Table of Contents

 

 

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, 2019

 

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)

 

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

 

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of exchange on which registered

Common Stock, par value $.001 per share

 

CPST

 

NASDAQ Capital Market

Series B Junior Participating Preferred Stock Purchase Rights

 

 

 

 


 

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 

 

The number of shares outstanding of the registrant’s common stock as of August 2, 2019 was 73,442,825.

 

 

Table of Contents

CAPSTONE TURBINE CORPORATION

INDEX

 

 

    

 

    

Page
Number

PART I — FINANCIAL INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 and March 31, 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2019 and 2018

 

4

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended June 30, 2019 and 2018

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2019 and 2018 

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2. 

 

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

 

28

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

42

 

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

42

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

46

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

46

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

46

 

 

 

 

 

Item 5. 

 

Other Information

 

46

 

 

 

 

 

Item 6. 

 

Exhibits

 

47

 

 

 

 

 

Signatures 

 

48

 

 

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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,

 

 

    

2019

    

2019

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,612

 

$

29,727

 

Accounts receivable, net of allowances of $5,468 at June 30, 2019 and $5,298 at March 31, 2019

 

 

14,820

 

 

16,222

 

Inventories, net

 

 

20,481

 

 

20,343

 

Prepaid expenses and other current assets

 

 

4,407

 

 

3,818

 

Total current assets

 

 

64,320

 

 

70,110

 

Property, plant, equipment and rental assets, net

 

 

6,048

 

 

5,291

 

Non-current portion of inventories

 

 

1,407

 

 

1,403

 

Intangible assets, net

 

 

131

 

 

187

 

Other assets

 

 

8,492

 

 

2,972

 

Total assets

 

$

80,398

 

$

79,963

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

15,252

 

$

16,638

 

Accrued salaries and wages

 

 

1,360

 

 

1,637

 

Accrued warranty reserve

 

 

2,448

 

 

2,614

 

Deferred revenue

 

 

7,766

 

 

7,167

 

Current portion of notes payable and lease obligations

 

 

1,181

 

 

31

 

Total current liabilities

 

 

28,007

 

 

28,087

 

Deferred revenue - non-current

 

 

1,121

 

 

1,069

 

Term note payable, net

 

 

27,389

 

 

27,099

 

Long-term portion of notes payable and lease obligations

 

 

4,836

 

 

212

 

Other long-term liabilities

 

 

 —

 

 

342

 

Total liabilities

 

 

61,353

 

 

56,809

 

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, 73,407,734 shares issued and 73,144,573 shares outstanding at June 30, 2019; 71,971,586 shares issued and 71,709,203 shares outstanding at March 31, 2019

 

 

73

 

 

72

 

Additional paid-in capital

 

 

905,221

 

 

903,738

 

Accumulated deficit

 

 

(884,477)

 

 

(878,884)

 

Treasury stock, at cost; 263,162 shares at June 30, 2019 and 262,383 shares at March 31, 2019

 

 

(1,772)

 

 

(1,772)

 

Total stockholders’ equity

 

 

19,045

 

 

23,154

 

Total liabilities and stockholders' equity

 

$

80,398

 

$

79,963

 

 

See accompanying notes to condensed consolidated financial statements.

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CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

    

2019

    

2018

    

Revenue:

 

 

 

    

 

 

 

Product, accessories and parts

 

$

14,073

 

$

17,085

 

Service

 

 

5,171

 

 

4,104

 

Total revenue

 

 

19,244

 

 

21,189

 

Cost of goods sold:

 

 

 

 

 

 

 

Product, accessories and parts

 

 

12,232

 

 

15,630

 

Service

 

 

4,147

 

 

3,737

 

Total cost of goods sold

 

 

16,379

 

 

19,367

 

Gross margin

 

 

2,865

 

 

1,822

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

938

 

 

932

 

Selling, general and administrative

 

 

6,237

 

 

5,651

 

Total operating expenses

 

 

7,175

 

 

6,583

 

Loss from operations

 

 

(4,310)

 

 

(4,761)

 

Other income (expense)

 

 

 1

 

 

(14)

 

Interest expense

 

 

(1,276)

 

 

(118)

 

Loss before provision for income taxes

 

 

(5,585)

 

 

(4,893)

 

Provision for income taxes

 

 

 8

 

 

 4

 

Net loss

 

$

(5,593)

 

$

(4,897)

 

 

 

 

 

 

 

 

 

Net loss per common share—basic and diluted

 

$

(0.08)

 

$

(0.08)

 

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

 

 

72,578

 

 

61,762

 

 

See accompanying notes to condensed consolidated financial statements.

