NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business and Operations and Liquidity
Nature of the Business and Operations
American Superconductor Corporation (“AMSC” or the “Company”) was founded on April 9, 1987. The Company is a leading provider of megawatt-scale solutions that lower the cost of wind power and enhance the performance of the power grid. In the wind power market, the Company enables manufacturers to field wind turbines through its advanced engineering, support services and power electronics products. In the power grid market, the Company enables electric utilities and renewable energy project developers to connect, transmit and distribute power through its transmission planning services and power electronics and superconductor-based products. The Company’s wind and power grid products and services provide exceptional reliability, security, efficiency and affordability to its customers.
These unaudited condensed consolidated financial statements of the Company have been prepared on a going concern basis in accordance with United States generally accepted accounting principles (“GAAP”) and the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-Q. The going concern basis of presentation assumes that the Company will continue operations and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those instructions. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results for the interim periods ended
June 30, 2016
and
2015
and the financial position at
June 30, 2016
.
Liquidity
The Company has experienced recurring operating losses and as of
June 30, 2016
, the Company had an accumulated deficit of
$938.5 million
. In addition, the Company has experienced recurring negative operating cash flows. At
June 30, 2016
, the Company had cash and cash equivalents of
$35.2 million
. Cash used in operations for the
three
months ended
June 30, 2016
was
$2.1 million
.
From April 1, 2011 through the date of this filing, the Company has reduced its global workforce substantially. The Company has taken actions to consolidate certain business operations to reduce facility costs. As of
June 30, 2016
, the Company had a global workforce of
379
persons. The Company plans to closely monitor its expenses and, if required, expects to further reduce operating costs and capital spending to enhance liquidity.
Over the last several years, the Company has entered into several debt and equity financing arrangements in order to enhance liquidity. Since April 1, 2012, the Company has generated aggregate cash flows from financing activities of
$69.5 million
. This amount includes proceeds from an April 2015 equity offering, which generated net proceeds of approximately
$22.3 million
, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. See Note 9, “Debt”, and Note 11 “Stockholders Equity” for further discussion of these financing arrangements. The Company believes that it is in compliance with the covenants and restrictions included in the agreements governing its debt arrangements as of
June 30, 2016
.
In December 2015, the Company entered into a set of strategic agreements valued at approximately
$210.0 million
with Inox Wind Ltd. (“Inox”), which includes a multi-year supply contract pursuant to which the Company will supply electric control systems to Inox and a license agreement allowing Inox to manufacture a limited number of electrical control systems over the next three to four years. After this initial
three
to
four
year period, Inox agreed that the Company will continue as Inox’s preferred supplier and Inox will be required to purchase from the Company a majority of its electric control systems requirements for an additional
three
-year period. As of the date of this Quarterly Report on Form 10-Q, Inox has made all of the pre-payments necessary to allow the Company to begin shipping electrical control systems under the supply contract. These agreements are expected to provide a foundation for the business as the Company pursues its longer-term objectives.
On March 11, 2016, the Company sold
100%
of its minority share investment in Tres Amigas LLC ("Tres Amigas") to an investor for
$0.6 million
. The Company received
$0.3 million
according to the terms of the purchase agreement upon closing, which was recorded as a gain during the three months ended March 31, 2016. The final
$0.3 million
is to be paid when Tres Amigas achieves the earlier of certain agreed-upon financing conditions, which is expected to occur during the third quarter of fiscal 2016. See Note 13, “Minority Investments”, for further information about such investment.
The Company believes it has sufficient liquidity to fund its operations, capital expenditures and scheduled cash payments under its debt obligations for the next twelve months. The Company’s liquidity is highly dependent on its ability to increase revenues, its ability to control its operating costs, its ability to maintain compliance with the covenants and restrictions on its debt obligations (or obtain waivers from its lender in the event of non-compliance), and its ability to raise additional capital, if necessary. There can be no assurance that the Company will be able to continue to raise additional capital from other sources or execute on any other means of improving liquidity described above.
2. Stock-Based Compensation
The Company accounts for its stock-based compensation at fair value. The following table summarizes stock-based compensation expense by financial statement line item for the
three
months ended
June 30, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
Cost of revenues
|
$
|
50
|
|
|
$
|
97
|
|
Research and development
|
30
|
|
|
196
|
|
Selling, general and administrative
|
919
|
|
|
835
|
|
Total
|
$
|
999
|
|
|
$
|
1,128
|
|
During the
three
months ended
June 30, 2016
and
2015
, the Company granted
161,000
and
364,695
restricted stock awards, respectively. These awards generally vest over
3 years
. Awards for restricted stock include both time-based and performance-based awards. For options and awards that vest upon the passage of time, expense is being recorded over the vesting period. Performance-based awards are expensed over the requisite service period based on probability of achievement.
