AMERICAN SUPERCONDUCTOR CORP /DE/ - Quarter Report: 2020 September (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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

For the quarterly period ended September 30, 2020

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

For the transition period from _____ to _____.

Commission File Number: 0-19672

 

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American Superconductor Corporation

(Exact name of registrant as specified in its charter)

 

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Delaware	04-2959321
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
114 East Main St. Ayer, Massachusetts	01432
(Address of principal executive offices)	(Zip Code)

 

(978) 842-3000

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	AMSC	Nasdaq Global Select Market

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

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

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

Shares outstanding of the Registrant’s common stock:

 

Common Stock, par value $0.01 per share		27,603,102
Class		Outstanding as of November 2, 2020

 

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AMERICAN SUPERCONDUCTOR CORPORATION

INDEX

 

		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosure	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
Signature		31

 

 

 

		September 30, 2020				March 31, 2020
ASSETS
Current assets:
Cash and cash equivalents		$	41,246			$	24,699
Marketable securities			10,191				30,149
Accounts receivable, net			16,810				16,987
Inventory			14,155				18,975
Prepaid expenses and other current assets			3,496				2,959
Restricted cash			508				508
Total current assets			86,406				94,277
Marketable securities			—				5,046
Property, plant and equipment, net			8,140				8,565
Intangibles, net			3,309				3,550
Right-of-use assets			3,907				3,359
Goodwill			1,719				1,719
Restricted cash			5,782				5,657
Deferred tax assets			1,631				1,551
Other assets			333				385
Total assets		$	111,227			$	124,109
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	18,470			$	22,091
Lease liability, current portion			568				439
Deferred revenue, current portion			13,547				18,430
Total current liabilities			32,585				40,960
Deferred revenue, long term portion			8,409				7,712
Lease liability, long term portion			3,430				3,000
Deferred tax liabilities			352				180
Other liabilities			31				38
Total liabilities			44,807				51,890
Commitments and Contingencies (Note 14)
Stockholders' equity:
Common stock			234				229
Additional paid-in capital			1,055,548				1,053,507
Treasury stock			(3,336	)			(2,666	)
Accumulated other comprehensive loss			(262	)			(216	)
Accumulated deficit			(985,764	)			(978,635	)
Total stockholders' equity			66,420				72,219
Total liabilities and stockholders' equity		$	111,227			$	124,109

 

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Revenues		$	21,117			$	14,012			$	42,329			$	27,782
Cost of revenues			15,596				10,248				31,768				22,441
Gross margin			5,521				3,764				10,561				5,341
Operating expenses:
Research and development			2,719				2,398				5,218				4,871
Selling, general and administrative			5,887				5,400				11,524				10,655
Amortization of acquisition-related intangibles			121				85				242				170
Total operating expenses			8,727				7,883				16,984				15,696
Operating loss			(3,206	)			(4,119	)			(6,423	)			(10,355	)
Change in fair value of warrants			—				1,145				—				4,092
Interest income, net			161				335				320				840
Other (expense)/income, net			(476	)			1,520				(646	)			976
Loss before income tax expense			(3,521	)			(1,119	)			(6,749	)			(4,447	)
Income tax expense (benefit)			191				(294	)			380				(83	)
Net loss		$	(3,712	)		$	(825	)		$	(7,129	)		$	(4,364	)
Net loss per common share
Basic		$	(0.17	)		$	(0.04	)		$	(0.33	)		$	(0.21	)
Diluted		$	(0.17	)		$	(0.10	)		$	(0.33	)		$	(0.40	)
Weighted average number of common shares outstanding
Basic			21,860				20,656				21,775				20,586
Diluted			21,860				20,723				21,775				20,736

 

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Net loss		$	(3,712	)		$	(825	)		$	(7,129	)		$	(4,364	)
Other comprehensive loss, net of tax:
Foreign currency translation loss			(43	)			(1,269	)			(46	)			(851	)
Total other comprehensive loss, net of tax			(43	)			(1,269	)			(46	)			(851	)
Comprehensive loss		$	(3,755	)		$	(2,094	)		$	(7,175	)		$	(5,215	)

