately $12.8 million after deducting commissions paid of approximately $0.4 million. As of June 30, 2017, approximately $13.7 million remained available for issuance with respect to the at-the-market offering program. These available proceeds are subject to Instruction I.B.6(a) to Form S-3 often referred to as the “Baby Shelf Rules.”

 

10.  Fair Value Measurements

 

The FASB has established a framework for measuring fair value using generally accepted accounting principles. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:

 

Level 1.  Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

 

Level 2.  Inputs to the valuation methodology include:

 

·

Quoted prices for similar assets or liabilities in active markets

 

·

Quoted prices for identical or similar assets or liabilities in inactive markets

 

·

Inputs other than quoted prices that are observable for the asset or liability

 

·

Inputs that are derived principally from or corroborated by observable market data by correlation or other means

 

If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.

 

Level 3.  Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The table below presents our assets and liabilities that are measured at fair value on a recurring basis at June 30, 2017 and are categorized using the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Restricted cash

    

$

5,000

    

$

5,000

    

$

 —

    

$

 —

 

 

The table below presents our assets and liabilities that are measured at fair value on a recurring basis during the fiscal year ended March 31, 2017 and are categorized using the fair value hierarchy (in thousands):

 

 

 

15


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Cash equivalents

    

$

7,520

    

$

7,520

    

$

 —

    

$

 —

 

Restricted cash

    

$

5,514

    

$

5,514

    

$

 —

    

$

 —

 

Cash equivalents include cash held in money market and U.S. treasury funds at March 31, 2017.

 

Basis for Valuation

 

The carrying values reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. As the Company's obligations under the Credit Facility are based on adjustable market rates reflective of what would currently be available to the Company, the Company has determined that the carrying value approximates the fair value. The carrying values and estimated fair values of these obligations are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

 

June 30, 2017

 

March 31, 2017

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

    

Value

    

Fair Value

    

Value

    

Fair Value

 

Obligations under the credit facility

    

$

9,484

  

$

9,484

   

$

11,533

 

$

11,533

 

Adoption of ASU 2017-11

The Company changed its method of method of accounting for warrants through the early adoption of ASU 2017-11 during the three months ended June 30, 2017 on a full retrospective basis. Accordingly, the Company reclassified the warrant liability to additional paid in capital on its March 31, 2017 consolidated balance sheets, which increased additional paid-in capital by $2.9 million and decreased warrant liability by $2.9 million. In addition, because of the retrospective adoption, the Company credited change in fair value of warrant liability on its consolidated statements of operations by $0.5 million and $1.3 million for the three months and year ended March 31, 2017, respectively. The change in unrealized gain/loss on warrant liability was offset by a $1.3 million credit to accumulated deficit on the consolidated balance sheets. Adoption of ASU 2017-11 had no impact on the Company’s consolidated statement of cash flows in the current or previous interim and annual reporting periods. The adoption of ASU 2017-11 also had no impact on statement of operations during the three months ended June 30, 2016 and no cumulative effect to the accumulated deficit as of the beginning of the prior annual reporting period, as there were no warrants outstanding in those respective periods that were impacted by ASU 2017-11. The following table provides a reconciliation of warrant liability, additional paid-in capital, accumulated deficit and change in fair value of warrant liability on the consolidated balance sheets for the year ended March 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

    

Warrant Liability

    

Additional Paid-in Capital

 

Accumulated deficit

 

Balance, March 31, 2017 (Prior to adoption of ASU 2017-11)

 

$

2,917

 

$

870,457

 

$

(850,876)

 

Reclassified warrant liability

 

$

(4,240)

 

$

4,240

 

$

 —

 

Reclassified unrealized gain on warrant liability

 

$

1,323

 

$

 —

 

$

(1,323)

 

Balance, March 31, 2017 (After adoption of ASU 2017-11)

    

$

 —

    

$

874,697

 

$

(852,199)

 

 

 

11.  Revolving Credit Facility

 

Former Credit Facility  The Company maintained two Credit and Security Agreements, as amended, with Wells Fargo, which provided the Company with a line of credit of up to $20.0 million in the aggregate. As of June 30, 2016 and March 31, 2017, $6.1 million and $11.5 million in borrowings were outstanding, respectively, under the former credit facility. Interest expense related to the former credit facility during the first quarter of Fiscal 2018 was $0.2 million, which includes $0.1 million in amortization of deferred financing costs. Interest expense related to the former

16


 

credit facility during the first quarter of Fiscal 2017 was $0.1 million, which includes $43,750 in amortization of deferred financing costs. The Company’s borrowing rate was 4.9% at March 31, 2017.