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CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2019

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury Stock

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Deficit

    

Shares

    

Amount

    

Equity

Balance, March 31, 2019

 

71,971,586

 

 

72

 

 

903,738

 

 

(878,884)

 

262,383

 

 

(1,772)

 

 

23,154

Purchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

779

 

 

 —

 

 

 —

Vested restricted stock awards

 

2,278

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 

262

 

 

 —

 

 —

 

 

 —

 

 

262

Issuance of common stock, net of issuance costs

 

1,433,870

 

 

 1

 

 

1,221

 

 

 —

 

 —

 

 

 —

 

 

1,222

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(5,593)

 

 —

 

 

 —

 

 

(5,593)

Balance, June 30, 2019

 

73,407,734

 

$

73

 

$

905,221

 

$

(884,477)

 

263,162

 

$

(1,772)

 

$

19,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2018

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury Stock

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Deficit

    

Shares

    

Amount

    

Equity

Balance, March 31, 2018

 

57,062,598

 

 

57

 

 

889,585

 

 

(862,225)

 

145,952

 

 

(1,658)

 

 

25,759

Purchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

1,682

 

 

(3)

 

 

(3)

Vested restricted stock awards

 

4,688

 

 

 —

 

 

 3

 

 

 —

 

 —

 

 

 —

 

 

 3

Stock-based compensation

 

 —

 

 

 —

 

 

227

 

 

 —

 

 —

 

 

 —

 

 

227

Issuance of common stock, net of issuance costs

 

3,466,901

 

 

 3

 

 

4,967

 

 

 —

 

 —

 

 

 —

 

 

4,970

Warrants exercised

 

3,806,243

 

 

 4

 

 

(4)

 

 

 —

 

 —

 

 

 —

 

 

 —

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(4,897)

 

 —

 

 

 —

 

 

(4,897)

Balance, June 30, 2018

 

64,340,430

 

$

64

 

$

894,778

 

$

(867,122)

 

147,634

 

$

(1,661)

 

$

26,059

 

 

 

 

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CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

    

2019

    

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(5,593)

 

$

(4,897)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

373

 

 

287

 

Amortization of financing costs and discounts

 

 

290

 

 

38

 

Amortization of right-of-use assets

 

 

359

 

 

 —

 

Reduction in accounts receivable allowances

 

 

 —

 

 

(3)

 

Inventory provision

 

 

220

 

 

137

 

Provision for warranty expenses

 

 

205

 

 

397

 

Loss on disposal of equipment

 

 

 —

 

 

 7

 

Stock-based compensation

 

 

262

 

 

227

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

1,402

 

 

84

 

Inventories

 

 

(363)

 

 

(621)

 

Prepaid expenses, other current assets and other assets

 

 

(459)

 

 

(2,324)

 

Accounts payable and accrued expenses

 

 

(1,864)

 

 

61

 

Accrued salaries and wages and long term liabilities

 

 

(276)

 

 

(247)

 

Accrued warranty reserve

 

 

(372)

 

 

(218)

 

Deferred revenue

 

 

651

 

 

1,054

 

Net cash used in operating activities

 

 

(5,165)

 

 

(6,018)

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Expenditures for property, equipment and rental assets

 

 

(977)

 

 

(163)

 

Net cash used in investing activities

 

 

(977)

 

 

(163)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net proceeds from revolving credit facility

 

 

 —

 

 

1,497

 

Repayment of notes payable and lease obligations

 

 

(195)

 

 

(125)

 

Cash used in employee stock-based transactions

 

 

(1)

 

 

(3)

 

Net proceeds from issuance of common stock and warrants

 

 

1,223

 

 

4,973

 

Net cash provided by financing activities

 

 

1,027

 

 

6,342

 

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

 

 

(5,115)

 

 

161

 

Cash, Cash Equivalents and Restricted Cash, Beginning of Year

 

 

29,727

 

 

19,408

 

Cash, Cash Equivalents and Restricted Cash, End of Year

 

$

24,612

 

$

19,569

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

607

 

$

82

 

Income taxes

 

$

15

 

$

 4

 

Supplemental Disclosures of Non-Cash Information:

 

 

 

 

 

 

 

Acquisition of property and equipment through accounts payable

 

$

93

 

$

 —

 

Renewal of insurance contracts which was financed by notes payable

 

$

536

 

$

 —

 

 

See accompanying notes to condensed consolidated financial statements.

