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 September 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 November 7, 2019 was 8,414,752.

 

 

 

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 September 30, 2019 and March 31, 2019

 

3

 

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

 

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

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 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

 

29

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

46

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

46

 

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

46

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

50

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

50

 

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

 

50

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

50

 

 

 

 

 

Item 5. 

 

Other Information

 

50

 

 

 

 

 

Item 6. 

 

Exhibits

 

51

 

 

 

 

 

Signatures 

 

52

 

 

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

 

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30,

    

March 31,

 

 

    

2019

    

2019

 

Assets

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

20,898

 

$

29,727

 

Accounts receivable, net of allowances of $5,115 at September 30, 2019 and $5,298 at March 31, 2019

 

 

18,095

 

 

16,222

 

Inventories, net

 

 

19,857

 

 

20,343

 

Prepaid expenses and other current assets

 

 

4,178

 

 

3,818

 

Total current assets

 

 

63,028

 

 

70,110

 

Property, plant, equipment and rental assets, net

 

 

7,186

 

 

5,291

 

Non-current portion of inventories

 

 

1,398

 

 

1,403

 

Intangible assets, net

 

 

75

 

 

187

 

Other assets

 

 

8,508

 

 

2,972

 

Total assets

 

$

80,195

 

$

79,963

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

15,883

 

$

16,638

 

Accrued salaries and wages

 

 

1,631

 

 

1,637

 

Accrued warranty reserve

 

 

2,331

 

 

2,614

 

Deferred revenue

 

 

6,224

 

 

7,167

 

Current portion of notes payable and lease obligations

 

 

1,490

 

 

31

 

Total current liabilities

 

 

27,559

 

 

28,087

 

Deferred revenue - non-current

 

 

987

 

 

1,069

 

Term note payable, net

 

 

27,672

 

 

27,099

 

Long-term portion of notes payable and lease obligations

 

 

4,482

 

 

212

 

Other long-term liabilities

 

 

 —

 

 

342

 

Total liabilities

 

 

60,700

 

 

56,809

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $.001 par value; 1,000,000 shares authorized; none issued

 

 

 —

 

 

 —

 

Common stock, $.001 par value; 51,500,000 shares authorized, 7,985,495 shares issued and 7,955,191 shares outstanding at September 30, 2019; 7,197,349 shares issued and 7,171,110 shares outstanding at March 31, 2019

 

 

80

 

 

72

 

Additional paid-in capital

 

 

910,213

 

 

903,738

 

Accumulated deficit

 

 

(889,000)

 

 

(878,884)

 

Treasury stock, at cost; 30,304 shares at September 30, 2019 and 26,239 shares at March 31, 2019

 

 

(1,798)

 

 

(1,772)

 

Total stockholders’ equity

 

 

19,495

 

 

23,154

 

Total liabilities and stockholders' equity

 

$

80,195

 

$

79,963

 

 

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2019

    

2018

    

2019

    

2018

 

Revenue:

 

 

 

    

 

 

 

 

 

 

 

 

 

Product, accessories and parts

 

$

15,988

 

$

18,627

 

$

30,061

    

$

35,712

 

Service

 

 

4,752

 

 

3,547

 

 

9,923

 

 

7,651

 

Total revenue

 

 

20,740

 

 

22,174

 

 

39,984

 

 

43,363

 

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product, accessories and parts

 

 

13,460

 

 

16,945

 

 

25,692

 

 

32,575

 

Service

 

 

4,199

 

 

3,192

 

 

8,346

 

 

6,929

 

Total cost of goods sold

 

 

17,659

 

 

20,137

 

 

34,038

 

 

39,504

 

Gross margin

 

 

3,081

 

 

2,037

 

 

5,946

 

 

3,859

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

900

 

 

891

 

 

1,838

 

 

1,822

 

Selling, general and administrative

 

 

5,499

 

 

5,308

 

 

11,736

 

 

