PART I
Item 1. Business.
Overview
Capstone Turbine Corporation ("Capstone" or the "Company") develops, manufactures, markets and services microturbine technology
solutions for use in stationary distributed power generation applications, including cogeneration (combined heat and power ("CHP"), integrated combined heat and power ("ICHP"), and combined cooling,
heat and power ("CCHP")), renewable energy, natural resources and critical power supply. In addition, our microturbines can be used as battery charging generators for hybrid electric vehicle
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 power, wind powered systems and fuel cells. For customers who do not have access to the electric
utility grid, microturbines provide clean, on-site power with fewer scheduled maintenance intervals and greater fuel flexibility than competing technologies. For customers with access to the electric
grid, microturbines provide an additional source of continuous duty power, thereby providing additional reliability and potential cost savings. With our stand-alone feature, customers can produce
their own energy in the event of a power outage and can use microturbines as their primary source of power for extended periods. Because our microturbines also produce clean, usable heat energy, they
provide economic advantages to customers who can benefit from the use of hot water, chilled water, air conditioning and heating. Our microturbines are sold, installed and serviced primarily through
our global distribution network. Together we offer new and remanufactured parts as well as a comprehensive Factory Protection Plan ("FPP"). Successful implementation of microturbines relies on the
quality of the microturbine, marketability for appropriate applications, and the quality of the installation and support.
We
believe we were the first company to offer a commercially available power source using microturbine technology. Capstone offers microturbines designed for commercial, industrial, and
utility users with product offerings ranging from 30 kilowatts ("kW") to one megawatt in electric power output. Our 30 kW ("C30") microturbine can produce enough electricity to power a small
convenience store. The 65 kW ("C65") microturbine can produce enough heat to provide hot water to a 100-room hotel while also providing about one-third of its electrical requirements. Our 200 kW
("C200") microturbine is well suited for larger hotels, office buildings and wastewater treatment plants, among others. By packaging the C200 microturbine power modules into an International
Organization for Standardization ("ISO") sized container, Capstone has created a family of microturbine offerings from 600 kW up to one megawatt in a compact footprint. Our 1000 kW ("C1000 Series")
microturbines are well suited for utility substations, larger commercial and industrial facilities and remote oil and gas applications. Our microturbines combine patented air-bearing technology,
advanced combustion technology and sophisticated power electronics to form efficient and ultra-low emission electricity and cooling and heat production systems. Because of our air-bearing technology,
our microturbines do not require liquid lubricants. This means they do not require routine maintenance to change and dispose of oil or other liquid lubricants, as do the most common competing
products. Capstone microturbines can be fueled by various sources, including natural gas, propane, sour gas, renewable fuels such as landfill or digester gas, kerosene, diesel and biodiesel. The C65
and C200 microturbines are available with integrated heat exchangers, making them easy to engineer and install in applications where hot water is used. Our products produce exceptionally clean power.
Our C65 was certified by the California Air Resources Board ("CARB") as meeting its stringent 2007 emissions requirementsthe same emissions standard used to certify fuel cells and the
same emissions levels as a state-of-the-art central power plant. Our C65 Landfill and Digester Gas systems were certified in January 2008 by
CARB as meeting 2008 waste gas emissions requirements for landfill and digester gas applications. Our C200 Landfill and
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Digester
Gas systems were certified in November 2010 by CARB as meeting 2008 waste gas emissions requirements for landfill and digester gas applications.
On
February 1, 2010, we acquired the 100 kW ("TA100") microturbine product line from Calnetix Power Solutions, Inc. ("CPS"). The TA100 microturbine is most similar to the
Capstone product design compared to other microturbine products in the industry.
We
sell complete microturbine units, subassemblies, components and various accessories. We also remanufacture microturbine engines and provide after-market parts and services. Our
microturbines are sold primarily through distributors and Original Equipment Manufacturers ("OEMs"). Distributors purchase our products for sale to end users and also provide application engineering
and installation support. Distributors are also required to provide a variety of additional services, including engineering the applications in which the microturbines will be used, installation
support of the products at the end users' sites, commissioning the installed applications and providing post-commissioning service. Our distributors perform as value-added resellers.
OEMs integrate Capstone's products into their own product solutions.
To
assure proper installation of Capstone microturbine systems, we have instituted a Factory Trained Installer ("FTI") training and certification program. Personnel from our distributors
and OEMs, as well as design engineering firms, contractors and end users attend this FTI training. We offer to assist all customers by reviewing their installation designs to confirm that the
technical requirements for proper operation have been met, such as electrical interconnections, load requirements, fuel type and pressure, cooling air flow and turbine exhaust routing. As part of the
microturbine commissioning process, we also receive a checklist to confirm that the final installation adheres to Capstone technical requirements before we accept any warranty obligations. This is
aimed at providing the end user with a proper installation that will operate as expected for the life of the equipment.
Capstone
has a factory direct service offering for commissioning and post-commissioning service. Through our global distribution network, we offer a comprehensive FPP for a fixed annual
fee to perform regularly scheduled and unscheduled maintenance as needed. Capstone provides factory and on-site training to certify all personnel that are allowed to perform service on our
microturbines. Individuals who are certified are called Authorized Service Providers or, ASPs, and must be employed by a distributor in order to perform work pursuant to a Capstone FPP. The majority
of our distributors provide these services.
This
Annual Report on Form 10-K (this "Form 10-K") refers to Capstone's fiscal years ending March 31 as its "Fiscal" years.
Our Products
We began commercial sales of our C30 products in 1998, targeting the emerging distributed generation industry that was being driven by
fundamental changes in power requirements. In September 2000, we shipped the first commercial unit of our 60 kW microturbine ("C60"), which was replaced by the C65 model during the quarter ended
March 31, 2006. We began shipping the C60 Integrated CHP solution in 2003. The first commercial C200 microturbine was shipped on August 28, 2008. Our C1000 Series product was
developed based on Capstone's C200 microturbine engine. The C1000 Series product can be configured into 1,000 kW, 800 kW and 600 kW solutions in a single ISO-sized container. The first commercial
shipment of our C1000 Series product was on December 29, 2008. We began shipping TA100 microturbines in March 2010.
During
Fiscal 2014, we booked total orders of $131.5 million for 675 units, or 135.3 megawatts, compared to $112.6 million for 765 units, or 107.2 megawatts, during Fiscal
2013. We shipped 671 units with an aggregate of 109.9 megawatts, generating revenue of $108.8 million compared to 628 units with an aggregate of 103.2 megawatts, generating revenue of
$102.7 million during Fiscal 2013. Total backlog
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as
of March 31, 2014 increased $22.7 million, or 15%, to $171.6 million from $148.9 million at March 31, 2013. As of March 31, 2014, we had 820 units, or
188.2 megawatts, in total backlog compared to 816 units, or 162.8 megawatts, at the same date last year. The timing of the backlog is based on the requirement date indicated by our customers. However,
based on historical experience, management expects that a significant portion of our backlog may not be shipped within the next twelve months. The timing of shipments is subject to change based on
several variables (including customer deposits, payments, availability of credit and customer delivery schedule changes), most of which are not in our control and can affect the timing of our revenue.
The
following table summarizes our backlog:
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As of March 31,
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2014
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2013
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Megawatts
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Units
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Megawatts
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Units
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C30
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3.0
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101
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5.8
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193
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C65
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33.8
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520
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28.4
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438
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TA100
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1.9
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19
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2.3
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23
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C200
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3.4
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17
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4.6
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23
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C600
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9.0
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15
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10.2
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17
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C800
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8.8
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11
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7.2
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9
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C1000
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127.0
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127
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103.0
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103
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Waste heat recovery generator
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1.3
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10
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1.3
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10
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Total Backlog
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188.2
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820
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162.8
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816
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Capstone
microturbines are compact, lightweight and environmentally friendly generators of electricity and heat compared to competing technologies. They operate on the same principle as
a jet engine with the added capability of using a variety of commercially available fuels. For example, our microturbines can operate on low British Thermal Unit ("BTU") gas, which is gas with lower
energy content, and can also operate on gas with a high amount of sulfur, known in the industry as sour gas. Examples of these fuel sources include methane from facilities such as wastewater treatment
plants, landfills and anaerobic digesters.
Our
microturbines incorporate four major design features:
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advanced combustion technology;
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patented air-bearing technology;
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digital power electronics; and
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remote monitoring capability.
Our
advanced combustion technology allows Capstone microturbines to achieve low emissions with a design geared towards manufacturability. These low emission levels not only provide an
environmentally friendly product, but also eliminate permitting requirements in several municipalities for continuously operated onsite power generation. The air-bearing system allows the
microturbine's single moving assembly to produce power without the need for typical petroleum-based lubrication. Air-bearings use a high-pressure field of air rather than petroleum lubricants. This
improves reliability and reduces maintenance such as oil changes. The electronic controls manage critical functions and monitor operations of the microturbine. For instance, our electronics control
the microturbine's speed, temperature and fuel flow and communicate with external networks and building management systems. The power electronics coordinate with the grid when the units are operated
in a grid-connect mode and with the onboard battery when equipped for stand-alone mode. All control functions are
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performed
digitally. Performance is optimized, resulting in lower emissions, higher reliability and high efficiency over a variable power range.
The
electrical output of our units can be paralleled in multiple unit configurations through our Advanced Power Server product and a digital communications cable to serve larger
installations requiring electrical loads up to ten megawatts.
Our
products can operate:
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connected to the electric utility grid as a current source;
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on a stand-alone basis as a voltage source;
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multipacked to support larger loads as a "virtual single" unit; and
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in dual mode, where the microturbine operates connected to the electric utility grid or operates independently.
We
also offer C65 and C200 ICHP systems. These systems combine the standard C65 and C200 microturbine unit with a heat recovery module that provides electricity and heats water.
Our
family of products is offered in the following configurations:
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C30
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C65
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TA100
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C200
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C1000 Series
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Fuel Types
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Grid
Connect
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Dual
Mode
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Grid
Connect
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Dual
Mode
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Grid
Connect
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Dual
Mode
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Grid
Connect
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Dual
Mode
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Grid
Connect
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Dual
Mode
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Low pressure natural gas
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X
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X
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X
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X
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X
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X
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X
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X
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X
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X
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High pressure natural gas
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X
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X
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X
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X
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X
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X
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X
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X
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X
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X
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Compressed natural gas
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X
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X
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X
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X
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X
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X
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X
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X
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X
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X
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Landfill gas
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X
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X
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X
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X
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Digester gas
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X
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X
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X
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X
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Gaseous propane
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X
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X
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X
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X
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X
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X
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X
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X
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High pressure sour gas
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X
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X
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X
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X
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X
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X
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X
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X
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Diesel
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X
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X
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X
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X
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X
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X
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X
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X
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Kerosene
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X
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X
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X
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X
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We
offer various accessories for our products including rotary gas compressors with digital controls, heat recovery modules for CHP applications, dual mode controllers that allow
automatic transition between grid connect and stand-alone modes, batteries with digital controls for stand-alone or dual-mode operations, power servers for large multipacked installations, protocol
converters for Internet access, packaging options and miscellaneous parts such as frames, exhaust ducting and installation hardware. We also sell microturbine components and subassemblies.
Our
electronic controls manage microturbines using Capstone's proprietary software and advanced algorithms. The controls:
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start the turbogenerator and manage its load;
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coordinate the functioning of the microturbine with the grid;
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manage the speed, fuel flow and exhaust temperature of the microturbine;
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convert the variable frequency, up to a maximum of 1,600 Hertz and variable voltage power produced by the generator into a
usable output of either 50 or 60 Hertz AC for stationary applications or DC for hybrid electric vehicle applications; and
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provide digital communications to externally maintain and control the equipment.
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In addition, our proprietary Capstone Remote Monitoring Software ("CRMS") allows end users to remotely operate and manage the microturbine. Unlike the technology
of other power sources that require on-site monitoring and maintenance, the CRMS allows end users to remotely and efficiently monitor performance, power generation and time of operation using our CRMS
interface software with standard personal computers. This remote capability can provide end users with power generation flexibility and cost savings. Capstone is currently developing an Internet-based
system to provide real-time continuous remote monitoring and diagnostics to customers who purchase the service.
The
C30 microturbines were initially designed to operate connected to an electric utility grid and to use a high pressure natural gas fuel source. We have expanded our microturbine's
functionality to operate with different fuels. The combustor system remains the same for all fuels except for the fuel injectors, which currently vary between liquid and gaseous fuels. The Capstone
microturbine's multi-fuel capability provides significant competitive advantages with respect to some of our selected vertical markets.
Our
C65 grid-connect and stand-alone microturbine power systems are listed by Underwriters Laboratories ("UL") as meeting the UL 2200 stationary engine generator standards
and the UL 1741 utility interconnection requirements. Our products are manufactured by processes that are ISO 9001:2000 and ISO 14001:2004 certified.
In
2002, the California Energy Commission certified our C30 and C60 microturbines as the first products to comply with the requirements of its "Rule 21" grid interconnection
standard. This standard streamlines the process for connecting distributed generation systems to the grid in California. The benefits of achieving this standard include avoiding both costly external
equipment procurement requirements and extensive site-by-site and utility-by-utility analysis. Our protective relay functionality has also been recognized by the State of New York, which has
pre-cleared our microturbines for connection to New York's electric utility grid.
Our
C60 microturbine was the first combustion power generation product to be certified by the CARB as meeting its stringent distributed generation emissions standards that went into
effect in 2003. Our C65 microturbine now meets the even more stringent CARB 2007 standard for natural gas.
The
TA100 microturbine offers a digital communication interface which can be connected to an external controller (not sold by Capstone) to provide multiple unit and dual mode dispatching
functionality. An external synchronization board is provided to parallel the electrical output in multiple unit configurations for stand-alone operation.
We
are the first microturbine manufacturer to achieve UL Class I, Division 2 certification for operation in hazardous-area oil and gas applications. These specially packaged
systems are applied in oil and gas production areas with potentially explosive environments. In September 2009, we received UL certification for our C200 grid-connect and stand-alone microturbine as
meeting the UL 2200 stationary engine generator standards and the UL 1741 utility interconnection requirements. In June 2010, we received UL certification for our C1000 Series grid-connect and
stand-alone microturbine as meeting the UL 2200 stationary engine generator standards and the UL 1741 utility interconnection requirements.
Applications
Worldwide, stationary power generation applications vary from huge central stationary generating facilities up to 1,000 MW to back-up
generators as small as 2 kW. Historically, power generation in most developed countries such as the United States has been part of a regulated utility system. A number of developments related
primarily to the deregulation of the utility industry as well as significant technology advances have broadened the range of power supply choices available to all types of customers.
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Capstone
products serve multiple vertical markets worldwide. Within the markets served, we focus on vertical markets that we have identified as having the greatest near-term potential.
In the markets we are focusing on, which are energy efficiency, renewable energy, natural resources, critical power supply and mobile products, we have identified specific targeted vertical market
segments.
Energy EfficiencyCHP/CCHP
Energy efficiency maximizes the use of energy produced by the microturbines, reduces emissions compared with traditional power
generation and enhances the economic advantage to customers. Energy efficiency uses both the heat and electric energy produced in the power generation process. Using the heat and electricity created
from a single combustion process increases the efficiency of the system from approximately 30% to 75% or more. The increased operating efficiency reduces overall greenhouse gas emissions compared with
traditional independent sources such as power generation and local thermal generation and, through displacement of other separate systems, can reduce operating costs. Our microturbines' emissions of
commonly found air pollutants ("criteria pollutants"), such as nitrogen oxides ("NOx"), carbon monoxide ("CO") and volatile organic compounds ("VOCs"), are lower than those from the on-site boilers
that our CHP system displaces, meaning that local emissions of these pollutants are actually reduced when a Capstone energy efficiency CHP system is installed. This high CHP efficiency also means more
efficient use of fuel and can reduce net utility costs for end users. The most common uses of heat energy include space heating and air conditioning, heating and cooling water, as well as drying and
other applications. For example, we have used the heat generated by the microturbines to supply hot water solutions for hotels, office buildings and retail, commercial and industrial customers. When
our microturbine exhaust drives an absorption chiller, the chiller produces chilled water for air conditioning and other uses.
There
are energy efficiency markets for CHP and CCHP applications worldwide. A study conducted for the US Department of Energy ("DOE") calculated the total potential energy efficiency
CHP market in the United States to be over 35.5 gigawatts through 2020. Many governments have encouraged more efficient use of the power generation process to reduce pollution, lower dependence on
fossil fuels and control the cost of locally produced goods. To access these markets, we have entered into agreements with distributors which have engineered energy efficiency CHP packages that
utilize the hot exhaust air of the microturbine for heating water and also use the hot exhaust to run an absorption chiller for air conditioning. We also offer our own integrated energy efficiency CHP
and CCHP product for the C65, C200 and C1000 Series products.
Renewable Energy
Our microturbines can use renewable methane gases from landfills, wastewater treatment facilities and other biogas applications such as
food processing and agricultural waste, referred to as green waste, and cow, pig and chicken manure. They can burn these renewable waste gases with minimal emissions, thereby, in some cases, avoiding
the imposition of penalties incurred for pollution while simultaneously producing electricity from this "free" renewable fuel for use at the site or in the surrounding areas. The microturbines have
demonstrated effectiveness in these applications and outperform conventional combustion engines in a number of situations, including when the gas contains a high amount of sulfur.
Capstone
released for sale the C65 stand-alone digester product for sale in the renewable energy market segment in 2007. This product is targeted at remote villages in third-world
countries with wastewater treatment facilities that offer a valuable source of fuel which can be converted to electricity. A joint applications and engineering team evaluated the performance of the
existing C65 digester gas system to ensure that the combustion system would be stable from 0 to 100% power output. Minor controls changes were implemented to increase stability at low power levels.
The ability to convert this
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low
BTU fuel to electricity along with the high reliability and low maintenance features of this product make it well suited for this market.
Natural ResourcesOil, Natural Gas, Shale Gas & Mining
On a worldwide basis, there are thousands of locations where the drilling, production, compression and transportation of natural
resources and other extraction and production processes create fuel byproducts, which traditionally have been released or burned into the atmosphere. Our microturbines are installed in the natural
resource market to be used in oil and gas exploration, production, compression and transmission sites both onshore and offshore as a highly reliable critical source of power generation. In addition,
our microturbines can use flare gas as a fuel to provide prime power. Typically these oil and gas or mining operations have no electric utility grid and rely solely on Capstone's microturbine for
reliable low emission power supply.
Many
major oil and gas companies are exploring large shale reserves, or plays, in the United States. In mid-2010 Capstone sold its first microturbines into the U.S. shale gas market in
the Eagle Ford and Marcellus shale plays. The addressable market for Capstone microturbines in this industry is significant. The shale gas market is expected to grow substantially, especially since
the U.S. Environmental Protection Agency's ("EPA") Clean Air Act has strict requirements for emissions levels at natural gas sites.
The
C200 product is offered for sale configured to meet Class 1 Zone 2 hazardous location requirements for the oil and gas market. Hazardous location requirements are met through
package ventilation changes for purging and pressurizing package air to avoid potential flammable mixtures as well as controls for emergency disconnect of fuel and electrical sources. The package is
upgraded to stainless steel construction to withstand the corrosive offshore environments where these units are installed. Oil and gas customers prefer the low maintenance and high reliability
attributes offered by our turbines to ensure continued production. Capstone also offers C30 and C65 microturbine products in similar configurations.
Critical Power Supply
Because of the potentially catastrophic consequences of even momentary system failure, certain power users such as high technology,
health care and information systems facilities require particularly high levels of reliability in their power service. To meet these customer requirements, traditional solutions utilize
Uninterruptible Power Supplies ("UPS") to protect critical loads from momentary power disturbances along with backup diesel generators for extended outages. Capstone offers an alternative solution
that can both meet customer reliability requirements and reduce operating costs.
