10-Q 1 cpst-20180630x10q.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, 2018

 

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 August 3, 2018 was 64,193,809.

 

 

 


 

CAPSTONE TURBINE CORPORATION

INDEX

 

 

    

 

    

Page
Number

PART I — FINANCIAL INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and March 31, 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2. 

 

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

 

25

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

38

 

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

38

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

41

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

41

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

41

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

41

 

 

 

 

 

Item 5. 

 

Other Information

 

41

 

 

 

 

 

Item 6. 

 

Exhibits

 

42

 

 

 

 

 

Signatures 

 

44

 

 

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,

 

 

    

2018

    

2018

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,569

 

$

14,408

 

Restricted cash

 

 

6,000

 

 

5,000

 

Accounts receivable, net of allowances of $5,677 at June 30, 2018 and $5,744 at March 31, 2018

 

 

15,886

 

 

15,968

 

Inventories, net

 

 

16,055

 

 

15,633

 

Prepaid expenses and other current assets

 

 

5,018

 

 

2,803

 

Total current assets

 

 

56,528

 

 

53,812

 

Property, plant and equipment, net

 

 

2,788

 

 

2,859

 

Non-current portion of inventories

 

 

1,103

 

 

1,041

 

Intangible assets, net

 

 

355

 

 

411

 

Other assets

 

 

315

 

 

250

 

Total assets

 

$

61,089

 

$

58,373

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

13,560

 

$

13,503

 

Accrued salaries and wages

 

 

1,334

 

 

1,588

 

Accrued warranty reserve

 

 

1,861

 

 

1,682

 

Deferred revenue

 

 

6,529

 

 

6,596

 

Revolving credit facility

 

 

10,024

 

 

8,527

 

Current portion of notes payable and capital lease obligations

 

 

77

 

 

192

 

Total current liabilities

 

 

33,385

 

 

32,088

 

Deferred revenue - non-current

 

 

1,121

 

 

 —

 

Long-term portion of notes payable and capital lease obligations

 

 

121

 

 

130

 

Other long-term liabilities

 

 

403

 

 

396

 

Total liabilities

 

 

35,030

 

 

32,614

 

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, 64,340,430 shares issued and 64,192,796 shares outstanding at June 30, 2018; 57,062,598 shares issued and 56,916,646 shares outstanding at March 31, 2018

 

 

64

 

 

57

 

Additional paid-in capital

 

 

894,777

 

 

889,585

 

Accumulated deficit

 

 

(867,121)

 

 

(862,225)

 

Treasury stock, at cost; 147,634 shares at June 30, 2018 and 145,952 shares at March 31, 2018

 

 

(1,661)

 

 

(1,658)

 

Total stockholders’ equity

 

 

26,059

 

 

25,759

 

Total liabilities and stockholders' equity

 

$

61,089

 

$

58,373

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

June 30,

 

 

    

2018

    

2017

 

Revenue:

 

 

 

    

 

 

 

Product, accessories and parts

 

$

17,085

 

$

15,491

 

Service

 

 

4,104

 

 

3,749

 

Total revenue

 

 

21,189

 

 

19,240

 

Cost of goods sold:

 

 

 

 

 

 

 

Product, accessories and parts

 

 

15,630

 

 

14,037

 

Service

 

 

3,737

 

 

2,964

 

Total cost of goods sold

 

 

19,367

 

 

17,001

 

Gross margin

 

 

1,822

 

 

2,239

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

932

 

 

1,149

 

Selling, general and administrative

 

 

5,651

 

 

4,960

 

Total operating expenses

 

 

6,583

 

 

6,109

 

Loss from operations

 

 

(4,761)

 

 

(3,870)

 

Other expense

 

 

(14)

 

 

(10)

 

Interest income

 

 

 —

 

 

 9

 

Interest expense

 

 

(118)

 

 

(221)

 

Loss before provision for income taxes

 

 

(4,893)

 

 

(4,092)

 

Provision for income taxes

 

 

 4

 

 

 —

 

Net loss

 

$

(4,897)

 

$

(4,092)

 

 

 

 

 

 

 

 

 

Net loss per common share—basic and diluted

 

$

(0.08)

 

$

(0.10)

 

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

 

 

61,762

 

 

41,081

 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

June 30,

 

 

    

2018

    

2017

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(4,897)

 

$

(4,092)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

287

 

 

304

 

Amortization of deferred financing costs

 

 

38

 

 

105

 

Reduction in accounts receivable allowances

 

 

(3)

 

 

(13)

 

Inventory provision

 

 

137

 

 

183

 

Provision for warranty expenses

 

 

397

 

 

779

 

Loss on disposal of equipment

 

 

 7

 

 

23

 

Stock-based compensation

 

 

227

 

 

154

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

84

 

 

4,786

 

Inventories

 

 

(621)

 

 

(1,010)

 

Prepaid expenses and other current assets

 

 

(2,324)

 

 

296

 

Accounts payable and accrued expenses

 

 

61

 

 

(1,147)

 

Accrued salaries and wages and long term liabilities

 

 

(247)

 

 

(455)

 

Accrued warranty reserve

 

 

(218)

 

 

(1,472)

 

Deferred revenue

 

 

1,054

 

 

827

 

Net cash used in operating activities

 

 

(6,018)

 

 

(732)

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(163)

 

 

(178)

 

Net cash used in investing activities

 

 

(163)

 

 

(178)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net proceeds from (repayments of) revolving credit facility

 

 

1,497

 

 

(2,049)

 

Repayment of notes payable and capital lease obligations

 

 

(125)

 

 

(122)

 

Cash used in employee stock-based transactions

 

 

(3)

 

 

(5)

 

Net proceeds from issuance of common stock and warrants

 

 

4,973

 

 

2,520

 

Net cash provided by financing activities

 

 

6,342

 

 

344

 

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

 

 

161

 

 