New Credit Facility   On June 2, 2017, the Company, entered into two secured credit facilities (the “Bridge Bank Credit Agreements”) with Western Alliance Bank through its Bridge Bank division (“Bridge Bank”), with credit support provided by the Export-Import Bank of the United States through its working capital guarantee program. Under the terms of the Bridge Bank Credit Agreements, the Company may borrow up to $12.0 million on a revolving basis depending on, among other factors, the amount of its eligible inventory and accounts receivable. The Bridge Bank Credit Agreements are for a two-year period ending June 2, 2019. Upon closing with Bridge Bank the Company’s existing credit facilities with Wells Fargo, were paid off in full.

Total borrowings, letter of credit obligations and the then aggregate committed amount of cash management services under the Bridge Bank Credit Agreements may not exceed 85% of the sum of unrestricted cash and the amount of cash collateral held at Bridge Bank. As a condition of the Bridge Bank Credit Agreements, the Company has restricted $5.0 million of cash equivalents as additional security for the credit facility. Borrowings under the Bridge Bank Credit Agreements will bear per annum interest at the prime rate plus 1.5 percent, subject to increase during the occurrence of an event of default. Obligations under the Bridge Bank Credit Agreements are secured by all of the Company’s assets, including intellectual property and general intangibles. The Company has incurred $0.2 million in origination fees. These fees has been recorded under the caption “Prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheets and amortized to interest expense through June 2019. As of June 30, 2017, $9.5 million in borrowings were outstanding under the new credit facility. Interest expense related to the new credit facility during the first quarter of Fiscal 2018 was $58,800, which includes $18,000 in amortization of deferred financing costs. The Company’s borrowing rate was 5.8% at June 30, 2017.

The Bridge Bank Credit Agreements include affirmative covenants as well as negative covenants that prohibit a variety of actions without Bridge Bank’s consent, including covenants that limit the Company’s ability to (a) incur or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or stock of another entity, or (d) sell, assign, transfer or otherwise dispose of the Company’s assets. 

The financial covenants  of the domestic credit agreement with Bridge Bank (the “Domestic Facility”) requires the Company not to exceed specified levels of losses relative to its financial model and the outstanding line of credit advances may not exceed 85% of  the sum of unrestricted cash and the amount of cash collateral held at Bridge Bank. The Domestic Facility also defines an event of default to include a material adverse effect on the Company’s business. An event of default for this or any other reason, if not waived, could have a material adverse effect on the Company. As of June 30, 2017 we were in compliance with the covenants contained in the Bridge Bank Credit Agreements for Fiscal 2018. 

 

12.  Accrued Warranty Reserve

 

The Company provides for the estimated costs of warranties at the time revenue is recognized. The specific terms and conditions of those warranties vary depending upon the microturbine product sold and geography of sale.  The Company’s product warranties generally start from the delivery date and continue for up to eighteen months. Factors that affect the Company’s warranty obligation include product failure rates, anticipated hours of product operations and costs of repair or replacement in correcting product failures. These factors are estimates that may change based on new information that becomes available each period. Similarly, the Company also accrues the estimated costs to address reliability repairs on products no longer in warranty when, in the Company’s judgment, and in accordance with a specific plan developed by the Company, it is prudent to provide such repairs. The Company assesses the adequacy of recorded warranty liabilities quarterly and makes adjustments to the liability as necessary. When the Company has sufficient evidence that product changes are altering the historical failure occurrence rates, the impact of such changes is then taken into account in estimating future warranty liabilities. During the three months ended December 31, 2016, the Company recorded a one-time non-cash warranty provision of approximately $5.2 million to retrofit proactively select non-Signature Series C200 microturbines with the more robust new Signature Series generator components to improve product performance and reliability. The balance of this reliability repair program as of June 30, 2017 was $1.3 million. Changes in accrued warranty reserve during the first quarter of Fiscal 2018 are as follows (in thousands):

17


 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of the period

 

$

3,766

 

Standard warranty provision

 

 

878

 

Accrual related to reliability repair programs

 

 

(99)

 

Deductions for warranty claims

 

 

(1,472)

 

Balance, end of the period

 

$

3,073

 

 

 

 

 

13.  Deferred Revenue

As of March 31, 2017 the balance of deferred revenue was approximately $5.0 million. The change in deferred revenue attributed to Comprehensive Factory Protection Plan (“FPP”) contracts during the first quarter of Fiscal 2018 was an decrease of $61,500 and the change in deferred revenue attributed to deposits during the first quarter of Fiscal 2018 was increase of $0.9 million. Changes in deferred revenue during the first quarter of Fiscal 2018 are as follows (in thousands):

 

 

 

 

 

FPP Balance, beginning of the period

 

$

3,414

 

FPP Billings

 

 

3,617

 

FPP Revenue recognized

 

 

(3,678)

 

Balance attributed to FPP contracts

 

 

3,353

 

Deposits

 

 

2,524

 

Deferred revenue balance, end of the period

 

$

5,877

 

 

Deferred revenue attributed to FPP contracts represents the unearned portion of the billed agreements. FPP agreements are generally paid quarterly in advance with revenue recognized on a straight line basis over the contract period. Deposits are primarily non-refundable cash payments from distributors for orders to be delivered in the future.