Capstone
has developed the world's only microturbine powered UPS solutions that offer clean, IT-grade power and can completely displace the need for traditional UPS and backup diesel
generators. We offer two microturbine-powered UPS solutions. The Capstone UPSource microturbine-powered UPS solution provides prime or emergency power solutions. Capstone's Hybrid UPS microturbine
powered solution provides power when dispatched in high efficiency, standard UPS and emergency power solutions. Both critical power supply products offer 99.999999% availability in an n+1
configuration when the product has at least one independent backup. Our microturbine-powered UPS solutions are UL listed. These integrated solutions are ideal for new construction or facility
expansion and are typically installed with absorption chillers or other heat recovery systems to obtain high efficiency and reduce operating costs compared with traditional solutions.
Dual
mode units operating in a prime power configuration can support a 150% overload for 10 seconds during transient conditions. Dual mode units operating in grid parallel mode
can provide customers a back-up power system with an economic return. These systems offer high onsite energy efficiency when combined with a heat exchanger (CHP) to create hot water or with a chiller
(CCHP)
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for
air conditioning at these facilities. This configuration, when combined with the Capstone Dual Mode Controller, can transition from the grid parallel mode to prime power mode in less than ten
seconds. Capstone microturbines can also be installed along with a rotary UPS to provide a complete line-interactive continuous power solution. In this case, the microturbines remain in grid connect
mode while the rotary UPS stabilizes the utility voltage and provides a seamless transfer from operation connected to the grid to operation isolated from the grid.
Mobile ProductsHybrid Electric Vehicles
Our technology is also used in hybrid electric vehicle ("HEV") applications. Our customers have applied our products in hybrid electric
vehicles such as transit buses and trucks. In these applications the microturbine acts as an onboard battery charger to recharge the battery system as needed. The benefits of microturbine hybrids
include extended range, fuel economy gains, quieter operation, reduced emissions and higher reliability compared with traditional internal combustion engines. Internal combustion diesel engine
manufacturers have been challenged for the last several years to develop technology improvements, prior to aftertreatment that reduce emissions to levels specified by the EPA and CARB 2007 and 2010
standards. Many manufacturers are incorporating aftertreatment that increases upfront equipment costs, vehicle weight and life cycle costs and may reduce overall engine efficiency.
Mobile ProductsMarine
Our technology is also used in marine applications. Our customers have applied our products in the commercial vessel and luxury yacht
markets. The most immediate market for our marine products is for use as ship axillaries. In this application, the microturbines provide power to the vessel's electrical loads and, in some cases, the
vessel is able to utilize the exhaust energy to increase the overall efficiency of the application, reducing overall fuel consumption and emissions. The other application is similar to our HEV
application where the vessel is driven by an electric propulsion system and the microturbine serves as an on board range extender. Our marine customers use both our liquid fueled and natural gas
products. Liquefied natural gas ("LNG") is in its early stages as a marine fuel, and the number of vessels powered by LNG is forecasted to double every two years over the next decade. Vessel owners
can receive the same benefits as users of stationary Capstone products: low emissions with no aftertreatment, long maintenance intervals, high reliability, low noise and no vibration.
Sales, Marketing and Distribution
We primarily sell our microturbine product, parts and service through distributors. Our typical terms of sale include shipment of the
products with title, care, custody and control transferring at our dock, payment due anywhere from in advance of shipment to 90 days from shipment, and warranty periods of approximately 15 to
18 months from shipment. We typically do not have customer acceptance provisions in our agreements.
North America
We have distribution agreements with a number of companies throughout North America for the resale of our products. Many of these
distributors serve multiple markets in their select geographic regions. The primary markets served in this region have been energy efficiency, renewable energy, natural resources, critical power and
mobile products. The energy efficiency and natural resources vertical markets are expected to grow as a result of an increased domestic production of hydrocarbons, the low downstream price of natural
gas and public and regulatory acceptance of distributed generation.
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Recent
energy reform in Mexico has the potential to open new market opportunities in the energy market. Capstone's strategy in Mexico is to develop distributors that have demonstrated
commitment and proficiency over a period of years to represent Capstone across various market verticals.
In
developing our sales opportunities we have identified the need to address various requirements present in our target localities. These requirements include electric grid
interconnection standards, gas utility connection requirements, emissions standards, building and fire safety codes and various inspections and approvals. The costs and scheduling ramifications of
these various approvals, in conjunction with normal bidding process requirements and construction delays, can be significant to the completion of an installation. Our goal is to work with the
applicable regulating entities to establish compliant standards for the installation of our microturbines so that the costs and installation timelines are minimized for our customers. Management
believes that we can create market advantages for our products through enhancing the ease of deploying our distributed generation solutions.
Asia and Australia
Our sales and marketing strategy in Asia and Australia has been to develop and strengthen distributor relationships throughout these
continents.
Our
target markets in Asia and Australia are energy efficiency, renewable energy and natural resources. Our historical sales in Southeast Asia and Australia have primarily been in the
CHP, CCHP and the oil and gas market. Other areas in Asia and the Pacific Rim offer attractive opportunities as well. China is expected to see growth in the oil and gas market, while biogas recovery
is showing signs of growth in Southeast Asia.
Middle East and Africa
Our target market in the Middle East and Africa is primarily oil and gas. Flare gas to power projects are a particularly attractive
market opportunity given the volume of gas being flared and the acute and chronic need for stable power in the region. Management has targeted distributors and customers involved in the capture and
use of flare gas in the oil and gas market.
Europe and Russia
To address the European market, including Russia, we are strengthening our relationships with existing and new distributors and have
increased Capstone local sales and service support. We have an office in Europe for the purpose of working with our distributors there on a daily basis to realize growth opportunities. We have
established a spare parts distribution center in Europe to make parts readily available to our distributors. Europe has a history of extensive use of distributed generation technologies. During Fiscal
2014, the European market was showing signs of improvement with an increase in revenue of 59%, primarily from Russia, compared to Fiscal 2013. Further, the continuation or escalation of the current
geopolitical instability in Russia and Ukraine could negatively impact our operations, sales, and future growth prospects in that region. For more information, see "Risk Factors" beginning on
Page 14 of this Form 10-K.
South America
South America constitutes a diverse group of markets that vary greatly in potential capture for Capstone based on a number of factors
including availability of oil and gas production and transmission, energy pricing and political and investment climate. While Capstone has distributors in nearly all South American countries,
management is focused on what we consider to be the top markets, such as Colombia, Brazil, Chile and Ecuador. Our target markets in South America are energy efficiency, renewable energy and natural
resources. Our historical sales in South America have primarily been in the natural resources market.
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Revenue
For geographic and segment revenue information, please see Note 2Summary of Significant Accounting
PoliciesSegment Reporting in the "Notes to Consolidated Financial Statements."
Customers
Sales to E-Finity Distributed Generation, LLC ("E-Finity), one of the Company's domestic distributors, accounted for 19% of our
revenue for the year ended March 31, 2014. Sales to BPC Engineering ("BPC"), one of the Company's Russian distributors, accounted for 17%, 11% and 26% of our revenue for the years ended
March 31, 2014, 2013 and 2012, respectively. Sales to Horizon Power Systems ("Horizon"), one of the Company's domestic distributors, accounted for 12%, 27% and 19% of our revenue for the years
ended March 31, 2014, 2013 and 2012, respectively. Additionally, BPC, Electro Mecanique Industries ("EMI"), one of the Company's distributors in the Middle East and Africa, and E-Finity
accounted for 26%, 18% and 16%, respectively, of net accounts receivable as of March 31, 2014. BPC and Regatta Solutions, Inc., one of the Company's domestic distributors, accounted for
35% and 11%, respectively, of net accounts receivable as of March 31, 2013.
Competition
The market for our products is highly competitive. Our microturbines compete with existing technologies such as reciprocating engines
and may also compete with emerging distributed generation technologies, including solar power, wind-powered systems, fuel cells and other microturbines. Many potential customers rely on the utility
grid for their electrical power. Many of our distributed generation competitors are large, well-established companies that derive competitive advantages from production economies of scale, worldwide
presence, brand recognition and greater resources which they can devote to product development or promotion.
Generally,
power purchased from the electric utility grid is less costly than power produced by distributed generation technologies. Utilities may also charge fees to interconnect to
their power grids. However, we can provide economic benefits to end users in instances where the waste heat from our microturbine has value (CHP and CCHP), where fuel costs are low (renewable
energy/renewable fuels), where the costs of connecting to the grid may be high or impractical (such as remote power applications), where reliability and power quality are of critical importance, or in
situations where peak shaving could be economically advantageous because of highly variable electricity prices. Because Capstone microturbines can provide a reliable source of power and can operate on
multiple fuel sources, management believes they offer a level of flexibility not currently offered by other technologies such as reciprocating engines.
Our
reciprocating engine competitors have products and markets that are well developed and technologies that have been proven for some time. A reciprocating engine, also known as an
internal combustion engine, is similar to those used in automotive applications. Reciprocating engines are popular for primary and back-up power applications despite higher levels of emissions, noise
and maintenance. These technologies, which typically have a lower up-front cost than microturbines, are currently produced by Caterpillar Inc., Cummins Inc., Deutz Corporation, GE Gas
Engines (which now includes Waukesha and Jenbacher), MAN SE, Tecogen, Inc. and Wärtsilä Corporation, among others.
Our
microturbines may also compete with other distributed generation technologies, including solar power, wind power systems and fuel cells. Solar and wind powered systems produce no
emissions. The main drawbacks to solar and wind powered systems are their dependence on weather conditions, the utility grid and high capital costs that can often make these systems uneconomical
without government subsidies depending upon geographic locale and application of the technology. Although the market for fuel cells is still developing, a number of companies are focused on markets
similar to ours, including FuelCell Energy Inc., Bloom Energy Corporation, LG Fuel Cell Systems, a business unit
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of
LG Electronics, Plug Power Inc. and Ballard Power Systems Inc. Fuel cells have lower levels of NOx, CO, VOCs and other criteria pollutant emissions than our microturbines. Fuel cells,
like solar and wind powered systems, have received higher levels of incentives for the same type of applications as microturbines. Management believes that, absent these higher government incentives,
microturbines provide a better value to end users in most applications. However, over the medium-to-long term, fuel cell technology companies may introduce products that compete more directly with our
microturbines.
We
also compete with other companies who have microturbine products, including FlexEnergy and Turbec S.p.A.
Overall,
we compete with end users' other options for electrical power and heat generation on the basis of our microturbine's ability
to:
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provide power when a utility grid is not available or goes out of service;
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reduce total cost of purchasing electricity and fuel;
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improve electric power availability and provide high power quality;
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operate on multiple fuel types;
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reduce emissions (both criteria pollutants and greenhouse gases);
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simplify operation; and
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control maintenance costs and associated disposal of hazardous materials.
Governmental and Regulatory Impact
Our markets can be positively or negatively impacted by the effects of governmental and regulatory matters. We are affected not only by
energy policy, laws, regulations and incentives of governments in the markets in which we sell, but also by rules, regulations and costs imposed by utilities. Utility companies or governmental
entities may place barriers on the installation or interconnection of our product with the electric grid. Further, utility companies may charge additional fees to customers who install on-site power
generation; thereby reducing the electricity they take from the utility, or for having the capacity to use power from the grid for back-up or standby purposes. These types of restrictions, fees or
charges could hamper the ability to install or effectively use our product, or increase the cost to our potential customers for using our systems. This could make our systems less desirable, thereby
adversely affecting our revenue and profitability. In addition, utility rate reductions can make our products less competitive which would have a material adverse effect on our operations. These
costs, incentives and rules are not always the same as those faced by technologies with which we compete. However, rules, regulations, laws and incentives could also provide an advantage to our
distributed generation solutions as compared with competing technologies if we are able to achieve required compliance in a lower cost, more efficient manner. Additionally, reduced emissions and
higher fuel efficiency could help our customers combat the effects of global warming. Accordingly, we may benefit from increased government regulations that impose tighter emission and fuel efficiency
standards.
Capstone
continues to engage with federal and state policymakers to develop government programs to promote the deployment of Capstone's low emission and energy efficient products.
Linda Sanchez, U.S. Representative for California's 38th congressional district recently introduced H.R. 4428, or the American Microturbine Manufacturing and Clean Energy
Deployment Act of 2014. This legislation may stimulate the market for Capstone products by increasing the investment tax credit available to microturbine projects. We cannot provide assurance that any
such legislation will be enacted, however. In the wake of numerous destructive storms, several state and local governments are putting greater value in resilient distributed generation resources,
including CHP and microgrids. However, utilities in other states have asked public utility commissioners to revisit incentive programs
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and
exemptions from grid usage charges for distributed generation technologies, arguing that these policies shift costs to other rate payers.
The
United States Government is focused on promoting exports of American products with a specific emphasis on clean energy goods. Capstone participates in export promotion activities
such as trade missions which help us enter new markets by facilitating interactions with foreign buyers and distributors. Government funding can impact the rate of development of new technologies.
While we continue to receive development funding, committed amounts remaining are relatively low. Competing new technologies generally receive larger incentives and development funding than do
microturbines. There are certain recent federal funding solicitations that may support microturbine development. We cannot provide any assurance that any proposal Capstone submits will be funded.
Sourcing and Manufacturing
We are focused on continuously improving our supply chain effectiveness, strengthening our manufacturing processes and increasing
operational efficiencies within our organization. Our microturbines are designed to achieve high volume and low cost production objectives. Our manufacturing designs include the use of conventional
technology, which has been proven in high volume automotive and turbocharger production for many years. Many components used in the manufacture of our products are readily fabricated from commonly
available raw materials or off-the-shelf items available from multiple supply sources; however, certain items are custom made to meet our specifications. We believe that in most cases, adequate
capacity exists at our suppliers and that alternative sources of supply are available or could be developed within a reasonable period of time. We have an on-going program to develop alternative
back-up suppliers for sole source parts. We regularly reassess the adequacy and abilities of our suppliers to meet our needs. We continue to evaluate and implement new systems designed to provide
improved quality, reliability, service, greater efficiency and lower supply chain costs. We have substantially increased our focus on process controls and validations, supplier controls, distribution
controls and providing our operations teams with the training and tools necessary to drive continuous improvement in product quality. In addition, we remain focused on examining our operations and
general business activities to identify cost-improvement opportunities in order to enhance our operational effectiveness. Our ability to leverage these capabilities may be affected by the current
variability in our demand volumes and forecasting. Our strategy is to identify primary and secondary sources for critical components when available to minimize factory down time due to unavailability
of such parts, which could affect our ability to meet manufacturing schedules.
We
have a combined total of approximately 109,000 square foot manufacturing footprint running on a single shift in the San Fernando Valley area of Southern California. We assemble and
test units as well as manufacture air-bearings and certain combustion system components at our facility in Chatsworth,
California. Additionally, we assemble and test our C200 and C1000 Series products and manufacture recuperator cores at our facility in Van Nuys, California. Management believes our manufacturing
facilities located in Chatsworth and Van Nuys, California have a combined production capacity of approximately 2,000 units per year, depending on product mix. Excluding working capital requirements,
management believes we can expand our combined production capacity to approximately 4,000 units per year, depending on product mix, with approximately $10 to $15 million of capital
expenditures. We have not committed to this expansion nor identified a source for its funding, if available.
Solar
Turbines Incorporated ("Solar"), a wholly owned subsidiary of Caterpillar Inc., was our sole supplier of recuperator cores prior to 2001. In 2000, we exercised an option to
license Solar's technology, which allows us to manufacture these cores ourselves and we began manufacturing them in June 2001. The cores are subject to a per-unit royalty fee. As of March 31,
2014, cumulative royalties of $0.5 million have been paid under the terms of the licensing agreement with Solar.
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In September 2007, we entered into a Development and License Agreement (the "Development Agreement") with UTCP, a division of United Technologies Corporation. The
Development Agreement engaged UTCP to fund and support our continued development and commercialization of our 200 kilowatt ("C200") microturbine. In return we agreed to pay a predetermined
fixed rate for each microturbine system covered by the agreement. In August 2009, the Development Agreement was assigned by UTCP to Carrier Corporation ("Carrier"). The fixed rate royalty was reduced
by 50% during the three months ended September 30, 2013 as a result of the contractual reduction. As of March 31, 2014, cumulative royalties of $13.4 million have been paid under
the terms of the licensing agreement with Carrier.
Research and Development ("R&D")
For the fiscal years ended March 31, 2014, 2013 and 2012, R&D expenses were $9.0 million, $9.0 million and
$8.2 million, respectively, and include 7%, 7% and 7% of total revenue, respectively, for these fiscal years. R&D expenses are reported net of benefits from cost-sharing programs, such as
Department of Energy ("DOE") grants and the Development Agreement with Carrier. Benefits from cost-sharing programs were $1.4 million, $1.7 million and $0.8 million for Fiscal
2014, 2013 and 2012, respectively. Our R&D activities enabled us to become one of the first companies to develop a commercially available microturbine that operates in parallel with
the grid. We were the first company to successfully demonstrate a commercially available microturbine that operates on a stand-alone basis.
We
are focused on making improvements to our C30, C65, and C200 products to be compliant with the new low and medium voltage grid inter-connect requirements in Europe for decentralized
power generation. These improvements require hardware and software changes to our power inverters to allow power that can be fed into the grid smoothly and efficiently. In addition, we continue to
work cost reduction activities to improve the direct material costs of our microturbine products. Current cost reduction activities are focused on leveraging the capabilities of our supply base
through identification of value added suppliers, working with existing suppliers to identify process and tooling improvements, entering into long term agreements and transitioning parts to low cost
manufacturing regions. Cross functional teams, including internal engineering resources and supplier resources, are used to drive changes with a focus on mutually beneficial long-term relationships.
In
September 2011, we received CARB certification to the 2007 Fossil Fuel Standards for our C200 ICHP microturbine power systems. This standard represents the most stringent emissions
standard worldwide set to the Best Available Control Technology ("BACT") for large central power plants. To put these emissions levels in perspective, it is challenging to measure the extremely low
levels required with today's best emissions measurement equipment. These emissions levels were achieved through scaling and optimization of Capstone existing lean premix combustion technology.
We
continue to release variants of the C200 product to provide the same features that we offer customers with our C30 and C65 microturbine products. A liquid fuel version of the C200
product has been developed with Capstone's lean premix combustion technology. This technology allows operation on various fuels by changing the injector to achieve the necessary fuel to air ratio
mixture, fuel atomization, stability, and exhaust emission levels. The control system is modified to incorporate required algorithm modifications for start/stop sequencing and load state operation.
Liquid fuel products are well suited for markets where customers do not have access to gaseous fuels but still demand the low emissions, low maintenance, and high reliability benefits offered by
Capstone's microturbine products. Capstone received the 2011 NOVA Award from the Construction Innovation Forum for its C65 Hybrid UPS Microturbine at Syracuse University's data
centerlabeled one of the greenest data centers in the world. The product utilizes Capstone's inverter electronics and controls technology to provide continuous power quality to the
customer critical load. The load inverter is connected through a central power bus to provide power from one of three available power sources including the utility grid, battery storage system, or
microturbine generator. Power to the critical load is
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synchronized
to an available utility grid to allow direct bypass of the critical load to the utility grid. This redundant functionality is provided in a single integrated package that can be scaled to
a larger seamless power unit through Capstone's multipack feature. These units can also be combined with a heat recovery module or an absorption chiller to provide higher total output efficiency.