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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 and distribution networks applications, including energy efficient cogeneration combined heat and power (“CHP”), integrated combined heat and power (“ICHP”), and combined cooling, heat and power (“CCHP”), as well as renewable energy, natural resources and critical power supply applications. Microturbines allow customers to produce power on-site in parallel with the electric grid or stand-alone when no utility grid is available. Several technologies are used to provide “on-site power generation” (also called “distributed generation”) such as reciprocating engines, solar photovoltaic power (“PV”), wind turbines and fuel cells. 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. In addition, the Company’s microturbines have been used as battery charging generators for hybrid electric vehicles and to provide power to a vessel’s electrical loads in marine applications. We sell microturbine units, components and accessories, as well as offer long-term microturbine rentals. We also remanufacture microturbine engines and provide new and remanufactured aftermarket spare parts, accessories, services, and comprehensive long-term service contracts for up to 20 years. 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, 2019 was derived from audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019. 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 2019. 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  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 2019 filed with the SEC on June 11, 2019, that have had a material impact on the Company's condensed consolidated financial statements and related notes, except for the accounting policy for lease recognition as a result of the adoption of Accounting Standards Update (“ASU”) No. 2016-02, as discussed in Note 3—Recently Issued Accounting Standards.

Evaluation of Ability to Maintain Current Level of Operations  In connection with preparing the condensed consolidated financial statements for the first quarter of Fiscal 2020, 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 2020 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 its products more expensive in such markets and ongoing global geopolitical tensions. The Company incurred a net loss of $5.6 million and used cash in operating activities of $5.2 million for the first quarter of Fiscal 2020. The Company’s working capital requirements during the first quarter of Fiscal 2020 were in line with management’s expectations, which included higher inventory and accounts payable payments, offset by lower accounts receivable due to lower revenue in the three months ended June 30, 2019. The Company’s net loss expanded during the first quarter of Fiscal 2020 primarily because of

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lower revenue from microturbine products and higher interest expense. As of June 30, 2019, the Company had cash and cash equivalents of $24.6 million, and outstanding debt of $30.0 million. 

Management evaluated these conditions in relation to the Company’s ability to meet its obligations as they become due. The Company’s ability to continue current operations and to execute on management’s plans is dependent on its ability to generate cash flows from operations. Management believes that the Company will continue to make progress on its path to profitability by continuing to 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). 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, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity 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 funds received under the note purchase agreement, 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 our first quarter of Fiscal 2020 financial statements.

Basis for Consolidation  The condensed 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 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). 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. On April 1, 2019, the Company adopted this standard. See Note 16—Leases for additional discussion of the impact of the adoption of ASU 2016-02.

In June 2018, the FASB issued ASU 2018-07, “Shared-Based Payment Arrangements with Nonemployees” (Topic 505), (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under ASU 2018-07, most of the guidance on such payments to nonemployees will be aligned with the requirements for share-based payments granted to employees. Under the ASU 2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed on the grant date, as defined in ASC 718, and will use the term nonemployee vesting period, rather than requisite service period. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted if financial statements have not yet been issued. The Company adopted ASU 2018-07 on April 1, 2019 and it did not have a material impact on the Company’s condensed consolidated financial statements.

On August 17, 2018, the SEC issued Release No. 33-10532, “Disclosure Update and Simplification”, (“Release No. 33-10532”) which amends certain redundant, duplicative, outdated, superseded or overlapping disclosure requirements. The amendments in this rule are intended to facilitate the disclosure of information to investors and to simplify compliance without significantly impacting the mix of information provided to investors. The amendments also expand the disclosure requirements regarding the analysis of stockholders’ equity for interim financial statements, in which entities will be required to present a reconciliation for each period for which a statement of comprehensive

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income is required to be filed. The final rule became effective on November 5, 2018, however the SEC announced that it would not object if a filer’s first presentation of the changes in stockholders’ equity were included in its Form 10-Q for the quarter that begins after the effective date of the amendments. The Company adopted Release No. 33-10532 on April 1, 2019 and it did not have a material impact on the Company’s financial disclosures.