The estimated fair value of the Company’s stock-based awards, less expected annual forfeitures, is amortized over the awards’ service period. The total unrecognized compensation cost for unvested outstanding stock options was
$0.5 million
at
June 30, 2016
. This expense will be recognized over a weighted average expense period of approximately
2.2 years
. The total unrecognized compensation cost for unvested outstanding restricted stock was
$3.3 million
at
June 30, 2016
. This expense will be recognized over a weighted-average expense period of approximately
2.0 years
.
The Company did not grant any stock options during the
three
months ended
June 30, 2016
or
2015
.
3. Computation of Net Loss per Common Share
Basic net loss per share (“EPS”) is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Where applicable, diluted EPS is computed by dividing the net loss by the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period, calculated using the treasury stock method. Common equivalent shares include the effect of restricted stock, exercise of stock options and warrants and contingently issuable shares. For each of the three months ended
June 30, 2016
and
2015
,
1.6 million
shares were not included in the calculation of diluted EPS as they were considered anti-dilutive, of which 0.4 million relate to outstanding stock options, and 1.2 million relate to outstanding warrants, respectively.
The following table reconciles the numerators and denominators of the earnings per share calculation for the three months ended
June 30, 2016
and
2015
(in thousands, except per share data):
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
Net loss
|
(10,355
|
)
|
|
(9,121
|
)
|
Denominator:
|
|
|
|
Weighted-average shares of common stock outstanding
|
14,132
|
|
|
12,312
|
|
Weighted-average shares subject to repurchase
|
(456
|
)
|
|
(201
|
)
|
Shares used in per-share calculation ― basic
|
13,676
|
|
|
12,111
|
|
Shares used in per-share calculation ― diluted
|
13,676
|
|
|
12,111
|
|
Net loss per share ― basic
|
(0.76
|
)
|
|
(0.75
|
)
|
Net loss per share ― diluted
|
(0.76
|
)
|
|
(0.75
|
)
|
4. Fair Value Measurements
A valuation hierarchy for disclosure of the inputs to valuation used to measure fair value has been established. This hierarchy prioritizes the inputs into three broad levels as follows:
|
|
|
|
|
|
Level 1
|
-
|
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
|
|
|
|
|
|
Level 2
|
-
|
Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
|
|
|
|
|
|
Level 3
|
-
|
Unobservable inputs that reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data.
|
The Company provides a gross presentation of activity within Level 3 measurement roll-forward and details of transfers in and out of Level 1 and 2 measurements. A change in the hierarchy of an investment from its current level is reflected in the period during which the pricing methodology of such investment changes. Disclosure of the transfer of securities from Level 1 to Level 2 or Level 3 is made in the event that the related security is significant to total cash and investments. The Company did not have any transfers of assets and liabilities from Level 1 and Level 2 to Level 3 of the fair value measurement hierarchy during the
three
months ended
June 30, 2016
.
A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair value on a recurring basis, measured as of
June 30, 2016
and
March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Carrying
Value
|
|
Quoted Prices in
Active Markets
(
Level 1)
|
|
Significant Other
Observable Inputs
(
Level 2)
|
|
Significant
Unobservable Inputs
(
Level 3)
|
June 30, 2016:
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
17,061
|
|
|
$
|
17,061
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
Warrants
|
$
|
3,905
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Carrying
Value
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
March 31, 2016:
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
16,040
|
|
|
$
|
16,040
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
Warrants
|
$
|
3,227
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,227
|
|
The table below reflects the activity for the Company’s major classes of liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
Warrants
|
April 1, 2016
|
$
|
3,227
|
|
Mark to market adjustment
|
678
|
|
Balance at June 30, 2016
|
$
|
3,905
|
|
|
|
|
|
|
|
Warrants
|
April 1, 2015
|
$
|
2,999
|
|
Mark to market adjustment
|
228
|
|
Balance at March 31, 2016
|
$
|
3,227
|
|
The following table provides the assets and liabilities measured at fair value on a non-recurring basis, as of
June 30, 2015
. During the three months ended
June 30, 2015
the Company’s investment in Tres Amigas was determined to be no longer recoverable and was fully impaired. See note 13, “Minority Investments” for further details:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
Carrying
|
|
Active Markets
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
Value
|
|
(
Level 1)
|
|
(
Level 2)
|
|
(
Level 3)
|
June 30, 2015:
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Investment in unconsolidated entity - Tres Amigas
|
$
|
—
|
|
|
$
|
|
$
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Valuation Techniques
Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities of three months or less that are regarded as high quality, low risk investments and are measured using such inputs as quoted prices, and are classified within Level 1 of the valuation hierarchy. Cash equivalents consist principally of certificates of deposits and money market accounts.