Unlike current
UPS products combined with reciprocating engines for backup, the low emissions of the Capstone Hybrid UPS product allow for continuous operation year round allowing customers the ability to receive a
payback on their capital equipment investment. In November 2012, we received UL certification for our C65 Hybrid UPS microturbine system as meeting the UL 2200 stationary engine generator standards
and the UL 1741 utility interconnection requirements.
We
are continuing to work on product improvements to our C30 and C65 microturbine products targeted at the hybrid electric bus and truck market. Because of Capstone's single moving
assembly, manufacturers believe there is also the opportunity to produce a lower cost product in larger automotive volumes. Our current focus is on a next generation product that would include
existing components and a liquid-cooled set of electronics that are consistent with the size, cost and cooling strategies employed on vehicles today. During the 2011 Hybrid Truck User's Forum in
Baltimore Maryland, it was announced that both Kenworth Truck Company and Peterbilt Motors Company are working with Capstone to demonstrate Class 7 and Class 8 microturbine range
extended series hybrid trucks. Both vehicles are concept trucks intended to quantify the performance, efficiency, and economic benefits of a microturbine-based series hybrid solution. Future
development efforts will be based on the lessons learned from these programs. In the meantime, Capstone has other hybrid vehicle customers that will benefit from continued development of this
technology.
The
C65 Liquid Fuel microturbine demonstrated emissions levels which meet the CARB 2010 standards for Heavy Duty Diesel Engines. These requirements are met using test procedures which
evaluate emissions performance through start/stop and load transient cycles. Capstone is able to meet these extremely low emissions requirements using its lean premix combustion technology with no
aftertreatment. Competitive reciprocating engine technologies require aftertreatment components that increase system cost, require frequent maintenance, and impact engine efficiency. The C30 Liquid
Fuel microturbine met these requirements in March 2009. In August 2011, we announced configurations of the C30 and C65 compressed natural gas ("CNG") fueled microturbines that meet extremely low
emission standards, including the U.S. Environmental Protection Agency and CARB 2010 emissions requirements for On-Road Heavy Duty Diesel Engines for Urban Bus. Test emissions from both the C30 and
C65 Natural Gas microturbines measured dramatically less than the emissions levels set forth by the CARB standard including NOx at 75% and CO at 96% less than the required levels. We believe that
future products will require the implementation of On Board Diagnostic controls to gain certification through the CARB.
Capstone
is working with the Department of Energy ("DOE") on two next generation technology roadmap programs, including a High Efficiency Microturbine with integral heat recovery and
advanced AFA (Alumina Forming Austenitic) stainless steel material program in partnership with Oak Ridge National Laboratory (ORNL). The High Efficiency Microturbine with integral heat recovery is
focused on improving microturbine electrical efficiency and overall system efficiency utilizing heat recovery. AFA stainless steel is a material that offers superior oxidation and creep resistance to
commercial heat-resistant steel alloys used in Capstone microturbines at a significantly reduced cost. We are currently focusing efforts on the development of the C370 Dual Spool High Efficiency
Microturbine with integral heat recovery system. In March 2013, Capstone successfully completed proof-of-concept testing of the low pressure spool also known as the C250 that produced 270 kW as part
of the first phase of development to increase power and electrical efficiency. This accomplishment allowed Capstone to successfully achieve Phase Gate 2 requirements of the DOE contract and proceed
with high pressure spool development. Capstone also increased the power capability of the power electronics and electrical system required to support this higher power generator. The second phase of
the
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program,
which has now begun, is expected to incorporate further engine efficiency improvements, resulting in a product with a projected electrical efficiency of 42% and targeted power output of
370 kW. Improvements in efficiency are key to all markets as improved fuel efficiency benefits users through lower operating costs. We expect to commercialize these products into the C200/C1000
product family upon successful project completion and acceptable technical readiness level.
Protecting our Intellectual Property Rights and Patents
We rely on a combination of patent, trade secret, copyright and trademark law and nondisclosure agreements to establish and protect our
intellectual property rights in our products. In this regard, we have obtained 105 U.S. and 37 international patents (in certain cases covering the same technology in multiple jurisdictions). The
patents we have obtained will expire between 2014 and 2027.
Management
believes that a policy of protecting intellectual property is an important component of our strategy of being the leader in microturbine system technology and will provide us
with a long-term competitive advantage. In addition, we implement security procedures at our plants and facilities and have confidentiality agreements with our suppliers, distributors, employees and
certain visitors to our facilities.
Organization and Employees
We were organized in 1988. On June 22, 2000, we reincorporated as a Delaware corporation.
As
of March 31, 2014, we had 225 employees. No employees are covered by collective bargaining arrangements. We consider relations with our employees to be good.
Available Information
This Form 10-K, as well as our quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") are made available free of charge on the Company's Internet
website (http://www.capstoneturbine.com) as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission ("SEC").
Item 1A. Risk Factors.
This document contains certain forward-looking statements (as such term is defined in Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange Act) pertaining to, among other
things,
-
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our results of
operations;
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profits and losses;
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R&D activities;
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sales expectations;
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our ability to develop markets for our products;
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sources for parts;
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federal, state and local government regulations;
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general business;
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industry and economic conditions applicable to us;
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the efficiency, reliability and environmental advantages of our products and their need for
maintenance;
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our ability to be cost-competitive and to outperform
competition;
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customer satisfaction;
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the value of using our products;
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our ability to achieve economies of scale;
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market advantage;
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return on investments;
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issues with suppliers;
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anticipation of product supply requirements;
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listing requirements;
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our microturbine
technology;
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the utilization of our
products;
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competition;
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the introduction of new technologies;
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our production
capacity;
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protection of intellectual property;
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the adequacy of our
facilities;
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dividends;
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business strategy;
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product development;
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capital resources;
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capital expenditures;
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liquidity;
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amortization expense of intangibles;
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cost of warranties;
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stock-based
compensation;
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our stockholders rights
plan;
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purchase and lease commitments;
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current liabilities;
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recently issued accounting standards;
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market risk;
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interest rate sensitivity;
and
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growth of the shale gas market.
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These statements are based largely on our current expectations, estimates and forecasts and are subject to a number of risks and uncertainties. Actual results
could differ materially from those anticipated by these forward-looking statements. Factors that can cause actual results to differ materially include, but are not limited to, those discussed below.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The following factors should be considered in addition to the other
information contained herein in evaluating Capstone and its business. We assume no obligation to update any of the forward-looking statements after the filing of this Annual Report to conform such
statements to actual results or to changes in our expectations, except as may be required by law.
The following are risk factors that could affect our business, financial condition, results of operations, and cash flows. These risk factors should be considered
in connection with evaluating the forward-looking statements contained in this Annual Report because these factors could cause actual results and conditions to differ materially from those projected
in forward-looking statements. Before you invest in our publicly traded securities, you should know that making such an investment involves some risks, including the risks described below. Additional
risks of which we may not be aware or that we currently believe are immaterial may also impair our business operations or our stock price. If any of the risks actually occur, our business, financial
condition, results of operations or cash flow could be negatively affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. In
assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Annual Report, our quarterly reports on Form 10-Q and other documents
filed by us from time to time.
Our operating history is characterized by net losses. We anticipate further losses and we may never become profitable.
Since inception, we have incurred annual operating losses. We expect this trend to continue until such time that we can sell a
sufficient number of units and achieve a cost structure to become profitable. Our business is such that we have relatively few customers and limited repeat business. As a result, we may not maintain
or increase revenue. We may not have adequate cash resources to reach the point of profitability, and we may never become profitable. Even if we do achieve profitability, we may be unable to increase
our sales and sustain or increase our profitability in the future.
We may be unable to fund our future operating requirements, which could force us to curtail our operations.
To the extent that the funds we now have on hand are insufficient to fund our future operating requirements, we would need to raise
additional funds, through further public or private equity or debt financings depending upon prevailing market conditions. These financings may not be available or, if available, may be on terms that
are not favorable to us and could result in dilution to our stockholders and reduction of the trading price of our stock. The state of worldwide capital markets could also impede our ability to raise
additional capital on favorable terms or at all. If adequate capital were not available to us, we likely would be required to significantly curtail our operations or possibly even cease our
operations.
We
maintain two Credit and Security Agreements (the "Agreements"), with Wells Fargo Bank, National Association, ("Wells Fargo"), that provide us with a credit facility up to
$15.0 million in the aggregate. At March 31, 2014, we had $13.2 million outstanding under this line of credit. Under this credit facility, we are required to satisfy specified
financial and restrictive covenants. Failure to comply with these covenants could cause an event of default which, if not cured or waived, could require us to repay
substantial indebtedness immediately or allow Wells Fargo to terminate the credit facility. In addition, we have pledged our accounts receivable, inventories, equipment, patents and other assets as
collateral under the Agreements which would be subject to seizure by Wells Fargo if we were in default and unable to repay the indebtedness.
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Several
times since entering into the Agreements, we have not been in compliance with certain covenants under the Agreements. In connection with each event of noncompliance, Wells Fargo
waived the event of default and, on several occasions, we amended the Agreements in response to the default. As of March 31, 2014, we were not in compliance with the annual net income financial
covenant contained in the Agreements, as amended. On April 25, 2014, we received from Wells Fargo a waiver of such noncompliance. If we had not obtained the default waivers, or if we are ever
again in noncompliance, we would not be able to draw additional funds under the credit facility. The Agreement also defines an event of default to include a material adverse effect on our business, as
determined by Wells Fargo. An event of default for this or any other reason, if not waived, would have a material adverse effect on the Company.
Our
obligations under the credit facility could have important consequences, including the following:
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We may have difficulty obtaining additional financing at favorable interest rates to meet our requirements for operations,
capital expenditures, general corporate or other purposes.
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We will be required to dedicate a substantial portion of our cash flow to the payment of principal and interest on
indebtedness, which will reduce the amount of funds available for operations, capital expenditures and future acquisitions.
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We may be required to repay our indebtedness immediately if we default on any of the numerous financial or other
restrictive covenants contained in the Agreements. It is not certain whether we will have, or will be able to obtain, sufficient funds to make these accelerated payments. If any outstanding
indebtedness under the credit facility is accelerated, our assets may not be sufficient to repay such indebtedness.
For
more information, see the section below entitled "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources."
If we are unable to either substantially improve our operating results or obtain additional financing, we may be unable to continue as a going concern.
Should we be unable to execute our plans to build sales and margins while controlling costs, we may be unable to continue as a going
concern on a longer term basis. In particular, we must generate positive cash flow from operations and net income and otherwise improve our results of operations substantially on a longer term basis.
Our available cash and proceeds from future financings, if any, that we may be able to obtain, may not be sufficient to fund our operating expenses, capital expenditures and other cash requirements.
Any such lack of funds would affect our ability to continue as a going concern. These events and circumstances could have a material adverse effect on our ability to raise additional capital and on
the market value of our common stock and our ability to maintain a credit facility acceptable to the Company. Moreover, should we experience a cash shortage that requires us to curtail or cease our
operations, or should we be unable to continue as a going concern, you could lose all or part of your investments in our securities.
Impairment charges on our long-lived assets, including intangible assets with finite lives would adversely affect our financial position and results of operations.
We evaluate the carrying value of long-lived assets, including intangible assets with finite lives, for impairment whenever events or
changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine whether impairment has occurred, we compare the undiscounted cash flows of the long-lived
asset group with its carrying value. The estimation of future cash flows requires significant estimates of factors that include future sales growth, gross margin performance, including our estimates
of reductions in our direct material costs, and reductions in operating expenses.
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If
our sales growth, gross margin performance or other estimated operating results are not achieved at or above our forecasted level, or inflation exceeds our forecast, the carrying value of our asset
group may prove to be unrecoverable and we may incur impairment charges in the future. In addition, significant and unanticipated changes in circumstances, such as significant adverse changes in
business climate, unanticipated competition, loss of key customers or changes in technology or markets, could
require a charge for impairment that can materially and adversely affect our reported net loss and our stockholders' equity.
A sustainable market for microturbines may never develop or may take longer to develop than we anticipate which would adversely affect our results of operations.
Our products represent an emerging market, and we do not know whether our targeted customers will accept our technology or will
purchase our products in sufficient quantities to allow our business to grow. To succeed, demand for our products must increase significantly in existing markets, and there must be strong demand for
products that we introduce in the future. If a sustainable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we have incurred to develop our
products, we may have further impairment of assets, and we may be unable to meet our operational expenses. The development of a sustainable market for our systems may be hindered by many factors,
including some that are out of our control. Examples include:
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consumer reluctance to try a new product;
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regulatory requirements;
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the cost competitiveness of our microturbines;
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costs associated with the installation and commissioning of our microturbines;
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maintenance and repair costs associated with our microturbines;
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the future costs and availability of fuels used by our microturbines;
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economic downturns and reduction in capital spending;
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consumer perceptions of our microturbines' safety and quality;
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the emergence of newer, more competitive technologies and products; and
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decrease in domestic and international incentives.
Our operating results are dependent, in large part, upon the successful commercialization of our products. Failure to produce our products as scheduled and budgeted would
materially and adversely affect our business and financial condition.
We cannot be certain that we will deliver ordered products in a timely manner. Any reliability or quality issues that may arise with
our products could prevent or delay scheduled deliveries or adversely impact the performance of our products. Any such delays or costs could significantly impact our business, financial condition and
operating results.
We may not be able to produce our products on a timely basis if we fail to correctly anticipate product supply requirements or if we suffer delays in production resulting
from issues with our suppliers. Our suppliers may not supply us with a sufficient amount of components or components of adequate quality, or they may provide components at significantly increased
prices.
Some of our components are currently available only from a single source or limited sources. We may experience delays in production if
we fail to identify alternative suppliers,
or if any parts supply is interrupted, each of which could materially adversely affect our business and operations. In order to
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reduce
manufacturing lead times and ensure adequate component supply, we enter into agreements with certain suppliers that allow them to procure inventories based upon criteria defined by us. If we
fail to anticipate customer demand properly, an oversupply of parts could result in excess or obsolete inventories, which could adversely affect our business. Additionally, if we fail to correctly
anticipate our internal supply requirements, an undersupply of parts could limit our production capacity. Our inability to meet volume commitments with suppliers could affect the availability or
pricing of our parts and components. A reduction or interruption in supply, a significant increase in price of one or more components or a decrease in demand of products could materially adversely
affect our business and operations and could materially damage our customer relationships. Financial problems of suppliers on whom we rely could limit our supply of components or increase our costs.
Also, we cannot guarantee that any of the parts or components that we purchase will be of adequate quality or that the prices we pay for the parts or components will not increase. Inadequate quality
of products from suppliers could interrupt our ability to supply quality products to our customers in a timely manner. Additionally, defects in materials or products supplied by our suppliers that are
not identified before our products are placed in service by our customers could result in higher warranty costs and damage to our reputation. We also outsource certain of our components
internationally and expect to increase international outsourcing of components. As a result of outsourcing internationally, we may be subject to delays in delivery because of regulations associated
with the import/export process, delays in transportation or regional instability.
We may not be able to effectively manage our growth, expand our production capabilities or improve our operational, financial and management information systems, which would
impair our results of operations.
If we are successful in executing our business plan, we will experience growth in our business that could place a significant strain on
our business operations, management and other resources. Our ability to manage our growth will require us to expand our production capabilities, continue to improve our operational, financial and
management information systems, and to motivate and effectively manage our employees. We cannot provide assurance that our systems, procedures and controls or financial resources will be adequate, or
that our management will keep pace with this growth. We cannot provide assurance that our management will be able to manage this growth effectively.
Adverse economic conditions may have an impact on our business and financial condition, including some effects we may not be able to predict.
Adverse economic conditions may prevent our customers from purchasing our products or delay their purchases, which would adversely
affect our business, financial condition and results of operations. In addition, our ability to access the capital markets may be severely restricted or made very expensive at a time when we need, or
would like, to do so, which could have a material adverse impact on our liquidity and financial resources. Certain industries in which our customers do business and certain geographic areas have been
and could continue to be adversely affected by the continued recession in economic activity.
Product quality expectations may not be met, causing slower market acceptance or warranty cost exposure.
In order to achieve our goal of improving the quality and lowering the total costs of ownership of our products, we may require
engineering changes. Such improvement initiatives may render existing inventories obsolete or excessive. Despite our continuous quality improvement initiatives, we may not meet customer expectations.
Any significant quality issues with our products could have a material adverse effect on our rate of product adoption, results of operations, financial condition and cash flow. Moreover, as we develop
new configurations for our microturbines and as our customers place existing configurations in commercial use, our products may perform below expectations. Any significant performance below
expectations could adversely affect our operating results, financial condition and cash flow and affect the marketability of our products.
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We sell our products with warranties. There can be no assurance that the provision for estimated product warranty will be sufficient to cover our warranty
expenses in the future. We cannot ensure that our efforts to reduce our risk through warranty disclaimers will effectively limit our liability. Any significant incurrence of warranty expense in excess
of estimates could have a material adverse effect on our operating results, financial condition and cash flow. Further, we have at times undertaken programs to enhance the performance of units
previously sold. These enhancements have at times been provided at no cost or below our cost. If we choose to offer such programs again in the future, such actions could result in significant costs.
We operate in a highly competitive market among competitors who have significantly greater resources than we have and we may not be able to compete effectively.
Capstone microturbines compete with several technologies, including reciprocating engines, fuel cells and solar power. Competing
technologies may receive certain benefits, like governmental subsidies or promotion, or be able to offer consumer rebates or other incentives that we cannot receive or offer to the same extent. This
could enhance our competitors' abilities to fund research, penetrate markets or increase sales. We also compete with other manufacturers of microturbines.
Our
competitors include several well-known companies with histories of providing power solutions. They have substantially greater resources than we do and have established worldwide
presence. Because of greater resources, some of our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, to devote greater resources to
the promotion and sale of their products than we can or lobby for governmental regulations and policies to create competitive advantages vis-à-vis our products. We believe that
developing and maintaining a competitive advantage will require continued investment by us in product development and quality, as well as attention to product performance, our product prices, our
conformance to industry standards, manufacturing capability and sales and marketing. In addition, current and potential competitors have established or may in the future establish collaborative
relationships among themselves or with third parties, including third parties with whom we have business relationships. Accordingly, new competitors or alliances may emerge and rapidly acquire
significant market share.
Overall,
the market for our products is highly competitive and is changing rapidly. We believe that the primary competitive factors affecting the market for our products, including some
that are outside of our control, include:
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name recognition, historical performance and market power of our competitors;
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product quality and performance;
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operating efficiency;
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product price;
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availability, price and compatibility of fuel;
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development of new products and features; and
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emissions levels.
There
is no assurance that we will be able to successfully compete against either current or potential competitors or that competition will not have a material adverse effect on our
business, operating results, financial condition and cash flow.
If we do not effectively implement our sales, marketing and service plans, our sales will not grow and our results of operations will suffer.
Our sales and marketing efforts may not achieve intended results and, therefore, may not generate the revenue we anticipate. As a
result of our corporate strategies, we have decided to focus our
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resources
on selected vertical markets. We may change our focus to other markets or applications in the future. There can be no assurance that our focus or our near term plans will be successful. If
we are not able to address markets for our products successfully, we may not be able to grow our business, compete effectively or achieve profitability.
Our sales and results of operations could be materially and adversely impacted by risks inherent in international markets.
As we expand in international markets, customers may have difficulty or be unable to integrate our products into their existing systems
or may have difficulty complying with foreign regulatory and commercial requirements. As a result, our products may require redesign. Any redesign of the product may delay sales or cause quality
issues. In addition, we may be subject to a variety of other risks associated with international business, including import/export restrictions, fluctuations in currency exchange rates and global
economic or political instability. Two of our top distributors are located in Russia and Belgium, and therefore we are particularly susceptible to risks associated with doing business in these two
countries.