 

14.  Other Current Liabilities

The Company is a party to a Development and License Agreement with Carrier Corporation (“Carrier”) regarding the payment of royalties on the sale of each of the Company’s 200 kilowatt (“C200”) microturbines. Carrier earned $0.2 million in royalties for C200 and C1000 Series system sales during each of the first quarter of Fiscal 2018 and 2017. Earned royalties of approximately $0.2 million and $0.3 million were unpaid as of June 30, 2017 and March 31, 2017, respectively, and are included in accrued expenses in the accompanying balance sheets.

 

15.  Commitments and Contingencies

Purchase Commitments

As of June 30, 2017, the Company had firm commitments to purchase inventories of approximately $28.4 million through Fiscal 2019. Certain inventory delivery dates and related payments are not firmly scheduled; therefore, amounts under these firm purchase commitments will be payable upon the receipt of the related inventories.

Lease Commitments

The Company leases offices and manufacturing facilities under various non-cancelable operating leases expiring at various times through the fiscal year ending March 31, 2020. All of the leases require the Company to pay maintenance, insurance and property taxes. The lease agreements for primary office and manufacturing facilities provide for rent escalation over the lease term and renewal options for five-year periods. Rent expense is recognized on a straight-line basis over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to deferred rent, which is included in other long-term liabilities in the accompanying balance sheets. The balance of deferred rent was approximately $0.1 million and $0.2 million as of June 30, 2017 and March 31, 2017, respectively. Rent expense was approximately $0.6 million during the first quarter of each of Fiscal 2018 and Fiscal 2017.

18


 

On June 7, 2017 the Company and Prologis, L.P entered into a Fourth Amendment to Lease (the “Van Nuys Fourth Amendment”) to amend the Lease by extending the term of the Lease for a period of sixty-two (62) months commencing on December 31, 2017 to February 28, 2023. The Van Nuys Fourth Amendment also adjusts the monthly base rent payable by the Company under the Lease Agreement to the following: $0 per month from January 1, 2018 through February 28, 2018; $66,846 per month from March 1, 2018 through December 31, 2018; $68,852 per month from January 1, 2019 through December 31, 2019; $70,917 per month from January 1, 2020 through December 31, 2020; $73,045 per month from January 1, 2021 through December 31, 2021; $75,236 per month from January 1, 2022 through December 31, 2022; and $77,493 per month from January 1, 2023 through February 28, 2023. The Van Nuys Fourth Amendment also provides the Company with an option to extend the Lease by an additional five year term following the expiration of the term of the Lease as amended by the Lease Amendment and provides that Prologis, L.P. will contribute a tenant improvement allowance toward the Company’s approved alterations to the premises.

Other Commitments

The Company has agreements with certain of its distributors requiring that if the Company renders parts obsolete in inventories the distributors own and hold in support of their obligations to serve fielded microturbines, then the Company is required to replace the affected stock at no cost to the distributors. While the Company has never incurred costs or obligations for these types of replacements, it is possible that future changes in the Company’s product technology could result and yield costs to the Company if significant amounts of inventory are held at distributors. As of June 30, 2017, no significant inventories were held at distributors.

Legal Matters

Federal Securities Class Action

Two putative securities class action complaints were filed against the Company and certain of its current and former officers in the United States District Court for the Central District of California under the following captions:  David Kinney, etc. v. Capstone Turbine, et al., No. 2:15-CV-08914 on November 16, 2015 (the “Kinney Complaint”) and Kevin M. Grooms, etc. v. Capstone Turbine, et al., No. 2:15-CV-09155 on December 18, 2015 (the “Grooms Complaint”).