Warrants
Warrants were issued in conjunction with a Securities Purchase Agreement (the “Purchase Agreement”) with Capital Ventures International (“CVI”) in April 2012, an equity offering to Hudson Bay Capital in November 2014, and a Loan and Security Agreement with Hercules Technology Growth Capital, Inc. (“Hercules”) in June 2012 and through subsequent amendments. See Note 9, “Debt,” and Note 10 “Warrants and Derivative Liabilities,” for additional information. These warrants are subject to revaluation at each balance sheet date, and any change in fair value will be recorded as a change in fair value in derivatives and warrants until the earlier of their exercise or expiration.
The Company relies on various assumptions in a lattice model to determine the fair value of warrants. The Company has valued the warrants within Level 3 of the valuation hierarchy. See Note 10, “Warrants and Derivative Liabilities,” for a discussion of the warrants and the valuation assumptions used.
5. Accounts Receivable
Accounts receivable at
June 30, 2016
and
March 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
March 31,
2016
|
Accounts receivable (billed)
|
$
|
6,250
|
|
|
$
|
18,089
|
|
Accounts receivable (unbilled)
|
843
|
|
|
1,229
|
|
Less: Allowance for doubtful accounts
|
(54
|
)
|
|
(54
|
)
|
Accounts receivable, net
|
$
|
7,039
|
|
|
$
|
19,264
|
|
6. Inventory
Inventory at
June 30, 2016
and
March 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
March 31,
2016
|
Raw materials
|
$
|
11,949
|
|
|
$
|
9,665
|
|
Work-in-process
|
1,229
|
|
|
3,411
|
|
Finished goods
|
11,111
|
|
|
3,215
|
|
Deferred program costs
|
4,598
|
|
|
2,221
|
|
Net inventory
|
$
|
28,887
|
|
|
$
|
18,512
|
|
The Company recorded inventory write-downs of
$0.3 million
and
$0.6 million
for each of the three months ended
June 30, 2016
and
2015
, respectively. These write downs were based on evaluating its inventory on hand for excess quantities and obsolescence.
Deferred program costs as of
June 30, 2016
and
March 31, 2016
primarily represent costs incurred on programs accounted for under contract accounting where the Company needs to complete development milestones before revenue and costs will be recognized.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at
June 30, 2016
and
March 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
March 31,
2016
|
Accounts payable
|
$
|
7,650
|
|
|
$
|
5,837
|
|
Accrued inventories in-transit
|
1,501
|
|
|
1,908
|
|
Accrued other miscellaneous expenses
|
3,769
|
|
|
3,003
|
|
Accrued compensation
|
7,598
|
|
|
7,526
|
|
Income taxes payable
|
1,402
|
|
|
1,281
|
|
Accrued warranty
|
2,774
|
|
|
3,601
|
|
Total
|
$
|
24,694
|
|
|
$
|
23,156
|
|
The Company generally provides a
one
to
three
year warranty on its products, commencing upon installation. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience.
Product warranty activity was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
Balance at beginning of period
|
$
|
3,601
|
|
|
$
|
3,934
|
|
Change in accruals for warranties during the period
|
101
|
|
|
(5
|
)
|
Settlements during the period
|
(928
|
)
|
|
(585
|
)
|
Balance at end of period
|
$
|
2,774
|
|
|
$
|
3,344
|
|
8. Income Taxes
T
he Company recorded income tax expense of
$0.3 million
and
$0.6 million
the
three
months ended
June 30, 2016
and
2015
, respectively. Income tax expense was primarily due to income taxes in the Company’s foreign jurisdictions.
Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than
50%
likely to be realized upon ultimate settlement. The Company re-evaluates these uncertain tax positions on a quarterly basis. The evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. The Company did not identify any uncertain tax positions in the
three
months ended
June 30, 2016
and did not have any gross unrecognized tax benefits as of March 31, 2016.
9. Debt
Senior Secured Term Loans
On November 15, 2013, the Company amended its existing Loan and Security Agreement with Hercules and entered into a new term loan (the “Term Loan B”), borrowing
$10.0 million
. After closing fees and expenses, the net proceeds to the Company for the Term Loan B were
$9.8 million
. The Term Loan B bears an interest rate of 11% plus the percentage, if any, by which the prime rate as reported by the Wall Street Journal exceeds 3.75%. The Company is repaying the Term Loan B in equal monthly installments ending on November 1, 2016. The principal balance of the Term Loan B is approximately
$1.7 million
as of
June 30, 2016
. The Company will pay an end of term fee of
$0.5 million
upon the earlier of maturity or prepayment of the Term Loan B. The Company has accrued the end of term fee and recorded a corresponding amount into the debt discount. The Term Loan B includes a mandatory prepayment feature which allows Hercules the right to use any of the Company’s net proceeds from specified asset dispositions greater than
$1.0 million
in a calendar year to pay off any outstanding accrued interest and principal balance on the Term Loan B. The Company determined the fair value to be de-minimis for this feature. In addition, the Company incurred
$0.2 million
of legal and origination costs at inception of the loan, which have been recorded as a debt discount.