4.  Customer Concentrations and Accounts Receivable

 

Sales to E-Finity Distributed Generation, LLC (“E-Finity”) and Cal Microturbine (“CAL”), two of the Company’s domestic distributors, accounted for 12% and 10%, respectively, of revenue for the first quarter of Fiscal 2020. 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, accounted for 18%, 12% and 10%, respectively, of revenue for the first quarter of Fiscal 2019.

Additionally, Innovative Energy Company Limited, one of Company’s Jamaican distributors, and DTC Soluciones S.A. de C.V. (“DTC”), one of the Company’s Mexican distributors, accounted for 12% and 11%, respectively, of net accounts receivable as of June 30, 2019.  Reliable Secure Power Systems, (“RSP”), one of the Company’s domestic distributors and E-Finity, accounted for 14% and 10%, respectively, of net accounts receivable as of March 31, 2019.

 

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 $4.8 million as of June 30, 2019, and this balance was fully reserved.

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. 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. As of June 30, 2019, 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 Amended Assignment Agreement. The payments of $0.4 million and $0.3 million, due March 20, 2019 and June 20, 2019, respectively, under the Amended Assignment Agreement, have not been received at the time of this filing.

The Company recorded a net bad debt recovery of approximately $2,800 during the first quarter of Fiscal 2019. As of March 31, 2015, the Company had an amount owed of approximately $8.1 million by BPC. As of June 30, 2019, the Company cumulatively collected approximately $1.8 million from BPC on their accounts receivable, which has been previously reserved. The Company cumulatively collected approximately $1.5 million from TI, under the terms of the Assignment Agreement and the Amended Assignment Agreement. The remaining balance of the fully reserved accounts receivable was $4.8 million as of June 30, 2019.

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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, 2019 and March 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

 

    

2019

    

2019

 

Raw materials

 

$

23,877

 

$

24,426

 

Work in process

 

 

93

 

 

 —

 

Finished goods

 

 

1,870

 

 

1,207

 

Total

 

 

25,840

 

 

25,633

 

Less inventory reserve

 

 

(3,952)

 

 

(3,887)

 

Less non-current portion

 

 

(1,407)

 

 

(1,403)

 

Current portion

 

$

20,481

 

$

20,343

 

 

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, 2019 is 1.2 years. The Company expects to use the non-current portion of the inventories on hand as of June 30, 2019 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

 

$

635

 

25 to 36 months

 

 

772

 

Total

 

$

1,407

 

 

6.  Property, Plant, Equipment and Rental Assets

 

Property, plant, equipment and rental assets consisted of the following as of June 30, 2019 and March 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

June 30,

 

March 31,

 

 

    

2019

    

2019

 

Machinery, equipment, automobiles and furniture

 

$

15,577

 

$

15,344

 

Leasehold improvements

 

 

11,079

 

 

11,074

 

Molds and tooling

 

 

3,003

 

 

2,893

 

Rental assets

 

 

3,539

 

 

2,818

 

 

 

 

33,198

 

 

32,129

 

Less, accumulated depreciation

 

 

(27,150)

 

 

(26,838)

 

Total property, plant, equipment and rental assets, net

 

$

6,048

 

$

5,291

 

During the first quarter of Fiscal 2020, the Company deployed approximately $0.7 million of its C1000 Signature Series systems under its factory rental program.

The Company regularly reassesses the useful lives of property and equipment and retires assets no longer in service. Depreciation expense for property, equipment and rental assets was $0.3 million and $0.2 million for the first quarter of Fiscal 2020 and 2019, respectively.

 

 

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7.  Intangible Assets

 

Intangible assets consisted of the following as of June 30, 2019 and March 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

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

 

 

2,109

 

 

131

 

Trade name & parts, service and TA100 customer relationships

 

1.2 to 5 years

 

 

1,766

 

 

1,766

 

 

 —

 

Total

 

 

 

$

7,706

 

$

7,575

 

$

131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

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

 

 

2,053

 

 

187

 

Trade name & parts, service and TA100 customer relationships

 

1.2 to 5 years

 

 

1,766

 

 

1,766

 

 

 —

 

Total

 

 

 

$

7,706

 

$

7,519

 

$

187

 

 

Amortization expense for the intangible assets was $0.1 million during the first quarter of each of Fiscal 2020 and 2019, respectively.

