10-Q 1 cpst-20171231x10q.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 December 31, 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.)

 

 

 

16640 Stagg Street
Van Nuys, California
(Address of principal executive offices)

 

91406
(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 January 31, 2018 was 54,080,962.

 

 

 


 

CAPSTONE TURBINE CORPORATION

INDEX

 

 

    

 

    

Page
Number

PART I — FINANCIAL INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of December 31, 2017 and March 31, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2017 and 2016

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 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

 

24

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

40

 

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

40

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

42

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

44

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

44

 

 

 

 

 

Item 5. 

 

Other Information

 

44

 

 

 

 

 

Item 6. 

 

Exhibits

 

45

 

 

 

 

 

Signatures 

 

46

 

 

2


 

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

 

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

    

March 31,

 

 

    

2017

    

2017

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,522

 

$

14,191

 

Restricted cash

 

 

5,000

 

 

5,514

 

Accounts receivable, net of allowances of $6,154 at December 31, 2017 and $6,845 at March 31, 2017

 

 

16,078

 

 

17,003

 

Inventories

 

 

14,223

 

 

14,538

 

Prepaid expenses and other current assets

 

 

3,063

 

 

3,073

 

Total current assets

 

 

49,886

 

 

54,319

 

Property, plant and equipment, net

 

 

2,986

 

 

2,115

 

Non-current portion of inventories

 

 

1,040

 

 

961

 

Intangible assets, net

 

 

467

 

 

651

 

Other assets

 

 

290

 

 

225

 

Total assets

 

$

54,669

 

$

58,271

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

12,762

 

$

14,719

 

Accrued salaries and wages

 

 

1,260

 

 

1,819

 

Accrued warranty reserve

 

 

1,760

 

 

3,766

 

Deferred revenue

 

 

5,232

 

 

5,050

 

Revolving credit facility

 

 

10,966

 

 

11,533

 

Current portion of notes payable and capital lease obligations

 

 

318

 

 

302

 

Total current liabilities

 

 

32,298

 

 

37,189

 

Long-term portion of notes payable and capital lease obligations

 

 

17

 

 

26

 

Other long-term liabilities

 

 

118

 

 

158

 

Total liabilities

 

 

32,433

 

 

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, 50,334,343 shares issued and 50,188,428 shares outstanding at December 31, 2017; 38,920,174 shares issued and 38,803,630 shares outstanding at March 31, 2017

 

 

50

 

 

39

 

Additional paid-in capital

 

 

884,126

 

 

874,697

 

Accumulated deficit

 

 

(860,282)

 

 

(852,199)

 

Treasury stock, at cost; 145,915 shares at December 31, 2017 and 116,544 shares at March 31, 2017

 

 

(1,658)

 

 

(1,639)

 

Total stockholders’ equity

 

 

22,236

 

 

20,898

 

Total liabilities and stockholders' equity

 

$

54,669

 

$

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

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenue:

 

 

 

    

 

 

 

 

 

    

 

 

 

Product, accessories and parts

 

$

18,876

 

$

16,540

 

$

50,373

 

$

43,841

 

Service

 

 

3,885

 

 

3,645

 

 

11,403

 

 

10,408

 

Total revenue

 

 

22,761

 

 

20,185

 

 

61,776

 

 

54,249

 

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product, accessories and parts

 

 

15,471

 

 

21,828

 

 

43,059

 

 

46,806

 

Service

 

 

2,333

 

 

2,356

 

 

8,505

 

 

7,772

 

Total cost of goods sold

 

 

17,804

 

 

24,184

 

 

51,564

 

 

54,578

 

Gross margin

 

 

4,957

 

 

(3,999)

 

 

10,212

 

 

(329)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

957

 

 

1,282

 

 

3,244

 

 

4,254

 

Selling, general and administrative

 

 

4,057

 

 

4,848

 

 

13,815

 

 

15,631

 

Total operating expenses

 

 

5,014

 

 