(566)

 

Cash, Cash Equivalents and Restricted Cash, Beginning of Period

 

 

19,408

 

 

19,705

 

Cash, Cash Equivalents and Restricted Cash, End of Period

 

$

19,569

 

$

19,139

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

82

 

$

108

 

Income taxes

 

$

 4

 

$

 —

 

Supplemental Disclosures of Non-Cash Information:

 

 

 

 

 

 

 

Acquisition of property and equipment through accounts payable

 

$

 —

 

$

 7

 

 

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 and distribution networks, including cogeneration (combined heat and power (“CHP”), integrated combined heat and power (“ICHP”), and combined cooling, heat and power (“CCHP”)), renewable energy, natural resources and critical power supply. In addition, the Company’s microturbines can be used as battery charging generators for hybrid electric vehicles and to provide power to a vessel’s electrical loads in marine applications. The Company’s microturbines can be interconnected to other distributed energy resources to form “microgrids” (also called “distribution networks”) located within a specific geographic area and provide power to a group of buildings. The Company also remanufactures microturbine engines and provides aftermarket parts and services. 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, 2018 was derived from audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018. 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 2018. 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.

Significant Accounting Policies  Except for the accounting policy for revenue recognition that was updated, as set forth below, as a result of adopting Accounting Standards Update (“ASU”) No. 2014-09 (defined below), there have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the Fiscal Year 2018 filed with the SEC on June 7, 2018, that have had a material impact on the Company's condensed consolidated financial statements and related notes.

Evaluation of Ability to Maintain Current Level of Operations  In connection with preparing the consolidated financial statements for the first quarter of Fiscal 2019, 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 2019 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 global geopolitical tensions. The Company incurred a net loss of $4.9 million and used cash in operating activities of $6.0 million for the first quarter of Fiscal 2019. The Company’s working capital requirements during the first quarter of Fiscal 2019 were higher than management’s expectations, which included $2.2 million in prepayments to one of the Company’s single source suppliers that notified the Company that they were at maximum capacity and would require prepayment and a significant increase in the price of multiple components in order to fulfill the Company’s supply requirements for Fiscal 2019 and a pay down of accrued expenses of $1.0 million with respect to the Company’s one-time leadership incentive program compensation. As of June 30, 2018, the Company had cash, cash equivalents and restricted cash of $19.6 million, and outstanding borrowings under its credit facility of $10.0 million.

6


 

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 maintain low operating expenses and develop its geographical and vertical markets.  The Company may seek to raise funds by selling additional securities (through at-the-market offerings or otherwise) 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. 

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 Western Alliance Bank through its Bridge Bank division (“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 first quarter of Fiscal 2019 financial statements.

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

 

Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU, 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-09”). ASU 2014-09 outlines a single, comprehensive model for accounting for revenue from contracts with customers and requires more detailed disclosure to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from such contracts. ASU 2014-09 provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On April 1, 2018, the Company adopted ASU 2014-09 under the modified retrospective transition method. This method was applied to contracts that were not complete as of the date of initial application of ASU 2014-09.

During the first quarter of Fiscal 2019, the Company recognized revenue based on ASU 2014-09, however revenue for the first quarter of Fiscal 2018 was recognized based on Accounting Standards Codification, Topic 605, Revenue Recognition. See Note 13—Revenue Recognition for additional discussion of the impact of the adoption of ASU 2014-09.

Not yet adopted

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, our estimated income tax is considered provisional and the Company’s analysis is expected to be finalized by the end of the 2018 calendar year.

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.

4.  Customer Concentrations and Accounts Receivable

 

Sales to Warren CAT, a direct sale to a domestic end-use customer, Supernova Energy Services SAS (“Supernova”), one of the Company’s Latin American distributors and E-Finity Distributed Generation, LLC (“E-Finity), one of the Company’s domestic distributors, accounted for 18%, 12% and 10%, respectively, of revenue for the first quarter of Fiscal 2019. Sales to Horizon Power Systems (“Horizon”), one of the Company’s domestic distributors, and E-Finity, accounted for 21% and 15%, respectively, of revenue for the first quarter of Fiscal 2018.

Additionally, Serba Dinamik Sdn Bhd (“Serba”), one of the Company’s Malaysian distributors, Supernova, Reliable Secure Power Systems, one of the Company’s domestic distributors (“RSP”) and E-Finity accounted for 15%, 12%, 10% and 10%, respectively, of net accounts receivable as of June 30, 2018. Serba, E-Finity, and Supernova accounted for 20%, 18% and 10%, respectively, of net accounts receivable as of March 31, 2018.

On October 13, 2017, the Company entered into an Accounts Receivable Assignment Agreement (the “Assignment Agreement”) and Promissory Note (the “Note”) with Turbine International, LLC (“TI”).  

Pursuant to the terms of the Assignment Agreement, the Company agreed to assign to TI the right, title and interest to receivables owed to the Company from BPC Engineering, its former Russian distributor (“BPC”), upon TI’s payment to the Company of $2.5 million in three payments by February 1, 2018. The Company received payments from TI of approximately $1.0 million under the Assignment Agreement during Fiscal 2018, which was recorded as bad debt recovery. The receivables owed to the Company from BPC had a balance of $5.3 million as of June 30, 2018, and this balance was fully reserved. As of June 30, 2018, the right, title and interest to the receivables owed to the Company from BPC had not been assigned to TI, as TI had not yet made all payments as required under the Assignment Agreement by February 1, 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 Agreement and Note. However, due to the Company’s limited business relationship with TI and the missed payments on the Assignment Agreement, the Company deferred recognition of the Assignment Agreement and Note until collectability is reasonably assured.   

In connection with the terms of the Note, the Company granted TI the sole distribution rights for its products and services in the Russian oil and gas sector. As a result of this appointment, TI agreed to pay the Company $3.8 million over a three-year period in 35 equal monthly installments starting in August 2018.