On December 19, 2014, the Company entered into a second amendment with Hercules (the “Hercules Second Amendment”) and entered into a new term loan, borrowing an additional
$1.5 million
(the “Term Loan C”). After closing fees and expenses, the net proceeds to the Company for the Term Loan C were
$1.4 million
. The Term Loan B and Term Loan C are collectively referred to as the “Term Loans”. The Term Loan C also bears the same interest rate as the Term Loan B. The Company will make interest only payments until maturity on
June 1, 2017
, when the loan is scheduled to be repaid in its entirety. The maturity date of the Term Loan C was extended from March 1, 2017 to June 1, 2017 due to the Company’s April 2015 equity offering which raised more than
$10 million
in new capital before December 31, 2015. The Company will pay an end of term fee of approximately
$0.1 million
upon earlier of maturity or prepayment of the Term Loan C. The Company has accrued the end of term fee and recorded a corresponding amount in the debt discount. The Term Loan C includes the same mandatory prepayment feature as the Term Loan B. The Company determined the fair value to be de-minimus for this feature. In addition, the Company incurred approximately
$0.1 million
of legal and origination costs at inception of the loan, which have been recorded as a debt discount.
Hercules received warrants to purchase
13,927
shares of common stock (the “First Warrant”) and
25,641
shares of common stock (the “Second Warrant”) in conjunction with a prior term loan which has been repaid in full and the Term Loan B. Due to certain adjustment provisions within the warrants, they qualified for liability accounting. The fair value of the warrants,
$0.4 million
and
$0.2 million
, respectively, was recorded upon issuance to debt discount and a warrant liability. In conjunction with the Hercules Second Amendment, the First Warrant and Second Warrant were cancelled and replaced with the issuance of a new warrant (the “Hercules Warrant”) to purchase
58,823
shares of common stock at an exercise price of
$11.00
per share, subject to adjustment. The Hercules Warrant expires on June 30, 2020. See Note 10, “Warrants and Derivative Liabilities”, for a discussion on the Hercules Warrant and the valuation assumptions used.
Under Term Loan B, the total debt discount including the Hercules Warrant, end of term fee and legal and origination costs of
$1.0 million
is being amortized into interest expense over the term of the Term Loan B using the effective interest method. During each of the three months ended
June 30, 2016
and
2015
, the Company recorded non-cash interest expense for amortization of the debt discount related to the Term Loan B of less than
$0.1 million
. Under Term Loan C, the total debt discount, including the Hercules Warrant, end of term fee and legal and origination costs of
$0.3 million
is being amortized into interest expense over the term of the Term Loan C using the effective interest method. During each of the three months ended
June 30, 2016
and
2015
, the Company recorded non-cash interest expense for amortization of the debt discount related to the Term Loan C of less than
$0.1 million
.
The Term Loans are secured by substantially all of the Company’s existing and future assets, including a mortgage on real property owned by the Company’s wholly-owned subsidiary, ASC Devens LLC, and located at 64 Jackson Road, Devens, Massachusetts. The Term Loans contain certain covenants that restrict the Company’s ability to, among other things, incur or assume certain debt, merge or consolidate, materially change the nature of the Company’s business, make certain investments, acquire or dispose of certain assets, make guarantees or grant liens on its assets, make certain loans, advances or investments, declare dividends or make distributions or enter into transactions with affiliates. In addition, there is a covenant that requires the Company to maintain a minimum unrestricted cash balance (the “Minimum Threshold”) in the United States. As a result of the Company’s April 2015 equity offering, the Minimum Threshold was reduced to the lesser of
$2.0 million
or the aggregate outstanding principal balance of the Term Loans. As of
June 30, 2016
, the Minimum Threshold was
$2.0 million
. The events of default under the Term Loans include, but are not limited to, failure to pay amounts due, breaches of covenants, bankruptcy events, cross defaults under other material indebtedness and the occurrence of a material adverse effect and/or change in control. In the case of a continuing event of default, Hercules may, among other remedies, declare due all unpaid principal amounts outstanding and any accrued but unpaid interest and foreclose on all collateral granted to Hercules as security under the Term Loans.
Interest expense on the Term Loans for the three months ended
June 30, 2016
and
2015
, was
$0.2 million
and
$0.3 million
, respectively, each of which included less than
$0.1 million
of non-cash interest expense related to the amortization of the debt discount on the respective Term Loans.
Although the Company believes that it is in compliance with the covenants and restrictions under the Term Loans as of
June 30, 2016
, there can be no assurance that the Company will continue to be in compliance.