6,130

 

 

17,059

 

 

19,885

 

Loss from operations

 

 

(57)

 

 

(10,129)

 

 

(6,847)

 

 

(20,214)

 

Other expense

 

 

(12)

 

 

(436)

 

 

(8)

 

 

(480)

 

Interest income

 

 

 —

 

 

 8

 

 

 9

 

 

21

 

Interest expense

 

 

(170)

 

 

(129)

 

 

(489)

 

 

(392)

 

Change in warrant valuation

 

 

(84)

 

 

 —

 

 

(741)

 

 

 —

 

Loss before income taxes

 

 

(323)

 

 

(10,686)

 

 

(8,076)

 

 

(21,065)

 

Provision for income taxes

 

 

 —

 

 

 —

 

 

 7

 

 

 3

 

Net loss

 

$

(323)

 

$

(10,686)

 

$

(8,083)

 

$

(21,068)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share—basic and diluted

 

$

(0.01)

 

$

(0.31)

 

$

(0.18)

 

$

(0.68)

 

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

 

 

46,760

 

 

34,761

 

 

45,465

 

 

30,823

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

    

2017

    

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(8,083)

 

$

(21,068)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

854

 

 

1,186

 

Amortization of deferred financing costs

 

 

168

 

 

129

 

Reduction in accounts receivable allowances

 

 

(771)

 

 

(1,384)

 

Inventory provision

 

 

1,027

 

 

824

 

Provision for warranty expenses

 

 

610

 

 

6,462

 

Loss on disposal of equipment

 

 

25

 

 

170

 

Stock-based compensation

 

 

409

 

 

653

 

Change in warrant valuation

 

 

741

 

 

 —

 

Warrant issuance expenses

 

 

 —

 

 

421

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

1,697

 

 

1,747

 

Inventories

 

 

(791)

 

 

763

 

Prepaid expenses and other current assets

 

 

(252)

 

 

(334)

 

Accounts payable and accrued expenses

 

 

(1,769)

 

 

(1,134)

 

Accrued salaries and wages and long term liabilities

 

 

(598)

 

 

(464)

 

Accrued warranty reserve

 

 

(2,616)

 

 

(3,790)

 

Deferred revenue

 

 

181

 

 

212

 

Net cash used in operating activities

 

 

(9,168)

 

 

(15,607)

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(1,421)

 

 

(431)

 

Net cash used in investing activities

 

 

(1,421)

 

 

(431)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net repayments of revolving credit facility

 

 

(567)

 

 

(795)

 

Repayment of notes payable and capital lease obligations

 

 

(298)

 

 

(373)

 

Cash used in employee stock-based transactions

 

 

(22)

 

 

(16)

 

Net proceeds from issuance of common stock and warrants

 

 

8,293

 

 

19,886

 

Net cash provided by financing activities

 

 

7,406

 

 

18,702

 

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

 

 

(3,183)

 

 

2,664

 

Cash, Cash Equivalents and Restricted Cash, Beginning of Period

 

 

19,705

 

 

16,706

 

Cash, Cash Equivalents and Restricted Cash, End of Period

 

$

16,522

 

$

19,370

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

317

 

$

259

 

Income taxes

 

$

 7

 

$

 3

 

Supplemental Disclosures of Non-Cash Information:

 

 

 

 

 

 

 

Acquisition of property and equipment through accounts payable

 

$

162

 

$

43

 

Renewal of insurance contracts which was financed by notes payable

 

$

422

 

$

503

 

 