On June 5, 2018, the Company entered into an amendment to the Assignment Agreement (the “Amended Assignment Agreement”) and the Note (the “Amended Note”) with TI. Pursuant to the terms of the Amended Assignment Agreement, the right, title and interest to receivables owed to the Company from BPC will be contingent upon TI’s payment to the Company of the remaining approximately $1.5 million in five payments by September 20, 2019. During the first quarter of Fiscal 2019 no payment was due under these agreements. Under the terms of the Amended Note, TI agreed to pay the Company $3.8 million over a three-year period in 13 equal quarterly installments starting in December 20, 2019.

The Company recorded bad debt recoveries of approximately $2,800 and $13,000 during the three months ended June 30, 2018 and 2017, respectively. As of March 31, 2015, the Company had an amount owed of approximately $8.1 million by BPC. As of June 30, 2018, the Company collected cumulatively approximately $1.8 million from BPC on their accounts receivable which has been previously reserved. Additionally, the Company collected approximately $1.0 million from TI, under the terms of the Assignment Agreement. The remaining balance of the fully reserved accounts receivable is $5.3 million as of June 30, 2018.

8


 

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 June 30, 2018 and March 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

 

    

2018

    

2018

 

Raw materials

 

$

19,567

 

$

17,981

 

Work in process

 

 

46

 

 

111

 

Finished goods

 

 

3,080

 

 

4,076

 

Total

 

 

22,693

 

 

22,168

 

Less inventory reserve

 

 

(5,535)

 

 

(5,494)

 

Less non-current portion

 

 

(1,103)

 

 

(1,041)

 

Current portion

 

$

16,055

 

$

15,633

 

 

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, 2018 is 1.4 years. The Company expects to use the non-current portion of the inventories on hand as of June 30, 2018 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

 

$

449

 

25 to 36 months

 

 

654

 

Total

 

$

1,103

 

 

 

6.  Property, Plant and Equipment

 

Property, plant and equipment consisted of the following as of June 30, 2018 and March 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

 

    

2018

    

2018

 

Machinery, rental equipment, equipment, automobiles and furniture

 

$

15,115

 

$

15,481

 

Leasehold improvements

 

 

11,017

 

 

10,949

 

Molds and tooling

 

 

2,834

 

 

2,904

 

 

 

 

28,966

 

 

29,334

 

Less, accumulated depreciation

 

 

(26,178)

 

 

(26,475)

 

Total property, plant and equipment, net

 

$

2,788

 

$

2,859

 

 

 

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 for each of the first quarters of Fiscal 2019 and 2018.

 

 

 

9


 

7.  Intangible Assets

 

Intangible assets consisted of the following as of June 30, 2018 and March 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

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

 

 

1,885

 

 

355

 

Trade name & parts, service and TA100 customer relationships

 

1.2 to 5 years

 

 

1,766

 

 

1,766

 

 

 —

 

Total

 

 

 

$

7,706

 

$

7,351

 

$

355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

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

 

 

1,829

 

 

411

 

Trade name & parts, service and TA100 customer relationships

 

1.2 to 5 years

 

 

1,766

 

 

1,766

 

 

 —

 

Total

 

 

 

$

7,706

 

$

7,295

 

$

411

 

 

Amortization expense for the intangible assets was $0.1 million during the first quarter of each of Fiscal 2019 and 2018, respectively.

 

Expected future amortization expense of intangible assets as of June 30, 2018 is as follows (in thousands):

 

 

 

 

 

 

 

 

Amortization

 

Year Ending March 31,

    

Expense

 

2019 (remainder of fiscal year)

 

 

168

 

2020

 

 

187

 

Total expected future amortization

 

$

355

 

 

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 $7,100 and $6,500 were earned by Solar for the first quarter of Fiscal 2019 and 2018, respectively. Earned royalties of approximately $7,100 and $8,000 were unpaid as of June 30, 2018 and March 31, 2018, respectively, and are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

 

8.  Stock-Based Compensation

The following table summarizes, by condensed consolidated statement of operations line item, stock-based compensation expense for the Company’s first quarter of Fiscal 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

2018

    

2017

 

Cost of goods sold

 

$

12

    

$

20

 

Research and development

 

 

 7

 

 

 7

 

Selling, general and administrative

 

 

208

 

 

127

 

Stock-based compensation expense

 

$

227

 

$

154

 

 

10


 

Stock Plans

 

2000 Equity Incentive Plan and 2017 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. 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. On June 5, 2018, the Company’s Board of Directors approved an amendment of the 2017 Plan, subject to stockholder approval, to increase the aggregate number of shares of common stock authorized for issuance under the 2017 Plan by 3,000,000 shares of common stock. The amendment of the 2017 Plan has been submitted for approval by the Company’s stockholders at the 2018 annual meeting of stockholders.

 

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. 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 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

Aggregate

 

 

 

 

 

Average

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Exercise Price

 

Term

 

Value

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

Options outstanding at March 31, 2018

    

212,392

    

$

20.71

    

 

    

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

 

Exercised

 

 —

 

$

 —

 

 

 

 

 

 

Forfeited, cancelled or expired

 

 —

 

$

 —

 

 

 

 

 

 

Options outstanding at June 30, 2018

 

212,392

 

$

20.71

 

2.6

 

 

 —

 

Options fully vested at June 30, 2018 and those expected to vest beyond June 30, 2018

 

212,392

 

$

20.71

 

2.6

 

 

 —

 

Options exercisable at June 30, 2018

 

212,392

 

$

20.71

 

2.6

 

 

 —

 

 

Black-Scholes Model Valuation Assumptions

 

There were no stock options granted during either of the first quarters of Fiscal 2019 or 2018. There was no expense associated with stock options during the first quarter of Fiscal 2019. The Company recorded expense of approximately $8,000 associated with its stock options during the first quarter of Fiscal 2018. There were no unvested stock option awards as of June 30, 2018.

