Notes to Condensed Consolidated Financial Statements
(unaudited)
1.
Organization
Clean Diesel Technologies, Inc. is a leading provider of technology and solutions to the automotive emissions control markets. We possess market leading expertise in emissions catalyst design and engineering for automotive and off-road applications. In particular, we have a proven ability to develop proprietary materials incorporating various base metals that replace costly platinum group metals ("PGM") and rare earth metals in coatings on vehicle catalytic converters. Our business is driven by increasingly stringent global emission standards for internal combustion engines, which are major sources of a variety of harmful pollutants.
We deliver our catalyst technology through the supply of materials and technology used in the catalyst coating process as well as finished products such as coated substrates and emission control systems. We supply our proprietary catalyst technologies to major automakers, heavy duty truck manufacturers, catalyst manufacturers, distributors, integrators and retrofitters.
We produce coated substrates at our ISO Technical Specifications certified manufacturing facility in Oxnard, California. In some instances, the coated substrates we produce are integrated into exhaust systems by third-party manufacturers before being shipped to our end customer. We also supply coated substrates directly to exhaust systems manufacturers for incorporation in their own products.
Over the past decade, we have developed several generations of high performance catalysts, including our low-PGM mixed phase catalysts, or MPC® that are used on certain new Honda vehicles. During the same period we have developed the ability to deliver our catalyst technology to other catalyst manufacturers in the form of functional powders or material systems. Recently, we have expanded our offering of material systems beyond MPC® to include new synergized-PGM diesel oxidation catalysts, or SPGM™ DOCs, base-metal activated rhodium support, or BMARS™, and Spinel™ technologies. Most catalytic systems require significant amounts of costly PGMs to operate effectively. Our family of unique high-performance material systems, featuring inexpensive base-metals with low PGM content will enable further advances in catalyst performance. We are marketing these new catalyst technologies to other catalyst manufacturers in a proprietary powder form, which will allow them to capture the benefits of our advanced catalyst technology in their own manufacturing operations and will provide a new source of revenue for the Company.
2.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. Therefore, the condensed consolidated financial statements contemplate the realization of assets and liquidation of liabilities in the ordinary course of business. The Company has suffered recurring losses and negative cash flows from operations since inception, resulting in an accumulated deficit of
$226.5 million
at
June 30, 2017
. The Company has funded its operations through asset sales, credit facilities and other borrowings and equity sales. At
June 30, 2017
, the Company had
$1.6 million
in cash.
The Company’s continuation as a going concern is dependent upon its ability to obtain adequate financing, which the Company has successfully secured since inception, including financing from equity sales and asset divestitures. However, there is no assurance that the Company will be able to achieve projected levels of revenue and maintain access to sufficient working capital, and accordingly, there is substantial doubt as to whether the Company’s existing cash resources and working capital are sufficient to enable it to continue its operations within one year from the financial statement issuance date. The Company is currently working towards obtaining a new credit facility that would provide the Company the flexibility it needs as it implements its new business strategy. If the Company is unable to obtain the necessary capital, it will be forced to license or liquidate its assets, significantly curtail or cease its operations and/or seek reorganization under the U.S. Bankruptcy Code.
The Company has a
$7.5 million
secured demand facility backed by its receivables and inventory with Faunus Group International, Inc. ("FGI"). At
June 30, 2017
, the Company had
$0.7 million
in borrowings outstanding under this facility with
$6.8 million
available, subject to the availability of eligible accounts receivable and inventory balances for collateral. There is no guarantee that the Company will be able to borrow to the full limit of
$7.5 million
if FGI chooses not to finance a portion of its receivables or inventory. Additionally, FGI can cancel the facility at any time. For additional information, refer to Note 9, "Debt".
On May 19, 2015, the Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective on November 17, 2015. The Form S-3 permits the Company to sell in one or more registered transactions up to an aggregate of
$50.0 million
of various securities not to exceed one-third of the Company’s public float in any
12
-month period. As of
June 30, 2017
, the Company had sold an aggregate of
$3.1 million
using the Form S-3.