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 consolidated 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 Fiscal Year 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 third 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 third quarter of Fiscal 2018 interim condensed consolidated 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 impact of the volatility of the global oil and gas markets, a strong U.S. dollar in certain markets making our products more expensive in such markets and ongoing geopolitical tensions in Russia, North Africa and the Middle East. During the third quarter of Fiscal 2018, the Company’s working capital requirements were in-line with management’s expectations, which included the reduction in inventory as a result of a decrease in finished goods and the continued management of the timing of payments of accounts payable. The Company incurred a net loss of $0.3 million and used cash in operating activities of $3.3 million for the third quarter of Fiscal 2018. The Company incurred a net loss of $8.1 million and used cash in operating activities of $9.2 million for nine months ended December 31, 2017. The Company also had capital expenditures related to the consolidation of its facilities in the third quarter of Fiscal 2018 which contributed to the cash used in investing activities. As of December 31, 2017, the Company had cash, cash equivalents and restricted cash of $16.5 million, and outstanding borrowings under its credit facility of $11.0 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

6


 

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. 

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 and the ability to borrow under its credit facility with Bridge Bank, 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 third quarter of Fiscal 2018 financial statements.

Change in Accounting Treatment During the three months ended June 30, 2017, the Company changed its method of accounting for warrants through the early adoption of Accounting Standards Update No. 2017-11. For purposes of presentation, the Company on a full retrospective basis, adjusted the warrant liability on its consolidated balance sheets, the change in fair value of warrant liability on its consolidated statement of operations and the change in fair value of warrant liability on its consolidated statements of cash flows to reflect this change in accounting for warrants in this report on Form 10-Q. See Note 3—Recently Issued Accounting Standards and Note 10—Fair Value Measurements for discussion with respect to this change in method of accounting for warrants.

Basis for Consolidation 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. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provides additional implementation guidance on the previously issued ASU 2016-02 Leases (Topic 842).

7


 

ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. 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.

Revenue Recognition Related ASUs:

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 Securities and Exchange Commission (“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.

In September 2017, the FASB issued ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments”(“ASU 2017-13”) The amendments in ASU 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU 2014-09 and ASU 2016-02.

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. ASU 2014-09 provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period presented. The Company has not yet determined which adoption method will be implemented at this time.

8


 

The Company is continuing to analyze the impact of the new standard on the Company’s revenue contracts, comparing our current accounting policies and practices to the requirements of the new standard. The new standard requires additional detailed disclosures regarding the company’s contracts with customers, including disclosure of remaining unsatisfied performance obligations, in the first quarter Fiscal 2019. We are also identifying and implementing changes to the Company’s business processes, systems and controls to support adoption of the new standard in Fiscal 2019. While the Company has not yet identified any material changes in the timing of revenue recognition for our various revenues streams, our evaluation is ongoing and not complete.

4.  Customer Concentrations and Accounts Receivable

 

Sales to E-Finity Distributed Generation, LLC (“E-Finity”) and Cal Microturbine (“CAL”), two of the Company’s domestic distributors, accounted for 29% and 14%, respectively, of revenue for the three months ended December 31, 2017. Sales to BPC Engineering (“BPC”), one of the Company’s former Russian distributors, and Horizon Power Systems (“Horizon”), one of the Company’s domestic distributors, each accounted for 16% of revenue for the three months ended December 31, 2016. For the nine months ended December 31, 2017, E-Finity and Horizon accounted for 19% and 10% of revenue, respectively. For the nine months ended December 31, 2016, BPC and Horizon, accounted for 12% and 10% of revenue, respectively.

Additionally, E-Finity, and CAL accounted for 42% and 15%, respectively, of net accounts receivable as of December 31, 2017. E-Finity, Dtc Soluciones Inmobiliarias S.A. de C.V. (“DTC”), one of the Company’s Mexican distributors and 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 $0.7 million and $0.8 million during the three and nine months ended December 31, 2017, respectively. As of December 31, 2017, the Company collected approximately $1.8 million from BPC on their accounts receivable allowance of approximately $8.1 million. The Company recorded net bad debt expense of approximately $12,000 for the three months ended December 31, 2016. During the nine months ended December 31, 2016, the Company recorded approximately $1.4 million in net bad debt recovery, which was previously reserved during Fiscal 2015, for cash received primarily from BPC and Electro Mecanique Industries, one of the Company’s distributors in the Middle East and Africa.