The current geopolitical instability in Russia and Ukraine and related sanctions by the U.S. government against certain companies and individuals may hinder our ability to
conduct business with potential or existing customers and vendors in these countries.
We derived approximately 17% and 11% of our revenue from Russia during Fiscal 2014 and Fiscal 2013, respectively. The continuation or
escalation of the current geopolitical instability in Russia and Ukraine could negatively impact our operations, sales, and future growth prospects in that region. Recently, the U.S. government
imposed sanctions through several executive orders restricting U.S. companies from conducting business with specified Russian and Ukrainian individuals and companies. While we believe that the
executive orders currently do not preclude us from conducting business with our current customers in Russia, the sanctions imposed by the U.S. government may be expanded in the future to restrict us
from engaging with them. If we are unable to conduct business with new or existing customers or pursue opportunities in Russia or Ukraine, our business, including revenue, profitability and cash
flows, could be materially adversely affected. In addition, we are currently evaluating the impact of the executive orders on our relationships with vendors. If we are unable to conduct business with
certain vendors, our operations in Russia and the Ukraine could be materially adversely affected.
We have identified a material weakness in our internal controls over financial reporting which existed as of March 31, 2014. If we fail to properly remediate this or
any future weaknesses or fail to maintain effective internal controls, there will be an adverse impact on our operations or the market price of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual reports on Form 10-K
our assessment of the effectiveness of our internal controls over financial reporting. As of March 31, 2014, a material weakness was detected which related to our risk assessment process. There
can be no assurance that we will be able to implement fully our plan and controls to address this material weakness or that the plan and controls, if implemented, will be successful in remediating
this material weakness. In addition, we may in the future identify further material weaknesses in our internal controls over financial reporting that we have not discovered to date. If we cannot
adequately maintain the effectiveness of our internal controls over financial reporting, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action
could adversely affect our financial results and the market price of our securities.
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We may not be able to retain or develop relationships with OEMs or distributors in our targeted markets, in which case our sales would not increase as expected.
In order to serve certain of our targeted markets, we believe that we must ally ourselves with companies that have particular expertise
or better access to those markets. We believe that retaining or developing relationships with strong OEMs (which to date have typically resold our products under their own brands or packaged
our products with other products as part of an integrated unit) or distributors in these targeted markets can improve the rate of adoption as well as reduce the direct financial burden of introducing
a new technology and creating a new market. Because of OEMs' and distributors' relationships in their respective markets, the loss of an OEM or distributor could adversely impact the ability to
penetrate our target markets. We offer our OEMs and distributors stated discounts from list price for the products they purchase. In the future, to attract and retain OEMs and
distributors we may provide volume price discounts or otherwise incur significant costs that may reduce the potential revenues from these relationships. We may not be able to retain or develop
appropriate OEMs and distributors on a timely basis, and we cannot provide assurance that the OEMs and distributors will focus adequate resources on selling our products or will be
successful in selling them. In addition, some of the relationships may require that we grant exclusive distribution rights in defined territories. These exclusive distribution arrangements could
result in our being unable to enter into other arrangements at a time when the OEM or distributor with whom we form a relationship is not successful in selling our products or has reduced its
commitment to market our products. We cannot provide assurance that we will be able to negotiate collaborative relationships on favorable terms or at all. Our inability to have appropriate
distribution in our target markets may adversely affect our financial condition, results of operations and cash flow.
Activities necessary to integrate any future acquisitions may result in costs in excess of current expectations or be less successful than anticipated.
During Fiscal 2010, we completed the acquisition of certain assets relating to the microturbine business of CPS, and we may acquire
other businesses in the future. The success of these transactions will depend on, among other things, our ability to develop productive relationships with the corresponding distributors and to
integrate assets and personnel, if any, acquired in these transactions and to apply our internal controls processes to these acquired businesses. The integration of any acquired businesses or
significant assets may require significant attention from our management, and the diversion of management's attention and resources could have a material adverse effect on our ability to manage our
business. Furthermore, we may not realize the degree or timing of benefits we anticipated when we first enter into these transactions. If actual integration costs are higher than amounts assumed, if
we are unable to integrate the assets and personnel acquired in an acquisition as anticipated, or if we are unable to fully benefit from anticipated synergies, our business, financial condition,
results of operations, and cash flows could be materially adversely affected.
We have substantial accounts receivable, and increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on our cash flows
and results of operations.
Our accounts receivable balance, net of allowances, was $28.0 million and $17.9 million as of March 31, 2014 and
March 31, 2013, respectively. Days sales outstanding in accounts receivable (DSO) at the end of Fiscal 2014 was 70 days, compared with 46 days at the end of Fiscal 2013. We
recorded bad debt expense of $0.2 million and $0.3 million during Fiscal 2014 and Fiscal 2013, respectively. No assurances can be given that future bad debt expense will not increase
above current operating levels. Increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on cash flows and results of operations.
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Loss of a significant customer could have a material adverse effect on our results of operations.
E-Finity, BPC and Horizon accounted for approximately 19%, 17% and 12%, respectively, of our revenue for Fiscal 2014. Additionally, BPC
and E-Finity accounted for 26% and 16%, respectively, of net accounts receivable as of March 31, 2014. The loss of E-Finity, Horizon, BPC or any other significant customers could adversely
affect our results of operations.
We may not be able to develop sufficiently trained applications engineering, installation and service support to serve our targeted markets.
Our ability to identify and develop business relationships with companies who can provide quality, cost-effective application
engineering, installation and service can significantly affect our success. The application engineering and proper installation of our microturbines, as well as proper maintenance and service, are
critical to the performance of the units. Additionally, we need to reduce the total installed cost of our microturbines to enhance market opportunities. Our inability to improve the quality of
applications, installation and service while reducing associated costs could affect the marketability of our products.
Changes in our product components may require us to replace parts held at distributors.
We have entered into agreements with some of our distributors requiring that if we render parts obsolete in inventories they own and
hold in support of their obligations to serve fielded microturbines, we are required to replace the affected stock at no cost to the distributors. It is possible that future changes in our product
technology could involve costs that have a material adverse effect on our results of operations, cash flow or financial position.
We operate in a highly regulated business environment, and changes in regulation could impose significant costs on us or make our products less economical, thereby affecting
demand for our microturbines.
Our products are subject to federal, state, local and foreign laws and regulations, governing, among other things, emissions and
occupational health and safety. Regulatory agencies may impose special requirements for the implementation and operation of our products or that may significantly affect or even eliminate some of our
target markets. We may incur material costs or liabilities in complying with government regulations. In addition, potentially significant expenditures could be required in order to comply with
evolving environmental and health and safety laws, regulations and requirements that may be adopted or imposed in the future. Furthermore, our potential utility customers must comply with numerous
laws and regulations. The deregulation of the utility industry may also create challenges for our marketing efforts. For example, as part of electric utility deregulation, federal, state and local
governmental authorities may impose transitional charges or exit fees, which would make it less economical for some potential customers to switch to our products. We can provide no assurances that we
will be able to obtain these approvals and changes in a timely manner, or at all. Non-compliance with applicable regulations could have a material adverse effect on our operating results.
The
market for electricity and generation products is heavily influenced by federal and state government regulations and policies. The deregulation and restructuring of the electric
industry in the United States and elsewhere may cause rule changes that may reduce or eliminate some of the advantages of such deregulation and restructuring. We cannot determine how any deregulation
or restructuring of the electric utility industry may ultimately affect the market for our microturbines. Changes in regulatory standards or policies could reduce the level of investment in the
research and development of alternative power sources, including microturbines. Any reduction or termination of such programs could increase the cost to our potential customers, making our systems
less desirable, and thereby adversely affect our revenue and other operating results.
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Utility companies or governmental entities could place barriers to our entry into the marketplace, and we may not be able to effectively sell our products.
Utility companies or governmental entities could place barriers on the installation of our products or the interconnection of the
products with the electric grid. Further, they may charge additional fees to customers who install on-site generation or have the capacity to use power from the grid for back-up or standby purposes.
These types of restrictions, fees or charges could hamper the ability to install or effectively use our products or increase the cost to our potential customers for using our systems. This could make
our systems less desirable, thereby adversely affecting our revenue and other operating results. In addition, utility rate reductions can make our products less competitive which would have a material
adverse effect on our operations. The cost of electric power generation bears a close relationship to natural gas and other fuels. However, changes to electric utility tariffs often require lengthy
regulatory approval and include a mix of fuel types as well as customer categories. Potential customers may perceive the resulting swings in natural gas and electric pricing as an increased risk of
investing in on-site generation.
We depend upon the development of new products and enhancements of existing products.
Our operating results depend on our ability to develop and introduce new products, enhance existing products and reduce the costs to
produce our products. The success of our products is dependent on several factors, including proper product definition, product cost, timely completion and introduction of the products,
differentiation of products from those of our competitors, meeting changing customer requirements, emerging industry standards and market acceptance of these products. The development of new,
technologically advanced products and enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends.
There can be no assurance that we will successfully identify new product opportunities, develop and bring new or enhanced products to market in a timely manner, successfully lower costs and achieve
market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
Operational restructuring may result in asset impairment or other unanticipated charges.
As a result of our corporate strategy, we have identified opportunities to outsource to third-party suppliers certain functions which
we currently perform. We believe outsourcing can reduce product costs, improve product quality and increase operating efficiency. These actions may not yield the expected results, and outsourcing may
result in production delays or lower quality products. Transitioning to outsourcing may cause certain of our affected employees to leave before the outsourcing is complete. This could result in a lack
of the experienced in-house talent necessary to successfully implement the outsourcing. Further, depending on the nature of operations outsourced and the structure of agreements we reach with
suppliers to perform these functions, we may experience impairment in the value of manufacturing assets related to the outsourced functions or other unanticipated charges, which could have a material
adverse effect on our operating results.
We may not achieve production cost reductions necessary to competitively price our products, which would adversely affect our sales.
We believe that we will need to reduce the unit production cost of our products over time to maintain our ability to offer
competitively priced products. Our ability to achieve cost reductions will depend on our ability to develop low cost design enhancements, to obtain necessary tooling and favorable supplier contracts
and to increase sales volumes so we can achieve economies of scale. We cannot provide assurance that we will be able to achieve any such production cost reductions. Our
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failure
to achieve such cost reductions could have a material adverse effect on our business and results of operations.
Commodity market factors impact our costs and availability of materials.
Our products contain a number of commodity materials from metals, which include steel, special high temperature alloys, copper, nickel
and molybdenum, to computer components. The availability of these commodities could impact our ability to acquire the materials necessary to meet our production requirements. The cost of metals has
historically fluctuated. The
pricing could impact the costs to manufacture our products. If we are not able to acquire commodity materials at prices and on terms satisfactory to us or at all, our operating results may be
materially adversely affected.
Our products involve a lengthy sales cycle and we may not anticipate sales levels appropriately, which could impair our results of operations.
The sale of our products typically involves a significant commitment of capital by customers, with the attendant delays frequently
associated with large capital expenditures. For these and other reasons, the sales cycle associated with our products is typically lengthy and subject to a number of significant risks over which we
have little or no control. We expect to plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If sales
in any period fall significantly below anticipated levels, our financial condition, results of operations and cash flow would suffer. If demand in any period increases well above anticipated levels,
we may have difficulties in responding, incur greater costs to respond, or be unable to fulfill the demand in sufficient time to retain the order, which would negatively impact our operations. In
addition, our operating expenses are based on anticipated sales levels, and a high percentage of our expenses are generally fixed in the short term. As a result of these factors, a small fluctuation
in timing of sales can cause operating results to vary materially from period to period.
Potential litigation may adversely impact our business.
We may face litigation relating to labor matters or other matters. Any litigation could be costly, divert management attention or
result in increased cost of doing business.
Our business could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their
intellectual property rights.
We view our intellectual property rights as important assets. We seek to protect our intellectual property rights through a combination
of patent, trademark, copyright and trade secret laws, as well as licensing and confidentiality agreements. These protections may not be adequate to prevent third parties from using our intellectual
property without our authorization, breaching any confidentiality agreements with us, copying or reverse engineering our products, or developing and marketing products that are substantially
equivalent to or superior to our own. The unauthorized use of our intellectual property by others could reduce our competitive advantage and harm our business. If it became necessary for us to
litigate to protect these rights, any proceedings could be burdensome and costly and we may not prevail. We cannot guarantee that any patents, issued or pending, will provide us with any competitive
advantage or will not be challenged by third parties. Moreover, the expiration of
our patents may lead to increased competition with respect to certain products. In addition, we cannot be certain that we do not or will not infringe third parties' intellectual property rights. Any
such claim, even if it is without merit, may be expensive and time-consuming to defend, subject us to damages, cause us to cease making, using or selling certain products that incorporate the disputed
intellectual property, require us to redesign our products, divert management time and attention and/or require us to enter into costly royalty or licensing arrangements.
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Our results of operations could be materially and adversely affected by risks related to cyber security threats.
As a manufacturer of high technology commercial products, we face cyber security threats, as well as the potential for business
disruptions associated with information technology failures or cyber security attacks. We routinely experience cyber security threats, threats to our information technology infrastructure and attempts
to gain access to our sensitive information. Because of the evolving nature of these security threats, the impact of any future incident cannot be predicted. The occurrence of any of these events
could adversely affect our results of operations, the services we provide to customers, the competitive advantages derived from our R&D efforts, the usefulness of our products and services, our
reputation or our stock price.
We may incur costs and liabilities as a result of product liability claims.
We face a risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury
or other damage. Although we currently maintain product liability insurance coverage, we may not be able to obtain such insurance on
acceptable terms in the future, if at all, or obtain insurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the
attention of management and other personnel for long periods of time, regardless of the ultimate outcome. A significant unsuccessful product liability defense could have a material adverse effect on
our financial condition and results of operations. In addition, we believe our business depends on the strong brand reputation we have developed. If our reputation is damaged, we may face difficulty
in maintaining our market share and pricing with respect to some of our products, which could reduce our sales and profitability.
We have significant tax assets, usage of which may be subject to limitations in the future.
At March 31, 2014, we had federal and state net operating loss carryforwards of approximately $606.2 million and
$226.9 million, respectively, which may be utilized to reduce future taxable income, subject to limitations under Section 382 of the Internal Revenue Code of 1986. These deferred tax
assets have been fully offset by a valuation allowance. Any subsequent accumulations of common stock ownership leading to a change of control under Section 382 of the U.S. Internal Revenue Code
of 1986, including through sales of stock by large stockholders, all of which are outside of our control, could limit and defer our ability to utilize our net operating loss carryforwards to offset
future federal income tax liabilities.
Our success depends in significant part upon the continuing service of management and key employees.
Our success depends in significant part upon the continuing service of our executive officers, senior management and sales and
technical personnel. The failure of our personnel to execute our strategy or our failure to retain management and personnel could have a material adverse effect on our business. Our success will be
dependent on our continued ability to attract, retain and motivate highly skilled employees. There can be no assurance that we can do so.
Our
internal control systems rely on people trained in the execution of the controls. Loss of these people or our inability to replace them with similarly skilled and trained individuals
or new processes in a timely manner could adversely impact our internal control mechanisms.
Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control.
Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control. Our executive offices and
manufacturing facilities are located in southern California. Because the southern California area is located in an earthquake-sensitive area, we are particularly susceptible to the risk of damage to,
or total destruction of, our facilities in southern California and the surrounding transportation infrastructure, which could affect our ability to make and transport our
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products.
If an earthquake, fire or other natural disaster occurs at or near our facilities, our business, financial condition, operating results and cash flow could be materially adversely affected.
If we fail to meet all applicable Nasdaq Global Market requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market
liquidity of our common stock, impair the value of your investment and adversely affect our ability to raise needed funds.
Our common stock is listed on the Nasdaq Global Market. In order to maintain that listing, we must satisfy minimum financial and other
requirements. On December 21, 2012, we received a notice from the Nasdaq Listing Qualifications Department stating that, for the prior 30 consecutive business days, the closing bid price for
our common stock had been below the minimum $1.00 per share requirement for continued listing on the Nasdaq Global Market as set forth in Nasdaq Listing Rule 5450(a)(1). We subsequently
regained compliance with the minimum bid price requirement. However, there can be no assurance that we will be able to comply with the continued listing standards in the future.
If
we fail to meet all applicable Nasdaq Global Market requirements in the future and Nasdaq determines to delist our common stock, the delisting could adversely affect the market
liquidity of our common stock and adversely affect our ability to obtain financing for the continuation of our operations. This delisting could also impair the value of your investment.
The market price of our common stock has been and may continue to be highly volatile and you could lose all or part of your investment in our securities.
An investment in our securities is risky, and stockholders could lose their investment in our securities or suffer significant losses
and wide fluctuations in the market value of their investment. The market price of our common stock is highly volatile and is likely to continue to be highly volatile. Given the continued uncertainty
surrounding many variables that may affect our business and the industry in which we operate, our ability to foresee results for future periods is limited. This variability could affect our operating
results and thereby adversely affect our stock price. Many factors that contribute to this volatility are beyond our control and may cause the market price of our common stock to change, regardless of
our operating performance. Factors that could cause fluctuation in our stock price may include, among other things:
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actual or anticipated variations in quarterly operating results;
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market sentiment toward alternative energy stocks in general or toward Capstone;
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changes in financial estimates or recommendations by securities analysts;
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conditions or trends in our industry or the overall economy;
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loss of one or more of our significant customers;
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errors, omissions or failures by third parties in meeting commitments to us;
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changes in the market valuations or earnings of our competitors or other technology companies;
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the trading of options on our common stock;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures
or other strategic initiatives;
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announcements of significant market events, such as power outages, regulatory changes or technology changes;
-
-
changes in the estimation of the future size and growth rate of our market;
29
Table of Contents
-
-
future equity financings;
-
-
the failure to produce our products on a timely basis in accordance with customer expectations;
-
-
the inability to obtain necessary components on time and at a reasonable cost;
-
-
litigation or disputes with customers or business partners;
-
-
capital commitments;
-
-
additions or departures of key personnel;
-
-
sales or purchases of our common stock;
-
-
the trading volume of our common stock;
-
-
developments relating to litigation or governmental investigations; and
-
-
decreases in oil, natural gas and electricity prices.
In
addition, the stock market in general, and the Nasdaq Global Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of particular companies affected. The market prices of securities of technology companies and companies servicing the
technology industries have been particularly volatile. These broad market and industry factors may cause a material decline in the market price of our common stock, regardless of our operating
performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against that company. This type of
litigation, regardless of whether we prevail on the underlying claim, could result in substantial costs and a diversion of management's attention and resources, which could materially harm our
financial condition, results of operations and cash flow.
Provisions in our certificate of incorporation, bylaws and our stockholder rights plan, as well as Delaware law, may discourage, delay or prevent a merger or acquisition at
a premium price.
Provisions of our second amended and restated certificate of incorporation, amended and restated bylaws and our stockholder rights
plan, as well as provisions of the General Corporation Law of the State of Delaware, could discourage, delay or prevent unsolicited proposals to merge with or acquire us, even though such proposals
may be at a premium price or otherwise beneficial to you. These provisions include our board's authorization to issue shares of preferred stock, on terms the board determines in its discretion,
without stockholder approval, and the following provisions of Delaware law that restrict many business combinations.
We
are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which could prevent us from engaging in a business combination with a 15%
or greater stockholder for a period of three years from the date such stockholder acquired such status unless appropriate board or stockholder approvals are obtained.
