MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For this purpose, any statements contained herein that relate to future events or conditions, including without limitation, the statements in Part II, “Item 1A. Risk Factors” and in Part I under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding industry prospects, our prospective results of operations or financial position and adoption of accounting changes may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements represent management’s current expectations and are inherently uncertain. There are a number of important factors that could materially impact the value of our common stock or cause actual results to differ materially from those indicated by such forward-looking statements.
These important factors include, but are not limited to: A significant portion of our revenues are derived from a single customer, Inox, and we cannot predict if and how successful Inox will be in executing on Solar Energy Corporation of India ("SECI") orders under the new central and state auction regime, and any related failure by Inox to succeed under this regime, or any delay in Inox’s ability to deliver its wind turbines, could result in fewer electric control systems shipments to Inox; We have a history of operating losses and negative operating cash flows, which may continue in the future and require us to secure additional financing in the future; Our operating results may fluctuate significantly from quarter to quarter and may fall below expectations in any particular fiscal quarter; We may be required to issue performance bonds or provide letters of credit, which restricts our ability to access any cash used as collateral for the bonds or letters of credit; Changes in exchange rates could adversely affect our results of operations; If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired and may lead investors and other users to lose confidence in our financial data; Our financial condition may have an adverse effect on our customer and supplier relationships; Our contracts with the U.S. government are subject to audit, modification or termination by the U.S. government and include certain other provisions in favor of the government, and additional funding of such contracts may not be approved by U.S. Congress; Our success in addressing the wind energy market is dependent on the manufacturers that license our designs; Our success is dependent upon attracting and retaining qualified personnel and our inability to do so could significantly damage our business and prospects; We may experience difficulties re-establishing our HTS wire production capability in our Ayer, Massachusetts facility; We may not realize all of the sales expected from our backlog of orders and contracts; Our business and operations would be adversely impacted in the event of a failure or security breach of our information technology infrastructure; Failure to comply with evolving data privacy and data protection laws and regulations or to otherwise protect personal data, may adversely impact our business and financial results; We rely upon third-party suppliers for the components and subassemblies of many of our Wind and Grid products, making us vulnerable to supply shortages and price fluctuations, which could harm our business; Many of our revenue opportunities are dependent upon subcontractors and other business collaborators; If we fail to implement our business strategy successfully, our financial performance could be harmed; Problems with product quality or product performance may cause us to incur warranty expenses and may damage our market reputation and prevent us from achieving increased sales and market share;
Many of our customers outside of the United States may be either directly or indirectly related to governmental entities, and we could be adversely affected by violations of the United States Foreign Corrupt Practices Act and similar worldwide anti-bribery laws outside the United States; We have had limited success marketing and selling our superconductor products and system-level solutions, and our failure to more broadly market and sell our products and solutions could lower our revenue and cash flow;
We may acquire additional complementary businesses or technologies, which may require us to incur substantial costs for which we may never realize the anticipated benefits;
Our success depends upon the commercial adoption of the Resilient Electric Grid ("REG") system, which is currently limited, and a widespread commercial market for our products may not develop; Growth of the wind energy market depends largely on the availability and size of government subsidies, economic incentives and legislative programs designed to support the growth of wind energy;
We have operations in, and depend on sales in, emerging markets, including India, and global conditions could negatively affect our operating results or limit our ability to expand our operations outside of these markets; Changes in India’s political, social, regulatory and economic environment may affect our financial performance; Our products face intense competition, which could limit our ability to acquire or retain customers; Our international operations are subject to risks that we do not face in the United States, which could have an adverse effect on our operating results; Lower prices for other fuel sources may reduce the demand for wind energy development, which could have a material adverse effect on our ability to grow our Wind business; Adverse changes in domestic and global economic conditions could adversely affect our operating results; We face risks related to our intellectual property; We face risks related to our technologies; We face risks related to our legal proceedings; We face risks related to our common stock
; and the important factors discussed under the caption "Risk Factors" in Part 1. Item 1A of our Form 10-K for the fiscal year ended March 31, 2019 and our other reports filed with the SEC. These important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Any such forward-looking statements represent management’s estimates as of the date of this Quarterly Report on Form 10-Q. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
American Superconductor®, Amperium®, AMSC®, D-VAR®, PowerModule™,
D-VAR VVO®,
PQ-IVR®, SeaTitan®, Gridtec Solutions™, Windtec Solutions™ and Smarter, Cleaner...Better Energy™ are trademarks or registered trademarks of American Superconductor Corporation or our subsidiaries. We reserve all of our rights with respect to our trademarks or registered trademarks regardless of whether they are so designated in this Quarterly Report on Form 10-Q by an ® or ™ symbol. All other brand names, product names, trademarks or service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.