The putative class in the Kinney Complaint is comprised of all purchasers of the Company’s securities between November 7, 2013 and November 5, 2015.  The Kinney Complaint alleges material misrepresentations and omissions in public statements regarding BPC and the likelihood that BPC would not be able to fulfill many legal and financial obligations to the Company.  The Kinney Complaint also alleges that the Company’s financial statements were not appropriately adjusted in light of this situation and were not maintained in accordance with GAAP, and that the Company lacked adequate internal controls over accounting.  The Kinney Complaint alleges that these public statements and accounting irregularities constituted violations by all named defendants of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, as well as violations of Section 20(a) of the Exchange Act by the individual defendants.  The Grooms Complaint makes allegations and claims that are substantially identical to those in the Kinney Complaint, and both complaints seek compensatory damages of an undisclosed amount.  On January 16, 2016, several shareholders filed motions to consolidate the Kinney and Grooms actions and for appointment as lead plaintiff.  On February 29, 2016, the Court granted the motions to consolidate, and appointed a lead plaintiff.  On May 6, 2016, a Consolidated Amended Complaint with allegations and claims substantially identical to those of the Kinney Complaint was filed in the consolidated action.  The putative class period in the Consolidated Amended Complaint is June 12, 2014 to November 5, 2015.  Defendants filed a motion to dismiss the Consolidated Amended Complaint on June 17, 2016. On March 10, 2017, the Court issued an order granting Defendants’ motion to dismiss in its entirety with leave to amend. Plaintiffs filed an amended complaint on April 28, 2017. Defendants’ motion to dismiss was filed June 2, 2017. Plaintiffs filed their opposition to the motion to dismiss on July 7, 2017, and Defendants filed their reply in support of the motion to dismiss on July 28, 2017. A hearing is scheduled for August 18, 2017. The Company has not recorded any liability as of March 31, 2017 since any potential loss is not probable or reasonably estimable given the preliminary nature of the proceedings.

State Derivative Lawsuits — California

On February 18, 2016, a purported shareholder derivative action was filed in Los Angeles Superior Court in the State of California against the Company and certain of its current and former officers and directors under the following

19


 

caption:  Stesiak v. Jamison, et al., No. BC610782.  The lawsuit alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition.  The complaint also alleges that the defendants failed to timely adjust the Company’s account receivables and backlog to reflect BPC’s inability to pay the Company.  The complaint asserts causes of action for breach of fiduciary duty and unjust enrichment.  It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties and unjust enrichment, that the Company institute corporate governance reforms, and disgorgement from the individual defendants.  On May 5, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time as the defendants’ motion(s) to dismiss the federal securities class action are either granted with prejudice or denied in whole or in part.  On May 10, 2016, the Court entered that proposed order. Given that the federal securities class action was dismissed with leave to amend, this case is still stayed. A status conference is scheduled for September 20, 2017.

On June 8, 2016, a purported shareholder derivative action entitled Velma Kilpatrick v. Simon, et al., No. BC623167, was filed in Los Angeles Superior Court in the State of California against the Company and certain of its current and former officers and directors.  The complaint alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition.  The complaint also alleges that the defendants failed to timely adjust the Company’s account receivables and backlog to reflect BPC’s inability to pay the Company.  The complaint asserts causes of action for breach of fiduciary duty.  It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties, and that the Company institute corporate governance reforms. On August 23, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time as the defendants’ motion(s) to dismiss the federal securities class action are either granted with prejudice or denied in whole or in part.  Given that the federal securities class action was dismissed with leave to amend, this case is still stayed. A status conference is scheduled for September 26, 2017.

On December 27, 2016, a purported shareholder derivative action entitled Andre Rosowsky v. Jamison, et al., No. 30-2016-00894859-CU-MC-CJC was filed in Orange County Superior Court in the State of California against the Company and certain of its current and former officers and directors. The complaint alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition.  The complaint also alleges that the defendants failed to timely adjust the Company’s account receivables and backlog to reflect BPC’s inability to pay the Company.  The complaint asserts causes of action for breach of fiduciary duty and unjust enrichment.  It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties, that the Company institute corporate governance reforms, and restitution from the individual defendants. On April 14, 2017, the case was removed to the United States District Court for the Central District of California. On May 5, 2017, the plaintiff voluntarily dismissed his complaint without prejudice.

Federal Derivative Lawsuits

On March 7, 2016, a purported shareholder derivative action was filed in the United States District Court for the Central District of California against the Company and certain of its current and former officers and directors under the following caption:  Haber v. Jamison, et al., No. CV16-01569-DMG (RAOx).  The lawsuit alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition.  The complaint asserts a cause of action for breach of fiduciary duty.  It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties, and equitable relief, including that the Company institute appropriate corporate governance reforms.  On May 11, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time as the defendants’ motion(s) to dismiss the federal securities class action are either granted with prejudice or denied in whole or in part. On May 13, 2016, the Court entered that proposed order.  Given that the federal securities class action was dismissed with leave to amend, this case is still stayed.