3.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for interim financial reporting. In the opinion of management, all normal recurring accruals and adjustments that are necessary for a fair presentation have been reflected. Intercompany transactions and balances have been eliminated in consolidation. The results reported in these unaudited condensed consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. Certain financial information that is normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), but is not required for interim reporting purposes, has been condensed or omitted. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on April 7, 2017.
On July 22, 2016, the Company effected a one-for-five reverse stock split. All share and per share information presented in these unaudited condensed consolidated financial statements for periods prior to July 22, 2016 has been retroactively adjusted to reflect the reverse stock split.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. These estimates and assumptions are based on management's best estimates and judgment. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to impairment of long-lived assets, stock-based compensation, the fair value of financial instruments including warrants, allowance for doubtful accounts, inventory valuation, taxes and contingent and accrued liabilities. The Company bases its estimates on historical experience and various other factors, including the current economic environment, which it believes to be reasonable under the circumstances. Estimates and assumptions are adjusted when facts and circumstances dictate. Actual results may differ from these estimates under different assumptions and conditions. Management believes that the estimates are reasonable.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-9, "Revenue from Contracts with Customers (Topic 606)". ASU 2014-9 supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)". ASU 2014-9 requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB finalized the delay of the effective date by one year, making the new standard effective for interim periods and annual periods beginning after December 15, 2017. Early adoption is permitted, but it is not permitted earlier than the original effective date. ASU 2014-9 provides for either full retrospective adoption or a modified retrospective adoption by which it is applied only to the most current period presented. While the Company has not finalized the impact of the adoption of ASU 2014-9 on its consolidated financial statements, the Company does not expect the adoption to have a material impact.
In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory". ASU 2015-11 changes the measurement principle for inventory from the "lower of cost or market" to "lower of cost and net realizable value." Net realizable value is defined as the "estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation." ASU 2015-11 eliminates the guidance that entities consider replacement cost or net realizable value less an approximately normal profit margin in the subsequent measurement of inventory when cost is determined on a first-in, first-out or average cost basis. It is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years. The Company implemented ASU
2015-11 in the first quarter 2017. The adoption of this provision did not have a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-1, "Recognition and Measurement of Financial Assets and Financial Liabilities". ASU 2016-1 requires equity investments to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. ASU 2016-1 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is evaluating the impact of adoption of ASU 2016-1 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)". ASU 2016-2 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. generally accepted accounting principles. It is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is evaluating the impact of adoption of ASU 2016-2 on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 will change how companies account for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the statement of income when the awards vest or are settled, the guidance on employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is changing and the update requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The Company adopted ASU 2016-09 in the first quarter of 2017. The Company elected to account for the forfeitures when they occur. The adoption of this provision did not have a material impact on the Company's consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments: a consensus of the Emerging Task Force”. ASU 2016-15 provides guidance on how certain cash receipts and payments are presented and classified in the statement of cash flows, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. The standard is intended to reduce current diversity in practice. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this accounting standard on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets of Other Than Inventory.” Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 updates the current guidance by requiring that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for the income tax effects of an intra-entity transfer of inventory. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this accounting standard on its consolidated financial statements.
On May 10, 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting
. The guidance clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those
fiscal years. Early adoption is permitted. The Company believes the adoption of ASU 2017-09 will not have a significant impact on its consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815).
The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact that ASU 2017-11 will have on its consolidated financial statements.
4.
Inventories
Inventories consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
2,541
|
|
|
$
|
3,291
|
|
Work in process
|
576
|
|
|
790
|
|
Finished goods
|
2,716
|
|
|
3,044
|
|
Total inventories
|
$
|
5,833
|
|
|
$
|
7,125
|
|
5.