Executive Overview
We are a leading provider of megawatt-scale solutions that enhance the performance of the power grid, protect our Navy's fleet, and lower the cost of wind power. In the power grid market, we enable electric utilities, industrial facilities, and renewable energy project developers to connect, transmit and distribute power through our transmission planning services and power electronics and superconductor-based systems. In the wind power market, we enable manufacturers to field highly competitive wind turbines through our advanced power electronics and control system products, engineering, and support services. Our power grid and wind products and services provide exceptional reliability, security, efficiency and affordability to our customers.
Our power system solutions help to improve energy efficiency, alleviate power grid capacity constraints, improve system resiliency, and increase the adoption of renewable energy generation. Demand for our solutions is driven by the growing needs for modernized smart grids that improve power reliability, security and quality, the U.S. Navy's effort to upgrade in-board power systems to support fleet electrification, and the need for increased renewable sources of electricity, such as wind and solar energy. Concerns about these factors have led to increased spending by corporations and the military, as well as supportive government regulations and initiatives on local, state, and national levels, including renewable portfolio standards, tax incentives and international treaties.
We manufacture products using two proprietary core technologies: PowerModule™ programmable power electronic converters and our Amperium® high temperature superconductor (“HTS”) wires. These technologies and our system-level solutions are protected by a broad and deep intellectual property portfolio consisting of hundreds of patents and licenses worldwide.
We operate our business under two market-facing business units: Grid and Wind. We believe this market-centric structure enables us to more effectively anticipate and meet the needs of electric utilities, power generation project developers and wind turbine manufacturers.
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•
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Grid.
Through our Gridtec Solutions™, our Grid business segment enables electric utilities and renewable energy project developers to connect, transmit and distribute power with exceptional efficiency, reliability, security and affordability. We provide transmission planning services that allow us to identify power grid congestion, poor power quality, and other risks, which help us determine how our solutions can improve network performance. These services often lead to sales of our grid interconnection solutions for wind farms and solar power plants, power quality systems and transmission and distribution cable systems. We also sell ship protection products to the U.S. Navy through our Grid business segment.
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|
•
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Wind.
Through our Windtec Solutions™, our Wind business segment enables manufacturers to field wind turbines with exceptional power output, reliability and affordability. We supply advanced power electronics and control systems, license our highly engineered wind turbine designs, and provide extensive customer support services to wind turbine manufacturers. Our design portfolio includes a broad range of drive trains and power ratings of 2 megawatts (“MW”) and higher. We provide a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility.
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Our fiscal year begins on April 1 and ends on March 31. When we refer to a particular fiscal year, we are referring to the fiscal year beginning on April 1 of that same year. For example, fiscal 2019 refers to the fiscal year beginning on April 1, 2019. Other fiscal years follow similarly.
On July 3, 2018, we and our wholly-owned subsidiaries Suzhou AMSC Superconductor Co. Ltd. (“AMSC China”) and AMSC Austria GmbH (“AMSC Austria”) entered into a settlement agreement (the “Settlement Agreement”) with Sinovel Wind Group Co., Ltd. (“Sinovel”). The Settlement Agreement settles the litigation and arbitration proceedings between us and Sinovel listed on Schedule 2 of the Settlement Agreement (the “Proceedings”), and any other civil claims, counterclaims, causes of action, rights and obligations directly or indirectly relating to the subject matters of the Proceedings and the contracts between us and Sinovel listed on Schedules 1 and 4 of the Settlement Agreement (the “Contracts”), subject to the exception described in Section 1.1 of the Settlement Agreement. The Settlement Agreement was filed as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on July 9, 2018. Under the terms of the Settlement Agreement, Sinovel agreed to pay AMSC China an aggregate cash amount in Renminbi (“RMB”) equivalent to $57.5 million, consisting of two installments. Sinovel paid the first installment of the RMB equivalent of $32.5 million on July 4, 2018, and paid the second installment of the RMB equivalent of $25.0 million on December 27, 2018.
In addition, pursuant to the terms of the Settlement Agreement, we and AMSC Austria have granted Sinovel a non-exclusive license for certain of our intellectual property to be used solely in Sinovel’s doubly fed wind turbines (the “License”). We have agreed not to sue Sinovel, Sinovel’s power converter suppliers or Sinovel’s customers for use of the technology covered by the License.