On July 12, 2016 and July 18, 2016, respectively, two additional purported shareholder derivative actions were filed in the United States District Court for the Central District of California against the Company and certain of its

20


 

current and former officers and directors, under the caption Tuttle v. Atkinson, et al., No. CV16-05127, and Boll v. Jamison, et al., No. CV16-5282, respectively.  The lawsuits allege that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition.  The Tuttle complaint asserts causes of action for breach of fiduciary duty, gross mismanagement, and unjust enrichment, and the Boll complaint asserts causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets.  Both complaints demand damages sustained by the Company as a result of the individual defendants’ alleged breaches of fiduciary duties, and equitable relief, including that the Company institute appropriate corporate governance reforms. The federal derivative actions have been stayed until such time as the defendants’ motion(s) to dismiss the federal securities class action are either granted with prejudice or denied in whole or in part. Given that the federal securities class action was dismissed with leave to amend, these cases are still stayed.

 

Shareholder Demand

 

Following the dismissal without prejudice of his purported shareholder derivative action discussed above, former plaintiff in Andre Rosowsky v. Jamison, et al. sent us a letter dated July 7, 2017 (the “Shareholder Demand”) demanding that the Board of Directors take action to remedy purported breaches of fiduciary duties allegedly related to the claims asserted in the above-discussed securities class action and derivative actions. The Company acknowledged the Shareholder Demand on July 25, 2017. The Company’s Board of Directors has formed a committee to evaluate the Shareholder Demand.

16.  Net Loss Per Common Share

Basic loss per share of common stock is computed using the weighted average number of common shares outstanding for the period. Diluted loss per share is computed without consideration to potentially dilutive instruments because the Company incurred losses in the three months ended June 30, 2017 which would make these instruments anti-dilutive. As of June 30, 2017 and 2016, the number of anti-dilutive stock options and restricted stock units excluded from diluted net loss per common share computations was approximately 0.6 million and 0.7 million, respectively. As of June 30, 2017 and 2016, the number of warrants excluded from diluted net loss per common share computations was approximately 10.4 million and 6.0 million, respectively.

 

 

21


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included in this Form 10-Q and in our Annual Report on Form 10-K for the year ended March 31, 2017. When used in this Form 10-Q, and in the following discussion, the words “believes”, “anticipates”, “intends”, “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. These risks include those under Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2017 and in other reports we file with the SEC. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We assume no obligation to update any of the forward-looking statements contained herein after the filing of this Form 10-Q to conform such statements to actual results or changes in expectations except as may be required by law. All dollar amounts are approximate.

Overview

We are the market leader in microturbines based on the number of microturbines sold. Generally, power purchased from the electric utility grid is less costly than power produced by distributed generation technologies. Utilities may also charge fees to interconnect to their power grids. However, we can provide economic benefits to end users in instances where the waste heat from our microturbine has value (combined heat and power (“CHP”) and combined cooling, heat and power (“CCHP”)), where fuel costs are low (renewable energy/renewable fuels), where the costs of connecting to the grid may be high or impractical (such as remote power applications), where reliability and power quality are of critical importance, or in situations where peak shaving could be economically advantageous because of highly variable electricity prices. Because our microturbines can provide a reliable source of power and can operate on multiple fuel sources, management believes they offer a level of flexibility not currently offered by other technologies such as reciprocating engines.

We continue to execute on our three-pronged business profitability plan to reduce operating expenses; diversify and increase revenue; and improve gross margin. During the first quarter of Fiscal 2018 our net loss decreased by 9% to $4.1 million and our basic and diluted loss per share improved by 41% to $0.10 compared to $4.5 million and $0.17, respectively, in the same period of the previous year. The improvement in the net loss during the first quarter of Fiscal 2018 was primarily the result of a reduction of operating expenses of approximately 18% from the first quarter of Fiscal 2017. The improvement in the net loss per share during the first quarter of Fiscal 2018 was primarily the result of an increase in weighted average shares outstanding to 41.1 million for the first quarter of Fiscal 2018 from 27.2 million for the first quarter of Fiscal 2017. During the first quarter of Fiscal 2018 we continued to see a steady increase of incoming orders from a mix of our geographical and vertical markets and an increase in our service contract business with record level revenue, along with the decrease in our operating expenses as result of our continued initiatives to reduce operating expenses compared to the first quarter of Fiscal 2017. Our revenue from the Middle East and African markets during the first quarter of Fiscal 2018, was approximately 10% of revenue compared to 1% of revenue the same period last year as we continue to investment in key growth initiatives in these new markets. Our revenue continues to be negatively impacted by the volatility of the global oil and gas markets, a strong U.S. dollar (making our products more expensive overseas) and ongoing geopolitical tensions in Russia, North Africa and the Middle East.