Our
board of directors has adopted a stockholder rights plan, pursuant to which one preferred stock purchase right has been issued for each share of our common stock authorized and
outstanding. Until the occurrence of certain prescribed events, the rights are not exercisable and are transferable along with, and only with, each share of our common stock and are evidenced by the
common stock certificates. One preferred stock purchase right will also be issued with each share of our common stock we issue in the future until the rights plan expires or is terminated or we redeem
or exchange the rights for other property in accordance with the terms of the rights plan or at such time, if any, as the rights separate from each share of our common stock and become exercisable.
Each share of Series A Junior Participating Preferred Stock will be entitled to receive, when, as and if declared by our board
30
Table of Contents
of
directors out of funds legally available for the purpose, dividends payable in cash in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate per share amount of all
dividends or other distributions, including non-cash dividends (payable in kind), declared on our common stock other than a dividend payable in shares of common stock or a subdivision of the
outstanding shares of common stock. The rights plan prohibits the issuance of additional rights after the rights separate from our common stock. The rights plan is intended to protect our stockholders
in the event of an unfair or coercive offer to acquire us. However, the existence of the rights plan may discourage, delay or prevent a merger or acquisition of us that is not supported by our board
of directors.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal corporate offices, administrative, sales and marketing, R&D and support facilities consist of approximately 98,000 square
feet of leased office space, warehouse space and assembly and test space located at 21211 Nordhoff Street in Chatsworth, California. Our lease for those premises expires in July 2014, and we have two
five-year options to extend the term of this lease. We also lease an approximately 79,000 square foot facility at 16640 Stagg Street in Van Nuys, California as an engineering test and manufacturing
facility for our recuperator cores. This lease will expire in December 2017. Management believes our facilities are adequate for our current needs.
Item 3. Legal Proceedings.
From time to time, the Company may become subject to certain legal proceedings, claims and litigation arising in the ordinary course of
business. In the opinion of management, we are not a party to any other material legal proceedings, nor are we aware of any other pending or threatened litigation that would have a material effect on
our business, operating results, cash flows, financial position or results of operations should such litigation be resolved unfavorably.
Item 4. Mine Safety Disclosures.
Not applicable.
31
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(16,256
|
)
|
$
|
(22,563
|
)
|
$
|
(18,764
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,323
|
|
|
2,820
|
|
|
3,404
|
|
Amortization of deferred financing costs
|
|
|
223
|
|
|
148
|
|
|
169
|
|
Accounts receivable allowances
|
|
|
242
|
|
|
276
|
|
|
2,256
|
|
Inventory provision
|
|
|
1,509
|
|
|
1,307
|
|
|
1,525
|
|
Provision for warranty expenses
|
|
|
3,903
|
|
|
5,129
|
|
|
4,227
|
|
Loss on disposal of equipment
|
|
|
225
|
|
|
41
|
|
|
3
|
|
Stock-based compensation
|
|
|
2,147
|
|
|
1,601
|
|
|
1,652
|
|
Change in fair value of warrant liability
|
|
|
(10
|
)
|
|
(781
|
)
|
|
(13,983
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(10,320
|
)
|
|
359
|
|
|
(1,503
|
)
|
Inventories
|
|
|
(784
|
)
|
|
(2,878
|
)
|
|
(998
|
)
|
Prepaid expenses and other current assets
|
|
|
470
|
|
|
587
|
|
|
(220
|
)
|
Accounts payable and accrued expenses
|
|
|
4,475
|
|
|
1,221
|
|
|
2,660
|
|
Accrued salaries and wages and long term liabilities
|
|
|
90
|
|
|
(107
|
)
|
|
106
|
|
Accrued warranty reserve
|
|
|
(3,237
|
)
|
|
(4,324
|
)
|
|
(3,814
|
)
|
Deferred revenue
|
|
|
(432
|
)
|
|
94
|
|
|
1,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(15,432
|
)
|
|
(17,070
|
)
|
|
(21,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment
|
|
|
(1,179
|
)
|
|
(1,213
|
)
|
|
(1,419
|
)
|
Changes in restricted cash
|
|
|
|
|
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,179
|
)
|
|
(1,213
|
)
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Net (repayments of) proceeds from revolving credit facility
|
|
|
(248
|
)
|
|
3,045
|
|
|
3,351
|
|
Repayment of notes payable and capital lease obligations
|
|
|
(415
|
)
|
|
(128
|
)
|
|
(499
|
)
|
Net proceeds from (cash used in) employee stock-based transactions
|
|
|
362
|
|
|
(19
|
)
|
|
702
|
|
Net proceeds from issuance of common stock and warrants
|
|
|
|
|
|
|
|
|
23,146
|
|
Proceeds from exercise of common stock warrants and put options
|
|
|
5,954
|
|
|
4,250
|
|
|
11,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,653
|
|
|
7,148
|
|
|
38,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in Cash and Cash Equivalents
|
|
|
(10,958
|
)
|
|
(11,135
|
)
|
|
16,496
|
|
Cash and Cash Equivalents, Beginning of Year
|
|
|
38,817
|
|
|
49,952
|
|
|
33,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Year
|
|
$
|
27,859
|
|
$
|
38,817
|
|
$
|
49,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
506
|
|
$
|
588
|
|
$
|
672
|
|
Income taxes
|
|
$
|
246
|
|
$
|
635
|
|
$
|
204
|
|
Cash received during the period for income tax refund
|
|
$
|
|
|
$
|
|
|
$
|
127
|
|
Supplemental Disclosures of Non-Cash Information:
|
|
During the years ended March 31, 2014, 2013 and 2012, the Company incurred $491 thousand, $476 thousand and $635 thousand,
respectively, in connection with the renewal of insurance contracts, which was financed by notes payable.
|
|
Included in accounts payable at March 31, 2014, 2013 and 2012 is $7 thousand, $26 thousand, and $187 thousand of accrued purchases of
property and equipment, respectively.
|
|
During the year ended March 31, 2014 and 2013, the Company purchased fixed assets in consideration for the issuance of a note payable of
$158 thousand and $306 thousand, respectively. There were no fixed assets purchased with a note payable during the year ended March 31, 2012.
|
|
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Basis of Presentation
Capstone Turbine Corporation (the "Company") develops, manufactures, markets and services microturbine technology solutions for use in stationary distributed power generation
applications, including cogeneration (combined heat and power ("CHP"), integrated combined heat and power ("ICHP"), and combined cooling, heat and power ("CCHP")), renewable energy, natural resources
and critical power supply. In addition, the Company's microturbines can be used as battery charging generators for hybrid electric vehicle applications. The Company was organized in 1988 and has been
commercially producing its microturbine generators since 1998.
The
Company has incurred significant operating losses since its inception. Management anticipates incurring additional losses until the Company can produce sufficient revenue to cover
its operating costs. To date, the Company has funded its activities primarily through private and public equity offerings. This Annual Report on Form 10-K (this "Form 10-K") refers to
the Company's fiscal years ending March 31 as its "Fiscal" years.
The
consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company's net loss from operations for the Fiscal years ended 2014, 2013 and 2012 was $15.3 million, $22.0 million and
$31.7 million, respectively. Management believes the Company's net loss will continue to decrease as the Company makes overall progress on its path to profitability. The Company's cash and cash
equivalents as of March 31, 2014 and 2013 were $27.9 million and $38.8 million, respectively.
Management
believes that existing cash and cash equivalents are sufficient to meet the Company's anticipated cash needs for working capital and capital expenditures for at least the next
twelve months; however, if our anticipated cash needs change, it is possible that the Company may need to raise additional capital in the future. The Company may seek to raise funds by selling
additional securities to the public or to selected investors or by obtaining additional debt financing. There is no assurance that the Company will be able to obtain additional funds on commercially
favorable terms, or at all. If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be
reduced. In addition, any equity or debt securities that the Company would issue may have rights, preferences or privileges senior to those of the holders of its common stock.
The
consolidated financial statements include the accounts of the Company, Capstone Turbine International, Inc., its wholly owned subsidiary that was formed in June 2004, and
Capstone Turbine Singapore Pte., Ltd., its wholly owned subsidiary that was formed in February 2011, after elimination of inter-company transactions.
2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers only those investments that are highly liquid and readily convertible to cash with
original maturities of
three months or less at date of purchase as cash equivalents.
Restricted Cash
As of March 31, 2011, the Company had maintained $1.3 million as additional security for
its line of credit with Wells Fargo. During Fiscal 2012, Wells Fargo released $1.3 million of the restricted cash.
F-8
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
See
Note 11Revolving Credit Facility, for discussion of the line of credit with Wells Fargo.
Fair Value of Financial Instruments
The carrying value of certain financial instruments, including cash equivalents, accounts
receivable, accounts
payable, revolving credit facility and notes payable approximate fair market value based on their short-term nature. See Note 10Fair Value Measurements, for disclosure regarding
the fair value of other financial instruments.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and typically non-interest bearing. The
Company maintains
allowances for estimated losses resulting from the inability of customers to make required payments and other accounts receivable allowances.
Inventories
The Company values inventories at first in first out ("FIFO") basis and lower of cost or market. The composition of
inventory is
routinely evaluated to identify slow-moving, excess, obsolete or otherwise impaired inventories. Inventories identified as impaired are evaluated to determine if write-downs are required. Included in
the assessment is a review for obsolescence as a result of engineering changes in the Company's products. All inventories expected to be used in more than one year are classified as long-term.
Depreciation and Amortization
Depreciation and amortization are provided for using the straight-line method over the estimated
useful lives of the
related assets, ranging from two to ten years. Leasehold improvements are amortized over the lease term or the estimated useful lives of the assets, whichever is shorter. Intangible assets that have
finite useful lives are amortized over their estimated useful lives using the straight-line method with the exception of the backlog of 100 kW microturbines ("TA100") acquired from Calnetix Power
Solutions, Inc. ("CPS"). Purchased backlog is amortized based on unit sales and presented as a component of cost of goods sold.
Long-Lived Assets
The Company reviews the recoverability of long-lived assets, including intangible assets with finite lives,
whenever events or
changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest
charges) are less than the carrying value, the Company may be required to record a write-down, which is determined based on the difference between the carrying value of the assets and their estimated
fair value. The Company performed an analysis as of March 31, 2014 and determined that no impairment was necessary. Intangible assets include a manufacturing license, trade name, technology,
backlog and customer relationships. See Note 5Intangible Assets.
Deferred Revenue
Deferred revenue consists of deferred product and service revenue and customer deposits. Deferred revenue will
be recognized when
earned in accordance with the Company's revenue recognition policy. The Company has the right to retain all or part of customer deposits under certain conditions.
Revenue
The Company's revenue consists of sales of products, parts, accessories and service, which includes a comprehensive
Factory Protection Plan
("FPP"), net of discounts. Capstone's distributors purchase products, parts and FPPs for sale to end users and are also required to provide a variety of additional services, including application
engineering, installation, commissioning and post-commissioning repair and maintenance service. The Company's standard terms of sales to distributors and direct end-users include transfer of title,
care, custody and control at the point of
F-9
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
shipment,
payment terms ranging from full payment in advance of shipment to payment in 90 days, no right of return or exchange, and no post-shipment performance obligations by Capstone except
for warranties provided on the products and parts sold.
Revenue
from the sale of products, parts and accessories is generally recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales
arrangement exists; (b) price is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred. Delivery generally occurs when the title and the
risks and rewards of ownership have substantially transferred to the customer. Service performed by the Company has consisted primarily of time and materials based contracts. The time and materials
contracts are usually related to out-of-warranty units. Service revenue
derived from time and materials contracts is recognized as the service is performed. The Company also provides maintenance service contracts to customers of its existing installed base. The
maintenance service contracts are agreements to perform certain services to maintain a product for a specified period of time. Service revenue derived from maintenance service contracts is recognized
on a straight-line basis over the contract period.
Warranty
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 product sold and geography of sale. The Company's product warranties generally start from the delivery date and continue for up to eighteen 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.
Research and Development ("R&D")
The Company accounts for grant distributions and development funding as offsets to R&D
expenses and both are
recorded as the related costs are incurred. Total offsets to R&D expenses amounted to $1.4 million, $1.7 million and $0.8 million for the years ended March 31, 2014, 2013
and 2012, respectively.
Income Taxes
Deferred income tax assets and liabilities are computed for differences between the consolidated financial
statement and income tax
basis of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized.
Contingencies
The Company records an estimated loss from a loss contingency when information available prior to issuance of its
financial statements
indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated.
F-10
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
Risk Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risk consist
primarily of cash and cash
equivalents and accounts receivable. At March 31, 2014, the majority of our cash balances were held at financial institutions located in California. The accounts at these institutions are
insured by the Federal Deposit Insurance Corporation up to certain limits. Balances that exceed the insurance coverage aggregate to approximately $27.6 million as of March 31, 2014. The
Company places its cash and cash equivalents with high credit quality institutions. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit
losses.
Sales
to E-Finity Distributed Generation, LLC ("E-Finity), one of the Company's domestic distributors, accounted for 19% of the Company's revenue for the year ended
March 31, 2014. Sales to BPC Engineering ("BPC"), one of the Company's Russian distributors, accounted for 17%, 11% and 26% of revenue for the years ended March 31, 2014, 2013 and 2012,
respectively. Sales to Horizon Power Systems ("Horizon"), one of the Company's domestic distributors, accounted for 12%, 27% and 19% of revenue for the years ended March 31, 2014, 2013 and
2012, respectively. Additionally, BPC, Electro Mecanique Industries ("EMI"), one of the Company's distributors in the Middle East and Africa, and E-Finity accounted for 26%, 18% and 16%, respectively,
of net accounts receivable as of March 31, 2014. BPC and Regatta Solutions, Inc., one of the Company's domestic distributors, accounted for 35% and 11%, respectively, of net accounts
receivable as of March 31, 2013.
The
Company did not have receivables from the U.S. Department of Energy ("DOE") as of March 31, 2014. Accounts receivable, net of allowances as of March 31, 2013 includes
approximately $0.3 million of other receivables from the U.S. Department of Energy ("DOE") under grants awarded in 2009 and 2010.
The
Company recorded bad debt expense of approximately $0.2 million, $0.3 million and $2.3 million for the years ended March 31, 2014, 2013 and 2012,
respectively.
Certain
components of the Company's products are available from a limited number of suppliers. An interruption in supply could cause a delay in manufacturing, which would affect
operating results adversely.
Estimates and Assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of
America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include accounting for
accounts receivable allowances, stock-based compensation, inventory write-downs, valuation of long-lived assets including intangible assets with finite lives, product warranties, income taxes and
other contingencies. Actual results could differ from those estimates.
Net Loss Per Common Share
Basic loss per common share is computed using the weighted-average number of common shares outstanding
for the period.
Diluted loss per share is also computed without consideration to potentially dilutive instruments because the Company incurred losses which would make such instruments antidilutive. Outstanding stock
options at March 31, 2014, 2013 and 2012 were 12.9 million, 11.8 million and 10.0 million, respectively. Outstanding restricted stock units at March 31, 2014, 2013
and 2012 were 2.1 million, 1.5 million and 1.1 million, respectively. As of March 31, 2014, the Company did not have any warrants outstanding. As of each of
March 31, 2013 and 2012, the
F-11
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
number
of warrants excluded from diluted net loss per common share computations was approximately 26.5 million.
Stock-Based Compensation
Options or stock awards are recorded at their estimated fair value at the measurement date. The Company
recognizes
compensation cost for options and stock awards that have a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Segment Reporting
The Company is considered to be a single reporting segment. The business activities of this reporting segment
are the development,
manufacture and sale of turbine generator sets and their related parts and service. Following is the geographic revenue information based on the primary operating location of the Company's customers
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
United States
|
|
$
|
58,432
|
|
$
|
57,001
|
|
$
|
41,796
|
|
Mexico
|
|
|
8,956
|
|
|
22,581
|
|
|
7,798
|
|
All other North America
|
|
|
196
|
|
|
4,370
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America
|
|
|
67,584
|
|
|
83,952
|
|
|
49,710
|
|
Russia
|
|
|
23,216
|
|
|
13,827
|
|
|
29,722
|
|
All other Europe
|
|
|
17,820
|
|
|
12,036
|
|
|
17,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Europe
|
|
|
41,036
|
|
|
25,863
|
|
|
47,174
|
|
Asia
|
|
|
10,728
|
|
|
8,473
|
|
|
5,692
|
|
Australia
|
|
|
5,275
|
|
|
5,461
|
|
|
2,749
|
|
All other
|
|
|
8,482
|
|
|
3,808
|
|
|
4,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
133,105
|
|
$
|
127,557
|
|
$
|
109,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies (Continued)
The
following table summarizes the Company's revenue by product (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
C30
|
|
$
|
5,623
|
|
$
|
6,756
|
|
$
|
4,426
|
|
C65
|
|
|
29,107
|
|
|
22,899
|
|
|
28,680
|
|
TA100
|
|
|
460
|
|
|
1,485
|
|
|
681
|
|
C200
|
|
|
14,754
|
|
|
18,099
|
|
|
7,361
|
|
C600
|
|
|
10,374
|
|
|
12,384
|
|
|
7,567
|
|
C800
|
|
|
10,127
|
|
|
5,324
|
|
|
8,728
|
|
C1000
|
|
|
38,141
|
|
|
35,571
|
|
|
32,475
|
|
Waste heat recovery generator
|
|
|
180
|
|
|
|
|
|
|
|
Unit upgrades
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from Microturbine Products
|
|
|
108,766
|
|
|
102,647
|
|
|
89,918
|
|
Accessories, Parts and Service
|
|
|
24,339
|
|
|
24,910
|
|
|
19,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
133,105
|
|
$
|
127,557
|
|
$
|
109,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially
all of the Company's operating assets are in the United States.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard
Update ("ASU") 2014-09,
"Revenue from Contracts with Customers" ("ASU 2014-09"). ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company
will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or
services. The Company is evaluating its existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be affected by the new requirements. ASU 2014-09 is
effective for annual reporting periods beginning after December 15, 2016, including interim periods therein.
3. Inventories
Inventories are valued on a FIFO basis and lower of cost or market and consisted of the following as of March 31, 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Raw materials
|
|
$
|
19,080
|
|
$
|
20,198
|
|
Work in process
|
|
|
5
|
|
|
|
|
Finished goods
|
|
|
1,955
|
|
|
1,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,040
|
|
|
21,765
|
|
Less non-current portion
|
|
|
(2,938
|
)
|
|
(3,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
18,102
|
|
$
|
18,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
non-current portion of inventories represents that portion of the inventories in excess of amounts expected to be used in the next twelve months. The non-current inventories are
primarily
F-13
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Inventories (Continued)
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 March 31, 2014 is 1.7 years. The Company expects to use the non-current portion of the inventories on hand as of March 31, 2014 over the
periods presented in the following table (in thousands):
|
|
|
|
|
Expected Period of Use
|
|
Non-current Inventory
Balance Expected
to be Used
|
|
13 to 24 months
|
|
$
|
2,271
|
|
25 to 36 months
|
|
|
476
|
|
37 to 48 months
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Property, Plant and Equipment
Property, plant and equipment as of March 31, 2014 and 2013 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Estimated
Useful Life
|
Machinery, rental equipment, equipment, automobiles and furniture
|
|
$
|
20,665
|
|
$
|
20,649
|
|
2 - 10 years
|
Leasehold improvements
|
|
|
9,731
|
|
|
9,708
|
|
10 years
|
Molds and tooling
|
|
|
5,138
|
|
|
4,933
|
|
2 - 5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,534
|
|
|
35,290
|
|
|
Less, accumulated depreciation
|
|
|
(32,643
|
)
|
|
(31,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
2,891
|
|
$
|
3,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense for property, plant and equipment was $1.8 million, $2.3 million and $2.6 million for the years ended March 31, 2014, 2013 and 2012,
respectively.