10,962

 

Total operating expenses

 

 

6,399

 

 

6,199

 

 

13,574

 

 

12,784

 

Loss from operations

 

 

(3,318)

 

 

(4,162)

 

 

(7,628)

 

 

(8,925)

 

Other income (expense)

 

 

157

 

 

(7)

 

 

158

 

 

(21)

 

Interest expense

 

 

(1,287)

 

 

(186)

 

 

(2,563)

 

 

(304)

 

Loss before provision for income taxes

 

 

(4,448)

 

 

(4,355)

 

 

(10,033)

 

 

(9,250)

 

Provision for income taxes

 

 

 —

 

 

 2

 

 

 8

 

 

 5

 

Net loss

 

$

(4,448)

 

$

(4,357)

 

$

(10,041)

 

$

(9,255)

 

Less: Deemed dividend on purchase warrant for common shares

 

 

75

 

 

 —

 

 

75

 

 

 —

 

Net loss attributable to common stockholders

 

$

(4,523)

 

$

(4,357)

 

$

(10,116)

 

$

(9,255)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share attributable to common stockholders—basic and diluted

 

$

(0.59)

 

$

(0.67)

 

$

(1.36)

 

$

(1.46)

 

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

 

 

7,650

 

 

6,506

 

 

7,455

 

 

6,342

 

 

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury Stock

 

Stockholders’

 

    

Shares

    

Amount

    

Capital

    

Deficit

    

Shares

    

Amount

    

Equity

Balance, March 31, 2019

 

7,197,349

 

$

72

 

$

903,738

 

$

(878,884)

 

26,239

 

$

(1,772)

 

$

23,154

Purchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

78

 

 

 —

 

 

 —

Vested restricted stock awards

 

229

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 

262

 

 

 —

 

 —

 

 

 —

 

 

262

Issuance of common stock, net of issuance costs

 

143,387

 

 

 1

 

 

1,221

 

 

 —

 

 —

 

 

 —

 

 

1,222

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(5,593)

 

 —

 

 

 —

 

 

(5,593)

Balance, June 30, 2019

 

7,340,965

 

$

73

 

$

905,221

 

$

(884,477)

 

26,317

 

$

(1,772)

 

$

19,045

Purchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

3,987

 

 

(26)

 

 

(26)

Vested restricted stock awards

 

1,250

 

 

 —

 

 

26

 

 

 —

 

 —

 

 

 —

 

 

26

Stock-based compensation

 

 —

 

 

 —

 

 

104

 

 

 —

 

 —

 

 

 —

 

 

104

Exercise of stock options and employee stock purchases

 

522

 

 

 —

 

 

 3

 

 

 —

 

 —

 

 

 —

 

 

 3

Stock awards to Board of Directors

 

26,315

 

 

 —

 

 

(24)

 

 

 —

 

 —

 

 

 —

 

 

(24)

Issuance of common stock, net of issuance costs

 

616,443

 

 

 7

 

 

4,808

 

 

 —

 

 —

 

 

 —

 

 

4,815

Deemed dividend on purchase warrant for common shares

 

 —

 

 

 —

 

 

75

 

 

(75)

 

 —

 

 

 —

 

 

 —

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(4,448)

 

 —

 

 

 —

 

 

(4,448)

Balance, September 30, 2019

 

7,985,495

 

$

80

 

$

910,213

 

$

(889,000)

 

30,304

 

$

(1,798)

 

$

19,495

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Accumulated

 

Treasury Stock

 

Stockholders’

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Shares

 

Amount

 

Equity

Balance, March 31, 2018

    

5,706,260

    

$

57

    

$

889,585

    

$

(862,224)

    

14,596

    

$

(1,658)

    

$

25,760

Purchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

168

 

 

(3)

 

 

(3)

Vested restricted stock awards

 

469

 

 

 —

 

 

 3

 

 

 —

 

 —

 

 

 —

 