On October 31, 2018, we entered into a Subcontract Agreement with Commonwealth Edison Company (“ComEd”) (the “Subcontract Agreement”) for the manufacture and installation of the Company’s REG system within ComEd’s electric grid in Chicago, Illinois (the “Project”). As provided in the Subcontract Agreement, the Subcontract Agreement became effective upon the signing of an amendment by us and the U.S. Department of Homeland Security (“DHS”) to the existing contract (the “Prime Contract”) between us and DHS on June 20, 2019. Unless terminated earlier by us or DHS according to the terms of the Subcontract Agreement, the term of the Subcontract Agreement will continue until we complete our warranty obligations under the Subcontract Agreement. Under the terms of the Subcontract Agreement, we have agreed, among other things, to provide the REG system and to supervise ComEd’s installation of the REG system in Chicago. As part of our separate cost sharing arrangement with DHS under the Prime Contract, we expect funding provided by DHS in connection with the Subcontract Agreement to be between $9.0 to $11.0 million, which represents the total amount of revenue we are expected to recognize over the term of the Subcontract Agreement and includes up to $1.0 million that we have agreed to reimburse ComEd for costs incurred by ComEd while undertaking its tasks under the Subcontract Agreement (the “Reimbursement Amount”). In addition, we have agreed to deliver an irrevocable letter of credit in the amount of $5.0 million to secure certain Company obligations under the Subcontract Agreement. ComEd has agreed to provide the site and provide all civil engineering work required to support the installation, operation and integration of the REG system into ComEd’s electric grid. Other than the Reimbursement Amount, ComEd is responsible for its own costs and expenses. Construction of the Project is expected to commence within six months after DHS’s approval, which was obtained on June 20, 2019. The REG system is expected to be operational in 2021.
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ under different assumptions or conditions. Effective April, 1 2019, we adopted ASU 2016-02, which provides for new requirements in regards to leases. See Note 14, "Leases" for further details. Aside from the adoption of ASU 2016-02, there were no significant changes in the critical accounting policies that were disclosed in our Form 10-K for fiscal 2018, which ended on March 31, 2019.
Results of Operations
Three
months ended
June 30, 2019
compared to the
three
months ended
June 30, 2018
Revenues
Total revenues increased
9%
to $
13.8
million for the
three
months ended
June 30, 2019
, compared to $12.6 million for the
three
months ended
June 30, 2018
. Our revenues are summarized as follows (in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Grid
|
|
$
|
9,855
|
|
|
$
|
8,929
|
|
Wind
|
|
|
3,915
|
|
|
|
3,678
|
|
Total
|
|
$
|
13,770
|
|
|
$
|
12,607
|
|
Our Grid business unit accounted for
72%
of total revenues for the
three
months ended
June 30, 2019
, compared to 71% for the
three
months ended
June 30, 2018
. Our Grid business unit revenues increased
10%
to $
9.9
million in the
three
months ended
June 30, 2019
, from $8.9 million in the
three
months ended
June 30, 2018
. Grid business unit reven
ue increased, primarily driven by higher D-VAR revenues and the commencement of the REG project with ComEd,
partially offset by lower license revenue due to the joint venture agreement with BASF ending in fiscal 2018.
Our Wind business unit accounted for
28%
of total revenues for the
three
months ended
June 30, 2019
, compared to 29% for the
three
months ended
June 30, 2018
. Revenues in the Wind business un
it increased
6%
to $
3.9
million in the
three
months ended
June 30, 2019
, from $3.7 million in the
three
months ended
June 30, 2018
.
The increase over the prior year period was driven by increased development
revenue for the 3MW wind turbine platform with Inox. Inox has been active in the new central and state government auction regime in India and has over 900 MW of orders from the first four SECI central government auctions, and 50 MW from the Maharashtra state government auction. However, we cannot predict if and how successful Inox will be in executing on these orders or in obtaining new orders under the new central and state auction regime. Any failure by Inox to succeed under this regime, or any delay in Inox’s ability to deliver its wind turbines, could result in fewer ECS shipments to Inox.
Cost of Revenues and Gross Margin
Cost of revenues
increased b
y
40%
to $
12.2
million for the
three
months ended
June 30, 2019
, compared to $8.7 million for the
three
months ended
June 30, 2018
. Gross margin was
11%
for the
three
months ended
June 30, 2019
, compared to 31% for the
three
months ended
June 30, 2018
. T
he decrease in gross margin in the
three
month period was driven by a less favorable product mix than in the prior year period, primarily driven by the Grid business unit.
Operating Expenses
Research and development
R&D expense
s decreased in the
three
months ended
June 30, 2019
by
13%
to $
2.5
million from $2.8 million for the
three
months ended
June 30, 2018
. The decrease in R&D expense was due primarily to decreased compensation expense.
Selling, general, and administrative
SG&A expen
ses decreased by
9%
to $
5.3
million in the
three
months ended
June 30, 2019
, from $5.8 million in the
three
months ended
June 30, 2018
. The decrease in SG&A expense was due primarily to decreased compensation expense.
Amortization of acquisition related intangibles
We recorded amortization expense related to our core technology and know-how, trade names and trademark intangible assets of $
0.1
million in both of the
three
month periods ended
June 30, 2019
, and
2018
, respectively.
Restructuring
We recorded less than $0.3 million for facility exit costs in the
three
months ended
June 30, 2018
as a result of the move of the corporate office that was announced as part of our April 4, 2017 approved restructuring plan. There was no restructuring activity in the three months ended June 30, 2019.