10. Warrants and Derivative Liabilities
Senior Convertible Note Warrant
On April 4, 2012, the Company entered into the Purchase Agreement with CVI. The Purchase Agreement included a warrant to purchase
309,406
shares of the Company’s common stock (the “Original Warrant”). Pursuant to an exchange in October 2013, the Original Warrant was exchanged for a new warrant (the “Exchanged Warrant”). The Exchanged Warrant is exercisable at any time on or after the date that is
six months
after the issuance of the Original Warrant and entitles CVI to purchase shares of the Company’s common stock for a period of
five years
from the date the Original Warrant becomes exercisable at an exercise price equal to
$15.94
per share, subject to certain price-based and other anti-dilution adjustments. The Exchanged Warrant may not be exercised if, after giving effect to the conversion, CVI together with its affiliates, would beneficially own in excess of
4.99%
of the Company’s common stock. This percentage may be raised to any other percentage not in excess of
9.99%
at the option of CVI, upon at least
61
-days prior notice to the Company, or lowered to any other percentage, at the option of CVI, at any time.
The Company calculated the fair value of the Exchanged Warrant, utilizing an integrated lattice model. The lattice model is an option pricing model that involves the construction of a binomial tree to show the different paths that the underlying asset may take over the option’s life. A lattice model can take into account expected changes in various parameters such as volatility over the life of the options, providing more accurate estimates of option prices than the Black-Scholes model. See Note 4, "Fair Value Measurements", for further discussion.
The Company accounts for the Exchanged Warrant as a liability due to certain adjustment provisions within the warrant, which requires that it be recorded at fair value. The Exchanged Warrant is subject to revaluation at each balance sheet date and any change in fair value is recorded as a change in fair value of derivatives and warrants until the earlier of its expiration or its exercise at which time the warrant liability will be reclassified to equity.
Following is a summary of the key assumptions used to calculate the fair value of the Exchanged Warrant:
|
|
|
Fiscal Year 16
|
June 30,
2016
|
Risk-free interest rate
|
0.48%
|
Expected annual dividend yield
|
—
|
Expected volatility
|
76.30%
|
Term (years)
|
1.26
|
Fair value
|
$0.4 million
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 15
|
March 31,
2016
|
|
December 31,
2015
|
|
September 30,
2015
|
|
June 30,
2015
|
|
March 31,
2015
|
Risk-free interest rate
|
0.66%
|
|
0.96%
|
|
0.64%
|
|
0.74%
|
|
0.73%
|
Expected annual dividend yield
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
Expected volatility
|
76.76%
|
|
76.68%
|
|
73.39%
|
|
71.61%
|
|
70.42%
|
Term (years)
|
1.51
|
|
1.76
|
|
2.01
|
|
2.26
|
|
2.51
|
Fair value
|
$0.4 million
|
|
$0.3 million
|
|
$0.1 million
|
|
$0.2 million
|
|
$0.3 million
|
The Company recorded no change in the fair value of the Exchanged Warrant during the three months ended
June 30, 2016
, and a net gain of
$0.1 million
, resulting from the decrease in the fair value of the Exchanged Warrant during the three months ended
June 30, 2015
.
Hercules Warrant
On December 19, 2014, the Company entered into the Hercules Second Amendment. See Note 9, “Debt” for additional information. In conjunction with the agreement, the Company issued the Hercules Warrant to purchase
58,823
shares of the Company’s common stock. The Hercules Warrant is exercisable at any time after its issuance at an initial exercise price of
$11.00
per share, subject to certain price-based and other anti-dilution adjustments, and expires on
June 30, 2020
. As a result of the equity offering in April 2015, the exercise price of the Hercules Warrant was reduced to
$9.41
per share.
The Company accounts for the Hercules Warrant as a liability due to certain provisions within the warrant. The Hercules Warrant is subject to revaluation at each balance sheet date and any change in fair value is recorded as a change in fair value of derivatives and warrants until the earlier of its expiration or its exercise, at which time the warrant liability will be reclassified to equity.
Following is a summary of the key assumptions used to calculate the fair value of the Hercules Warrant:
|
|
|
Fiscal Year 16
|
June 30,
2016
|
Risk-free interest rate
|
0.86%
|
Expected annual dividend yield
|
—
|
Expected volatility
|
68.34%
|
Term (years)
|
4.00
|
Fair value
|
$0.3 million
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 15
|
March 31,
2016
|
|
December 31,
2015
|
|
September 30,
2015
|
|
June 30,
2015
|
|
March 31,
2015
|
Risk-free interest rate
|
1.08%
|
|
1.65%
|
|
1.31%
|
|
1.63%
|
|
1.41%
|
Expected annual dividend yield
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
Expected volatility
|
70.25%
|
|
73.57%
|
|
75.32%
|
|
72.57%
|
|
74.60%
|
Term (years)
|
4.25
|
|
4.50
|
|
4.75
|
|
5.00
|
|
5.25
|
Fair value
|
$0.2 million
|
|
$0.2 million
|
|
$0.1 million
|
|
$0.2 million
|
|
$0.2 million
|
The Company recorded a net loss, resulting from an increase in the fair value of the Hercules Warrant, of
$0.1 million
during the three months ended
June 30, 2016
to change in fair value of derivatives and warrants, and no change in the fair value of the Hercules Warrant during the three months ended
June 30, 2015
.