 

		Common Stock								Additional								Accumulated Other								Total
		Number of Shares				Par Value				Paid-in Capital				Treasury Stock				Comprehensive Income (Loss)				Accumulated Deficit				Stockholders' Equity
Balance at March 31, 2020			22,902			$	229			$	1,053,507			$	(2,666	)		$	(216	)		$	(978,635	)		$	72,219
Issuance of common stock - restricted shares			493				5				(5	)			—				—				—				—
Stock-based compensation expense			—				—				909				—				—				—				909
Issuance of stock for 401(k) match			13				—				88				—				—				—				88
Repurchase of treasury stock			—				—				—				(377	)			—				—				(377	)
Cumulative translation adjustment			—				—				—				—				(3	)			—				(3	)
Net loss			—				—				—				—				—				(3,417	)			(3,417	)
Balance at June 30, 2020			23,408			$	234			$	1,054,499			$	(3,043	)		$	(219	)		$	(982,052	)		$	69,419
Issuance of common stock - ESPP			8				—				99				—				—				—				99
Issuance of common stock - restricted shares			33				—				—				—				—				—				—
Stock-based compensation expense			—				—				849				—				—				—				849
Issuance of stock for 401(k) match			9				—				101				—				—				—				101
Repurchase of treasury stock			—				—				—				(293	)			—				—				(293	)
Cumulative translation adjustment			—				—				—				—				(43	)			—				(43	)
Net loss			—				—				—				—				—				(3,712	)			(3,712	)
Balance at September 30, 2020			23,458			$	234			$	1,055,548			$	(3,336	)		$	(262	)		$	(985,764	)		$	66,420

		Common Stock								Additional								Accumulated Other								Total
		Number of Shares				Par Value				Paid-in Capital				Treasury Stock				Comprehensive Income (Loss)				Accumulated Deficit				Stockholders' Equity
Balance at March 31, 2019			21,652			$	216			$	1,044,622			$	(2,101	)		$	(5	)		$	(961,539	)		$	81,193
Issuance of common stock - restricted shares			174				2				(2	)			—				—				—				—
Stock-based compensation expense			—				—				249				—				—				—				249
Issuance of stock for 401(k) match			8				—				81				—				—				—				81
Issuance of common stock - warrant exercise			23				—				294				—				—				—				294
Repurchase of treasury stock			—				—				—				(283	)			—				—				(283	)
Cumulative translation adjustment			—				—				—				—				418				—				418
Net loss			—				—				—				—				—				(3,539	)			(3,539	)
Balance at June 30, 2019			21,857			$	218			$	1,045,244			$	(2,384	)		$	413			$	(965,078	)		$	78,413
Issuance of common stock - ESPP			15				—				100				—				—				—				100
Issuance of common stock - restricted shares			10				—				—				—				—				—				—
Stock-based compensation expense			—				—				397				—				—				—				397
Issuance of stock for 401(k) match			12				—				92				—				—				—				92
Repurchase of treasury stock			—				—				—				(222	)			—				—				(222	)
Cumulative translation adjustment			—				—				—				—				(1,269	)			—				(1,269	)
Net loss			—				—				—				—				—				(825	)			(825	)
Balance at September 30, 2019			21,894			$	218			$	1,045,833			$	(2,606	)		$	(856	)		$	(965,903	)		$	76,686

 