 

Expected future amortization expense of intangible assets as of June 30, 2019 is as follows (in thousands):

 

 

 

 

 

 

 

 

Amortization

 

Year Ending March 31,

    

Expense

 

2020 (remainder of fiscal year)

 

$

131

 

Total expected future amortization

 

$

131

 

 

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 $7,200 and $7,100 were earned by Solar for the first quarter of Fiscal 2020 and 2019, respectively. Earned royalties of approximately $33,300 and $26,100 were unpaid as of June 30, 2019 and March 31, 2019, 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 2020 and 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

June 30,

 

    

2019

    

2018

Cost of goods sold

 

$

18

    

$

12

Research and development

 

 

10

 

 

 7

Selling, general and administrative

 

 

234

 

 

208

Stock-based compensation expense

 

$

262

 

$

227

 

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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 adopted an amendment of the 2017 Plan 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 was approved by the Company’s stockholders at the 2018 annual meeting of stockholders on August 30, 2018. As of June 30, 2019, there were 2,215,374 shares available for future grants under the 2017 Plan.

Stock Options

 

The Company issued stock options under the 2000 Plan and can issue 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 2020 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

Aggregate

 

 

 

 

 

Average

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Exercise Price

 

Term

 

Value

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

Options outstanding at March 31, 2019

    

174,944

    

$

20.94

    

 

    

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

 

Exercised

 

 —

 

$

 —

 

 

 

 

 

 

Forfeited, cancelled or expired

 

(33,500)

 

$

16.21

 

 

 

 

 

 

Options outstanding at June 30, 2019

 

141,444

 

$

22.05

 

2.6

 

 

 —

 

Options fully vested at June 30, 2019 and those expected to vest beyond June 30, 2019

 

141,444

 

$

22.05

 

2.6

 

 

 —

 

Options exercisable at June 30, 2019

 

141,444

 

$

22.05

 

2.6

 

 

 —

 

 

Black-Scholes Model Valuation Assumptions

 

There were no stock options granted during either of the first quarters of Fiscal 2020 or 2019. There was no expense associated with stock options during the first quarters of Fiscal 2020 or 2019. There were no unvested stock option awards as of June 30, 2019.

 

Restricted Stock Units and Performance Restricted Stock Units

 

The Company issued restricted stock units under the 2000 Plan and issued 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

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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, 2019

    

2,217,433

    

$

1.02

 

Granted

 

905,848

 

 

0.59

 

Vested and issued

 

(2,278)

 

 

12.80

 

Forfeited

 

(36,329)

 

 

0.85

 

Nonvested restricted stock units outstanding at June 30, 2019

 

3,084,674

 

 

0.89

 

Restricted stock units expected to vest beyond June 30, 2019

 

3,084,651

 

$

0.89

 

 

The following table provides additional information on restricted stock units and performance restricted stock units for the Company’s first quarter of Fiscal 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

    

2019

    

2018

 

Restricted stock compensation expense (in thousands)

 

$

262

    

$

227

 

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

 

$

 2

 

$

 7

 

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

 

$

0.59

 

$

1.59

 

 

As of June 30, 2019, there was approximately $1.5 million of total compensation cost related to unvested restricted stock units that is expected to be recognized as expense over a weighted average period of 1.8 years.

The Company’s 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 2020, the Company granted 301,356 PRSUs with a three-year performance measurement period and the criteria measured by the Company’s cash flow from operations and aftermarket sales absorption. The target PRSU awards for each participant, will be paid upon achievement of the target level of performance for cash flow from operations 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.

The weighted average per share grant date fair value of PRSUs granted during the first quarter of Fiscal 2020 was $0.89. However, based on the Company’s assessment as of June 30, 2019 that the PRSU threshold for the first performance measurement likely would not be met, the fair value of the PRSU awards were determined to be zero and no compensation expense was recorded or recognized during the first quarter of Fiscal 2020. 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.