F-14
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Intangible Assets
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2014
|
|
|
|
Weighted
Average
Amortization
Period
|
|
Intangible
Assets,
Gross
|
|
Accumulated
Amortization
|
|
Intangible
Assets, Net
|
|
Manufacturing license
|
|
17 years
|
|
$
|
3,700
|
|
$
|
3,536
|
|
$
|
164
|
|
Technology
|
|
10 years
|
|
|
2,240
|
|
|
933
|
|
|
1,307
|
|
Parts and service customer relationships
|
|
5 years
|
|
|
1,080
|
|
|
900
|
|
|
180
|
|
TA100 customer relationships
|
|
2 years
|
|
|
617
|
|
|
617
|
|
|
|
|
Backlog
|
|
Various
|
|
|
490
|
|
|
351
|
|
|
139
|
|
Trade name
|
|
1.2 years
|
|
|
69
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
8,196
|
|
$
|
6,406
|
|
$
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
|
Weighted
Average
Amortization
Period
|
|
Intangible
Assets,
Gross
|
|
Accumulated
Amortization
|
|
Intangible
Assets, Net
|
|
Manufacturing license
|
|
17 years
|
|
$
|
3,700
|
|
$
|
3,487
|
|
$
|
213
|
|
Technology
|
|
10 years
|
|
|
2,240
|
|
|
709
|
|
|
1,531
|
|
Parts and service customer relationships
|
|
5 years
|
|
|
1,080
|
|
|
684
|
|
|
396
|
|
TA100 customer relationships
|
|
2 years
|
|
|
617
|
|
|
617
|
|
|
|
|
Backlog
|
|
Various
|
|
|
490
|
|
|
317
|
|
|
173
|
|
Trade name
|
|
1.2 years
|
|
|
69
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
8,196
|
|
$
|
5,883
|
|
$
|
2,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense for the intangible assets was $0.5 million, $0.5 million, and $0.8 million for the years ended March 31, 2014, 2013 and 2012.
Expected
future amortization expense of intangible assets as of March 31, 2014 is as follows (in thousands):
|
|
|
|
|
Year Ending March 31,
|
|
Amortization
Expense
|
|
2015
|
|
$
|
512
|
|
2016
|
|
|
352
|
|
2017
|
|
|
273
|
|
2018
|
|
|
242
|
|
2019
|
|
|
224
|
|
Thereafter
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
Total expected future amortization
|
|
$
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Intangible Assets (Continued)
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 $83,000, $76,700, and $72,800 were earned by
Solar for the years ended March 31, 2014, 2013 and 2012, respectively. Earned royalties of approximately $20,700 and $24,600 were unpaid as of March 31, 2014 and 2013, respectively, and
are included in accrued expenses in the accompanying balance sheets.
6. Accrued Warranty Reserve
Changes in the accrued warranty reserve are as follows as of March 31, 2014, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Balance, beginning of the period
|
|
$
|
2,299
|
|
$
|
1,494
|
|
$
|
1,081
|
|
Standard warranty provision
|
|
|
2,857
|
|
|
3,874
|
|
|
3,790
|
|
Changes for accrual related to reliability repair programs
|
|
|
1,046
|
|
|
1,255
|
|
|
437
|
|
Deductions for warranty claims
|
|
|
(3,237
|
)
|
|
(4,324
|
)
|
|
(3,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$
|
2,965
|
|
$
|
2,299
|
|
$
|
1,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Deferred Revenue
Changes in deferred revenue are as follows as of March 31, 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
FPP Balance, beginning of the period
|
|
$
|
1,412
|
|
$
|
1,167
|
|
FPP Billings
|
|
|
7,689
|
|
|
5,884
|
|
FPP Revenue recognized
|
|
|
(7,040
|
)
|
|
(5,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance attributed to FPP contracts
|
|
|
2,061
|
|
|
1,412
|
|
Deposits
|
|
|
596
|
|
|
1,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue balance, end of the period
|
|
$
|
2,657
|
|
$
|
3,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
FPP deferred revenue 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.
8. Income Taxes
Current income tax provision is the amount of income taxes reported or expected to be reported on our income tax return. The provision for current income taxes for the year ended
March 31, 2014 was $0.2 million, which was all related to foreign taxes. The Company did not have current federal income taxes for the year ended March 31, 2014.
F-16
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Income Taxes (Continued)
Actual
income tax expense differed from the amount computed by applying statutory corporate income tax rates to loss from operations before income taxes. A reconciliation of income tax
(benefit) expense to the federal statutory rate follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Federal income tax at the statutory rate
|
|
$
|
(5,452
|
)
|
$
|
(7,436
|
)
|
$
|
(6,317
|
)
|
State taxes, net of federal effect
|
|
|
(93
|
)
|
|
(661
|
)
|
|
(727
|
)
|
Foreign taxes
|
|
|
134
|
|
|
675
|
|
|
313
|
|
R&D tax credit
|
|
|
37
|
|
|
(1,157
|
)
|
|
(455
|
)
|
Impact of state rate change
|
|
|
492
|
|
|
838
|
|
|
(693
|
)
|
Warrant liability
|
|
|
(3
|
)
|
|
(299
|
)
|
|
(5,301
|
)
|
Expiring NOL
|
|
|
1,543
|
|
|
|
|
|
9,765
|
|
Valuation allowance
|
|
|
3,614
|
|
|
(1,877
|
)
|
|
3,423
|
|
Excess tax benefitstock compensation
|
|
|
|
|
|
10,383
|
|
|
|
|
Other
|
|
|
(52
|
)
|
|
228
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
220
|
|
$
|
694
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's deferred tax assets and liabilities consisted of the following at March 31, 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
2,152
|
|
$
|
1,754
|
|
Warranty reserve
|
|
|
1,051
|
|
|
866
|
|
Deferred revenue
|
|
|
731
|
|
|
532
|
|
Net operating loss ("NOL") carryforwards
|
|
|
214,071
|
|
|
211,724
|
|
Tax credit carryforwards
|
|
|
18,369
|
|
|
18,295
|
|
Depreciation, amortization and impairment loss
|
|
|
3,631
|
|
|
3,997
|
|
Other
|
|
|
5,280
|
|
|
5,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
245,285
|
|
|
242,666
|
|
Valuation allowance for deferred tax assets
|
|
|
(236,169
|
)
|
|
(232,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
|
9,116
|
|
|
10,111
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Federal benefit of state taxes
|
|
|
(9,116
|
)
|
|
(10,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because
of the uncertainty surrounding the timing of realizing the benefits of favorable tax attributes in future income tax returns, the Company has placed a valuation allowance against
its net deferred income tax assets. The change in valuation allowance for Fiscal 2014, 2013 and 2012 was $3.6 million, $1.9 million and $3.4 million, respectively.
F-17
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Income Taxes (Continued)
The
Company's NOL and tax credit carryforwards for federal and state income tax purposes at March 31, 2014 were as follows (in thousands):
|
|
|
|
|
|
|
|
Amount
|
|
Expiration
Period
|
Federal NOL
|
|
$
|
606,193
|
|
2018 - 2034
|
State NOL
|
|
$
|
226,861
|
|
2014 - 2034
|
Federal tax credit carryforwards
|
|
$
|
9,487
|
|
2018 - 2034
|
State tax credit carryforwards
|
|
$
|
8,882
|
|
Indefinite
|
The
NOLs and federal and state tax credits can be carried forward to offset future taxable income, if any. Utilization of the NOLs and tax credits are subject to an annual limitation of
approximately $57.3 million due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The federal tax credit carryforward is a research
and development credit, which may be carried forward. The state tax credits consist of a research and development credit can be carried forward indefinitely.
Tax
benefits arising from the disposition of certain shares issued upon exercise of stock options within two years of the date of grant or within one year of the date of exercise by the
option holder ("Disqualifying Dispositions") provide the Company with a tax deduction equal to the difference between the exercise price and the fair market value of the stock on the date of exercise.
Approximately $27.7 million of the Company's federal and state NOL carryforwards as of March 31, 2014 were generated by Disqualifying Dispositions of stock options and exercises of
nonqualified stock options. In accordance with the reporting requirements under ASC 718, we did not include approximately $9.6 million of excess windfall tax benefits resulting from stock
option exercises as components of our gross deferred tax assets and corresponding valuation allowance disclosures, as tax attributes related to those windfall tax benefits should not be recognized
until they result in a reduction of taxes payable. The tax effected amount of gross unrealized net operating loss carry forwards excluded under ASC 718 was approximately $9.6 million at
March 31, 2014. When realized, those excess windfall tax benefits are credited to additional paid-in capital.
Accounting
Standards Codification ("ASC") 740, Income Taxes clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to
meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods,
disclosure and transition. Based on management's evaluation, the total amount of unrecognized tax benefits related to research and development credits was $2.4 million as of both
March 31, 2014 and March 31, 2013. There were no interest or penalties related to unrecognized tax benefits as of March 31, 2014 or March 31, 2013. For both
March 31, 2014 and March 31, 2013, $2.4 million of unrecognized tax benefits, that if recognized, would affect the effective tax rate. However, for both March 31, 2014 and
March 31, 2013, this impact would be offset by an equal increase in the deferred tax valuation allowance as the Company has recorded a full valuation allowance against its deferred tax assets
because of uncertainty as to future realization. The fully reserved recognized federal and state deferred tax assets related to research and development credits balance as of March 31, 2014 and
2013 was $9.5 million and $9.6 million, and $8.9 million and $8.7 million, respectively.
F-18
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Income Taxes (Continued)
A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
Balance at March 31, 2011
|
|
$
|
1,973
|
|
Gross increase related to prior year tax positions
|
|
|
|
|
Gross increase related to current year tax positions
|
|
|
175
|
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
$
|
2,148
|
|
Gross decrease related to prior year tax positions
|
|
|
(100
|
)
|
Gross increase related to prior year tax positions
|
|
|
222
|
|
Gross increase related to current year tax positions
|
|
|
148
|
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
$
|
2,418
|
|
Gross decrease related to prior year tax positions
|
|
|
(93
|
)
|
Gross increase related to prior year tax positions
|
|
|
1
|
|
Gross increase related to current year tax positions
|
|
|
115
|
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
2,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S.
federal, state, local or non-U.S. income tax examinations by tax authorities for the years before 2009. However, net
operating loss carryforwards remain subject to examination to the extent they are carried forward and impact a year that is open to examination by tax authorities. The Company's evaluation was
performed for the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2014. The Company settled its Internal Revenue Service examination of its U.S. federal
tax return for the fiscal year ended March 31, 2010 during the third quarter of the fiscal year ended March 31, 2012, with no findings that resulted in a change to the Company's
financial statements. When applicable, the Company accounts for interest and penalties generated by tax contingencies as interest and other expense, net in the statements of operations.
9. Stockholders' Equity
The following table summarizes, by statement of operations line item, stock-based compensation expense for the years ended March 31, 2014, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended March 31,
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Cost of goods sold
|
|
$
|
43
|
|
$
|
92
|
|
$
|
136
|
|
Research and development
|
|
|
562
|
|
|
319
|
|
|
324
|
|
Selling, general and administrative
|
|
|
1,542
|
|
|
1,190
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
2,147
|
|
$
|
1,601
|
|
$
|
1,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Stockholders' Equity (Continued)
Stock Plans
2000 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 27,980,000 shares. The 2000 Plan is administered by the Compensation Committee designated by the Board of Directors. The Compensation Committee's authority
includes determining the number of incentive awards and vesting provisions. As of March 31, 2014, there were 4,282,979 shares available for future grant.
As
of March 31, 2014, the Company had outstanding 3,550,000 non-qualified common stock options issued outside of the 2000 Plan. The Company granted 250,000 of these stock options
during the second quarter of Fiscal 2013, 250,000 of these stock options during Fiscal 2012 and 3,050,000 of the options prior to Fiscal 2008 as inducement grants to new officers and employees of the
Company, with exercise prices equal to the fair market value of the Company's common stock on the grant date. Included in the 3,550,000 options were 2,000,000 options granted to the Company's
President and Chief Executive Officer, 850,000 options granted to the Company's Executive Vice President of Sales and Marketing, 250,000 options granted to the Company's Senior Vice President of
Program Management, 250,000 options granted to the Company's Senior Vice President of Customer Service and 200,000 options granted to the Company's former Senior Vice President of Human Resources.
Additionally, as of March 31, 2014, the Company had outstanding 46,875 restricted stock units issued outside of the 2000 Plan. These restricted stock units were issued during the second quarter
of Fiscal 2013 as an inducement grant to the Company's Senior Vice President of Customer Service. Although the options and restricted stock units were not granted under the 2000 Plan, they are
governed by terms and
conditions identical to those under the 2000 Plan. 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. All outstanding options have a contractual term of ten years. The
restricted stock units vest in equal installments over a period of four years. Information relating to all outstanding stock options, except for rights associated with the Purchase Plan, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
(in years)
|
|
|
|
Options outstanding at March 31, 2013
|
|
|
11,791,765
|
|
$
|
1.33
|
|
|
|
|
|
|
|
Granted
|
|
|
1,665,200
|
|
$
|
0.93
|
|
|
|
|
|
|
|
Exercised
|
|
|
(345,317
|
)
|
$
|
1.35
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
|
(259,960
|
)
|
$
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2014
|
|
|
12,851,688
|
|
$
|
1.27
|
|
|
5.2
|
|
$
|
11,838,302
|
|
Options fully vested at March 31, 2014 and those expected to vest beyond March 31, 2014
|
|
|
12,665,079
|
|
$
|
1.27
|
|
|
5.2
|
|
$
|
11,622,598
|
|
Options exercisable at March 31, 2014
|
|
|
9,767,753
|
|
$
|
1.34
|
|
|
4.1
|
|
$
|
8,478,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted average per share grant date fair value of options granted during the fiscal years ended March 31, 2014, 2013 and 2012 was $0.60, $0.67 and $1.20, respectively. The
weighted average
F-20
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Stockholders' Equity (Continued)
per
share grant date fair value of options exercised during the fiscal years ended March 31, 2014 and 2012 was $1.35 and $0.99, respectively. The total intrinsic value of option exercises
during the fiscal years ended March 31, 2014 and 2012, was approximately $0.2 and $0.6 million, respectively. During the fiscal years ended March 31, 2014 and 2012, the amount of
cash received from the exercise of stock options was approximately $0.5 million and $0.8 million, respectively. There were no options exercised during the fiscal year ended
March 31, 2013. The Company recorded expense of approximately $1.1 million, $0.9 million and $0.9 million associated with its stock options for the fiscal years ended
March 31, 2014, 2013 and 2012, respectively. As of March 31, 2014, there was approximately $1.6 million of total compensation cost related to unvested stock option awards that is
expected to be recognized as expense over a weighted average period of 2.5 years.
The
Company calculated the estimated fair value of each stock option on the date of grant using the Black-Scholes valuation method and the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended March 31,
|
|
|
|
2014
|
|
2013
|
|
2012
|
|
Risk-free interest rates
|
|
|
0.9
|
%
|
|
0.8
|
%
|
|
1.9
|
%
|
Expected lives (in years)
|
|
|
5.7
|
|
|
5.7
|
|
|
5.0
|
|
Dividend yield
|
|
|
|
%
|
|
|
%
|
|
|
%
|
Expected volatility
|
|
|
77.3
|
%
|
|
79.8
|
%
|
|
89.0
|
%
|
Weighted average grant date fair value of options granted during the period
|
|
$
|
0.60
|
|
$
|
0.67
|
|
$
|
1.19
|
|
The
Company's computation of expected volatility for the fiscal years ended March 31, 2014, 2013 and 2012 was based on historical volatility. The expected life, or term, of
options granted is derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding. Management has selected a risk-free rate based
on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the options' expected term. Stock-based compensation expense is based on awards that are ultimately expected to
vest and accordingly, stock-based compensation recognized in the fiscal years ended March 31, 2014, 2013 and 2012 has been
F-21
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Stockholders' Equity (Continued)
reduced
by estimated forfeitures. Management's estimate of forfeitures is based on historical forfeitures. The following table outlines the restricted stock unit activity:
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Shares
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Nonvested restricted stock units outstanding at March 31, 2013
|
|
|
1,467,096
|
|
$
|
1.10
|
|
Granted
|
|
|
1,379,818
|
|
$
|
1.09
|
|
Vested and issued
|
|
|
(685,069
|
)
|
$
|
1.06
|
|
Forfeited
|
|
|
(100,621
|
)
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested restricted stock units outstanding at March 31, 2014
|
|
|
2,061,224
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units expected to vest beyond March 31, 2014
|
|
|
1,892,868
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
restricted stock units were 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 related compensation expense recognized has been reduced by estimated forfeitures. The Company's estimate of forfeitures is based on historical forfeitures. The restricted
stock units vest in equal installments over a period of two or four years. For restricted stock units with two year vesting, one-half of such units vest one year after the issuance date and the other
half vest two years after the issuance date. For restricted stock units with four year vesting, one-fourth vest annually beginning one year after the issuance date.
The
weighted average per share grant date fair value of restricted stock granted during the fiscal years ended March 31, 2014, 2013 and 2012 was $1.09, $1.00 and $1.47,
respectively. The total fair value of restricted stock units vested and issued by the Company during the fiscal years ended March 31, 2014, 2013 and 2012 was approximately $0.8 million,
$0.6 million and $1.1 million, respectively. The Company recorded expense of approximately $1.0 million, $0.8 million and $0.7 million associated with its restricted
stock awards and units for the fiscal years ended March 31, 2014, 2013 and 2012, respectively. As of March 31, 2014, 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 2.4 years.
During
the fiscal years ended March 31, 2014, 2013 and 2012 the Company issued a total of 91,603, 103,574 and 77,971 shares of stock, respectively, to non-employee directors who
elected to take payment of all or any part of the directors' fees in stock in lieu of cash. 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, in lieu of all or any portion of their annual retainer or committee fee
cash payment, a stock award. The shares of stock were valued based on the closing price of the Company's common stock on
the date of grant, and the weighted average grant date fair value for these shares during each of the fiscal years ended March 31, 2014, 2013 and 2012 was $1.26, $0.98 and $1.20, respectively.
F-22
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Stockholders' Equity (Continued)
2000 Employee Stock Purchase Plan
In June 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the "Purchase Plan"), which 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. Under the Purchase Plan, shares of common stock will be issued upon exercise of
the purchase rights. Under the Purchase Plan, an aggregate of 900,000 shares may be issued pursuant to the exercise of purchase rights. In August 2010, the Board of Directors adopted and the
stockholders approved an amendment and restatement of the Purchase Plan. The amendment and restatement includes an increase of 500,000 shares of common stock that will be available under the Purchase
Plan and extends the term of the Purchase Plan for a period of ten years. As amended, the Purchase Plan will continue by its terms through June 30, 2020, unless terminated sooner, and will
reserve for issuance a total of 1,400,000 shares of common stock. 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 Purchase Plan, 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 Global Market on the day in question. During the fiscal years ended March 31, 2014, 2013 and 2012, the Company issued a total of 12,302
shares, 22,478 shares and 21,338 shares of stock, respectively, to regular full and part-time employees or officers of the Company who elected to participate in the Purchase Plan. As of
March 31, 2014, there were 430,188 shares available for future grant under the Purchase Plan.