		Six Months Ended September 30,
		2020				2019
Cash flows from operating activities:
Net loss		$	(7,129	)		$	(4,364	)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization			2,009				2,262
Stock-based compensation expense			1,758				646
Provision for excess and obsolete inventory			1,250				196
Change in fair value of warrants			—				(4,092	)
Non-cash interest income			—				(112	)
Other non-cash items			233				(888	)
Unrealized foreign exchange loss on cash and cash equivalents			272				—
Changes in operating asset and liability accounts:
Accounts receivable			157				(2,244	)
Inventory			3,591				(3,589	)
Prepaid expenses and other assets			(866	)			(1,810	)
Accounts payable and accrued expenses			(3,192	)			2,799
Deferred revenue			(4,636	)			711
Net cash used in operating activities			(6,553	)			(10,485	)
Cash flows from investing activities:
Purchase of property, plant and equipment			(1,326	)			(1,736	)
Proceeds from the sale of property, plant and equipment			—				3,001
Purchase of marketable securities			—				(10,000	)
Sale of marketable securities			25,006				—
Change in other assets			63				66
Net cash (used in)/provided by investing activities			23,743				(8,669	)
Cash flows from financing activities:
Repurchase of treasury stock			(670	)			(505	)
Proceeds from exercise of employee stock options and ESPP			99				100
Net cash used in financing activities			(571	)			(405	)
Effect of exchange rate changes on cash			53				(74	)
Net increase/(decrease) in cash, cash equivalents and restricted cash			16,672				(19,633	)
Cash, cash equivalents and restricted cash at beginning of period			30,864				78,198
Cash, cash equivalents and restricted cash at end of period		$	47,536			$	58,565
Supplemental schedule of cash flow information:
Cash paid for income taxes, net of refunds		$	275			$	130
Non-cash investing and financing activities
Issuance of common stock to Hercules to settle warrant liability			—				294
Issuance of common stock to settle liabilities			189				173

 

1. Nature of the Business and Operations and Liquidity

 

Nature of the Business and Operations

 

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

 

These unaudited condensed consolidated financial statements of the Company have been prepared on a going concern basis in accordance with United States generally accepted accounting principles (“GAAP”) and the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-Q. The going concern basis of presentation assumes that the Company will continue operations and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those instructions. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results for the interim periods ended September 30, 2020 and 2019 and the financial position at September 30, 2020; however, these results are not necessarily indicative of results which may be expected for the full year. The interim condensed consolidated financial statements, and notes thereto, should be read in conjunction with the audited consolidated financial statements for the year ended March 31, 2020, and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020 filed with the SEC on June 2, 2020.

 

Liquidity

 

The Company has historically experienced recurring operating losses and as of September 30, 2020, the Company had an accumulated deficit of $985.8 million. In addition, the Company has historically experienced recurring negative operating cash flows.  At September 30, 2020, the Company had cash, cash equivalents, and marketable securities of $51.4 million. Marketable securities include certificate of deposits with maturities between six and eleven months.  Cash used in operations for the six months ended September 30, 2020 was $6.6 million.

 

In December 2015, the Company entered into a set of strategic agreements valued at approximately $210.0 million with Inox Wind Ltd. (“Inox” or “Inox Wind”), which includes a multi-year supply contract pursuant to which the Company will supply electrical control systems ("ECS") to Inox and a license agreement allowing Inox to manufacture a limited number of ECS. After Inox purchases the specified number of ECS required under the terms of the supply contract, Inox agreed that the Company will continue as Inox’s preferred supplier and Inox will be required to purchase from the Company a majority of its ECS requirements for an additional three-year period. Pursuant to these strategic agreements, Inox must forecast future purchase orders of sets of ECS which become firm orders three months prior to shipment, and Inox must post letters of credit before the Company will ship such orders. Inox had been delinquent on its obligation to post letters of credit for sets of ECS that Inox forecasted to purchase under the terms of the supply contract.  On May 29, 2020, the Company sent written notice to Inox notifying Inox of its default under the supply contract due to Inox’s failure to post letters of credit in the amount of €6.0 million for the payment of ECS that Inox is obligated to purchase under the terms of the supply contract.  If Inox failed to post letters of credit in the amount of €6.0 million in accordance with the terms of the supply contract within the ninety day cure period after receipt of the default notice, then the Company could have terminated the supply contract by providing written notice of such termination to Inox.  On September 2, 2020, Inox delivered approved letters of credit in the amount of €1.3 million for the payment of a portion of the ECS that Inox was obligated to purchase under the terms of the supply contract.  On September 11, 2020, the Company notified Inox that due to (i) the Company’s business relationship with Inox, and (ii) Inox’s delivery of approved letters of credit in the amount of €1.3 million as described above, the Company gave Inox until October 5, 2020 to regain compliance with the terms of the supply contract by providing approved letters of credit in the amount of €4.7 million for payment of the remaining ECS that Inox currently was obligated to purchase under the terms of the supply contract.  On October 1, 2020, Inox delivered approved letters of credit for payment of the remaining ECS that Inox was obligated to purchase under the terms of the supply contract and cured the default set forth in the May 29, 2020 default notice.