Goodwill and Intangible Assets
Goodwill
The Company recognized an impairment charge of
$4.7 million
for the year ended
December 31, 2016
. As such, the Company has
no
goodwill at
June 30, 2017
and
December 31, 2016
, respectively.
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
in Years
|
|
June 30, 2017
|
|
December 31, 2016
|
Trade name
|
15 - 20
|
|
$
|
1,209
|
|
|
$
|
1,204
|
|
Patents and know-how
|
5 - 12
|
|
4,113
|
|
|
4,090
|
|
Customer relationships
|
4 - 8
|
|
743
|
|
|
721
|
|
|
|
|
6,065
|
|
|
6,015
|
|
Less accumulated amortization
|
|
|
(4,798
|
)
|
|
(4,532
|
)
|
|
|
|
$
|
1,267
|
|
|
$
|
1,483
|
|
The Company recorded amortization expense related to amortizable intangible assets of
$0.1 million
and
$0.1 million
during the three months ended
June 30, 2017
and
2016
, respectively and
$0.2 million
and
$0.2 million
for the six months ended June 30, 2017 and 2016, respectively.
Estimated amortization expense for each of the next five years is as follows (in thousands):
|
|
|
|
|
Years ending December 31:
|
|
|
Remainder of 2017
|
$
|
214
|
|
2018
|
161
|
|
2019
|
161
|
|
2020
|
161
|
|
2021
|
161
|
|
Thereafter
|
409
|
|
|
$
|
1,267
|
|
6.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Accrued salaries and benefits
|
$
|
790
|
|
|
$
|
759
|
|
Accrued severance and other charges (1)
|
400
|
|
|
1,738
|
|
Accrued warranty (2)
|
312
|
|
|
338
|
|
Warrant liability (3)
|
1,560
|
|
|
1,226
|
|
Liability for consigned precious metals
|
1,615
|
|
|
1,282
|
|
Other
|
466
|
|
|
1,002
|
|
|
$
|
5,143
|
|
|
$
|
6,345
|
|
|
|
(1)
|
For additional information, refer to Note 7, “Severance and Other Charges”.
|
|
|
(2)
|
For additional information, refer to Note 8, “Accrued Warranty”.
|
|
|
(3)
|
For additional information, refer to Note 10, “Warrants” and Note 11, “Fair Value Measurements”.
|
7.
Severance and Other Charges
Severance and other charges consist of employee severance expense and lease exit costs, and the following summarizes the activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Lease Exit
Costs
|
|
Total
|
December 31, 2015
|
$
|
1,092
|
|
|
$
|
—
|
|
|
$
|
1,092
|
|
Provision
|
1,068
|
|
|
305
|
|
|
1,373
|
|
Payments
|
(818
|
)
|
|
—
|
|
|
(818
|
)
|
June 30, 2016
|
$
|
1,342
|
|
|
$
|
305
|
|
|
$
|
1,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
Lease Exit
Costs
|
|
Total
|
December 31, 2016
|
$
|
718
|
|
|
$
|
1,020
|
|
|
$
|
1,738
|
|
Provision - reversals
|
—
|
|
|
(619
|
)
|
|
(619
|
)
|
Payments
|
(482
|
)
|
|
(237
|
)
|
|
(719
|
)
|
June 30, 2017
|
$
|
236
|
|
|
$
|
164
|
|
|
$
|
400
|
|
At June 30, 2017 and December 31, 2016, the balance of severance and other charges were recorded in accrued expenses and other liabilities in the condensed consolidated balance sheet. In the second quarter of 2017, the Company reached an agreement with the property owner of its former Canadian facility to exit our lease prior to its December 2018 termination. Severance and other charges reflect the reduction of the liability for the remaining estimated costs relative to the closed facility.
8.
Accrued Warranty
The Company establishes reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with its customers. The Company generally warrants its products against defects between
one
and
five years
from date of shipment, depending on the product. The warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods. Historically, warranty returns have not been material.