On October 18, 2017, the Company announced that it had granted Turbine International, LLC (“TI”) and its affiliate, MTE Service, the sole distribution rights for Capstone products and services in the Russian oil and gas sector in exchange for approximately $6.3 million in cash. In connection with the appointment of TI as the Company’s distributor in the Russian oil and gas sector, on October 13, 2017, the Company and TI entered into an Accounts Receivable Assignment Agreement (the “Accounts Receivable Agreement”) and Promissory Note (the “Promissory Note”). Pursuant to the terms of the Accounts Receivable Agreement, the Company assigned to TI its right, title and interest to receivables owed to the Company from BPC. As consideration for the assignment of the BPC receivable, TI agreed to pay the Company $2.5 million in three payments by February 1, 2018. Under the terms of the Promissory Note, TI agreed to pay the Company $3.8 million to be paid over a three-year period in 35 equal monthly installments starting in August 2018. On October 13, 2017, the Company and Hispania Petroleum, S.A. (the “Guarantor”), entered into a Guaranty Agreement (the “Guaranty Agreement”) whereby the Guarantor guarantees TI’s obligations under the Accounts Receivable Agreement and Promissory Note. MTE Service is a wholly owned subsidiary of Hispania Petroleum S.A. The Company received payments of approximately $0.6 million and $0.7 million under the Accounts Receivable Agreement during the three and nine months ended December 31, 2017, respectively and these payments have been recorded as recovery of bad debts and included under the caption “Selling, general and administrative” in the accompanying condensed consolidated statements of operations. As of date of issuance of the Company’s third quarter of Fiscal 2018 interim condensed consolidated financial statements the February 1, 2018 payment of $1.8 million has not yet been received. The Company is currently in discussions with TI regarding the timing of this payment.

9


 

5.  Inventories

 

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

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

 

    

2017

    

2017

 

Raw materials

 

$

14,941

 

$

15,035

 

Work in process

 

 

133

 

 

 —

 

Finished goods

 

 

189

 

 

464

 

Total

 

 

15,263

 

 

15,499

 

Less non-current portion

 

 

(1,040)

 

 

(961)

 

Current portion

 

$

14,223

 

$

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 December 31, 2017 is 1.3 years. The Company expects to use the non-current portion of the inventories on hand as of December 31, 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

 

$

391

 

25 to 36 months

 

 

649

 

Total

 

$

1,040

 

 

 

6.  Property, Plant and Equipment

 

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

 

 

 

 

 

 

 

 

 

 

December 31,

 

March 31,

 

 

    

2017

    

2017

 

Machinery, rental equipment, equipment, automobiles and furniture

 

$

15,891

 

$

17,657

 

Leasehold improvements

 

 

10,836

 

 

9,870

 

Molds and tooling

 

 

2,929

 

 

2,866

 

 

 

 

29,656

 

 

30,393

 

Less, accumulated depreciation

 

 

(26,670)

 

 

(28,278)

 

Total property, plant and equipment, net

 

$

2,986

 

$

2,115

 

 

 

The Company regularly reassesses the useful lives of property and equipment and retires assets no longer in service. Depreciation expense for property and equipment was $0.2 million and $0.6 million for the three and nine months ended December 31, 2017, respectively. The Company recorded depreciation expense of $0.3 million and $1.0 million for the three and nine months ended December 31, 2016, respectively.

 

 

7.  Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

Intangible

 

 

 

 

 

 

 

 

 

Amortization

 

Assets,

 

Accumulated

 

Intangible

 

 

 

Period

 

Gross

 

Amortization

 

Assets, Net

 

Manufacturing license

    

17 years

    

$

3,700

    

$

3,700

    

$

 —

 

Technology

 

10 years

 

 

2,240

 

 

1,773

 

 

467

 

Trade name & parts, service and TA100 customer relationships

 

1.2 to 5 years

 

 

1,766

 

 

1,766

 

 

 —

 

Total

 

 

 

$

7,706

 

$

7,239

 

$

467

 

 

10


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 and $0.2 million for each of the three and nine months ended December 31, 2017 and 2016, respectively.