 

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

 

On October 22, 2020, the Company entered into an underwriting agreement with Oppenheimer & Co. Inc., as representative of the several underwriters named therein, relating to the issuance and sale (the “Offering”) of 3,670,000 shares of the Company’s common stock at a public offering price of $15.00 per share. The net proceeds to the Company from the Offering were approximately $51.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. The Offering closed on October 26, 2020. In addition, the Company has granted the underwriters a 30-day option to purchase up to an additional 550,500 shares of common stock at the public offering price.

 

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

 

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

 

The Company believes that based on the information presented above and its quarterly management assessment, it has sufficient liquidity to fund its operations and capital expenditures for the next twelve months following the issuance of the financial statements for the six months ended September 30, 2020. The Company’s liquidity is highly dependent on its ability to increase revenues, including its ability to collect revenues under its agreements with Inox, its ability to control its operating costs, and its ability to raise additional capital, if necessary.  The impact of the COVID-19 pandemic on the global financing markets may reduce the Company's ability to raise additional capital, if necessary, which could negatively impact the Company's liquidity.  There can be no assurance that the Company will be able to continue to raise additional capital, on favorable terms or at all, from other sources or execute on any other means of improving liquidity described above.

 

 

 

2. Revenue Recognition

 

The Company’s revenues in its Grid segment are derived primarily through enabling the transmission and distribution of power, providing planning services that allow it to identify power grid needs and risks, and developing ship protection systems for the U.S. Navy. The Company’s revenues in its Wind segment are derived primarily through supplying advanced power electronics and control systems, licensing its highly engineered wind turbine designs, and providing extensive customer support services to wind turbine manufacturers. The Company records revenue based on a five-step model in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. For its customer contracts, the Company identifies the performance obligations, determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) control of goods or services is transferred to the customer. In the three and six months ended September 30, 2020, 78% and 79% of revenue, respectively, was recognized at the point in time when control transferred to the customer, with the remainder being recognized over time.  In both the three and six months ended September 30, 2019, 77% of revenue was recognized at the point in time when control transferred to the customer, with the remainder being recognized over time.

 

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

 

The Company's equipment and system product line includes certain contracts which do not meet the requirements of an exchange transaction and therefore do not fall within the scope of ASC 606.  As these non-exchange transaction contracts are considered grant revenue and do not fall within any specific accounting literature, the Company follows guidance within ASC 606 by analogy to recognize grant revenue over time.  In the three and six months ended September 30, 2020 the Company recorded $0.4 million and $0.8 million in grant revenue, respectively, which is included in the Company’s Grid segment revenue.  In the three and six months ended September 30, 2019, the Company recorded $0.7 million and $1.1 million in grant revenue, respectively, which is included in the Company’s Grid revenue.

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

As of September 30, 2020, and 2019, the Company’s contract assets and liabilities primarily relate to the timing differences between cash received from a customer in connection with contractual rights to invoicing and the timing of revenue recognition following completion of performance obligations. The Company's accounts receivable balance is made up entirely of customer contract related balances. Changes in the Company’s contract assets, which are included in “Accounts receivable (unbilled)” and “Deferred program costs” (see Note 7, “Accounts Receivable” and Note 8, “Inventory” for a reconciliation to the condensed consolidated balance sheets) and contract liabilities, which are included in the current portion and long term portion of "Deferred revenue" in the Company’s condensed consolidated balance sheets, are as follows:

 

 

 

 

The Company’s remaining performance obligations represent the unrecognized revenue value of the Company’s contractual commitments. The Company’s performance obligations may vary significantly each reporting period based on the timing of major new contractual commitments. As of September 30, 2020, the Company had outstanding performance obligations on existing contracts under ASC 606 to be recognized in the next twelve months of approximately $48.5 million. There are also approximately $10.7 million of outstanding performance obligations to be recognized over a period of thirteen to sixty months. The remaining performance obligations are subject to customer actions and therefore the timing of revenue recognition cannot be reasonably estimated. The twelve-month performance obligations include anticipated shipments to Inox based on the twelve-month rolling forecast provided by Inox on the multi-year supply contract. The quantities specified in any forecast provided by Inox related to the multi-year supply contract are firm and irrevocable for the first three months of a twelve-month rolling forecast. The timing of the performance obligations beyond the twelve-month forecast provided by Inox are not determinable and therefore are not included in the total remaining performance obligations. 

 

The following table sets forth customers who represented 10% or more of the Company’s total revenues for the three and six months ended September 30, 2020 and 2019:

 

 

 

3. Stock-Based Compensation

 

The Company accounts for its stock-based compensation at fair value. The following table summarizes stock-based compensation expense by financial statement line item for the three and six months ended September 30, 2020 and 2019 (in thousands):

 

 

The Company issued 27,341 shares of immediately vested common stock and 688,167 shares of restricted stock awards during the six months ended September 30, 2020 and issued 13,174 shares of immediately vested common stock and 170,500 shares of restricted stock awards during the six months ended September 30, 2019.  These restricted stock awards generally vest over 2-3 years.  Awards for restricted stock include both time-based and performance-based awards.  For options and restricted stock awards that vest upon the passage of time, expense is being recorded over the vesting period.  Performance-based awards are expensed over the requisite service period based on probability of achievement.

 

The estimated fair value of the Company’s stock-based awards, less expected annual forfeitures, is amortized over the awards’ service period. The total unrecognized compensation cost for unvested outstanding stock options was less than $0.1 million at September 30, 2020. This expense will be recognized over a weighted average expense period of approximately 0.6 years. The total unrecognized compensation cost for unvested outstanding restricted stock was $5.9 million at September 30, 2020. This expense will be recognized over a weighted-average expense period of approximately 2.2 years.

 

The Company did not grant any stock options during the three or six months ended September 30, 2020.  The Company granted 5,939 stock options during the six months ended September 30, 2019.  The stock options granted during the six months ended September 30, 2019 will vest over 2 years. The weighted average assumptions used in the Black Scholes valuation model for stock options granted during the six months ended September 30, 2019 are as follows:

 

 

 

 

4. Computation of Net Loss per Common Share

 

Basic net loss per share (“EPS”) is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Where applicable, diluted EPS is computed by dividing the net loss by the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period, calculated using the treasury stock method. Common equivalent shares include the effect of restricted stock, exercise of stock options and warrants and contingently issuable shares. Stock options and warrants that are out-of-the-money with exercise prices greater than the average market price of the underlying common shares and shares of performance based restricted stock where the contingency was not met are excluded from the computation of diluted EPS as the effect of their inclusion would be anti-dilutive.  For the three and six months ended September 30, 2020, 0.1 million shares related to outstanding stock options were not included in the calculation of diluted EPS as they were considered anti-dilutive. For the three and six months ended September 30, 2019, 0.2 million shares were not included in the calculation of diluted EPS as they were considered anti-dilutive.

 

The following table reconciles the numerators and denominators of the earnings per share calculation for the three and six months ended September 30, 2020 and 2019 (in thousands, except per share data):

 

 

For the three and six months ended September 30, 2019, the diluted net loss per common share amounts under the treasury stock method were calculated based on the dilutive effect of the total number of shares of common stock related to the warrants issued to Hudson Bay Capital (the “Hudson Warrants”) for 818,181 shares with an exercise price of $7.81.  For the three and six month periods ended September 30, 2019, the average stock price was $8.50 and $9.56 respectively, providing 66,638 and 150,025 dilutive shares respectively, for the Hudson Warrants. The decrease in the fair value of the warrant liability of $1.1 million and $4.1 million, respectively, is included in the net loss available to common shareholders for the diluted net loss per common share amount when the impact is dilutive. 