 

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. The restricted stock units vest over a period of two, three or four years. For restricted stock units with two year vesting, 100% vests on the second year anniversary. For restricted stock units with three year vesting, one-third vest annually beginning one year after the issuance date. 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

11


 

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 Units and Performance Restricted Stock Units

 

Shares

 

Value

 

Nonvested restricted stock units outstanding at March 31, 2018

    

2,011,611

    

$

0.90

 

Granted

 

309,202

 

 

1.59

 

Vested and issued

 

(4,688)

 

 

21.46

 

Forfeited

 

(10,162)

 

 

1.02

 

Nonvested restricted stock units outstanding at June 30, 2018

 

2,305,963

 

 

0.95

 

Restricted stock units expected to vest beyond June 30, 2018

 

2,305,940

 

$

0.95

 

 

The following table provides additional information on restricted stock units for the Company’s first quarter of Fiscal 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

2018

    

2017

 

Restricted stock compensation expense (in thousands)

 

$

227

    

$

139

 

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

 

$

 7

 

$

 7

 

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

 

$

1.59

 

$

0.67

 

 

As of June 30, 2018, there was approximately $1.2 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 2.0  years.

The Company adopted PRSU activity is included in the above restricted stock units tables. The PRSU Program has a two-year or three-year performance measurement period. The performance measurement period will begin on April 1 of the first fiscal year and end on March 31 of the second fiscal year or the third fiscal year. The program is intended to have overlapping performance measurement periods (e.g., a new three-year cycle begins each year on April 1), subject to Compensation Committee approval. At the end of each performance measurement period, the Compensation Committee will determine the achievement against the performance objectives.

During the first quarter of Fiscal 2019, the Company granted 147,327 PRSUs with three-year performance measurement period and the criteria measured by the Company’s free cash flow and aftermarket sales absorption. The target PRSU awards for each participant, will be paid upon achievement of the target level of performance for free cash flow and aftermarket sale absorption, taking into account the applicable weighting for the individual metric. Achievement of a performance goal at the threshold level will result in a payment that is 50% of the target PRSU award. Achievement of a performance goal at the maximum level will result in a payment that is 150% of the target PRSU award. The Compensation Committee will use an interpolation table that weights performance between levels for determining the portion of the Target PRSU that is earned. In addition, during the first quarter of Fiscal 2019, the Company granted 150,000 PRSUs to its President and Chief Executive officer with two-year performance measurement period and the criteria measured by the Company’s institutional ownership levels, Distributor Support System (“DSS program”) cash collections and Factory Protection Plan (“FPP”) gross margins. This equity award is 100% vesting in two years and based on predetermined equally weighted criteria. See Note 13—Revenue Recognition for additional discussion on DSS program.

The weighted average per share grant date fair value of PRSUs granted during the first quarter of Fiscal 2019 was $1.59. However, based on the Company’s assessment as of June 30, 2018 that the PRSU threshold for the first performance measurement likely would not be met, the fair value of the PRSU awards were adjusted to zero and no compensation expense was recorded or recognized during the first quarter of Fiscal 2019. Any compensation expense will be recognized over the corresponding requisite service period and will be adjusted in subsequent reporting periods if the Company’s assessment of the probable level of achievement of the performance goals change. The Company will continue to periodically assess the likelihood of the PRSU threshold being met until the end of the applicable performance period.

12


 

 

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. There were no restricted stock awards granted during the first quarter of Fiscal 2019. During the first quarter of Fiscal 2018 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30, 2017

 

Restricted stock awards compensation expense (in thousands)

 

$

 7

 

Restricted stock awards granted

 

 

2,016

 

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

 

$

0.62

 

 

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.

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 a rights agreement (the “NOL Rights Agreement”) with Broadridge Financial Solutions, Inc. successor-in-interest to 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 “Right”) for each share of the Company’s common stock authorized and outstanding. Each 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 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 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

13


 

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 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 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 Rights are redeemed pursuant to the NOL Rights Agreement; (iii) the time at which the Rights are exchanged pursuant to the NOL Rights Agreement; (iv) the time at which the 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 June 7, 2018, the Company entered into a sales agreement with H.C. Wainwright & Co., LLC 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 $25.0 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, 2018, the Company issued 0.7 million shares of the Company’s common stock under this at-the-market offering program and the net proceeds to the Company from the sale of the Company’s common stock were approximately $1.0 million after deducting commissions paid of approximately $32,600. As of June 30, 2018, approximately $24.0 million remained available for issuance with respect to this at-the-market offering program.

On April 13, 2018, a warrant holder exercised its rights to the warrant agreement to exercise on a cashless basis 5,760,000 Series A warrants at an exercise price of $0.60 per share under the warrant agreement. In accordance with terms of the warrant agreement, after taking into account the shares withheld to satisfy the cashless exercise option, the Company issued 3,806,243 shares of common stock.

As of June 30, 2018, there were 2,718,750 Series A warrants outstanding and there are no Series B warrants outstanding.

14


 

Effective August 28, 2015, the Company entered into a sales agreement with Cowen and Company, LLC with respect to an at-the-market offering program pursuant to which the Company offered and sold, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $30.0 million. During the three months ended June 30, 2018, the Company issued 2.8 million shares of the Company’s common stock under this at-the-market offering program and the net proceeds to the Company from the sale of the Company’s common stock were approximately $4.0 million after deducting commissions paid of approximately $0.1 million. As of June 30, 2018, 26.0 million shares of the Company’s common stock were cumulatively 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 $28.6 million after deducting commissions paid of approximately $0.8 million. This at-the-market offering program expired on May 29, 2018.  