 

Expected future amortization expense of intangible assets as of December 31, 2017 is as follows (in thousands):

 

 

 

 

 

 

 

 

Amortization

 

Year Ending March 31,

    

Expense

 

2018 (remainder of fiscal year)

 

 

56

 

2019

 

 

224

 

2020

 

 

187

 

Thereafter

 

 

 —

 

Total expected future amortization

 

$

467

 

 

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 $9,200 and $7,400 were earned by Solar for the three months ended December 31, 2017 and 2016, respectively. Royalties of approximately $22,900 and $22,100 were earned by Solar for the nine months ended December 31, 2017 and 2016, respectively. Earned royalties of approximately $9,200 and $10,000 were unpaid as of December 31, 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 three and nine months ended December 31, 2017 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

    

2017

    

2016

    

2017

    

2016

 

Cost of goods sold

 

$

 —

    

$

16

 

$

38

    

$

45

 

Research and development

 

 

 4

 

 

 6

 

 

16

 

 

22

 

Selling, general and administrative

 

 

98

 

 

152

 

 

355

 

 

586

 

Stock-based compensation expense

 

$

102

 

$

174

 

$

409

 

$

653

 

 

Stock Plans

 

2000 Equity Incentive Plan and 2017 Equity Incentive Plan

 

In June 2000, the Company adopted the 2000 Equity Incentive Plan (the “2000 Plan”). The 2000 Plan provides for a total maximum aggregate number of shares which may be issued of 1,849,000 shares. In June 2017, the Company’s Board of Directors (the “Board”) adopted the Capstone Turbine Corporation 2017 Equity Incentive Plan (the “2017 Plan”) which was approved by the stockholders at the Company’s 2017 annual meeting of stockholders on August 31, 2017 (the “2017 Annual Meeting”). The 2017 Plan provides for awards of up to 3,000,000 shares of common stock. The 2017 Plan is administered by the Compensation Committee designated by the Board (the “Compensation Committee”). The Compensation Committee’s authority includes determining the number of incentive awards and vesting provisions.

 

11


 

Stock Options

 

The Company issued stock options under the 2000 Plan and issues stock options under the 2017 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 through the adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). 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 nine months ended December 31, 2017 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

 

(97,590)

 

$

3.68

 

 

 

 

 

 

Options outstanding at December 31, 2017

 

216,947

 

$

20.79

 

3.0

 

 

 —

 

Options fully vested at December 31, 2017 and those expected to vest beyond December 31, 2017

 

216,947

 

$

20.79

 

3.0

 

 

 —

 

Options exercisable at December 31, 2017

 

216,947

 

$

20.79

 

3.0

 

 

 —

 

 

Black-Scholes Model Valuation Assumptions

 

There were no stock options granted during either the three or nine months ended December 31, 2017. The Company calculated the estimated fair value of each stock option granted during the three and nine months ended December 31, 2016 on the date of grant using the Black-Scholes option-pricing model and the following weighted-average assumptions:

 

 

 

 

 

 

 

 

Three and Nine Months Ended

 

 

December 31, 2016

Risk-free interest rates

 

 

1.3

%  

Expected lives (in years)

 

 

5.7

 

Dividend yield

 

 

 —

%  

Expected volatility

 

 

133.9

%  

Weighted average grant date fair value of options granted during the period

 

$

1.52

 

 

The Company’s computation of expected volatility for the three and nine months ended December 31, 2016 was based on historical volatility. The expected life, or term, of options granted is derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding. Management has selected a risk-free rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the options’ expected term. There was no expense associated with stock options during the three months ended December 31, 2017. The Company recorded expense of approximately $8,000 associated with its stock options during the three months ended December 31, 2016. The Company recorded expense of approximately $17,000 and $11,000 associated with its stock options during the nine months ended December 31, 2017 and 2016, respectively.