 

 3

Stock-based compensation

 

 —

 

 

 —

 

 

227

 

 

 —

 

 —

 

 

 —

 

 

227

Warrants exercised

 

346,691

 

 

 3

 

 

4,967

 

 

 —

 

 —

 

 

 —

 

 

4,970

Issuance of common stock, net of issuance costs

 

380,621

 

 

 4

 

 

(4)

 

 

 —

 

 —

 

 

 —

 

 

 —

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(4,898)

 

 —

 

 

 —

 

 

(4,898)

Balance, June 30, 2018

 

6,434,041

 

$

64

 

$

894,778

 

$

(867,122)

 

14,764

 

$

(1,661)

 

$

26,059

Purchase of treasury stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

6,254

 

 

(70)

 

 

(70)

Vested restricted stock awards

 

330

 

 

 —

 

 

70

 

 

 —

 

 —

 

 

 —

 

 

70

Stock-based compensation

 

 —

 

 

 —

 

 

224

 

 

 —

 

 —

 

 

 —

 

 

224

Exercise of stock options and employee stock purchases

 

102

 

 

 —

 

 

 1

 

 

 —

 

 —

 

 

 —

 

 

 1

Stock awards to Board of Directors

 

45,719

 

 

 —

 

 

(70)

 

 

 —

 

 —

 

 

 —

 

 

(70)

Issuance of common stock, net of issuance costs

 

301,608

 

 

 4

 

 

3,105

 

 

 —

 

 —

 

 

 —

 

 

3,109

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(4,357)

 

 —

 

 

 —

 

 

(4,357)

Balance, September 30, 2018

 

6,781,800

 

$

68

 

$

898,108

 

$

(871,479)

 

21,018

 

$

(1,731)

 

$

24,966

 

 

 

 

 

 

5

Table of Contents

CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

    

2019

    

2018

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net loss

 

$

(10,041)

 

$

(9,255)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

816

 

 

568

 

Amortization of financing costs and discounts

 

 

573

 

 

85

 

Amortization of right-of-use assets

 

 

691

 

 

 —

 

(Reduction) in accounts receivable allowances

 

 

(77)

 

 

55

 

Inventory provision

 

 

428

 

 

408

 

Provision for warranty expenses

 

 

452

 

 

1,251

 

Loss on disposal of equipment

 

 

(2)

 

 

 7

 

Stock-based compensation

 

 

366

 

 

451

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,795)

 

 

(619)

 

Inventories

 

 

64

 

 

(320)

 

Prepaid expenses, other current assets and other assets

 

 

299

 

 

(5,135)

 

Accounts payable and accrued expenses

 

 

(1,426)

 

 

448

 

Accrued salaries and wages and long term liabilities

 

 

(8)

 

 

(32)

 

Accrued warranty reserve

 

 

(735)

 

 

(691)

 

Deferred revenue

 

 

(1,025)

 

 

184

 

Net cash used in operating activities

 

 

(11,420)

 

 

(12,595)

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Expenditures for property, equipment and rental assets

 

 

(3,031)

 

 

(316)

 

Net cash used in investing activities

 

 

(3,031)

 

 

(316)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Net proceeds from revolving credit facility

 

 

 —

 

 

3,969

 

Repayment of notes payable and lease obligations

 

 

(393)

 

 

(173)

 

Cash used in employee stock-based transactions

 

 

(26)

 

 

(73)

 

Net proceeds from issuance of common stock and warrants

 

 

6,041

 

 

8,083

 

Net cash provided by financing activities

 

 

5,622

 

 

11,806

 

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

 

 

(8,829)

 

 

(1,105)

 

Cash, Cash Equivalents and Restricted Cash, Beginning of Year

 

 

29,727

 

 

19,408

 

Cash, Cash Equivalents and Restricted Cash, End of Year

 

$

20,898

 

$

18,303

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

1,579

 

$

186

 

Income taxes

 

$

15

 

$

 5

 

Supplemental Disclosures of Non-Cash Information:

 

 

 

 

 

 

 

Acquisition of property and equipment through accounts payable

 

$

17

 

$

110

 

Deemed dividend

 

$

75

 

$

 —

 

 

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

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.