 

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, 2018 and are categorized using the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

Total

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Restricted cash

    

$

6,000

    

$

6,000

    

$

 —

    

$

 —

 

 

The table below presents our assets and liabilities that are measured at fair value on a recurring basis at March 31, 2018 and are categorized using the fair value hierarchy (in thousands):

 

 

 

15


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

    

$

 —

    

$

 —

 

 

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, 2018

 

March 31, 2018

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

    

Value

 

Fair Value

 

Value

    

Fair Value

 

Obligations under the credit facility

    

$

10,024

  

$

10,024

 

$

8,527

 

$

8,527

 

 

 

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. Interest expense related the former credit facility with Wells Fargo during the first quarter of Fiscal 2018 was $0.2 million, which includes $0.1 million in amortization of deferred financing costs.

New Credit Facility  The Company maintains 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 $15.0 million on a revolving basis depending on, among other factors, the amount of its eligible inventory and accounts receivable. The Bridge Bank Credit Agreements will terminate in accordance with their terms on June 2, 2021.

On June 1, 2018, the Company entered into a letter agreement (the “Letter Agreement”) with Bridge Bank. The Letter Agreement extended the maturity date under the Company’s Bridge Bank Credit Agreements from June 2, 2019 to June 2, 2021. The Letter Agreement increased the line of credit to an amount up to $15.0 million from $12.0 million. Additionally, the Letter Agreement reduced the per annum interest rate from prime rate plus 1.50 percent to prime rate plus 1.00 percent; the facility fee from 0.625% to 0.5%, and the cash collateral held at Bridge Bank from 42% to 40%, which is $6.0 million of the $15.0 million facility, as well as no fee for early termination.

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 $6.0 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 1.0 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 $0.4 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 will be amortized to interest expense through June 2021. As of June 30, 2018, $10.0 million in borrowings were outstanding and approximately $5.0 million borrowings available under the credit facility. Interest expense related to the credit facility during the first quarter of Fiscal 2019 was $0.1 million, which includes $38,500 in amortization of deferred financing costs. Interest expense related to the 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 6.0% at June 30, 2018.

16


 

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 have a material adverse effect on the Company. As of June 30, 2018 we were in compliance with the covenants contained in the Bridge Bank Credit Agreements for Fiscal 2019. 

 

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 the 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. Changes in accrued warranty reserve during the first quarter of Fiscal 2019 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Balance, beginning of the period

 

$

1,682

 

Standard warranty provision

 

 

397

 

Accrual related to reliability repair programs

 

 

 —

 

Deductions for warranty claims

 

 

(218)

 

Balance, end of the period

 

$

1,861

 

 

 

 

 

17


 

13.  Revenue Recognition

On April 1, 2018, the Company adopted the new revenue standard ASU 2014-09 and applied it to all contracts using the modified retrospective method. The Company determined there was no change in applying the new revenue standard, therefore no adjustment to the opening balance of accumulated deficit was needed.

The Company derives its revenues primarily from system sales, service contracts and professional services. Revenues are recognized when control of the systems and services is transferred to the Company’s customers in an amount that reflects the consideration it expects to be entitled to in exchange for those services.

The Company determines revenue recognition through the following steps:

•        Identification of the contract, or contracts, with a customer

•        Identification of the performance obligations in the contract

•        Determination of the transaction price

•        Allocation of the transaction price to the performance obligations in the contract

•        Recognition of revenue when, or as, the Company satisfies a performance obligation

The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied, which generally occurs, for systems, upon the transfer of control in accordance with the contractual terms and conditions of the sale. The majority of the Company’s revenue associated with systems is recognized at a point in time when the system is shipped to the customer. Revenue from service contracts and post-shipment performance obligations is recognized when or as those obligations are satisfied. The Company primarily offers assurance-type standard warranties that do not represent separate performance obligations and will separately offer and price extended warranties that are separate performance obligations for which the associated revenue is recognized over-time based on the extended warranty period. The Company records amounts billed to customers for reimbursement of shipping and handling costs within revenue. Shipping and handling costs associated with outbound freight after control over a system has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold. Sales taxes and other usage-based taxes are excluded from revenue.

Comprehensive Factory Protection Plan (“FPP”) service contracts require payment at the beginning of the contract period. Advance payments are not considered a significant financing component as they are typically received less than one year before the related performance obligations are satisfied. These payments are treated as a contract liability and are classified in deferred revenue in the Condensed Consolidated Balance Sheet. Once control transfers to the customer and the Company meets the revenue recognition criteria, the deferred revenue is recognized in the Condensed Consolidated Statement of Income. The deferred revenue relating to the annual maintenance service contracts is recognized in the Condensed Consolidated Statement of Income on a straight line basis over the expected term of the contract.

Significant Judgments - Contracts with Multiple Performance Obligations

The Company enters into contracts with its customers that often include promises to transfer multiple products, parts, accessories, FPP and services. A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.

Products, parts and accessories are distinct as such services are often sold separately. In determining whether FPP and service contracts are distinct, the Company considers the following factors for each FPP and services agreement: availability of the services from other vendors, the nature of the services, the timing of when the  services contract was signed in comparison to the product delivery date and the contractual dependence of the product on the

18


 

customer’s satisfaction with the professional services work. To date, the Company has concluded that all of the FPP and services contracts included in contracts with multiple performance obligations are distinct.

The Company allocates the transaction price to each performance obligation on a relative standalone selling price (“SSP”) basis. The SSP is the price at which the Company would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation.

The Company determines SSP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of the Company’s transactions, the customer demographic, the geographic area where systems and services are sold, price lists, its go-to-market strategy, historical sales and contract prices. The determination of SSP is made through consultation with and approval by the Company’s management, taking into consideration the go-to-market strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes to SSP.

In certain cases, the Company is able to establish SSP based on observable prices of products or services sold separately in comparable circumstances to similar customers. The Company uses a single amount to estimate SSP when it has observable prices.