The following summarizes the activity in the Company’s accrual for product warranty (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
338
|
|
|
$
|
228
|
|
Accrued warranty expense
|
117
|
|
|
142
|
|
Warranty claims paid
|
(147
|
)
|
|
(90
|
)
|
Translation Adjustment
|
4
|
|
|
(36
|
)
|
Balance at end of period
|
$
|
312
|
|
|
$
|
244
|
|
At June 30, 2017 and December 31, 2016, the balance of accrued warranty was recorded in accrued expenses and other liabilities in the condensed consolidated balance sheet.
9.
Debt
Notes payable consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Line of credit with FGI
|
$
|
672
|
|
|
$
|
1,458
|
|
$2.0 million, 8% shareholder note due 2017 (Kanis S.A.) (1)
|
—
|
|
|
1,803
|
|
|
672
|
|
|
3,261
|
|
Less current portion
|
(672
|
)
|
|
(3,261
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
Debt discount related to extinguishment and amendment of previous outstanding debt. The aggregate amount of unamortized debt discount was
$0.2 million
at December 31, 2016. For additional information, refer to the respective discussions below.
|
Line of credit with FGI
The Company maintains a
$7.5 million
secured demand facility with FGI backed by its receivables and inventory. The Company also granted FGI a first lien collateral interest in substantially all of its assets. The current termination date is August 15, 2017, however it may be extended at the Company's option for additional one-year terms. FGI can cancel the facility at any time and demand payment.
The interest rate on advances or borrowings under the FGI facility is the greater of (i)
6.50%
per annum and (ii)
2.50%
per annum above the prime rate, as defined in the FGI facility and was
6.50%
at June 30, 2017 and December 31, 2016. Any advances or borrowings under the FGI facility are due on demand.
At
June 30, 2017
, the Company had $
0.4 million
gross accounts receivable pledged to FGI as collateral for short-term debt as well as $
0.3 million
in borrowings outstanding against eligible inventory. The Company was in compliance with the terms of the FGI Facility at
June 30, 2017
and
December 31, 2016
. However, there is no guarantee that the Company will be able to borrow to the full limit of
$7.5 million
if FGI chooses not to finance a portion of the Company’s receivables or inventory.
Kanis S. A. Indebtedness
On April 1, 2016, the Company borrowed
$2.0 million
from Kanis S.A. pursuant to a promissory note with an interest rate of
8%
per annum and a maturity date of September 30, 2017 (see Note 17).
In January 2017, the Company repaid the entire
$2.0 million
balance and recorded a loss on extinguishment of
$0.2 million
.
10.
Warrants
Warrants outstanding and exercisable are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares(1)
|
|
Weighted
Average
Exercise
Price
|
|
Range of
Exercise Prices
|
Outstanding at December 31, 2016
|
979,869
|
|
|
$
|
6.36
|
|
|
$6.25-$21.00
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
$—
|
Expired
|
—
|
|
|
$
|
—
|
|
|
$—
|
Outstanding at June 30, 2017
|
979,869
|
|
|
$
|
6.36
|
|
|
$6.25 - $21.00
|
Exercisable at June 30, 2017
|
979,869
|
|
|
$
|
6.36
|
|
|
$6.25 - $21.00
|
(1) Outstanding and exercisable information includes
21,920
equity-classified warrants.
Warrant Liability
The Company's warrant liability is carried at fair value and is classified as Level 3 in the fair value hierarchy because the warrants are valued based on unobservable inputs.
The Company determines the fair value of its warrant liability using the Black-Scholes option-pricing model unless the awards are subject to market conditions, in which case it uses a Monte Carlo simulation model, which utilizes multiple input variables to estimate the probability that market conditions will be achieved. These models are dependent on several variables such as the instrument's expected term, expected strike price, expected risk-free interest rate over the expected term of the instrument, expected dividend yield rate over the expected term and the expected volatility. The expected strike price for warrants with full-ratchet down-round price protection is based on a weighted average probability analysis of the strike price changes expected during the term as a result of the full-ratchet down-round price protection.