Our products continue to gain interest in all six of the major vertical markets (energy efficiency, renewable energy, natural resources, critical power supply, transportation and marine). In the energy efficiency market, we continue to expand our market presence in hotels, office buildings, hospitals, retail and industrial applications globally. The renewable energy market is fueled by landfill gas, biodiesel, and biogas from sources such as food processing, agricultural waste and cow, pig and chicken manure. Our product sales in the oil and gas and other natural resources market is driven by our microturbines’ reliability, emissions profile and ease of installation. Given the volatility of the oil and gas market, however, we have refocused our business strategy to target projects within the energy efficiency and renewal energy markets. The actual shift to the energy efficiency market is reflected in the product shipments by vertical markets table on page 23. We have also seen increased interest in critical power supply applications as customers want solutions that can handle both primary and backup power.

We continue to focus on improving our products based on customer input, building brand awareness and new channels to market by developing a diversified network of strategic distribution partners. Our focus is on products and solutions that provide near term opportunities to drive repeatable business rather than discrete projects for niche markets. In addition, management closely monitors operating expenses and strives to improve manufacturing efficiencies while

22


 

simultaneously lowering direct material costs and increasing average selling prices. The key drivers to our success are revenue growth, higher average selling prices, lower direct material costs, positive new order flow and reduced cash usage.

An overview of our direction, targets and key initiatives are as follows:

1.

Focus on Vertical Markets Within the distributed generation markets that we serve, we focus on vertical markets that we identify as having the greatest near-term potential. In our primary products and applications (energy efficiency, renewable energy, natural resources, critical power supply, transportation and marine), we identify specific targeted vertical market segments. Within each of these segments, we identify what we believe to be the critical factors to success and base our plans on those factors. Given the volatility of the oil and gas market, we have refocused our business strategy to target projects within the energy efficiency and renewable energy markets.

The following table summarizes our product shipments by vertical markets:

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

    

2017

    

2016

 

Energy efficiency

    

56%

 

48%

 

Natural resources

 

39%

 

46%

 

Renewable energy

 

5%

 

6%

 

Energy Efficiency—CHP/CCHP

Energy efficiency refers to the proper utilization of both electrical and thermal energies in the power production process. In such applications, our microturbines are able to maximize the availability of usable energy to provide a significant economic advantage to customers while reducing their onsite emissions. CHP and CCHP can improve site economics by capturing the waste heat created from a single combustion process to increase the efficiency of the total system, from approximately 30 percent to 80 percent or more. Compared with more traditional, independent generation sources, the increase in operational efficiency also reduces greenhouse gas emissions through the displacement of other separate systems, which can also reduce operating costs.

Natural Resources—Oil, Natural Gas, Shale Gas & Mining

Our microturbines are installed in the natural resource market for use in both onshore and offshore applications, including oil and gas exploration, production, and at compression and transmission sites as a highly efficient and reliable source of power.  In some cases, these oil and gas or mining operations have no electric utility grid and rely solely on power generated onsite. There are numerous locations, on a global scale, where the drilling, production, compression and transportation of natural resources and other extraction and production processes create fuel byproducts, which are traditionally burned or released into the atmosphere. Our microturbines can turn these fuel byproducts - flare gas, or associated gas, into a useable fuel to provide prime power to these sites.

Renewable Energy

There is a growing transition to renewable energy sources and technologies happening on a global scale. Our microturbines run efficiently on renewable fuels such as methane and other biogases from landfills, wastewater treatment facilities and other small biogas applications like food processing plants, livestock farms and agricultural waste operations. Microturbines can burn these renewable fuels with minimal emissions, thereby, and in some cases, avoiding the imposition of penalties incurred for pollution while simultaneously producing electricity from this “free” fuel source for use at the site or in the surrounding areas. Our microturbines have demonstrated effectiveness in these smaller applications and may outperform conventional combustion engines in some situations, including when the gas contains a high amount of sulfur.

23


 

Critical Power Supply

Because of the potentially catastrophic consequences of system failure, momentary or otherwise, certain high demand power users, including high technology, health care and information systems facilities require higher levels of reliability in their power generation service. To meet these customer requirements, traditional solutions utilize UPS to protect critical loads from power disturbances along with back-up diesel generators for extended outages. We offer an alternative solution that can both meet customer reliability requirements and reduce operating costs.