 

5. Goodwill

 

The Company did not identify any triggering events in the three and six months ended September 30, 2020, that would require interim impairment testing of goodwill.

 

 

 

6. Fair Value Measurements

 

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

 

Level 1	-	Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2	-	Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3	-	Unobservable inputs that reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.

 

The Company provides a gross presentation of activity within Level 3 measurement roll-forward and details of transfers in and out of Level 1 and 2 measurements.  A change in the hierarchy of an investment from its current level is reflected in the period during which the pricing methodology of such investment changes.  Disclosure of the transfer of securities from Level 1 to Level 2 or Level 3 is made in the event that the related security is significant to total cash and investments.  The Company did not have any transfers of assets and liabilities from Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the six months ended September 30, 2020.

 

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

 

Valuation Techniques

 

Cash Equivalents

 

Cash equivalents consist of highly liquid instruments with maturities of three months or less that are regarded as high quality, low risk investments, are measured using such inputs as quoted prices and are classified within Level 1 of the valuation hierarchy. Cash equivalents consist principally of certificates of deposits and money market accounts.

 

Marketable Securities

 

Marketable securities consist of certificates of deposit that are measured using such inputs as quoted prices and are classified within Level 1 of the valuation hierarchy. The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such classification as of each balance sheet date.  All marketable securities are considered available for sale and are carried at fair value.   Changes in fair value are recorded to other income (expense), net.  The Company recognized $0.2 million and $0.1 million in unrealized losses on marketable securities, which is recorded in other income (expense), net, for the three and six months ended September 30, 2020 and less than a $0.1 million gain which was recognized during the three and six months ended September 30, 2020 upon the sale of one of the certificates of deposit.  The Company did not recognize any gains or losses on marketable securities in the three and six months ended September 30, 2019.  The Company periodically reviews the realizability of each short and long term marketable security when impairment indicators exist with respect to the security.  If other than temporary impairment of value of the security exists, the carrying value of the security is written down to its estimated fair value.

 

Warrants

 

The Company issued the Hudson Warrants in conjunction with an equity offering to Hudson Bay Capital in November 2014 and issued warrants to purchase 58,823 shares of the Company's common stock in conjunction a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (“Hercules Warrants”). The Hercules Warrants were exercised on April 8, 2019.  The Hudson Warrants were partially exercised on November 13, 2019 and the remaining unexercised warrants expired on November 13, 2019.  As of September 30, 2020 the Company has no remaining outstanding warrants.

 

The Company historically relied on various assumptions in a lattice model to determine the fair value of warrants. The Company had valued the warrants within Level 3 of the valuation hierarchy. See Note 12, “Warrants and Derivative Liabilities,” for a discussion of the warrants and the valuation assumptions used.

 

The following table provides the assets and liabilities carried at fair value on a recurring basis, measured as of September 30, 2020 and March 31, 2020 (in thousands):

 

 

 

 

 

 

7. Accounts Receivable

 

Accounts receivable at September 30, 2020 and March 31, 2020 consisted of the following (in thousands):

 

 

The Company recorded allowance for doubtful accounts of less than $0.1 million for the three months and six months ended September 30, 2020 and no allowance for the three or six months ended September 30, 2019.  The allowances are based on evaluation of customer accounts that are past due.

 

 

 

8. Inventory

 

Inventory, net of reserves, at September 30, 2020 and March 31, 2020 consisted of the following (in thousands):

 

 

The Company recorded inventory write-downs of $0.5 million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively.  The Company recorded inventory write-downs of $1.3 million and $0.2 million for the six months ended September 30, 2020 and 2019, respectively.  These write-downs were based on the Company's evaluation of its inventory on hand for excess quantities and obsolescence.