November 2014 Warrant
On November 13, 2014, the Company completed an offering of approximately
909,090
units of the Company’s common stock with Hudson Bay Capital. Each unit consisted of one share of the Company’s common stock and
0.9
of a warrant to purchase one share of common stock, or a warrant to purchase in the aggregate
818,181
shares (the “November 2014 Warrant”). The November 2014 Warrant is exercisable at any time, at an initial exercise price equal to
$11.00
per share, subject to certain price-based and other anti-dilution adjustments, and expires on
November 13, 2019
. As a result of the April 2015 equity offering, the exercise price of the November 2014 Warrant was reduced to
$9.41
per share.
The Company accounts for the November 2014 Warrant as a liability due to certain provisions within the warrant. The November 2014 Warrant is subject to revaluation at each balance sheet date and any change in fair value is recorded as a change in fair value of derivatives and warrants until the earlier of its expiration or its exercise, at which time the warrant liability will be reclassified to equity.
Following is a summary of the key assumptions used to calculate the fair value of the November 2014 Warrant:
|
|
|
Fiscal Year 16
|
June 30,
2016
|
Risk-free interest rate
|
0.77%
|
Expected annual dividend yield
|
—
|
Expected volatility
|
70.01%
|
Term (years)
|
3.37
|
Fair value
|
$3.2 million
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 15
|
March 31,
2016
|
|
December 31,
2015
|
|
September 30,
2015
|
|
June 30,
2015
|
|
March 31,
2015
|
Risk-free interest rate
|
0.98%
|
|
1.51%
|
|
1.17%
|
|
1.44%
|
|
1.28%
|
Expected annual dividend yield
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
Expected volatility
|
69.88%
|
|
70.02%
|
|
73.02%
|
|
74.18%
|
|
75.96%
|
Term (years)
|
3.62
|
|
3.87
|
|
4.12
|
|
4.37
|
|
4.62
|
Fair value
|
$2.6 million
|
|
$2.1 million
|
|
$1.3 million
|
|
$1.8 million
|
|
$2.5 million
|
The Company recorded a net loss, resulting from an increase in the fair value of the November 2014 Warrant, of
$0.6 million
in the three months ended
June 30, 2016
, and a net gain, resulting from a decrease in the fair value of the November 2014 Warrant, of
$0.7 million
during the three months ended
June 30, 2015
.
The Company prepared its estimates for the assumptions used to determine the fair value of the warrants issued in conjunction with both the Term Loans and our unsecured, senior convertible note with CVI, as well as the November 2014 Warrant utilizing the respective terms of the warrants with similar inputs, as described above.
11. Stockholders’ Equity
On April 29, 2015, the Company completed an equity offering with Cowen and Company, LLC, under which the Company sold
4.0 million
shares of its common stock at an offering price of
$6.00
per share. After underwriting, commissions and expenses, the Company received net proceeds from the offering of approximately
$22.3 million
.
12. Commitments and Contingencies
Legal Contingencies
From time to time, the Company is involved in legal and administrative proceedings and claims of various types. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary to make the consolidated financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in its consolidated financial statements.
On September 13, 2011, the Company commenced a series of legal actions in China against Sinovel Wind Group Co. Ltd. (“Sinovel”). The Company’s Chinese subsidiary, Suzhou AMSC Superconductor Co. Ltd., filed a claim for arbitration with the Beijing Arbitration Commission in accordance with the terms of the Company’s supply contracts with Sinovel. The case is captioned
(2011) Jing Zhong An Zi No. 963
. The Company alleges that Sinovel committed various material breaches of its contracts with the Company and Sinovel has refused to pay past due amounts for prior shipments of core electrical components and spare parts. The Company is seeking compensation for past product shipments and retention (including interest) in the amount of approximately RMB
485 million
(approximately
$76 million
) due to Sinovel’s breaches of its contracts. The Company is also seeking specific performance of its existing contracts as well as reimbursement of all costs and reasonable expenses with respect to the arbitration. The value of the undelivered components under the existing contracts, including the deliveries refused by Sinovel in March 2011, amounts to approximately RMB
4.6 billion
(approximately
$720 million
).