If SSP is not directly observable, for example when pricing is highly variable, the Company uses a range of SSP. The Company determines the SSP range using information that may include market conditions or other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customer size and geography.

The following table presents disaggregated revenue by business group for the first quarter of Fiscal 2019 (in thousands):

 

 

 

 

 

 

 

Three Months Ended

 

 

    

June 30, 2018

 

Microturbine Products

 

$

13,633

 

Accessories and Parts

 

 

3,452

 

Total Product, Accessories and Parts

 

 

17,085

 

Service

 

 

4,104

 

Total Revenue

 

$

21,189

 

Following is the geographic revenue information based on the primary operating location of the Company’s customers for the first quarter of Fiscal 2019 (in thousands):

 

 

 

 

 

 

 

Three Months Ended

 

 

    

June 30, 2018

 

United States

 

$

10,874

 

Mexico

 

 

609

 

All other North America

 

 

116

 

Total North America

 

 

11,599

 

Europe

 

 

4,873

 

Columbia

 

 

2,616

 

Asia

 

 

854

 

Australia

 

 

853

 

All other

 

 

394

 

Total Revenue

 

$

21,189

 

19


 

 

Contract Balances

Our contract liabilities consist of advance payments for systems as well as deferred revenue on service obligations and extended warranties. The current portion of deferred revenue is included in current liabilities under deferred revenue and the non-current portion of deferred revenue is included in other non-current liabilities in the Condensed Consolidated Balance Sheet.

As of June 30, 2018 the balance of deferred revenue was approximately $7.7 million compared to $6.6 million as of March 31, 2018. This overall increase in the balance of deferred revenue of $1.1 million during the first quarter of Fiscal 2019 was comprised of increases in deferred revenue attributable to deposits of $1.0 million and deferred revenue attributable to FPP contracts of $0.3 million. These increases were offset by a decrease in deferred revenue attributable to the Distributor Support System (“DSS program”) of $0.2 million. Changes in deferred revenue during the first quarter of Fiscal 2019 are as follows (in thousands):

 

 

 

 

 

 

 

 

    

FPP Balance, beginning of the period

 

$

3,549

 

FPP Billings

 

 

4,087

 

FPP Revenue recognized

 

 

(3,827)

 

Balance attributed to FPP contracts

 

 

3,809

 

DSS program

 

 

916

 

Deposits

 

 

2,925

 

Deferred revenue balance, end of the period

 

$

7,650

 

 

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. The DSS program began January 1, 2018 and service revenue derived from the DSS program began in March 2018 and is recognized on a pro rata basis as the distributors purchase our products. Deferred revenue attributed to Deposits are primarily non-refundable cash payments from distributors for future orders.

As of June 30, 2018, approximately $3.8 million of revenue is expected to be recognized from remaining performance obligations for FPP service contracts. The Company expects to recognize revenue on approximately $2.7 million of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. Revenue from remaining performance obligations for professional services contracts as of June 30, 2018 was not material.

Unsatisfied Performance Obligations

The Company has elected the practical expedient to disclose only the value of unsatisfied performance obligations for contracts with an original expected length greater than one year. The majority of the Company’s revenues resulted from sales of inventoried systems with short periods of manufacture and delivery and thus are excluded from this disclosure.

Practical Expedients

We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.

 

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 $0.3 million and $0.2 million in royalties for C200 and C1000 Series system sales during the first quarter of Fiscal 2019 and 2018, respectively. Earned royalties of approximately $0.3 million and $0.2 million were unpaid as of June 30, 2018 and March 31, 2018, respectively, and are included in accrued expenses in the accompanying balance sheets. See Note 17—Subsequent Events for discussion with respect to an amendment to the Development and License Agreement with Carrier.

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15.  Commitments and Contingencies

Purchase Commitments

As of June 30, 2018, the Company had firm commitments to purchase inventories of approximately $28.0 million through Fiscal 2020. 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 Fiscal 2025. 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 $0.4 million as of June 30, 2018 and March 31, 2018, respectively. Rent expense was approximately $0.6 million during each of the three months ended June 30, 2018 and 2017.

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, 2018, 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.  On February 9, 2018, the Court issued an Order denying Defendants’ motion to dismiss.  On March 30, 2018, Defendants filed an answer to the Consolidated Amended Complaint.  On May

21


 

17, 2018, the Court issued a scheduling order setting a trial date of March 17, 2020.  On June 26, 2018, the Court entered an order vacating all deadlines through the end of October 2018 and temporarily staying formal discovery and other proceedings to allow the parties time to conduct a mediation.  The parties are scheduled to participate in mediation on September 24, 2018.  The Company has not recorded any liability as of June 30, 2018 since any potential loss is not probable or reasonably estimable given the current status of the proceedings.

Federal Individual Securities Action

An individual securities complaint was filed against us, our Chief Executive Officer, and additional unidentified defendants in the United States District Court for the Central District of California under the following caption:  FiveT Investment Management LTD, et al., v. Capstone Turbine, et al., No. 2:18-CV-03512 on April 25, 2018.  The lawsuit alleges material misrepresentations and omissions regarding our revenue, sales, and operations because of alleged improper revenue recognition and backlog calculations related to BPC.  The lawsuit alleges that these statements 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 complaint also asserts claims against all named defendants for fraud, negligent misrepresentation, violations of California Civil Code sections 1709 and 1710, and California Corporations Code sections 25400 and 25401. Additionally, the complaint asserts a cause of action against the individual defendants for breach of fiduciary duty. It demands compensatory damages for the amount of damages allegedly suffered, pre-judgment and post-judgment interest, and fees.