The assumptions used in the Black-Scholes option-pricing model to estimate the fair value of the warrant liability as of
June 30, 2017
were as follows:
|
|
|
|
|
Expected volatility
|
92.4% - 101.5%
|
Risk-free interest rate
|
1.33% - 1.80%
|
Dividend yield
|
—
|
Expected life in years
|
2.3 - 4.5
|
The assumptions used in the Monte Carlo simulation model to estimate the fair value of the warrant liability as of
June 30, 2017
were as follows:
|
|
|
|
|
Expected volatility
|
91.3% - 106.2%
|
Risk-free interest rate
|
1.24% - 1.44%
|
Dividend yield
|
—
|
Expected life in years
|
1.1 - 2.4
|
The warrant liability, included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets, is re-measured at the end of each reporting period with changes in fair value recognized in other income (expense), net in the consolidated statements of comprehensive loss. Upon the exercise of a warrant that is classified as a liability, the fair value of the warrant exercised is re-measured on the exercise date and reclassified from warrant liability to additional paid-in capital.
11.
Fair Value Measurements
The Company measures certain financial assets and liabilities at fair value in accordance with a hierarchy which requires an entity to maximize the use of observable inputs which reflect market data obtained from independent sources and minimize the use of unobservable inputs. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable including quoted prices for similar instruments in active markets and quoted prices for identical or similar instruments in markets that are not active; and
Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.
Assets and liabilities measured at fair value on the Company’s balance sheet on a recurring basis include the following at June 30, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2017
|
—
|
|
|
—
|
|
|
$
|
1,560
|
|
December 31, 2016
|
—
|
|
|
—
|
|
|
$
|
1,226
|
|
There were
no
transfers in or out of Level 1, Level 2 or Level 3 fair value measurements during the three and six months ended June 30, 2017.
The following is a reconciliation of the warrant liability, included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets, measured at fair value using Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
1,226
|
|
|
$
|
3,072
|
|
Exercise of common stock warrants
|
—
|
|
|
(1,124
|
)
|
Remeasurement of common stock warrants
|
334
|
|
|
(1,588
|
)
|
Balance at end of period
|
$
|
1,560
|
|
|
$
|
360
|
|
The fair values of the Company’s cash, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and other current liabilities approximate carrying values due to the short maturity of these instruments. The fair value of the line of credit approximates its carrying value due to the variable interest rates.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.
12. Loss per Share
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares plus potentially dilutive common shares. Potentially dilutive common shares include employee stock options and restricted share units and warrants and debt that are convertible into the Company’s common stock.
Because the Company incurred net losses in the
three and six
months ended
June 30, 2017
and 2016, the effect of potentially dilutive securities has been excluded in the computation of diluted loss per share as their impact would be anti-dilutive. Potentially dilutive common stock equivalents excluded were
2.1 million
and
1.0 million
shares during the three and six months ended
June 30, 2017
and
2016
, respectively.
13.
Commitments and Contingencies
The Company leases facilities under non-cancellable operating leases. The leases expire at various dates through fiscal 2018 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance and maintenance costs, and provisions for minimum rent increases. Minimum lease payments, including scheduled rent increases are recognized as rent expense on a straight-line basis over the term of the lease.
Litigation
The Company is involved in legal proceedings from time to time in the ordinary course of its business. Management does not believe that any of these claims and proceedings against it is likely to have, individually or in the aggregate, a material adverse effect on the Company’s condensed consolidated financial condition, results of operations or cash flows. Accordingly, the Company cannot determine the final amount, if any, of its liability beyond the amount accrued in the unaudited condensed consolidated financial statements as of
June 30, 2017
, nor is it possible to estimate what litigation-related costs will be in the future.
For information related to commitments and contingencies related to Applied Utility Systems, a former subsidiary of the Company that was sold in 2009, refer to Note 16, “Discontinued Operations”.