 

Deferred program costs as of September 30, 2020 and March 31, 2020 primarily represent costs incurred on programs where the Company needs to complete performance obligations before the related revenue and costs will be recognized.

 

 

9. Property, Plant and Equipment

 

The cost and accumulated depreciation of property, plant and equipment at September 30, 2020 and March 31, 2020 are as follows (in thousands):

 

 

Depreciation expense was $0.9 million and $1.0 million for the three months ended September 30, 2020 and 2019, respectively. Depreciation expense was $1.8 million and $2.1 million for the six months ended September 30, 2020 and 2019, respectively.  The decrease in construction in progress primarily relates to the completion of capital investments in the Company's HTS equipment and leasehold improvements in the Company's leased facilities in Westminster and Ayer, Massachusetts.

 

 

10. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses at September 30, 2020 and March 31, 2020 consisted of the following (in thousands):

 

 

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

 

Product warranty activity was as follows (in thousands):

 

 

 

 

11. Income Taxes

 

The Company recorded income tax expense of $0.2 million and $0.4 million in the three and six month periods ended September 30, 2020.  The Company recorded income tax benefits of $0.3 million and $0.1 million in the three and six months ended September 30, 2019

 

Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions.  The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any.  The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement.  The Company re-evaluates these uncertain tax positions on a quarterly basis.  The evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity.  Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.  The Company did not identify any uncertain tax positions in the six months ended September 30, 2020 and did not have any gross unrecognized tax benefits as of March 31, 2020.

 

 

12. Warrants and Derivative Liabilities

 

The Company accounted for its warrants as liabilities due to certain adjustment provisions within the instruments, which required that they be recorded at fair value. The warrants were subject to revaluation at each balance sheet date and any change in fair value was recorded as a change in fair value of warrants until the earlier of its expiration or its exercise at which time the warrant liability was reclassified to equity. The Company calculated the fair value of the warrants utilizing an integrated lattice model. See Note 6, "Fair Value Measurements", for further discussion.  As of September 30, 2020, the Company had no remaining outstanding warrants.

 

Hercules Warrants

 

On December 19, 2014, the Company entered into a second amendment to the Loan and Security Agreement with Hercules (the "Hercules Second Amendment"). In conjunction with the Hercules Second Amendment, the Company issued the Hercules Warrant which replaced the First Warrant and the Second Warrant.  The Hercules Warrant was exercisable at any time after its issuance at an exercise price of $7.85 per share, subject to certain price-based and other anti-dilution adjustments, including the equity offering in May 2017, the acquisition of Infinia Technology Corporation ("ITC") with common stock in September 2017 and sales of common stock under the ATM entered into in January 2017.  This warrant had a fair value of $0.4 million as of March 31, 2019.  On April 8, 2019, Hercules notified the Company of its intent to exercise this warrant on a cashless basis.  Hercules received 22,821 shares of the Company's common stock on April 17, 2019.  As a result of this exercise the Company recorded a net gain of $0.1 million to change in fair value of warrants, resulting from the decrease in the fair value of the Hercules Warrant during the six months ended September 30, 2019.  

 

November 2014 Warrant

 

On November 13, 2014, the Company completed an offering of 909,090 units of the Company’s common stock with Hudson Bay Capital. Each unit consisted of one share of the Company’s common stock and 0.9 of a warrant to purchase one share of common stock, or a warrant to purchase in the aggregate 818,181 shares.  The Hudson Warrants were exercisable at any time, at an exercise price equal to $7.81 per share, subject to certain price-based and other anti-dilution adjustments including those noted above.  On November 13, 2019, Hudson partially exercised the Hudson Warrants for 786,000 restricted shares of Company common stock at $7.81 per share.  The remaining 32,181 warrants expired on November 13, 2019. The Company recorded net gains of $1.1 million and $4.1 million to change in fair value of warrants, resulting from the decrease in the fair value of the Hudson Warrants during the three and six months ended September 30, 2019 respectively. 