Restricted Stock Awards

The Company issued restricted stock awards under the 2000 Plan to employees and non-employee directors. There were no restricted stock awards granted during the first quarter of Fiscal 2020 or 2019. No expense was recorded associated with its restricted stock awards during the first quarter of Fiscal 2020 or 2019.

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

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. The maximum amount that an employee can contribute during a purchase right period is $25,000 or 15% of the employee’s regular compensation. Under the ESPP, the exercise price of a purchase right is 95% of the fair market value of such shares on the last day of the purchase right period. The fair market value of the stock is its closing price as reported on the Nasdaq Capital Market on the day in question. During the first quarter of Fiscal 2019, the Company issued a total of 1,012 shares of stock to regular full and part-time employees or officers of the Company who elected to participate in the ESPP. As of June 30, 2019, there were 497,909 shares available for future grant under the ESPP.

Stockholder Rights Plan

On May 6, 2019, the Company’s Board of Directors (the “Board”), declared a dividend of one right (a “New Right”) for each of the Company’s issued and outstanding shares of common stock, $0.001 par value per share (“Common Stock”). The dividend was paid to the stockholders of record at the close of business on May 16, 2019 (the “Record Date”). Each New Right entitles the registered holder, subject to the terms of the NOL Rights Agreement (as defined below), to purchase from the Company one one-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock (the “Preferred Stock”) at a price of $5.22 (the “Exercise Price”), subject to certain adjustments. The description and terms of the New Rights are set forth in the Rights Agreement dated as of May 6, 2019 (the “NOL Rights Agreement”) between the Company and Broadridge Financial Solutions, Inc., as Rights Agent (the “Rights Agent”).

The NOL Rights Agreement replaces the Company’s Rights Agreement, dated May 6, 2016, by and between the Company and Broadridge Financial Solutions, Inc., as successor-in-interest to Computershare Inc., as rights agent (the “Original Rights Agreement”). The Original Rights Agreement, and the rights thereunder to purchase fractional shares of Preferred Stock, expired at 5:00 p.m., New York City time, on May 6, 2019 and the NOL Rights Agreement was entered into immediately thereafter.

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, as amended (the “Tax Code”). 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 Tax Code, 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 Tax Code by (i) discouraging any person or group from becoming a 4.9% shareholder and (ii) discouraging any existing 4.9% shareholder from acquiring additional shares of the Company’s stock.

The New Rights will not be exercisable until the earlier to occur of (i) the close of business on the tenth business day after a public announcement or filing that a person has, or group of affiliated or associated persons have, become an “Acquiring Person,” which is defined as a person or group of affiliated or associated persons who, at any time after the date of the NOL Rights Agreement, have acquired, or obtained the right to acquire, beneficial ownership of 4.9% 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

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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 Securities 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.

With respect to certificates representing shares of Common Stock outstanding as of the Record Date, until the Distribution Date, the New Rights will be evidenced by such certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate Rights Certificates, as described further below. With respect to book entry shares of Common Stock outstanding as of the Record Date, until the Distribution Date, the New Rights will be evidenced by the balances indicated in the book entry account system of the transfer agent for the Common Stock. Until the earlier of the Distribution Date and the Expiration Date, as described below, the transfer of any shares of Common Stock outstanding on the Record Date will also constitute the transfer of the New Rights associated with such shares of Common Stock. As soon as practicable after the Distribution Date, separate certificates evidencing the New Rights (“Right Certificates”) will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date, and such Right Certificates alone will evidence the New Rights.

The New Rights, which are not exercisable until the Distribution Date, will expire prior to the earliest of (i) May 6, 2022 or such later day as may be established by the Board prior to the expiration of the New Rights, provided that the extension is submitted to the Company’s stockholders for ratification at the next annual meeting of stockholders of the Company succeeding such extension; (ii) the time at which the New Rights are redeemed pursuant to the NOL Rights Agreement; (iii) the time at which the New Rights are exchanged pursuant to the NOL Rights Agreement; (iv) the time at which the New Rights are terminated upon the occurrence of certain transactions; (v) the close of business on the first day after the Company’s 2019 annual meeting of stockholders, if approval by the stockholders of the Company of the NOL Rights Agreement has not been obtained on or prior to the close of business on the first day after the Company’s 2019 annual meeting of stockholders; (vi) the close of business on the effective date of the repeal of Section 382 of the Tax Code, if the Board 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, (the earliest of (i), (ii), (iii), (iv), (v), (vi) and (vii) is referred to as the “Expiration Date”).