14.
Geographic Information
Net sales by geographic region based on the location of the Company’s point of sale is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
United States
|
$
|
5,387
|
|
|
$
|
6,513
|
|
|
$
|
10,060
|
|
|
$
|
12,390
|
|
Canada
|
2,215
|
|
|
1,243
|
|
|
4,904
|
|
|
4,421
|
|
Europe
|
797
|
|
|
650
|
|
|
1,649
|
|
|
1,341
|
|
Total international
|
3,012
|
|
|
1,893
|
|
|
6,553
|
|
|
5,762
|
|
Total revenues
|
$
|
8,399
|
|
|
$
|
8,406
|
|
|
$
|
16,613
|
|
|
$
|
18,152
|
|
15. Concentrations
For the three months ended June 30, 2017 and 2016, Honda accounted for
57%
and
54%
, respectively, of the Company's revenues. For the six months ended June 30, 2017 and 2016, Honda accounted for
54%
and
55%
, respectively, of the Company's revenues. This customer accounted for
36%
and
35%
of the Company's accounts receivable at June 30, 2017 and December 31, 2016, respectively.
For the three months ended June 30, 2017, the Company had four suppliers that accounted for approximately
25%
,
12%
,
10%
, and
10%
of the Company's material purchases. For the three months ended June 30, 2016, the Company had one supplier that accounted for approximately
34%
of the Company's material purchases.
For the six months ended June 30, 2017, the Company had three suppliers that accounted for approximately
18%
,
11%
and
10%
of the Company's material purchases. For the six months ended June 30, 2016, the Company had one supplier that accounted for approximately
35%
of the Company's material purchases.
16.
Discontinued Operations
Applied Utility Systems, Inc.
The Company is undergoing a sales and use tax audit by the State of California (the “State”) on Applied Utility Systems, Inc
.
“AUS” for the period of 2007 through 2009. The audit has identified a project performed by the Company during that time
period for which sales tax was not collected and remitted and for which the State asserts that proper documentation of resale may not have been obtained and that the Company owes sales tax of
$1.5 million
, inclusive of interest. The Company contends and believes that it received sufficient and proper documentation from its customer to support not collecting and remitting sales tax from that customer and is actively disputing the audit report with the State. On August 12, 2013, the Company appeared at an appeals conference with the State Board of Equalization (“BOE”). On July 21, 2014, the Company received a Decision and Recommendation (“D&R”) from the BOE. The D&R’s conclusion was that the basis for the calculation of the aforementioned
$1.5 million
tax due should be reduced from
$12.2 million
to
$9.0 million
with a commensurate reduction in the tax owed to the State. Based on a re-audit, the BOE lowered the tax due to
$0.9 million
, inclusive of interest. The Company continues to disagree with these findings based on the aforementioned reasons. However, in October 2015, the Company offered to settle this case for
$0.1 million
, which is based on the expected cost of continuing to contest this audit. Accordingly, an accrual was charged to discontinued operations during the year ended December 31, 2015. Should the Company not prevail with the offer to settle this case, it plans to continue with the appeals process. Further, should the Company not prevail in this case, it will pursue reimbursement from the customer for all assessments from the State. As of each of June 30, 2017 and December 31, 2016, the Company had
$0.1 million
, respectively, in accrued expenses on the condensed consolidated balance sheet.
17. Restatement of Prior Period Financial Statements
Subsequent to the issuance of the Company's consolidated financial statement for the quarterly period ended September 30, 2016, the Company identified immaterial errors that were the result of an incorrect assessment of the April 1, 2016 debt transaction with Kanis S.A.