On October 8, 2011, Sinovel filed with the Beijing Arbitration Commission an application under the caption
(2011) Jing Zhong An Zi No. 963,
for a counterclaim against the Company for breach of the same contracts under which the Company filed its original arbitration claim. Sinovel claims, among other things, that the goods supplied by the Company do not conform to the standards specified in the contracts and claims damages in the amount of approximately RMB
1.2 billion
(approximately
$190 million
) upon Sinovel’s requests for change of counterclaim. On February 27, 2012, Sinovel filed with the Beijing Arbitration Commission an application under the caption
(2012) Jing Zhong An Zi No. 157,
against the Company for breach of the same contracts under which the Company filed its original arbitration claim. Sinovel claims, among other things, that the goods supplied by the Company do not conform to the standards specified in the contracts and claims damages in the amount of approximately RMB
105 million
(approximately
$17 million
). The Company believes that Sinovel’s claims are without merit and it intends to defend these actions vigorously. Since the proceedings in this matter are still in the early technical review phase, the Company cannot reasonably estimate possible losses or range of losses at this time.
Other
The Company enters into long-term construction contracts with customers that require the Company to obtain performance bonds. The Company is required to deposit an amount equivalent to some or all the face amount of the performance bonds into an escrow account until the termination of the bond. When the performance conditions are met, amounts deposited as collateral for the performance bonds are returned to the Company. In addition, the Company has various contractual arrangements in which minimum quantities of goods or services have been committed to be purchased on an annual basis.
As of
June 30, 2016
, the Company had
$0.4 million
of restricted cash included in current assets and
$0.9 million
of restricted cash included in long-term assets. These amounts included in restricted cash primarily represent deposits to secure letters of credit for various supply contracts. These deposits are held in interest bearing accounts.
13. Minority Investments
Investment in Tres Amigas LLC
The Company made an investment in Tres Amigas, focused on providing the first common interconnection of America’s
three
power grids to help the country achieve its renewable energy goals and facilitate the smooth, reliable and efficient transfer of green power from region to region. The Company’s original investment in Tres Amigas was
$5.4 million
.
During the three months ended June 30, 2015, the Company determined that as a result of delays in Tres Amigas securing financing for the project, as well as the Company’s expectation that its investment would not be recoverable based on recent adverse market indicators for potential sales of the Company’s share of the investment, that its investment in Tres Amigas required further analysis for other-than-temporary impairment. The Company recorded an impairment charge of
$0.7 million
to fully impair this investment in the three months ended June 30, 2015.
On March 11, 2016, the Company sold
100%
of its minority share investment in Tres Amigas to an investor for
$0.6 million
. The Company received
$0.3 million
according to the terms of the purchase agreement upon closing, which was recorded as a gain during the three months ended March 31, 2016. The final
$0.3 million
is to be paid when Tres Amigas achieves the earlier of certain agreed-upon financing conditions which is expected to occur during the third quarter of fiscal 2016.
14. Business Segments
The Company reports its financial results in
two
reportable business segments: Wind and Grid.
Through the Company’s Windtec Solutions, the Wind business segment enables manufacturers to field wind turbines with exceptional power output, reliability and affordability. The Company supplies advanced power electronics and control systems, licenses its highly engineered wind turbine designs, and provides extensive customer support services to wind turbine manufacturers. The Company’s design portfolio includes a broad range of drive trains and power ratings of
2
MWs and higher. The Company provides a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility.
Through the Company’s Gridtec Solutions, the Grid business segment enables electric utilities and renewable energy project developers to connect, transmit and distribute power with exceptional efficiency, reliability and affordability. The sales process is enabled by transmission planning services that allow it to identify power grid congestion, poor power quality and other risks, which helps the Company determine how its solutions can improve network performance. These services often lead to sales of grid interconnection solutions for wind farms and solar power plants, power quality systems, and transmission and distribution cable systems. The Company also sells ship protection products to the U.S. Navy through its Grid business segment.
The operating results for the
two
business segments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
Revenues
:
|
|
|
|
Wind
|
$
|
5,675
|
|
|
$
|
18,164
|
|
Grid
|
7,670
|
|
|
5,559
|
|
Total
|
$
|
13,345
|
|
|
$
|
23,723
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
Operating (loss) profit:
|
|
|
|
Wind
|
$
|
(3,030
|
)
|
|
$
|
127
|
|
Grid
|
(5,315
|
)
|
|
(6,508
|
)
|
Unallocated corporate expenses
|
(999
|
)
|
|
(1,876
|
)
|
Total
|
$
|
(9,344
|
)
|
|
$
|
(8,257
|
)
|
The accounting policies of the business segments are the same as those for the consolidated Company. The Company’s business segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measures are segment revenues and segment operating loss. The disaggregated financial results of the segments reflect allocation of certain functional expense categories consistent with the basis and manner in which Company management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. In addition, certain corporate expenses which the Company does not believe are specifically attributable or allocable to either of the
two
business segments have been excluded from the segment operating loss.
Unallocated corporate expenses primarily consist of stock-based compensation expense of
$1.0 million
and
$1.1 million
in the
three
months ended
June 30, 2016
and
2015
, respectively, and an impairment charge of
$0.7 million
for the
three
months ended
June 30, 2015
.