Each share of 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 aggregate quarterly dividend declared per share of Common Stock since the immediately preceding quarterly dividend payment date for the Common Stock (or, with respect to the first quarterly dividend payment on the Common Stock, since the first issuance of the Preferred Stock). Each share of 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 Preferred Stock will be entitled to receive 1,000 times the amount received per one share of Common Stock.

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

At-the-market offerings

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.

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

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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, 2019, the Company issued 1.4 million shares of the Company’s common stock under the at-the-market offering program and the net proceeds to the Company from the sale of the Company’s common stock were approximately $1.2 million after deducting commissions paid of approximately $44,300. As of June 30, 2019, approximately $16.5 million remained available for issuance with respect to this at-the-market offering program.

Warrants

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, 2019, there were 2,718,750 Series A warrants outstanding and there are no Series B warrants outstanding. Of the total Series A warrants outstanding, 2,178,750 Series A warrants were issued with an exercise price of $2.55 per share of common stock, and have an expiration date of October 25, 2021, and 540,000 Series A warrants with anti-dilution provisions were issued with an initial exercise price of $1.34 per share of common stock, and have an expiration date of April 22, 2021. As of June 30, 2019, the 540,000 Series A warrants with anti-dilution provisions had an exercise price of $0.57 per share of common stock.

On February 4, 2019, the Company sold to Goldman Sachs & Co. LLC (the “Holder”), a Purchase Warrant for Common Shares (the “Warrant”) pursuant to which the Holder may purchase shares of the Company’s common stock, par value $0.001 per share (the “Common Shares”) in an aggregate amount of up to 4,046,337 shares (the “Warrant Shares”). The Warrant was sold to the Holder at a purchase price of $150,000, in a private placement exempt from registration under the Securities Act. The Warrant may be exercised by the Holder at any time after August 4, 2019 at an exercise price equal to $0.8859 and will expire on February 4, 2024. The Warrant contains standard adjustment provisions in the event of additional stock issuances below the exercise price of the warrant, stock splits, combinations, rights offerings and similar transactions. The value of the Warrant was $2.3 million, and has been classified as an equity instrument in additional paid in capital in our consolidated balance sheets.

10.  Fair Value Measurements

 

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

 

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

 

Level 2.  Inputs to the valuation methodology include:

 

·

Quoted prices for similar assets or liabilities in active markets

 

·

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

 

·

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

 

·

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

 

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

 

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

 

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

 

 Basis for Valuation

 

The carrying values reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. The term note payable has been recorded net of a discount based on the fair value of the associated warrant and capitalized debt issuance costs. The carrying values and estimated fair values of these obligations are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

 

June 30, 2019

 

March 31, 2019

 

 

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

 

    

Value

    

Fair Value

    

Value

    

Fair Value

 

Term note payable

 

$

27,389

    

$

30,000

 

$

27,099

    

$

30,000

 

 

 

11.  Term Note Payable

 

On February 4, 2019 (the “Closing Date”), we entered into a Note Purchase Agreement (the “Note Purchase Agreement”), by and among us, certain subsidiaries of us party thereto as guarantors, Goldman Sachs Specialty Lending Holdings, Inc. and any other purchasers party thereto from time to time (collectively, the “Purchaser”) and Goldman Sachs Specialty Lending Holdings, Inc. Under the Note Purchase Agreement, we sold to the Purchaser $30.0 million aggregate principal amount of senior secured notes (the “Notes”), which bear interest at a rate of 13.0% per annum and payable quarterly on March 31, June 30, September 30 and December 31 of each year until maturity. The entire principal amount of the Notes is due and payable on February 4, 2022 (the “Maturity Date”). The Notes do not amortize and the entire principal balance is due in a single payment on the Maturity Date. As of June 30, 2019, $30.0 million in borrowings were outstanding under the three-year term note.