Transportation

Our technology also can be used in HEV applications. Our customers have applied our products in HEV applications such as transit buses and Class 7 and 8 work trucks. In these applications, the microturbine acts as an onboard battery charger to recharge the battery system as needed. The benefits of microturbine-powered HEV hybrids include extended range, fuel economy gains, quieter operation, reduced emissions and higher reliability when compared with traditional internal combustion engines. Internal combustion diesel engine manufacturers have been challenged for the last several years to develop technology improvements, prior to aftertreatment that reduce emissions to levels specified by the EPA and CARB 2007 and 2010 standards. Many manufacturers are incorporating aftertreatment that increases upfront equipment costs, vehicle weight and life cycle costs, which may reduce overall engine efficiency.

Marine

 

Our technology is also used in marine applications. Our customers have applied our products in the commercial vessel and luxury yacht market segments. The most feasible application for our marine products is for use as a ship auxiliary engine. In this application, the microturbines provide power to the vessel’s electrical loads and, in some cases, the vessel is able to utilize the exhaust energy to increase the overall efficiency of the application, thereby reducing overall fuel consumption and emissions. Another feasible application is similar to our HEV application where the vessel is driven by an electric propulsion system and the microturbine serves as an on board range extender.

Backlog

 

Net product orders were $16.9 million and $10.9 million for the first quarter of Fiscal 2018 and Fiscal 2017, respectively. Ending backlog was $117.3 million at June 30, 2017 compared to $108.4 million at June 30, 2016. Book-to-bill ratio was 1.3:1 and 0.9:1 for the first quarter of Fiscal 2018 and Fiscal 2017, respectively. Book-to-bill ratio is the ratio of new orders we received to units shipped and billed during a period.

A portion of our backlog is concentrated in the international oil and gas market which may impact the overall timing of shipments or the conversion of backlog to revenue. The timing of the backlog is based on the requirement date indicated by our customers. However, based on historical experience, management expects that a significant portion of our backlog may not be shipped within the next 18 months. Additionally, the timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and customer delivery schedule changes), most of which are not in our control and can affect the timing of our revenue. As a result, management believes the book-to-bill ratio demonstrates the current demand for our products in the given period

2.

Sales and Distribution Channels  We seek out distributors that have business experience and capabilities to support our growth plans in our targeted markets. We have a total of 96 distributors and Original Equipment Manufacturers (“OEMs”). In the United States and Canada, we currently have 23 distributors and OEMs. Outside of the United States and Canada, we currently have 73 distributors and OEMs. We continue to refine the distribution channels to address our specific targeted markets.

 

3.

Service  We provide service primarily through our global distribution network. Together with our global distribution network we offer a comprehensive FPP for a fixed annual fee to perform regularly scheduled and unscheduled maintenance as needed. We provide factory and on-site training to certify all personnel that are allowed to perform service on our microturbines. FPPs are generally paid quarterly in advance. Our FPP

24


 

backlog as of June 30, 2017 was $76.7 million, which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2029. Our FPP backlog as of June 30, 2016 was $71.4 million. Our FPP backlog as of March 31, 2017 was $77.1 million.

 

4.

Product Robustness and Life Cycle Maintenance Costs  We continue to invest in enhancements that relate to high performance and high reliability. An important element of our continued innovation and product strategy is to focus on the engineering of our product hardware and electronics to make them work together more effectively and deliver improved microturbine performance, reliability and low maintenance cost to our customers.

 

5.

New Product Development Our new product development is targeted specifically to meet the needs of our selected vertical markets. We expect that our existing product platforms, the C30, C65, C200 and C1000 Series microturbines, will be our foundational product lines for the foreseeable future. Our research and development project portfolio is centered on enhancing the features of these base products. More recently, due to our cost reduction efforts, our focus is on expanding the existing products, including the launch of our C1000 Signature Series microturbine in December 2015.

 

Our product development activities during Fiscal 2017 included new-patented fuel injector and certification of our C65 microturbine to applicable European Union medium voltage grid interconnection standards. In addition, we continued our development in our C200S ICHP microturbine and overall cost reduction for our Signature Series. We developed a new-patented multi-staged lean pre-vaporizing, pre-mixing fuel injector providing ultra-low emissions that meet EPA Tier 4 requirements for power generation. Under this new program, exhaust emissions from these engines will be required to decrease by more than 90%. Our C65, C200 and C1000 Series microturbines became VDE, BDEW and CEI certified during Fiscal 2017. These new standards were attained following the development and implementation of new microturbine system software architecture. The C200S microturbine incorporates numerous system and design upgrades intended to improve overall product quality, reliability, and performance. Our new C200S ICHP product further supports our effort to diversify our business into the CHP and CCHP energy efficiency markets and the new roof mounted integrated CHP heat recovery modules, designed specifically for our Signature Series product, is expected to add additional revenue opportunities.

6.