On June 29, 2018, the plaintiffs filed an Amended Complaint for Common Law Fraud and Negligent Misrepresentation.  The Amended Complaint asserts claims for common law fraud and negligent misrepresentation, against the Company, Mr. Jamison, and unidentified individual defendants. Defendants’ answer to the Amended Complaint is due on or by August 17, 2018. The parties have agreed to participate in a mediation to be held on September 24, 2018.  The Company has not recorded any liability as of June 30, 2018 since any potential loss is not probable or reasonably estimable given the current status 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 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.  On March 9, 2018, following the Court’s order denying Defendants’ motion to dismiss in the federal securities class action, the parties filed a stipulation and proposed order seeking to stay this action until the close of fact discovery in the federal securities class action. On March 20, 2018, the Court entered that proposed order.  A status conference is scheduled for October 4, 2018.

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.  On March 9,

22


 

2018, following the Court’s order denying Defendants’ motion to dismiss in the federal securities class action, the parties filed a stipulation and proposed order seeking to stay this action until the close of fact discovery in the federal securities class action.  On March 20, 2018, the Court entered that proposed order.  A status conference is scheduled for August 29, 2018.

The parties in both of the above state derivative lawsuits have agreed to participate in a mediation to be held on September 24, 2018. 

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.  

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 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 were 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. On March 9, 2018, following the Court’s order denying Defendants’ motion to dismiss in the federal securities class action, the parties filed a stipulation and proposed order seeking to stay this action until the close of fact discovery in the federal securities class action. On March 13, 2018, the Court granted the parties’ stipulation.

The parties in the above federal derivative lawsuits have agreed to participate in a mediation to be held on September 24, 2018.

Shareholder Demand

By letter dated July 7, 2017 (the “Shareholder Demand”), Andre Rosowsky demanded 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. On July 25, 2017, the Company acknowledged receipt of the Shareholder Demand and requested information from Mr. Rosowsky sufficient to show that he had standing to make the demand. The Board of Directors formed a committee to evaluate the Shareholder Demand in anticipation of receiving the requested information from Mr. Rosowsky. Mr. Rosowsky has failed to respond to the request for information and therefore the Company believes that Mr. Rosowsky abandoned 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, 2018 which would make these instruments anti-dilutive. As of June 30, 2018 and 2017, the number of anti-dilutive stock options and restricted stock units excluded

23


 

from diluted net loss per common share computations was approximately 2.5 million and 0.6 million, respectively. As of June 30, 2018, the number of PRSUs subject to performance conditions which have not been satisfied have been excluded from diluted net loss per common share computations was approximately 0.3 million.  There were no PRSUs outstanding as of June 30, 2017. As of June 30, 2018 and 2017, the number of warrants excluded from diluted net loss per common share computations was approximately 2.7 million and 10.4 million, respectively.

 

17. Subsequent Events

On July 25, 2018, the Company and Carrier entered into a Second Amendment to the Development and License Agreement (“Second Amendment”) whereby the Company agreed to pay Carrier approximately $3.0 million to conclude the Company’s current royalty obligation under the Development and License Agreement, dated as of September 4, 2007, as amended (“Development Agreement”) and release the Company from any future royalty payment obligations. The Second Amendment also removed non-compete provisions from the Development Agreement, allowing the Company to design, market or sell its C200 System in conjunction with any energy system and compete with Carrier products in the CCHP market.

24


 

 

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 Fiscal 2018. 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 Fiscal 2018 and in other reports we file with the Securities and Exchange Commission (“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. Our microturbines can be interconnected to other distributed energy resources to form “microgrids” (also called “distribution networks”) located within a specific geographic area and provide power to a group of buildings. 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.

Our goals for Fiscal 2019 are to achieve EBITDA breakeven; significantly grow gross margin and revenue for our accessories, parts and service; strengthen our core market verticals, while diversifying into additional market verticals and geographies; and drive towards 100% aftermarket sales absorption. During the first quarter Fiscal 2019 our net loss increased by 20% to $4.9 million and our basic and diluted loss per share improved by 20% to $0.08 compared to $4.1 million and $0.10, respectively, in the same period of the previous year. The increase in the net loss during the first quarter of Fiscal 2019 was primarily because we experienced lower than anticipated revenue from our accessories, parts and service aftermarket business. This was further hampered by increases in higher than normal both scheduled and unscheduled maintenance activities resulting in an elevated cost of goods and a lower gross margin compared to the same period last year. In addition, the increase in net loss was because our operating expenses during the first quarter of Fiscal 2019 increased approximately 8% compared to the same period last year. The increases in operating expense was primarily because of higher selling costs, legal expenses and increased allocation of certain facility expenses resulting from consolidating our operations and offices into our Van Nuys location. The improvement in the net loss per share during the first quarter of Fiscal 2019 was primarily the result of an increase in weighted average shares outstanding to 61.8 million for the first quarter of Fiscal 2019 from 41.1 million for the first quarter of Fiscal 2018. Total revenue increased 10% during the first quarter of Fiscal 2019 primarily because of an increase in revenue from the European and Russian, and Latin American geographic markets compared to the same period last year. Additionally, though the U.S. dollar has somewhat weakened against other currencies, it still continues to be an issue in select markets as the strong dollar makes our products more expensive in those markets as we sell in U.S. dollars.   

Our products continue to gain interest in all six of the major vertical markets (energy efficiency, renewable energy, natural resources, critical power supply, microgrid and transportation). 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 livestock 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, our business strategy is to target projects within the energy efficiency and renewal energy markets. However, we experienced growth in the natural resources market during the first quarter of Fiscal 2019, which we believe was primarily because oil prices continued to be above $60.00 per barrel. Although we have experienced an improvement in revenue during the first quarter of Fiscal 2019 due to a rebound in oil prices, we continue to be impacted by the volatility

25


 

of the global oil and gas markets and the ongoing global geopolitical tensions. We have also seen 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 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, microgrid and transportation products), 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, renewable energy and microgrid markets.