Obligations under the Note Purchase Agreement are secured by all of our assets, including intellectual property and general intangibles. The Note Purchase Agreement contains customary covenants, including, among others, covenants that restrict our ability to incur debt, grant liens, make certain investments and acquisitions, pay dividends, repurchase equity interests, repay certain debt, amend certain contracts, enter into affiliate transactions and asset sales or make certain equity issuances (including equity issuances that would cause an ownership change within the meaning of Section 382 of the Internal Revenue Code), and covenants that require us to, among other things, provide annual, quarterly and monthly financial statements, together with related compliance certificates, maintain its property in good repair, maintain insurance and comply with applicable laws.

The financial covenants of the Note Purchase Agreement require the Company not to exceed specified levels of losses relative to its financial model, beginning with the fiscal quarter ending September 30, 2020. Additionally, we shall not permit our minimum consolidated liquidity, which consists of our cash and cash equivalents, to be less than $12.0 million through February 4, 2020, and $9.0 million thereafter. As of June 30, 2019, the Company was in compliance with the covenants contained in the Note Purchase Agreement.

The three-year term note has been recorded net of a discount based on the fair value of the associated common stock warrants and debt issuance costs totaling $2.6 million. Amortization of the debt discount and debt issuance costs was $0.3 million for the three months ended June 30, 2019, based on an effective interest rate, and has been recorded as interest expense in the condensed consolidated statements of operations.

Interest expense related to the term note payable during the three months ended June 30, 2019 was $1.3 million, which includes $0.3 million in amortization of debt issuance costs.

When we entered into the Note Purchase Agreement the existing credit facility with Bridge Bank was paid in full. As such, there was no interest expense related to the credit facility during the first quarter of Fiscal 2020. Interest

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expense related to the credit facility during the three months ended June 30, 2018 was $0.1 million, which includes $38,500 in amortization of debt issuance costs.

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 2020 are as follows (in thousands):

 

 

 

 

 

 

Balance, beginning of the period

 

$

2,614

 

Standard warranty provision

 

 

205

 

Accrual related to reliability repair programs

 

 

 —

 

Deductions for warranty claims

 

 

(371)

 

Balance, end of the period

 

$

2,448

 

 

 

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

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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 Sheets. 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 Operations. The deferred revenue relating to the annual maintenance service contracts is recognized in the Condensed Consolidated Statement of Operations 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 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 2020 (in thousands):

 

 

 

 

 

 

Three Months Ended

 

    

June 30, 2019

Microturbine Products

 

$

10,086

Accessories and Parts

 

 

3,987

Total Product, Accessories and Parts

 

 

14,073

Service

 

 

5,171

Total Revenue

 

$

19,244

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Following is the geographic revenue information based on the primary operating location of the Company’s customers for the first quarter of Fiscal 2020 (in thousands):

 

 

 

 

 

 

Three Months Ended

 

    

June 30, 2019

United States

 

$

7,629

Mexico

 

 

1,241

All other North America

 

 

673

Total North America

 

 

9,543

Russia

 

 

1,455

All other Europe

 

 

2,549

Total Europe

 

 

4,004

Asia

 

 

1,528

Australia

 

 

1,670

All other

 

 

2,499

Total Revenue

 

$

19,244

 

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, 2019, the balance of deferred revenue was approximately $8.9 million compared to $8.2 million as of March 31, 2019. This overall increase in the balance of deferred revenue of $0.7 million during the first quarter of Fiscal 2020 was comprised of increases in deferred revenue attributable to FPP contracts of $0.1 million and deferred revenue attributable to deposits of $1.0 million, these increases were offset by a decrease in deferred revenue attributable to the Distributor Support System (“DSS program”) of $0.4 million. Changes in deferred revenue during the first quarter of Fiscal 2020 are as follows (in thousands):

 

 

 

 

FPP Balance, beginning of the period

 

$

4,881

FPP Billings

 

 

4,288

FPP Revenue recognized

 

 

(4,199)

Balance attributed to FPP contracts

 

 

4,970

DSS Program

 

 

1,324

Deposits

 

 

2,593

Deferred revenue balance, end of the period

 

$

8,887

 

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

As of June 30, 2019, approximately $5.0 million of revenue is expected to be recognized from remaining performance obligations for FPP service contracts. The Company expects to recognize revenue on approximately $3.9 million of these remaining performance obligations over the next 12 months and the balance of $1.1 million will be recognized thereafter. Revenue from remaining performance obligations for professional services contracts as of June 30, 2019 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.

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