Stockholder Rights Plan
The Company has entered into a rights agreement, as amended, with Mellon Investor Services LLC, as rights agent. In connection
with the rights agreement, the Company's board of directors authorized and declared a dividend distribution of one preferred stock purchase right for each share of the Company's common stock
authorized and outstanding. Each right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share of Series A Junior Participating Preferred
Stock, par value $0.001 per share, at a purchase price of $10.00 per unit, subject to adjustment. The description and terms of the rights are set forth in the rights agreement. Initially, the rights
are attached to all common stock certificates representing shares
then outstanding, and no separate rights certificates are distributed. Subject to certain exceptions specified in the rights agreement, the rights will separate from the common stock and will be
exercisable upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the outstanding shares of common stock, other than as a result of repurchases of stock by the Company or certain inadvertent actions by institutional or certain
other stockholders, or (ii) 10 days (or such later date as the Company's Board of Directors shall determine) following the commencement of a tender offer or exchange offer (other than
certain permitted offers described in the rights agreement) that would result in a person or group beneficially owning 20% or more of the outstanding shares of the Company's common stock. On
June 9, 2011, the Company's Board of Directors unanimously approved a second amendment to the rights agreement, which was approved by the stockholders in August 2011. The second amendment adds
an additional "sunset provision," which provides that the rights agreement will expire on the 30th day after the 2014 annual meeting of stockholders unless continuation of the rights agreement
is approved by the stockholders at that meeting. The second amendment also provides for an update to the definition of "Beneficial Owner" to include derivative interests in the calculation of a
F-23
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Stockholders' Equity (Continued)
stockholder's
ownership. In addition, the second amendment clarifies the manner in which the exchange provision of the rights agreement shall be effected. The rights are intended to protect the
Company's stockholders in the event of an unfair or coercive offer to acquire the Company. The rights, however, should not affect any prospective offeror willing to make an offer at a fair price and
otherwise in the best interests of the Company and its stockholders, as determined by the Board of Directors. The rights should also not interfere with any merger or other business combination
approved by the Board of Directors.
Underwritten and Registered Direct Placement of Common Stock
Effective March 5, 2012, the Company completed a registered direct placement in which it sold 22.6 million shares of the
Company's common stock, par value $.001 per share, and warrants to purchase 22.6 million shares of common stock with an initial exercise price of $1.55 per share, at a price of $1.11 per unit
(the "2012 Warrants"). Each unit consisted of one share of common stock and a warrant to purchase one share of common stock. The 2012 Warrants expired on October 31, 2013. In addition, the
Company obtained the right to require investors in the offering to purchase up to an aggregate maximum of 19.0 million additional shares of common stock from the Company (the "Put Options")
during two option exercise periods, the first such option exercise period beginning September 10, 2012 and the second such option exercise period beginning March 4, 2013. Each Put Option
was subject to certain conditions which reduced the number of shares that could be sold or eliminate the Put Option. These conditions included a minimum volume-weighted average price (VWAP) and a
minimum average trading volume of the Company's common shares during the
30 trading days prior to the exercise of the Put Option. The March 2012 sale resulted in net proceeds of approximately $23.1 million net of direct incremental costs of approximately
$1.9 million.
On
September 18, 2012, the Company entered into an Investor Agreement with one of the investors in the 2012 registered direct offering pursuant to which the investor agreed to
(i) waive the condition precedent to the Company's exercise of the Put Option requiring the arithmetic average of the average daily trading volumes during the measurement period set forth in
the subscription agreement between the Company and the investor and on the exercise date be not less than 1.75 million shares and (ii) amend the subscription agreement to provide that
the purchase price of the additional shares during the first exercise period would be discounted pursuant to a formula that resulted in a purchase price for the first exercise period of $0.94 per
share. Additionally, pursuant to the Investor Agreement, the Company agreed to amend the exercise price of the 2012 Warrants originally issued to the Investor to $1.26. The exercise of the first Put
Option resulted in net proceeds of $4.2 million. The 2012 Warrants still outstanding as of March 31, 2013 provided for the purchase of 22.6 million shares at a weighted average
exercise price of $1.41 per share. On February 21, 2013, the Company entered into a letter agreement (each a "Letter Agreement" and, collectively, the "Letter Agreements") with each of the
investors in the March 5, 2012 registered direct offering. Pursuant to the Letter Agreements, the parties evidenced their mutual agreement that the Company would not exercise any portion of the
second Put Option. The Company chose not to exercise the second of the two Put Options because of its improved cash position and its desire to avoid stockholder dilution. On October 31, 2013,
an unsolicited exercise of 2012 Warrants to purchase 4.7 million shares resulted in proceeds of approximately $6.0 million. Effective October 31, 2013, all remaining outstanding
2012 Warrants expired.
F-24
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Stockholders' Equity (Continued)
Effective
January 9, 2012, the Company entered into warrant exercise agreements with two holders of warrants issued by the Company on January 24, 2007 (the "2007 Warrants")
to purchase an aggregate of 1.6 million shares of the Company's common stock. Pursuant to the warrant exercise agreements, the holders agreed to exercise the 2007 Warrants at the existing
exercise price of $1.17 in exchange for fees in the aggregate amount of approximately $0.3 million. The net proceeds to the Company in connection with the exercise of these 2007 Warrants was
approximately $1.6 million.
Effective
November 21, 2011, the Company entered into warrant exercise agreements with (i) two holders of warrants issued by the Company on September 17, 2009 (the
"September 2009 Warrants") to purchase an aggregate of 5.8 million shares of the Company's common stock, (ii) four holders of warrants issued by the Company on September 17, 2008
(the "2008 Warrants") to purchase an aggregate of 2.4 million shares of the Company's common stock and (iii) six holders of 2007 Warrants to purchase an aggregate of 5.2 million
shares of the Company's common stock. Pursuant to the warrant exercise agreements, the September 2009 Warrant holders agreed to exercise the September 2009 Warrants described above at the existing
exercise price of $1.34 in exchange for a fee of an aggregate amount of approximately $5.4 million, the 2008 Warrant holders agreed to exercise the 2008 Warrants described above at the existing
exercise price of $1.60 in exchange for a fee of an aggregate amount of approximately $2.2 million and the 2007 Warrant holders agreed to exercise the 2007 Warrants described
above at the existing exercise price of $1.17 in exchange for a fee of an aggregate amount of approximately $1.8 million. The net proceeds to the Company, in connection with the exercise of the
September 2009 Warrants, the 2008 Warrants and the 2007 Warrants, were approximately $8.4 million. The 2008 Warrants to purchase an additional 0.5 million shares were subsequently
exercised on November 22, 2011 at the existing exercise price of $1.60 in exchange for a fee of approximately $0.5 million, resulting in net proceeds of approximately
$0.4 million.
The
following table outlines the warrant activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2012
|
|
September 2009
|
|
September 2008
|
|
January 2007
|
|
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Shares
|
|
Balance, March 31, 2011
|
|
|
|
|
|
5,780,347
|
|
|
7,342,647
|
|
|
8,535,574
|
|
Issuance of warrants
|
|
|
22,550,000
|
|
|
|
|
|
|
|
|
|
|
Anti-dilution provision
|
|
|
|
|
|
|
|
|
146,626
|
|
|
|
|
Warrants exercised
|
|
|
|
|
|
(5,780,347
|
)
|
|
(3,579,239
|
)
|
|
(7,298,234
|
)
|
Warrants expired
|
|
|
|
|
|
|
|
|
|
|
|
(1,237,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2012
|
|
|
22,550,000
|
|
|
|
|
|
3,910,034
|
|
|
|
|
Anti-dilution provision
|
|
|
|
|
|
|
|
|
51,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
|
22,550,000
|
|
|
|
|
|
3,961,471
|
|
|
|
|
Warrants exercised
|
|
|
(4,725,000
|
)
|
|
|
|
|
|
|
|
|
|
Warrants expired
|
|
|
(17,825,000
|
)
|
|
|
|
|
(3,961,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Fair Value Measurements
The FASB has established a framework for measuring fair value in generally accepted accounting principles. That framework provides a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurements) and the lowest priority
to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:
Level 1.
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in
active markets.
Level 2.
Inputs to the valuation methodology include:
-
-
Quoted prices for similar assets or liabilities in active markets
-
-
Quoted prices for identical or similar assets or liabilities in inactive markets
-
-
Inputs other than quoted prices that are observable for the asset or liability
-
-
Inputs that are derived principally from or corroborated by observable market data by correlation or other means
If
the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3.
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The
asset or liability's fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The
table below presents our assets and liabilities that are measured at fair value on a recurring basis during Fiscal 2014 and are categorized using the fair value hierarchy (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2014
|
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
13,737
|
|
$
|
13,737
|
|
$
|
|
|
$
|
|
|
Cash
equivalents includes cash held in money market and U.S. Treasury Funds at March 31, 2014.
The
table below presents our assets and liabilities that are measured at fair value on a recurring basis during Fiscal 2013 and are categorized using the fair value hierarchy (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2013
|
|
|
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents
|
|
$
|
27,742
|
|
$
|
27,742
|
|
$
|
|
|
$
|
|
|
Warrant liability
|
|
$
|
(10
|
)
|
$
|
|
|
$
|
|
|
$
|
(10
|
)
|
F-26
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Fair Value Measurements (Continued)
Basis for Valuation
The carrying values reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and
accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. As the Company's obligations under the Credit Facility are based on
adjustable market interest rates, the Company has determined that the carrying value approximates the fair value. The carrying values and estimated fair values of these obligations are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2014
|
|
As of March 31, 2013
|
|
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Obligations under the credit facility
|
|
$
|
13,228
|
|
$
|
13,228
|
|
$
|
13,476
|
|
$
|
13,476
|
|
The
Company adopted the amended provisions of ASC 815 on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed
to its own stock for the purpose of evaluating the first criteria of the scope exception in ASC 815. Warrants issued by the Company in prior periods with certain antidilution provisions for the
holder are no longer considered indexed to the Company's own stock, and therefore no longer qualify for the scope exception and must be accounted for as derivatives. These warrants were reclassified
as liabilities under the caption "Warrant liability" and recorded at estimated fair value at each reporting date, computed using the Monte Carlo simulation valuation method. The Company will continue
to adjust the warrant liability for changes in fair value until the earlier of the exercise of the warrants, at which time the liability will be reclassified to stockholders' equity, or expiration of
the warrants. Changes in the liability from period to period are recorded in the Statements of Operations under the caption "Change in fair value of warrant liability."
The
fair value of the Company's warrant liability (see Note 9Stockholders' EquityUnderwritten and Registered Direct Placement of Common Stock) recorded
in the Company's financial statements is determined using the Monte Carlo simulation valuation method and the quoted price of the Company's common stock in an active market, volatility and expected
life, a Level 3 measurement. Volatility is based on the actual market activity of the Company's stock. The expected life is based on the remaining contractual term of the warrants and the risk
free interest rate is based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants' expected life.
The
Company calculated the estimated fair value of warrants on the date of issuance and at each subsequent reporting date using the following assumptions:
|
|
|
|
|
Fiscal Year Ended
March 31, 2013
|
Risk-free interest rates range
|
|
0.1% to 0.2%
|
Contractual term (in years)
|
|
0.5 years to 1.2 years
|
Expected volatility range
|
|
37.2% to 65.8%
|
From
time to time, the Company sells common stock warrants that are derivative instruments. The Company does not enter into speculative derivative agreements and does not enter into
derivative agreements for the purpose of hedging risks.
F-27
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Fair Value Measurements (Continued)
As
discussed above, the Company adopted authoritative guidance issued by the FASB on contracts in an entity's own equity that requires the common stock warrants to be classified as
liabilities at their estimated fair value with changes in fair value at each reporting date recognized in the statement of operations. The table below provides a reconciliation of the beginning and
ending balances for the warrant liability which is measured at fair value using significant unobservable inputs (Level 3) (in thousands):
|
|
|
|
|
Warrant liability:
|
|
|
|
|
Balance as of March 31, 2011
|
|
$
|
20,772
|
|
Total realized and unrealized (gains) losses:
|
|
|
|
|
Income included in change in fair value of warrant liability
|
|
|
(13,872
|
)
|
Purchases, issuances and settlements
|
|
|
(6,109
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2012
|
|
$
|
791
|
|
Total realized and unrealized (gains) losses:
|
|
|
|
|
Income included in change in fair value of warrant liability
|
|
|
(781
|
)
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2013
|
|
$
|
10
|
|
Total realized and unrealized (gains) losses:
|
|
|
|
|
Income included in change in fair value of warrant liability
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Revolving Credit Facility
The Company maintains two Credit and Security Agreements, as amended (the "Agreements"), with Wells Fargo Bank, National Association ("Wells Fargo"), which provide the Company with a
line of credit of up to $15.0 million in the aggregate which amount was increased to an amount up to $20.0 million pursuant to the twelfth amendment described below (the "Credit
Facility"). In addition,
Wells Fargo has provided the Company with a non-revolving capital expenditure line of credit up to $0.5 million to acquire additional eligible equipment for use in the Company's business
pursuant to the amendment described below. The amount actually available to the Company may be less and may vary from time to time depending on, among other factors, the amount of its eligible
inventory and accounts receivable. As security for the payment and performance of the Credit Facility, the Company granted a security interest in favor of Wells Fargo in substantially all of the
assets of the Company. One of the Agreements will terminate in accordance with its terms on September 30, 2014 and the other one will terminate on September 30, 2017.
The
Agreements include affirmative covenants as well as negative covenants that prohibit a variety of actions without Wells Fargo's consent, including covenants that limit the Company's
ability to (a) incur or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or
stock of another entity, (d) pay dividends on, or purchase, acquire, redeem or retire shares of, the Company's capital stock, (e) sell, assign, transfer or otherwise dispose of all or
substantially all of the Company's assets, (f) change the Company's accounting method or (g) enter into a different line of business. Furthermore, the Agreements contain financial
covenants, including (a) a requirement not to exceed specified levels of losses, (b) a requirement to maintain a substantial minimum cash balance relative to the outstanding line of
credit advances, which was $18.4 million as of March 31, 2014, and (c) limitations on the
F-28
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Revolving Credit Facility (Continued)
Company's
annual capital expenditures. The Agreements also define an event of default to include a material adverse effect on the Company's business, as determined by Wells Fargo. An event of default
for this or any other reason, if not waived, would have a material adverse effect on the Company.
Several
times since entering into the Agreements the Company was not in compliance with certain covenants under the Credit Facility. In connection with each event of noncompliance, Wells
Fargo waived the event of default and, on several occasions, the Company amended the Agreements in response to the default and waiver. The following summarizes the recent events, amendments and
waivers:
-
-
As of December 31, 2013, the Company determined that it was not in compliance with the financial covenant contained
in the amended Agreements regarding the Company's net income for the nine months ended December 31, 2013. On January 31, 2014, the Company received from Wells Fargo a waiver of such
noncompliance.
-
-
As of March 31, 2014, the Company determined that it was not in compliance with the financial covenant contained in
the amended Agreements regarding the Company's annual net income for Fiscal 2014. On April 25, 2014, the Company received from Wells Fargo a waiver of such noncompliance.
-
-
On June 9, 2014, the Company entered into an amendment to the Agreements with Wells Fargo to increase the line of
credit to an amount up to $20.0 million from $15.0 million and extend the maturity date of one of the lines of credit through September 30, 2017. Additionally, this amendment made
certain changes to decrease the required minimum cash balance relative to the outstanding line of credit advances and set the financial covenants for Fiscal 2015. The amendment also added a
$0.5 million non-revolving capital expense line of credit.
If
the Company had not obtained the waivers and amended the Agreements as described above, the Company would not have been able to draw additional funds under the Credit Facility. In
addition, the Company has pledged its accounts receivables, inventories, equipment, patents and other assets as collateral for its Agreements, which would be subject to seizure by Wells Fargo if the
Company were in default under the Agreements and unable to repay the indebtedness. Wells Fargo also has the option to terminate the Agreements or accelerate the indebtedness during a period of
noncompliance. Based on the Company's current forecasts, the Company believes it will maintain compliance with the covenants contained in the amended Agreements for at least the next twelve months. If
a covenant violation were to occur, the Company would attempt to negotiate a waiver of compliance from Wells Fargo.
The
Company is required to maintain a Wells Fargo collection account for cash receipts on all of its accounts receivable. These amounts are immediately applied to reduce the outstanding
amount on the Credit Facility. The floating rate for line of credit advances is the sum of daily three month London Inter-Bank Offer Rate ("LIBOR"), which interest rate shall change whenever daily
three month LIBOR changes, plus applicable margin. Based on the revolving nature of the Company's borrowings and payments, the Company classifies all outstanding amounts as current liabilities. The
applicable margin varies based on net income and the minimum interest floor is set at $66,000 each calendar quarter. The Company's borrowing rate at March 31, 2014 and March 31, 2013 was
4.0% and 5.4%, respectively.
The
Company incurred $0.1 million in origination fees in connection with a September 2011 amendment to the Agreements that increased borrowing capacity and extended the maturity
date of the
F-29
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Revolving Credit Facility (Continued)
line
of credit. These fees were capitalized and are being amortized to interest expense through September 2014. The Company is also required to pay an annual unused line fee of one-quarter of one
percent of the daily average of the maximum line amount and 1.5% interest with respect to each letter of credit issued by Wells Fargo. These amounts, if any, are also recorded as interest expense by
the Company. As of March 31, 2014 and March 31, 2013, $13.2 million and $13.5 million in borrowings were outstanding, respectively, under the Credit Facility. As of
March 31, 2014, approximately $0.3 million was available for additional borrowing. Interest expense related to the Credit Facility during the year ended March 31, 2014 was
$0.7 million, which includes $0.2 million in amortization of deferred financing costs. Interest expense related to the Credit Facility during the year ended March 31, 2013 was
$0.7 million, which includes $0.1 million in amortization of deferred financing costs. Interest expense related to the Credit Facility during the year ended March 31, 2012 was
$0.8 million, which includes $0.2 million in amortization of deferred financing costs.
12. Commitments and Contingencies
Purchase Commitments
As of March 31, 2014, the Company had firm commitments to purchase inventories of approximately $32.2 million through
Fiscal 2017. Certain inventory delivery dates and related payments are not scheduled; therefore amounts under these firm purchase commitments will be payable upon the receipt of the related
inventories.
Lease Commitments
The Company leases offices and manufacturing facilities under various non-cancelable operating leases expiring at various times through
the fiscal year ending March 31, 2018. All of the leases require the Company to pay maintenance, insurance and property taxes. The lease agreements for primary office and manufacturing
facilities provide for rent escalation over the lease term and renewal options for five-year periods. Rent expense is recognized on a straight-line basis over the term of the lease. The difference
between rent expense recorded and the amount paid is credited or charged to deferred rent, which is included in other long-term liabilities in the accompanying consolidated balance sheets. The balance
of deferred rent was approximately $0.1 million as of March 31, 2014 and 2013, respectively. Rent expense was approximately $2.3 million, $2.1 million and
$2.1 million for the years ended March 31, 2014, 2013 and 2012, respectively.
On
August 27, 2009, the Company entered into a second amendment (the "Chatsworth Amendment") to the Lease Agreement, dated December 1, 1999, for leased premises used by the
Company for primary office space, engineering testing and manufacturing located in Chatsworth, California. The Chatsworth Amendment extends the term of the Lease Agreement from May 31, 2010 to
July 31, 2014. The Company has two five-year options to extend the term of the Lease Agreement beyond July 31, 2014. The Chatsworth Amendment also sets the monthly base rent payable by
the Company under the Lease Agreement at $67,000 per month, with an annual increase in the base rent on August 1, 2010, August 1, 2011, August 1, 2012 and August 1, 2013.
On such dates, the base rent shall increase by 5% of the base rent in effect at the time of the increase or a percentage equivalent to the increase in the Consumer Price Index, whichever is greater.