Reverse Stock Split  At the annual meeting of stockholders of the Company held on August 29, 2019, the Company’s stockholders approved an amendment to our Second Amended and Restated Certificate of Incorporation (the “Amendment”) to effect a reverse stock split of our common stock at a ratio in the range of one-for-five (1:5) to one-for-ten (1:10). Pursuant to such authority granted by the stockholders, the Company’s board of directors approved a one-for-ten (1:10) reverse stock split (the “Reverse Stock Split”) of the common stock and the filing of the Amendment. The certificate was filed with the Secretary of State of Delaware, effective on October 21, 2019 and the Reverse Stock Split became effective as of that date as filed with the SEC under the Securities and Exchange Act. Accordingly, all references to numbers of common shares, including the number of common shares on an as-if-converted basis, per-share data and share prices and exercise prices in the accompanying condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis.

Evaluation of Ability to Maintain Current Level of Operations  In connection with preparing the condensed consolidated financial statements for the six months ended September 30, 2019, management evaluated whether there

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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 second 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 $10.0 million and used cash in operating activities of $11.4 million for the six months ended September 30, 2019. The Company’s working capital requirements during the six months ended September 30, 2019 were higher than management’s expectations, which included higher accounts receivable due to delayed collections and higher accounts payable payments, partially offset by lower inventory. The Company’s net loss expanded during the six months ended September 30, 2019 compared to the same period the previous year primarily because of higher interest expense and higher selling, general and administrative expense, partially offset by higher gross margins from our accessories, parts and service business. As of September 30, 2019, the Company had cash and cash equivalents of $20.9 million, and outstanding debt of $30.0 million (see Note 11 – Term Note Payable for further discussion of the outstanding debt). 

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 second 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 Pronouncements

 

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, “Share-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

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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 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, two of the Company’s domestic distributors, accounted for 17% and 12%, respectively, of revenue for the three months ended September 30, 2019. Sales to Horizon Power Systems (“Horizon”) and E-Finity, two of the Company’s domestic distributors and Safwan Petroleum Technologies Company (“Spetco International”), one of the Company’s Middle East and African distributors, accounted for 15%, 12% and 10%, respectively, of revenue for the three months ended September 30, 2018. For the six months ended September 30, 2019, E-Finity and Cal Microturbine, accounted for 15% and 11% of revenue, respectively. For the six months ended September 30, 2018, E-Finity and Horizon, accounted for 11% and 10% of revenue, respectively.

Additionally, E-Finity and Cal Microturbine accounted for 13% and 10%, respectively, of net accounts receivable as of September 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 September 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 was 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

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equal quarterly installments starting in December 20, 2019. As of September 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, $0.3 million, and $0.3 million, due March 20, 2019, June 20, 2019, and September 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 $0.1 million during the three and six months ended September 30, 2019, respectively. The Company recorded a net bad debt expense of approximately $0.1 million during the three and six months ended September 30, 2018, respectively.

As of March 31, 2015, the Company had an amount owed of approximately $8.1 million by BPC. As of September 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 September 30, 2019.