 

 

 

 

13. Leases

 

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

 

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

 

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

 

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

 

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

 

Supplemental balance sheet information related to leases at September 30, 2020 and March 31, 2020 are as follows:

 

 

The costs related to the Company's leases for the three and six months ended September 30, 2020 and 2019 are as follows:

 

 

 

 

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

 

 

 

14. Commitments and Contingencies

 

Legal Contingencies

 

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

 

Other

 

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

 

As of September 30, 2020, and March 31, 2020, the Company had $5.8 million of restricted cash included in long-term assets and $0.5 million of restricted cash included in current assets, respectively. These amounts included in restricted cash primarily represent deposits to secure letters of credit for various supply contracts and long-term projects, including the irrevocable letter of credit in the amount of $5.0 million to secure certain of the Company's obligations under the Subcontract Agreement with ComEd.  These deposits are held in interest bearing accounts.  

 

 

 

15. Business Segments

 

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

 

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

 

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

 

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

 

 

 

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

 

Unallocated corporate expenses primarily consist of stock-based compensation expense of $0.8 million and $0.4 million in the three months ended September 30, 2020 and 2019, respectively.  Unallocated corporate expenses primarily consist of stock-based compensation expense of $1.8 million and $0.6 million in the six months ended September 30, 2020 and 2019, respectively.

 

Total assets for the two business segments as of September 30, 2020 and March 31, 2020 are as follows (in thousands):

 

 

 

 

16. Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in ASU 2016-13 will provide more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that year.  Following the release of ASU 2019-10 in November 2019, the new effective date, as long as the Company remains a smaller reporting company, would be annual reporting periods beginning after December 15, 2022.  The Company is currently evaluating the impact, if any, that the adoption of ASU 2016-13 may have on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 provide for increased effectiveness of the disclosures made around fair value measurements while including consideration for costs and benefits. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those periods. As of April 1, 2020, the Company has adopted ASU 2018-13 and noted no material impact on its consolidated financial statements, primarily due to the fact that the Company does not currently report any Level 3 fair value measurements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 provide for simplified accounting to several income tax situations and removal of certain accounting exceptions. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those periods. The Company does not expect the impact of the adoption of ASU 2019-12 to be material to its consolidated financial statements.

 

 

 

 

17. Subsequent Events

 

The Company has performed an evaluation of subsequent events through the time of filing this Quarterly Report on Form 10-Q with the SEC and has determined that other than the following information, there are no such events to report.  

 

On October 1, 2020, the Company entered into the Stock Purchase Agreement with the selling stockholders named therein.  Pursuant to the terms of the Stock Purchase Agreement and concurrently with entering into such agreement, the Company acquired all of the issued and outstanding (i) shares of capital stock of NEPSI, and (ii) membership interests of Northeast Power Realty, LLC, a New York limited liability company, which holds the real property that serves as NEPSI’s headquarters.  NEPSI is a U.S.-based global provider of medium-voltage metal-enclosed power capacitor banks and harmonic filter banks for use on electric power systems. NEPSI is now a wholly-owned subsidiary of the Company and will be operated by the Grid business unit. The NEPSI purchase price was $26.0 million in cash on hand, including cash from the settlement of the Company's $25 million certificate of deposit during the three months ended September 30, 2020, and 873,657 restricted shares of common stock of the Company.  The transaction also includes an earn-out opportunity with the potential for the issuance of up to an additional 1.0 million shares of common stock of the Company to the selling stockholders based on the achievement by NEPSI of certain revenue targets for the fiscal years ending March 31, 2021 through March 31, 2024. The Company assumed no debt in this transaction. NEPSI's results of operations will be included in the Company’s consolidated financial statements beginning on October 1, 2020.

 

On October 26, 2020, the Company completed the Offering of 3,670,000 shares of common stock of the Company at a public offering price of $15.00 per share.  The net proceeds to the Company from the Offering were approximately $51.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. In addition, the Company has granted the underwriters a 30-day option to purchase up to an additional 550,500 shares of common stock at the public offering price.