 

Restricted Stock Units and Performance Restricted Stock Units

 

The Company issued restricted stock units under the 2000 Plan and issues restricted stock units under the 2017 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 Fiscal 2017, the Company established an accounting policy election to assume zero

12


 

forfeiture for restricted stock units and account for forfeitures when they occur through the adoption of ASU 2016-09. 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

909,848

 

 

0.76

 

Vested and issued

 

(239,372)

 

 

2.63

 

Forfeited

 

(46,168)

 

 

1.79

 

Nonvested restricted stock units outstanding at December 31, 2017

 

941,017

 

 

0.94

 

Restricted stock units expected to vest beyond December 31, 2017

 

940,994

 

$

0.93

 

 

The following table provides additional information on restricted stock units for the three and nine months ended December 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2017

    

2016

    

2017

    

2016

 

Restricted stock compensation expense (in thousands)

 

$

102

    

$

165

 

$

389

    

$

540

 

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

 

$

19

 

$

25

 

$

156

 

$

132

 

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

 

$

0.89

 

$

0.91

 

$

0.76

 

$

1.64

 

 

As of December 31, 2017, there was approximately $0.7 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 2.3 years.

 

Restricted Stock Awards

The Company issued restricted stock awards under the 2000 Plan and issues restricted stock awards under the 2017 Plan to employees and non-employee directors. During the three and nine months ended December 31, 2017 and 2016 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 three and nine months ended December 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

    

2017

    

2016

    

2017

    

2016

 

Restricted stock awards compensation expense (in thousands)

 

$

 —

 

$

 1

 

$

 3

    

$

102

 

Restricted stock awards granted

 

 

 —

 

 

1,389

 

 

3,969

 

 

63,500

 

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

 

$

 —

 

$

0.90

 

$

0.63

 

$

1.56

 

 

For each term of the Board (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.

13


 

Employee Stock Purchase Plan

In June 2000, the Company adopted the Employee Stock Purchase Plan (the “ESPP”). The ESPP provides for the granting of rights to purchase common stock to regular full and part-time employees or officers of the Company and its subsidiaries. In June 2017, the Board unanimously approved an amendment and restatement to the ESPP which was approved by the stockholders at the Company’s annual meeting of stockholders on August 31, 2017. Prior to the current amendment, 70,000 shares of the Company’s common stock had been reserved for issuance. As amended, the ESPP continued by its terms and the number of shares of the Company’s common stock available increased by 500,000 shares which reserved for issuance a total of 570,000 shares of common stock. Under the ESPP, shares of the Company’s common stock are issued upon exercise of the purchase rights. The ESPP will continue by its terms through June 30, 2020, unless terminated sooner.

Stockholder Rights Plan

On May 6, 2016, the Company entered into Amendment No. 5 (the “Amendment”) to the Rights Agreement, by and between the Company and Mellon Investor Services LLC, as Rights Agent, 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, pursuant to which Computershare Inc. became rights agent as successor-in-interest to Mellon Investor Services LLC, and Amendment No. 4, dated as of August 5, 2014, (the “Original Rights Agreement”). 

The Amendment accelerated the expiration of the Company’s preferred share purchase rights (the “Original Rights”) from 5:00 p.m., Pacific Standard Time, on the 30th day after the 2017 Annual Meeting to 5:00 p.m., Pacific Standard 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 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.

14


 

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 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 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 2017 Annual Meeting of stockholders; (vi) the close of business on the effective date of 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 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.

At the 2017 Annual Meeting, the stockholders approved the NOL Rights Agreement.