Cost and Core Competencies  We believe that the core competencies of our products are air bearing technology, advanced combustion technology and sophisticated power electronics to form efficient and ultra-low emission electricity and cooling and heat production systems. Our core intellectual property is contained within our air bearing technology. We continue to review avenues for cost reduction by sourcing to the best value supply chain option. In order to utilize manufacturing facilities and technology more effectively, we are focused on continuous improvements in manufacturing processes. Additionally, considerable effort is being directed to manufacturing cost reduction through process improvement, product design, advanced manufacturing technology, supply management and logistics. Management expects to be able to leverage our costs as product volumes increase.

 

We believe that effective execution in each of these key areas will be necessary to leverage Capstone’s promising technology and early market leadership into achieving positive cash flow with growing market presence and improving financial performance. Based on our recent progress and assuming achievement of targeted cost reductions and product mix, pricing and performance, our financial model indicates that we will achieve positive cash flow when we generate $25 million in quarterly revenue with a 25% gross margin. We are in the process of consolidating our manufacturing processes into our Van Nuys location. We believe that once this is complete we will have a production capacity of approximately 2,000 units per year, depending on product mix. We believe we will be able to support this production capacity level by adding additional shifts, which would increase working capital requirements, and making some additional capital expenditures.

 

Critical Accounting Policies and Estimates

 

The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management believes the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results

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could differ from management’s estimates. Management believes the critical accounting policies listed below affect our more significant accounting judgments and estimates used in the preparation of the condensed consolidated financial statements. These policies are described in greater detail in our Annual Report on Form 10-K for Fiscal 2017 and continue to include the following areas:

 

·

Impairment of long-lived assets, including intangible assets with finite lives;

 

·

Inventory write-downs and classification of inventories;

·

Estimates of warranty obligations;

·

Accounts receivable allowances;

·

Deferred tax assets and valuation allowance; and

·

Stock-based compensation expense.

 

Results of Operations

 

Three Months Ended June 30, 2017 and 2016

 

The following table summarizes our revenue by geographic markets (amounts in millions):

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

2017

2016

 

 

    

Revenue

    

Revenue

 

United States and Canada

 

$

10.5

 

$

7.7

 

Europe and Russia

 

 

2.6

 

 

5.3

 

Latin America

 

 

1.4

 

 

2.2

 

Asia and Australia

 

 

2.8

 

 

3.7

 

Middle East and Africa

 

 

1.9

 

 

0.2

 

Total

 

$

19.2

 

$

19.1

 

Revenue  Revenue for the first quarter of Fiscal 2018 increased $0.1 million, or 1%, to $19.2 million from $19.1 million for the first quarter of Fiscal 2017. The change in revenue for the first quarter of Fiscal 2018 compared to the first quarter of Fiscal 2017 included increases in revenue of $2.8 million from the United States and Canadian markets and $1.7 million from the Middle East and African markets. These overall increases in revenue were offset by decreases in revenue of $2.7 million from the European and Russian markets, $0.9 million from the Asian and Australian markets and $0.8 million from the Latin American market. The increase in revenue in the United States and Canadian markets during the first quarter of Fiscal 2018 compared to the same period the previous year was primarily because we shipped a higher number of our C1000 Series systems in these markets. The increase in revenue in the Middle East and African markets during the first quarter of Fiscal 2018 compared to the same period in the previous year was primarily the result of our continued investment in key growth initiatives in those markets. Despite the increase in revenue in the Middle East and African markets, our revenue continues to be negatively impacted by the volatility of the global oil and gas markets, a strong U.S. dollar (making our products more expensive overseas) and ongoing geopolitical tensions in Russia, North Africa and the Middle East. The decrease in revenue in the European and Russian markets during the first quarter of Fiscal 2018 was primarily because of large non-recurring microturbine product shipments for specific projects that had occurred during the first quarter of Fiscal 2017. In addition, the decrease in European and Russian markets was primarily because there were no microturbine product shipments to Russia during the first quarter of Fiscal 2018 compared to the same period last year. The decrease in revenue in the Asian and Australian markets was primarily the result of large non-recurring microturbine product shipments for specific projects that had occurred during the first quarter of Fiscal 2017. The decrease in revenue in the Latin American market during the first quarter of Fiscal 2018 compared to the same period the previous year was primarily the result of a strong U.S. dollar and reduced capital and operational spending, particularly in the upstream and midstream sectors of the oil and gas markets.

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The following table summarizes our revenue (revenue amounts in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

2017

 

2016

 

 

    

Revenue

    

Megawatts

    

Units

    

Revenue

    

Megawatts

    

Units

 

Microturbine Product

 

$

12.6

 

12.1

 

52

 

$

12.1

 

11.6