The following table summarizes our product shipments by vertical markets:

 

 

 

 

 

 

 

 

 

 

Three Months

 

 

Ended June 30,

 

 

2018

    

 

2017

    

 

Energy efficiency

 

26

%

 

51

%

 

Natural resources

 

57

%

 

39

%

 

Renewable energy

 

10

%

 

 5

%

 

Microgrid

 

 7

%

 

 5

%

 

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

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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.

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. We have seen continued development in the critical market segment as it relates to heath care facilities.

Microgrid

Microgrid is a group of interconnected loads and distributed energy resources that acts as a single controllable energy entity with respect to the grid. Distributed energy resources typically include other dual-mode microturbines, reciprocating engines, solar photovoltaic (PV), wind turbine, fuel cells and battery storage.  Microgrids can be connected to larger electricity grids; however, in the event of a widespread outage, the microgrid will disconnect from the main grid and continue to operate independently to maintain the electricity supply to the homes and businesses that are connected to the microgrid’s electricity network. Our microturbines have the ability to meet the needs of microgrid end-users by lowering their overall cost to operate and by providing a versatile dispatchable technology that is fuel flexible and scalable enough to fit a wide variety of applications. We have seen continued development in the microgrid market segment.

Transportation

Our technology is also used in hybrid electric vehicle (“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.

Our technology is also used in marine applications. Our customers have applied our products in the commercial vessel and luxury yacht market segments. The 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. Transportation is a developing market segment for us. In Fiscal 2018, transportation products were only for customer demonstrations.

Backlog

 

Net product orders were approximately $11.5 million and $16.9 million for the first quarter of Fiscal 2019 and Fiscal 2018, respectively. Ending backlog was approximately $95.1 million at June 30, 2018 compared to $117.3 million at June 30, 2017. Book-to-bill ratio was 1.2:1 and 1.3:1 for the first quarter of Fiscal 2019 and Fiscal 2018, respectively. Book-to-bill ratio is the ratio of new orders we received to units shipped and billed during a period.

During the first quarter of Fiscal 2019 we removed from product backlog orders related to Regatta Solutions, our former California distributor (“Regatta”) for approximately $3.8 million. This removal was the result of the reassignment of the California sales territory to Cal Microturbine, our new exclusive distribution partner in California.

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On October 13, 2017, we entered into an Accounts Receivable Assignment Agreement (the “Assignment Agreement”) and Promissory Note (the “Note”) with Turbine International, LLC (“TI”). 

Pursuant to the terms of the Assignment Agreement, we agreed to assign to TI the right, title and interest to receivables owed to us from BPC Engineering, our former Russian distributor (“BPC”), upon TI’s payment to us of $2.5 million in three payments by February 1, 2018. We received payments from TI of approximately $1.0 million under the Assignment Agreement during Fiscal 2018 which was recorded as bad debt recovery. The receivables owed to us from BPC had a balance of $5.3 million as of March 31, 2018, and this balance was fully reserved. As of March 31, 2018, the right, title and interest to the accounts receivables owed to us from BPC had not been assigned to TI, as TI had not yet made all payments as required under the Assignment Agreement by February 1, 2018.

In connection with the terms of the Note, we granted TI the sole distribution rights for our products and services in the Russian oil and gas sector. As a result of this appointment, TI agreed to pay us $3.8 million over a three-year period in 35 equal monthly installments starting in August 2018.

On October 13, 2017, we and Hispania Petroleum, S.A. (the “Guarantor”), entered into a Guaranty Agreement (the “Guaranty Agreement”) whereby the Guarantor guarantees TI’s obligations under the Agreement and Note. However, due to our limited business relationship with TI and the missed payments on the Assignment Agreement, we deferred recognition of the Assignment Agreement and Note until collectability is reasonably assured.   

On June 5, 2018, we entered into an amendment to the Assignment Agreement (the “Amended Assignment Agreement”) and the Note (the “Amended Note”) with TI. Pursuant to the terms of the Amended Assignment Agreement, the right, title and interest to receivables owed to us from BPC will be contingent upon TI’s payment to us of the remaining approximately $1.5 million in five payments by September 20, 2019. During the first quarter of Fiscal 2019 no payment was due under these agreements. Under the terms of the Amended Note, TI agreed to pay us $3.8 million over a three-year period in 13 equal quarterly installments starting in December 20, 2019.

Due to the above amendments, during the three months ended March 31, 2018 we removed from product backlog orders related to BPC for approximately $7.2 million. This removal was the result of product pricing that we no longer would honor. After removal of the foregoing orders, the remaining backlog related to BPC as of June 30, 2018 comprises up to approximately 43% of our total backlog. This remaining backlog related to BPC continues to be reviewed with TI and the other new distributors in the region, and they have the right to request delivery of those backlog orders if the associated projects proceed. Nonetheless, the remaining backlog related to BPC may be negatively impacted.

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. A significant portion of our revenue is derived from sales to distributors who resell our products to end users. We have a total of 103 distributors, Original Equipment Manufacturers (“OEMs”) and national accounts. In the United States and Canada, we currently have 25 distributors, OEMs and national accounts. Outside of the United States and Canada, we currently have 78 distributors, OEMs and national accounts. We continue to refine our distribution channels to address our specific targeted markets.

 

Effective January 1, 2018, we launched our Distributor Support System (“DSS program”) to provide additional support for distributor business development activities, customer lead generation, brand awareness and tailored

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marketing services for each of our major geography and market vertical. This new program is funded by our distributors and was developed to provide improved worldwide distributor training, sales efficiency, website development, company branding and provide funding for increased strategic marketing activities. See Note 13—Revenue Recognition for additional discussion of revenue recognition for this program.

 

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 backlog at the end of the first quarter of Fiscal 2019 and Fiscal 2018 was approximately $72.3 million and $76.7 million, respectively, which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2031. Our FPP backlog as of March 31, 2018 was approximately $75.6 million. Additionally, we offer new and remanufactured parts through our global distribution network.

 

4.

Product Robustness and Life Cycle Maintenance Costs  We continu