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

 

On October 26, 2017, the Company entered into a Warrant Exercise Agreement (the “Exercise Agreement”) with a holder of the Series A warrants (the “Exercising Holder”), which Exercising Holder owns Series A warrants exercisable for 1,928,750 shares of Common Stock. Pursuant to the Exercise Agreement, the Exercising Holder and the Company agreed that the Exercising Holder would exercise its Series A warrants with respect to 1,928,750 shares of Common Stock underlying such Series A warrants for a reduced exercise price equal to $0.90 per share. On October 27, 2017, the Company received net proceeds of approximately $1.7 million from the exercise of the Series A warrants by the Exercising Holder. The Company did not pay any financial advisory fees in connection with the exercise of the Series A warrants by the Exercising Holder. In addition, the exercise resulted in the reduction of warrants to purchase common stock, par value $0.001 per share, of the Company by approximately 19% and was not dilutive to existing stockholders of the Company calculated on a fully diluted basis for outstanding warrants.

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 were approved by the Company’s stockholders at the 2017 annual meeting of stockholders held on August 31, 2017 and exercise price of the warrants was adjusted to $0.60 per share. The value of this down round feature was measured using the Binomial valuation model and resulted in a loss of approximately $0.1 million and $0.7 million during the three and nine months ended December 31, 2017, respectively. 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

15


 

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. 

As of December 31, 2017, there were 8,478,750 Series A warrants outstanding. During Fiscal 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 December 31, 2017, the Company issued 3.4 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 $2.6 million after deducting commissions paid of approximately $0.1 million. During the nine months ended December 31, 2017, the Company issued 9.2 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 $6.5 million after deducting commissions paid of approximately $0.2 million. As of December 31, 2017, 16.5 million shares of the Company’s common stock were sold pursuant to the at-the-market offering program and the net proceeds to the Company from the sale of the common stock were approximately $19.3 million after deducting commissions paid of approximately $0.6 million. As of December 31, 2017, approximately $9.6 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.

 

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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 December 31, 2017 and are categorized using the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 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 Fiscal 2017 and are categorized using the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

December 31, 2017

 

March 31, 2017

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

    

Value

 

Fair Value

 

Value

    

Fair Value

 

Obligations under the credit facility

    

$

10,966

  

$

10,966

 

$

11,533

 

$

11,533

 

Adoption of ASU 2017-11

The Company changed its 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 $1.8 million, $0.5 million and $1.3 million for the three months ended December 31, 2016, three months ended March 31, 2017 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 following table provides a reconciliation of warrant liability, additional paid-in capital,

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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 December 31, 2016 and March 31, 2017, $8.7 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 nine months ended December 31, 2017 was $0.2 million, which includes $0.1 million in amortization of deferred financing costs. Interest expense related to the former credit facility during the three months ended December 31, 2016 was $0.1 million, which includes $43,800 in amortization of deferred financing costs. Interest expense related to the former credit facility during the nine months ended December 31, 2016 was $0.4 million, which includes $0.1 million in amortization of deferred financing costs. The Company’s borrowing rate was 4.9% at March 31, 2017. Upon closing the Bridge Bank Credit Agreements with Bridge Bank the Company’s existing credit facilities with Wells Fargo were paid off in full.

New Credit Facility   On June 2, 2017, the Company entered into the Bridge Bank Credit Agreements with Western Alliance Bank through 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.

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 have 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 December 31, 2017, $11.0 million in borrowings were outstanding and $1.0 million borrowings available under the new credit facility. Interest expense related to the new credit facility during the three months ended December 31, 2017 was $0.2 million, which includes $34,300 in amortization of deferred financing costs. Interest expense related to the new credit facility during the nine months ended December 31, 2017 was $0.3 million, which includes $0.1 million in amortization of deferred financing costs. The Company’s borrowing rate was 6.0% at December 31, 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”), which is included in the Bridge Bank Credit Agreements, 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

18


 

have a material adverse effect on the Company. As of December 31, 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 twenty-four 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 remaining non-cash warranty provision of approximately $0.6 million for this reliability repair program was reversed during the three months ended December 31, 2017 because the program was completed. Changes in accrued warranty reserve during the nine months ended December 31, 2017 are as follows (in thousands):

 

 

 

 

 

 

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