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 September 30, 2019 and March 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

September 30,

 

March 31,

 

 

    

2019

    

2019

 

Raw materials

 

$

21,713

 

$

24,426

 

Work in process

 

 

155

 

 

 —

 

Finished goods

 

 

2,281

 

 

1,207

 

Total

 

 

24,149

 

 

25,633

 

Less inventory reserve

 

 

(2,894)

 

 

(3,887)

 

Less non-current portion

 

 

(1,398)

 

 

(1,403)

 

Current portion

 

$

19,857

 

$

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 September 30, 2019 is 1.1 years. The Company expects to use the non-current portion of the inventories on hand as of September 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

 

$

688

 

25 to 36 months

 

 

710

 

Total

 

$

1,398

 

 

 

 

6.  Property, Plant, Equipment and Rental Assets

 

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

 

 

 

 

 

 

 

 

 

 

September 30,

 

March 31,

 

 

    

2019

    

2019

 

Machinery, equipment, automobiles and furniture

 

$

15,582

 

$

15,344

 

Leasehold improvements

 

 

11,114

 

 

11,074

 

Molds and tooling

 

 

3,055

 

 

2,893

 

Rental assets

 

 

4,874

 

 

2,818

 

 

 

 

34,625

 

 

32,129

 

Less, accumulated depreciation

 

 

(27,439)

 

 

(26,838)

 

Total property, plant, equipment and rental assets, net

 

$

7,186

 

$

5,291

 

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During the second quarter of Fiscal 2020, the Company deployed approximately $1.3 million of its C1000 Signature Series systems (1.6 megawatts “MW”) under its long-term rental program, bringing the total rental fleet to 6.2 MWs. During the six months ended September 30, 2019, the Company deployed approximately $2.0 million of its C1000 Signature Series systems under its long-term 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 $0.4 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively. Depreciation expense for property, equipment and rental assets was $0.7 million and $0.4 million for the six months ended September 30, 2019 and 2018, respectively.

 

 

7.  Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 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

 

 

2,165

 

 

75

 

Trade name & parts, service and TA100 customer relationships

 

1.2 to 5 years

 

 

1,766

 

 

1,766

 

 

 —

 

Total

 

 

 

$

7,706

 

$

7,631

 

$

75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 for each of the three and six months ended September 30, 2019 and 2018, respectively.

 

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

 

 

 

 

 

 

 

Amortization

 

Year Ending March 31,

    

Expense

 

2020 (remainder of fiscal year)

 

$

75

 

Total expected future amortization

 

$

75

 

 

The manufacturing license provides the Company with the ability to manufacture recuperator cores previously purchased from Solar Turbines Incorporated (“Solar”). The Company is required to pay a per-unit royalty fee over a seventeen-year period for cores manufactured and sold by the Company using the technology. Royalties of approximately $9,200 and $10,000 were earned by Solar for the three months ended September 30, 2019 and 2018, respectively. Royalties of approximately $16,400 and $17,100 were earned by Solar for the six months ended September 30, 2019 and 2018, respectively. Earned royalties of approximately $42,500 and $26,100 were unpaid as of September 30, 2019 and March 31, 2019, respectively, and are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

 

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8.  Stock-Based Compensation

The following table summarizes, by condensed consolidated statement of operations line item, stock-based compensation expense for the Company’s three and six months ended September 30, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2019

    

2018

 

2019

    

2018

 

Cost of goods sold

 

$

18

    

$

13

 

$

36

    

$

25

 

Research and development

 

 

10

 

 

 6

 

 

20

 

 

13

 

Selling, general and administrative

 

 

76

 

 

205

 

 

310

 

 

413

 

Stock-based compensation expense

 

$

104

 

$

224

 

$

366

 

$

451

 

 

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 184,900 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 300,000 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 300,000 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.

On August 29, 2019, at the Company’s 2019 annual meeting, the Registrant’s stockholders approved another amendment to the 2017 Plan to increase the aggregate number of shares authorized for issuance under the 2017 Plan by 300,000 shares to 900,000 shares of common stock. As of September 30, 2019, there were 523,613 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

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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 six months ended September 30, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

Aggregate

 

 

 

 

 

Average

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Exercise Price

 

Term

 

Value

 

 

 

 

 

 

 

 

(in years)

 

 

 

 

Options outstanding at March 31, 2019

    

17,495

    

$

209.40

    

 

    

 

 

 

Granted

 

 —

 

$

 —