On
March 28, 2013, the Company and Prologis, L.P., formerly known as AMB Property, L.P., entered into a third amendment (the "Van Nuys Amendment") to the Lease
Agreement dated
F-30
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Commitments and Contingencies (Continued)
September 25,
2000, for leased premises used by the Company for engineering testing and manufacturing located in Van Nuys, California. The Van Nuys Amendment extends the term of the Lease
Agreement from December 31, 2012 to December 31, 2017. The Amendment also adjusts the monthly base rent payable by the Company under the Lease Agreement to the following: $60,000 per
month from January 1, 2013 through June 30, 2015 and $65,000 per month from July 1, 2015 through December 31, 2017.
At
March 31, 2014, the Company's minimum commitments under non-cancelable operating leases were as follows (in thousands):
|
|
|
|
|
Year Ending March 31,
|
|
Operating
Leases
|
|
2015
|
|
$
|
1,285
|
|
2016
|
|
|
917
|
|
2017
|
|
|
800
|
|
2018
|
|
|
584
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
3,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commitments
During the three months ended December 31, 2012, the Company incurred $0.5 million in connection with the renewal of
insurance contracts, which was financed by a note payable. The note bears interest at rate of 2.2% per annum with principal and interest paid monthly through August 2013. The outstanding balance of
the note payable as of March 31, 2013 was approximately $0.2 million. As of March 31, 2014 this note payable was paid in full.
In
September 2010, the Company was awarded a grant from the DOE for the research, development and testing of a more efficient microturbine Combined Heat and Power (CHP) system. Part of
the improved efficiency will come from an improved microturbine design, with a projected electrical efficiency of 42% and power output of 370 kW. The project is estimated to cost approximately
$17.4 million. The DOE will contribute $5.0 million toward the project, and the Company will incur approximately $12.4 million in research and development expense. The contract is
over a five-year period and will be completed by September 2015. The Company billed the DOE under the contract for this project a cumulative amount of $3.5 million through March 31,
2014.
In
November 2009, the Company was awarded a grant from the DOE for the research, development and testing of a more fuel flexible microturbine capable of operating on a wider variety of
biofuels. This program concluded in August 2013 and the Company billed the DOE a cumulative amount of $1.4 million under this contract.
Agreements
the Company has with some of its distributors require that if the Company renders parts obsolete in inventories they own and hold in support of their obligations to serve
fielded microturbines, then the Company is required to replace the affected stock at no cost to the distributors. While the Company has never incurred costs or obligations for these types of
replacements, it is possible that future changes in the Company's product technology could result and yield costs to the
F-31
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Commitments and Contingencies (Continued)
Company
if significant amounts of inventory are held at distributors. As of March 31, 2014, no significant inventories were held at distributors.
Legal Matters
From time to time, the Company may become subject to certain legal proceedings, claims and litigation arising in the ordinary course of
business. In the opinion of management, the Company is not currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a
material effect on the Company's operating results, cash flows, financial position or results of operations should such litigation be resolved unfavorably.
13. Employee Benefit Plans
The Company maintains a defined contribution 401(k) profit-sharing plan in which all employees are eligible to participate. Employees may contribute up to Internal Revenue Service annual
limits or, if less, 90% of their eligible compensation. Employees are fully vested in their contributions to the plan. The plan also provides for both Company matching and discretionary contributions,
which are determined by the Board of Directors. The Company began matching 50 cents on the dollar up to 4% of the employee's contributions in October 2006. Prior to that date, no Company contributions
had been made since the inception of the plan. The Company's match vests 25% a year over four years starting from the employee's hire date. The expense recorded by the Company for the years ended
March 31, 2014, 2013 and 2012 was approximately $0.3 million, $0.2 million and $0.3 million, respectively.
14. Other Current Liabilities
In September 2007, the Company entered into a Development and License Agreement (the "Development Agreement") with UTC Power Corporation ("UTCP"), a division of United Technologies
Corporation. The Development Agreement engaged UTCP to fund and support the Company's continued development and commercialization of the Company's 200 kilowatt ("C200") microturbine. Pursuant to the
terms of the Development Agreement, UTCP contributed $12.0 million in cash and approximately $800,000 of in-kind services toward the Company's efforts to develop the C200. In return, the
Company agreed to pay to UTCP an ongoing royalty of 10% of the sales price of the C200 sold to customers other than UTCP until the aggregate of UTCP's cash and in-kind services investment had been
recovered and, thereafter, the royalty would be reduced to 5% of the sales price. In August 2009, the Development Agreement was assigned by UTCP to Carrier Corporation ("Carrier").
On
January 14, 2011, the Company entered into an amendment to the Development Agreement with Carrier that amended the royalty payment from a certain percentage of the sales prices
to a predetermined fixed rate for each microturbine system covered by the amendment. The fixed rate royalty was reduced by 50% during the three months ended September 30, 2013 as a result of
the contractual reduction. Carrier earned $2.8 million, $4.3 million and $3.2 million in royalties for C200 and C1000 Series system sales during the year ended March 31,
2014, 2013 and 2012, respectively. Earned royalties of $0.6 million and $1.4 million were unpaid as of March 31, 2014 and March 31, 2013, respectively, and are included in
accrued expenses in the accompanying balance sheets.
F-32
Table of Contents
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Subsequent Events
On May 1, 2014, the Company entered into an underwriting agreement with Cowen and Company, LLC and FBR & Co. acting as the book-running managers and
Craig-Hallum Capital Group LLC as co-manager, related to a public offering of 18.8 million shares of the Company's common stock at a price of $1.70 per share less underwriting discounts
and commissions. The shares were allocated to a single institutional investor. The net proceeds to the Company from the sale of the Common Stock, after deducting fees and other offering expenses, was
approximately $29.8 million. The offering closed on May 6, 2014.
F-33
Table of Contents
SCHEDULE II
CAPSTONE TURBINE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2014, 2013 and 2012
(In thousands)
|
|
|
|
|
Accounts Receivable Allowances:
|
|
|
|
Balance, March 31, 2011
|
|
$
|
212
|
|
Additions charged to costs and expenses
|
|
|
2,256
|
|
Deductions
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2012
|
|
$
|
2,228
|
|
Additions charged to costs and expenses
|
|
|
276
|
|
Deductions
|
|
|
(362
|
)
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
$
|
2,142
|
|
Additions charged to costs and expenses
|
|
|
242
|
|
Deductions
|
|
|
(138
|
)
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2014
|
|
$
|
2,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
Table of Contents
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
CAPSTONE TURBINE CORPORATION
|
Date: June 12, 2014
|
|
By:
|
|
/s/ EDWARD I. REICH
Edward I. Reich
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
|
KNOW
ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Capstone Turbine Corporation, hereby severally constitute Darren R. Jamison and Edward I. Reich, and
each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, this Annual Report on
Form 10-K and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors to enable Capstone Turbine
Corporation to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ DARREN R. JAMISON
Darren R. Jamison
|
|
President, Chief Executive Officer and Director (Principal Executive Officer)
|
|
June 12, 2014
|
/s/ EDWARD I. REICH
Edward I. Reich
|
|
Executive Vice President, Chief Financial Officer (Principal Financial Officer)
|
|
June 12, 2014
|
/s/ JAYME L. BROOKS
Jayme L. Brooks
|
|
Chief Accounting Officer (Principal Accounting Officer)
|
|
June 12, 2014
|
/s/ GARY D. SIMON
Gary D. Simon
|
|
Chairman of the Board of Directors
|
|
June 12, 2014
|
/s/ RICHARD K. ATKINSON
Richard K. Atkinson
|
|
Director
|
|
June 12, 2014
|
/s/ JOHN V. JAGGERS
John V. Jaggers
|
|
Director
|
|
June 12, 2014
|
Table of Contents
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ NOAM LOTAN
Noam Lotan
|
|
Director
|
|
June 12, 2014
|
/s/ GARY J. MAYO
Gary J. Mayo
|
|
Director
|
|
June 12, 2014
|
/s/ ELIOT G. PROTSCH
Eliot G. Protsch
|
|
Director
|
|
June 12, 2014
|
/s/ HOLLY A. VAN DEURSEN
Holly A. Van Deursen
|
|
Director
|
|
June 12, 2014
|
/s/ DARRELL J. WILK
Darrell J. Wilk
|
|
Director
|
|
June 12, 2014
|
Table of Contents
Exhibit Index
|
|
|
|
Exhibit
Number
|
|
Description
|
|
2.1
|
|
Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated February 1, 2010(a)
|
|
|
|
|
|
2.2
|
|
Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated March 31, 2011(b)
|
|
|
|
|
|
2.3
|
|
Second Amendment to Asset Purchase Agreement between Capstone Turbine Corporation and Calnetix Power Solutions, Inc., dated April 28, 2011(b)
|
|
|
|
|
|
3.1
|
|
Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation(c)
|
|
|
|
|
|
3.2
|
|
Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation(d)
|
|
|
|
|
|
3.3
|
|
Amended and Restated Bylaws of Capstone Turbine Corporation(e)
|
|
|
|
|
|
4.1
|
|
Specimen stock certificate(f)
|
|
|
|
|
|
4.2
|
|
Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock(g)
|
|
|
|
|
|
4.3
|
|
Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Capstone Turbine Corporation dated September 16, 2008(h)
|
|
|
|
|
|
4.4
|
|
Certificate of Amendment to Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock dated August 30, 2012(i)
|
|
|
|
|
|
4.5
|
|
Rights Agreement, dated July 7, 2005, between Capstone Turbine Corporation and Mellon Investor Services LLC(g)
|
|
|
|
|
|
4.6
|
|
Amendment No. 1 to Rights Agreement, dated July 3, 2008, between Capstone Turbine Corporation and Mellon Investor Services LLC(j)
|
|
|
|
|
|
4.7
|
|
Amendment No. 2 to Rights Agreement, dated June 9, 2011, between Capstone Turbine Corporation and Mellon Investor Services LLC(b)
|
|
|
|
|
|
10.1
|
|
Amended and Restated License Agreement, dated August 2, 2000, by and between Solar Turbines Incorporated and Capstone Turbine Corporation(k)
|
|
|
|
|
|
10.2
|
|
Transition Agreement, dated August 2, 2000, by and between Capstone Turbine Corporation and Solar Turbines Incorporated(k)
|
|
|
|
|
|
10.3
|
|
Lease between Capstone Turbine Corporation and Northpark IndustrialLeahy Division LLC, dated December 1, 1999, as amended, for leased premises at 21211 Nordhoff Street, Chatsworth, California(l)
|
|
|
|
|
|
10.4
|
|
Lease between Capstone Turbine Corporation and Prologis, L.P., formerly known as AMB Property, L.P., dated September 25, 2000, as amended, for leased premises at 16640 Stagg Street, Van Nuys,
California(m)
|
|
|
|
|
|
10.5
|
*
|
Capstone Turbine Corporation Amended and Restated 2000 Equity Incentive Plan as amended and restated effective August 30, 2012(n)
|
|
|
|
|
|
10.6
|
*
|
Form of Stock Option Agreement for Amended and Restated 2000 Equity Incentive Plan(o)
|
|
|
|
|
|
10.7
|
*
|
Form of Stock Bonus Agreement for Capstone Turbine Corporation 2000 Equity Incentive Plan(p)
|
Table of Contents
|
|
|
|
Exhibit
Number
|
|
Description
|
|
10.8
|
*
|
Amended and Restated Capstone Turbine Corporation Change of Control Severance Plan(q)
|
|
|
|
|
|
10.9
|
|
Development and License Agreement between Capstone Turbine Corporation and Carrier Corporation, successor in interest to UTC Power Corporation, dated September 4, 2007(r)
|
|
|
|
|
|
10.10
|
|
First Amendment to the Development and License Agreement between Capstone Turbine Corporation and Carrier Corporation, successor in interest to UTC Power Corporation, dated January 14, 2011(b)
|
|
|
|
|
|
10.11
|
|
Form of Investor Agreement, dated September 18, 2012, between Capstone Turbine Corporation and an investor in the 2012 registered direct offering(s)
|
|
|
|
|
|
10.12
|
|
Form of Investor Letter Agreement, dated February 21, 2013, between Capstone Turbine Corporation and investors in the 2012 registered direct offering(t)
|
|
|
|
|
|
10.13
|
|
Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 9, 2009 (Domestic Facility)(u)
|
|
|
|
|
|
10.14
|
|
Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 9, 2009 (Ex-Im Subfacility)(u)
|
|
|
|
|
|
10.15
|
|
First Amendment to Credit and Security Agreement between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 9, 2009(u)
|
|
|
|
|
|
10.16
|
|
Second Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated November 5, 2009(v)
|
|
|
|
|
|
10.17
|
|
Third Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 11, 2010(p)
|
|
|
|
|
|
10.18
|
|
Fourth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 29, 2010(w)
|
|
|
|
|
|
10.19
|
|
Fifth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated November 9, 2010(x)
|
|
|
|
|
|
10.20
|
|
Sixth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated March 23, 2011(y)
|
|
|
|
|
|
10.21
|
|
Seventh Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 9, 2011(b)
|
|
|
|
|
|
10.22
|
|
Eighth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated September 27, 2011(z)
|
|
|
|
|
|
10.23
|
|
Ninth Amendment to the Credit and Security Agreements and Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated February 8, 2012(aa)
|
|
|
|
|
|
10.24
|
|
Tenth Amendment to the Credit and Security Agreements between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 12, 2012(bb)
|
|
|
|
|
|
10.25
|
|
Eleventh Amendment to the Credit and Security Agreements between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 7, 2013(m)
|
|
|
|
|
|
10.26
|
|
Waiver of Defaults between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated April 25, 2014
|
|
|
|
|
Table of Contents
|
|
|
|
Exhibit
Number
|
|
Description
|
|
10.27
|
|
Twelfth Amendment to the Credit and Security Agreements between Capstone Turbine Corporation and Wells Fargo Bank, NA, dated June 9, 2014(cc)
|
|
|
|
|
|
10.28
|
*
|
Capstone Turbine Corporation Amended and Restated Executive Performance Incentive Plan as amended and restated effective August 29, 2013(dd)
|
|
|
|
|
|
10.29
|
*
|
Inducement Stock Option Agreement with Darren R. Jamison, dated December 18, 2006(ee)
|
|
|
|
|
|
10.30
|
*
|
Restricted Stock Agreement with Darren R. Jamison, dated December 18, 2006(ee)
|
|
|
|
|
|
10.31
|
*
|
Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, dated December 1, 2006(ee)
|
|
|
|
|
|
10.32
|
*
|
Amendment to Letter Agreement between Capstone Turbine Corporation and Darren R. Jamison, effective April 8, 2009(u)
|
|
|
|
|
|
10.33
|
*
|
Letter Agreement between Capstone Turbine Corporation and James D. Crouse, dated January 31, 2007(ff)
|
|
|
|
|
|
10.34
|
*
|
Inducement Stock Option Agreement with James D. Crouse, dated February 5, 2007(ff)
|
|
|
|
|
|
10.35
|
*
|
Restricted Stock Agreement with James D. Crouse, dated February 5, 2007(ff)
|
|
|
|
|
|
10.36
|
*
|
Form of Inducement Stock Option Agreement(gg)
|
|
|
|
|
|
10.37
|
*
|
Form of Inducement Restricted Stock Unit Agreement(gg)
|
|
|
|
|
|
10.38
|
*
|
Amended and Restated Change in Control Severance Agreement with Darren R. Jamison, dated June 14, 2012(bb)
|
|
|
|
|
|
10.39
|
*
|
Consulting Agreement with Mark Gilbreth, dated April 1, 2013(m)
|
|
|
|
|
|
10.40
|
|
Underwriting Agreement dated May 1, 2014 by and between the Company and Cowen and Company, LLC, as representative of the several underwriters(hh)
|
|
|
|
|
|
14.1
|
|
Code of Business Conduct
|
|
|
|
|
|
14.2
|
|
Code of Ethics for Senior Financial Officers and Chief Executive Officer
|
|
|
|
|
|
21
|
|
Subsidiary List(b)
|
|
|
|
|
|
23.1
|
|
Consent of KPMG LLP
|
|
|
|
|
|
23.2
|
|
Consent of Deloitte & Touche LLP
|
|
|
|
|
|
24
|
|
Power of Attorney (included on the signature page of this Form 10-K)
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
101.INS
|
**
|
XBRL Instance Document
|
|
|
|
|
|
101.SCH
|
**
|
XBRL Schema Document
|
|
|
|
|
|
101.CAL
|
**
|
XBRL Calculation Linkbase Document
|
|
|
|
|
|
101.LAB
|
**
|
XBRL Label Linkbase Document
|
|
|
|
|
|
101.PRE
|
**
|
XBRL Presentation Linkbase Document
|
Table of Contents
|
|
|
|
Exhibit
Number
|
|
Description
|
|
101.DEF
|
**
|
XBRL Definition Linkbase Document
|
-
*
-
Management
contract or compensatory plan or arrangement
-
(a)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on February 5, 2010 (File No. 001-15957).
-
(b)
-
Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (File
No. 001-15957).
-
(c)
-
Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated May 8, 2000 (File
No. 333-33024).
-
(d)
-
Incorporated
by reference to Appendix B to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 17, 2012 (File
No. 001-15957).
-
(e)
-
Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2005
(File No. 001-15957).
-
(f)
-
Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-1/A, dated June 21, 2000 (File
No. 333-33024).
-
(g)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 8, 2005 (File No. 001-15957).
-
(h)
-
Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009 (File
No. 001-15957).
-
(i)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 6, 2012 (File
No. 001-15957).
-
(j)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 10, 2008 (File No. 001-15957).
-
(k)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on October 16, 2000 (File No. 001-15957).
-
(l)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 2, 2009 (File
No. 001-15957).
-
(m)
-
Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2013 (File
No. 001-15957).
-
(n)
-
Incorporated
by reference to Appendix A to Capstone Turbine Corporation's Definitive Proxy Statement, filed on July 17, 2012 (File
No. 001-15957).
-
(o)
-
Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005
(File No. 001-15957).
-
(p)
-
Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2010 (File
No. 001-15957).
-
(q)
-
Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004
(File No. 001-15957).
-
(r)
-
Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007
(File No. 001-15957).
-
(s)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on September 19, 2012 (File
No. 001-15957).
-
(t)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on February 26, 2013 (File
No. 001-15957).
Table of Contents
-
(u)
-
Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended March 31, 2009 (File
No. 001-15957).
-
(v)
-
Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for quarterly period ended September 30, 2009 (File
No. 001-15957).
-
(w)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on July 1, 2010 (File No. 001-15957).
-
(x)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on November 12, 2010 (File
No. 001-15957).
-
(y)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on March 25, 2011 (File No. 001-15957).
-
(z)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on October 3, 2011 (File No. 001-15957).
-
(aa)
-
Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011
(File No. 001-15957).
-
(bb)
-
Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended on March 31, 2012 (File
No. 001-15957).
-
(cc)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on June 10, 2014 (File No. 001-15957).
-
(dd)
-
Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013
(File No. 001-15957).
-
(ee)
-
Incorporated
by reference to Capstone Turbine Corporation's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2006
(File No. 001-15957).
-
(ff)
-
Incorporated
by reference to Capstone Turbine Corporation's Annual Report on Form 10-K for the fiscal year ended on March 31, 2007 (File
No. 001-15957).
-
(gg)
-
Incorporated
by reference to Capstone Turbine Corporation's Registration Statement on Form S-8, dated June 17, 2009 (File
No. 333-160049).
-
(hh)
-
Incorporated
by reference to Capstone Turbine Corporation's Current Report on Form 8-K, filed on May 1, 2014 (File No. 001-15957).
Capstone Turbine (NASDAQ:CPST)
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