On April 1, 2016, the Company executed a promissory note (the “Note”) in favor of Kanis S.A., pursuant to which Kanis S.A. loaned the Company
$2.0 million
(the “New Loan”). In addition, on April 1, 2016, the Company entered into an amendment to the loan agreement (the “Amendment”) with Kanis S.A., pursuant to which the Company and Kanis S.A. agreed to amend certain prior loans and amendments aggregating a principal balance of
$7.5 million
(the “Existing Loans”). The Amendment included the addition of a conversion feature to the Existing Loans, providing for their conversion into the Company’s common stock. Certain financial instruments of the Amendment required bifurcation and were determined to be an embedded derivative comprised of a conversion feature and a call option valued at
$3.9 million
using the Monte Carlo simulation model. The Company recorded the bifurcated derivative as a liability with a corresponding debt discount. During the three months ended June 30, 2016, the Company recognized
$0.3 million
of debt discount amortization, and on June 30, 2016, the Company marked to market the derivative liability resulting in a gain on the derivative liability of
$2.8 million
.
During the three months ended September 30, 2016, the Company received stockholder approval to complete the conversion of the Existing Loans into common stock, which conversion occurred on August 30, 2016. The Company accounted for the conversion of the Existing Loans as an extinguishment. The Company subsequently reviewed the accounting treatment of the Amendment and determined that the Amendment resulted in the extinguishment of the Existing Loans, and that the Company should have followed the accounting required for debt extinguishment and recorded the revalued Existing Loans on April 1, 2016.
As a result of its review, the Company determined that an extinguishment loss should have been recorded in other income (expense) with a corresponding decrease to Notes payable, net of debt discount and current portion in the second quarter of 2016 for
$1.6 million
as a result of the April 1, 2016 Amendment of the Existing Loans
The Company has restated the three and six months ending June 30, 2016 Condensed Consolidated Statement of Comprehensive Loss and Condensed Consolidated Statements of Cash Flows to correct for the extinguishment loss of $
1.6 million
and
$0.1 million
of amortization of discount, respectively, within other income (expense).
The impact of this error in the prior year periods was not material to the consolidated financial statements in any of the periods effected. In addition, the Company properly reflected the extinguishment loss in its consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2016.
The revisions to the Company's Condensed Consolidated Statement of Comprehensive Loss for the three and six months ended June 30, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2016
|
|
As Reported
|
|
As Restated
|
|
As Reported
|
|
As Restated
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(756
|
)
|
|
(691
|
)
|
|
(1,148
|
)
|
|
(1,083
|
)
|
Gain on bifurcated derivative liability
|
2,754
|
|
|
2,754
|
|
|
2,754
|
|
|
2,754
|
|
Loss on extinguishment of convertible debt
|
—
|
|
|
(1,630
|
)
|
|
—
|
|
|
(1,630
|
)
|
Gain (loss) on warrant liability
|
792
|
|
|
792
|
|
|
1,588
|
|
|
1,588
|
|
Other income, net
|
1,008
|
|
|
1,008
|
|
|
628
|
|
|
628
|
|
Total other income
|
3,798
|
|
|
2,233
|
|
|
3,822
|
|
|
2,257
|
|
Income (loss) from continuing operations before income taxes
|
646
|
|
|
(919
|
)
|
|
(2,547
|
)
|
|
(4,112
|
)
|
Net income (loss)
|
1,343
|
|
|
(222
|
)
|
|
(1,428
|
)
|
|
(2,993
|
)
|
Comprehensive income (loss)
|
$
|
810
|
|
|
$
|
(755
|
)
|
|
$
|
(1,698
|
)
|
|
$
|
(3,263
|
)
|
Earnings/(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.35
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.80
|
)
|
Diluted
|
$
|
0.13
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.80
|
)
|
|
|
|
|
|
|
|
|
The revisions to the Company's Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30, 2016
|
|
As Reported
|
|
As Restated
|
Cash flows from operating activities:
|
|
|
|
Net loss
|
$
|
(1,428
|
)
|
|
$
|
(2,993
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
Loss on extinguishment of convertible debt
|
—
|
|
|
1,630
|
|
Amortization of debt discount
|
291
|
|
|
226
|
|