Total assets for the
two
business segments as of
June 30, 2016
and
March 31, 2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
March 31,
2016
|
Wind
|
$
|
25,704
|
|
|
$
|
34,389
|
|
Grid
|
40,027
|
|
|
36,255
|
|
Corporate assets
|
60,320
|
|
|
64,674
|
|
Total
|
$
|
126,051
|
|
|
$
|
135,318
|
|
The following table sets forth customers who represented 10% or more of the Company’s total revenues for the
three
months ended
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
2016
|
|
2015
|
INOX Wind Limited
|
27
|
%
|
|
47
|
%
|
Reed & Reed Inc.
|
17
|
%
|
|
—
|
%
|
Essential Energy
|
13
|
%
|
|
—
|
%
|
XJ Group Corporation
|
12
|
%
|
|
—
|
%
|
Beijing JINGCHENG New Energy Co., Ltd
|
—
|
%
|
|
25
|
%
|
M.A. Mortenson Company
|
—
|
%
|
|
11
|
%
|
15. Recent Accounting Pronouncements
In May 2014, the FASB and the International Accounting Standards Board (IASB) issued ASU 2014-09,
ASU Revenue from Contracts with Customers (Topic 606),
The guidance substantially converges final standards on revenue recognition between the FASB and IASB providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles. The ASU is effective for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact, if any, the adoption of ASU 2014-09 may have on its current practices.
In July 2014, the FASB issued ASU 2014-12,
Compensation - Stock Compensation (Topic 718): Accounting for Share Based Payments When the Terms of an Award Provide that a Performance Target could be Achieved after the Requisite Service Period.
To account for such awards, a reporting entity should apply existing guidance in FASB Accounting Standards Codification
Topic 718, Compensation - Stock Compensation
, as it relates to awards with performance conditions that affect vesting. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. The Company adopted ASU 2014-12 effective April 1, 2016 and concludes that there is no material impact on its current practices.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern.
The new standard explicitly requires the assessment at interim and annual periods, and provides management with its own disclosure guidance. This ASU is effective for annual reporting periods and interim periods, within those annual periods ending after December 15, 2016. The Company is currently evaluating the impact, if any, the adoption of ASU 2014-15 may have on its current practices.
In April 2015, the FASB issued ASU 2015-03
Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU 2015-03
require an entity to present debt issuance costs on the balance sheet as a direct deduction from the related debt liability as opposed to an asset. Amortization of the costs will continue to be reported as interest expense. The Company adopted ASU 2015-03 effective April 1, 2016 and concludes that there is no material impact on its consolidated results of operations, financial condition, or cash flow.
In June 2015, the FASB issued ASU 2015-10
Technical Corrections and Improvements. The amendments in ASU 2015-10
clarify and correct some of the differences that arose between original guidance from FASB, EITF and other sources, and the translation into the new Codification. The Company adopted ASU 2015-10 effective April 1, 2016 and concludes that there is no material impact on its consolidated results of operations, financial condition, or cash flow.
In July 2015, the FASB issued ASU 2015-11
Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in ASU 2015-11
clarify the proper way to identify market value in the use of lower of cost or market value valuation method. As market value could be determined multiple ways under prior standards, it will now be considered as net realizable value. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, the adoption of ASU 2015-11 may have on its current practices.
In September 2015, the FASB issued ASU 2015-16
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.
The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined. The Company adopted ASU 2015-16 effective April 1, 2016 and concludes that there is no material impact on its consolidated results of operations, financial condition, or cash flow.
In January 2016, the FASB issued ASU 2016-01
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. The amendments in ASU 2016-01 will enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-01 may have on its current practices.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the effects adoption of this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
. The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent consideration. The ASU is effective for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-08 may have on its current practices.
In March 2016, the FASB issued ASU 2016-09
Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The amendments in ASU 2016-09 will simplify several aspects of the accounting for share-based payment transactions, including tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-09 may have on its current practices.
In April 2016, the FASB issued ASU 2016-10
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
. The amendments in ASU 2016-10 will clarify the identification of performance obligations and the licensing implementation guidance. The ASU is effective for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-10 may have on its current practices.
In April 2016, the FASB issued ASU 2016-12
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
. The amendments in ASU 2016-12 will clarify the prior guidance surrounding collectability criteria, presentation of taxes collected, non-cash consideration, contract modifications, completed contracts at completion and retrospective application guidance. The ASU is effective for annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-12 may have on its current practices.
In June 2016, the FASB issued ASU 2016-13
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. The amendments in ASU 2016-13 will provide more decision useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that year. The Company is currently evaluating the impact, if any, the adoption of ASU 2016-13 may have on its current practices.
16. Subsequent Events
The Company has performed an evaluation of subsequent events through the time of filing this Quarterly Report on Form 10-Q with the SEC, and has determined that there are no such events to report.
AMERICAN SUPERCONDUCTOR CORPORATION