Operating loss
Our operating loss is summarized as follows (in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
Grid
|
|
$
|
(4,663
|
)
|
|
$
|
(2,666
|
)
|
Wind
|
|
|
(1,324
|
)
|
|
|
(1,367
|
)
|
Unallocated corporate expenses
|
|
|
(249
|
)
|
|
|
(1,095
|
)
|
Total
|
|
$
|
(6,236
|
)
|
|
$
|
(5,128
|
)
|
Our Grid segment generated an operating loss of $
4.7
million in the
three
months ended
June 30, 2019
, compared to a loss of $2.7 million in the
three
months ended
June 30, 2018
.
The increase in the Grid business unit operating loss in the
three
months ended
June 30, 2019
was primarily due to a less favorable product mix and a higher cost of sales.
Our Wind segment generated an operating loss of $
1.3
milli
on in the
three
months ended
June 30, 2019
, compared to a loss of $1.4 million in the
three
months ended
June 30, 2018
. The slight decrease in the Wind business unit operating loss was due primarily to increased revenue related to the 3MW platform as discussed above.
Unallocated corporate expenses primarily consist of stock-based compensation expense of $
0.2
million and $0.8 million, in the
three
months ended
June 30, 2019
and
2018
, respectively and restructuring charges of $0.3 million in the
three
months ended
June 30, 2018
.
Change in fair value of warrants
The change in fair value of warrants resulted in a gain of $
2.9
million in the
three
months ended
June 30, 2019
, compared to a loss of $0.5 million in the
three
months ended
June 30, 2018
. The change in the fair value was primarily driven by changes in stock price, which is a key valuation metric.
Interest income, net
Interest income, net, was $
0.5
million in the
three
months ended
June 30, 2019
, compared to $0.2 million in the
three
months ended
June 30, 2018
. The increase in interest income was primarily related to higher cash balances earning higher interest rates than in prior periods as well as the non-cash interest income recognized from receipt of the final payment on the Devens facility note receivable.
Other income (expense), net
Other income (expense), net, was expense of $
0.5
million in the
three
months ended
June 30, 2019
, compared to income of $0.6 million in the
three
months ended
June 30, 2018
. Th
e increase in other expense, net, was primarily driven by higher foreign currency gains.
Income Taxes
Income tax expense was $
0.2
million in the
three
months ended
June 30, 2019
, compared to income tax benefit of less than $0.1 million in the
three
months ended
June 30, 2018
. The increase in income tax expense is due primarily to taxable income in foreign jurisdictions.
Non-GAAP Measures
Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures included in this Form 10-Q, however, should be considered in addition to, and not as a substitute for or superior to the comparable measure prepared in accordance with GAAP.
We define non-GAAP net loss as net loss before stock-based compensation, amortization of acquisition-related intangibles, consumption of zero cost-basis inventory, changes in fair value of warrants, and other non-cash or unusual charges, and the tax effect of those adjustments calculated at the relevant rate for our non-GAAP metric, indicated in the table below. We believe non-GAAP net loss assists management and investors in comparing our performance across reporting periods on a consistent basis by excluding these non-cash or non-recurring charges that we do not believe are indicative of our core operating performance. A reconciliation of GAAP to non-GAAP net loss is set forth in the table below (in thousands, except per share data):
|
|
Three Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(3,539
|
)
|
|
$
|
(4,737
|
)
|
Stock-based compensation
|
|
|
249
|
|
|
|
785
|
|
Amortization of acquisition-related intangibles
|
|
|
85
|
|
|
|
85
|
|
Consumption of zero cost-basis inventory
|
|
|
0
|
|
|
|
(249
|
)
|
Changes in fair value of warrants
|
|
|
(2,946
|
)
|
|
|
464
|
|
Tax effect of adjustments for consumption of zero cost-basis inventory
|
|
|
0
|
|
|
|
40
|
|
Non-GAAP net loss
|
|
$
|
(6,151
|
)
|
|
$
|
(3,612
|
)
|
|
|
|
|
|
|
|
|
|
Non-GAAP net loss per share - basic
|
|
$
|
(0.30
|
)
|
|
$
|
(0.18
|
)
|
Weighted average shares outstanding - basic
|
|
|
20,514
|
|
|
|
20,167
|
|
We incurred non-GAAP net loss of $
6.2
million or $
0.30
per share, for the
three
months ended
June 30, 2019
, compared to non-GAAP net loss of $3.6 million or $0.18 per share for the
three
months ended
June 30, 2018
. The
increase in
non-GAAP net loss was primarily due to the
less favorable product mix compared to the prior year period, primarily driven by the Grid business unit.
We define non-GAAP operating cash flow as operating cash flow before the Sinovel settlement (net of legal fees and expenses); tax effect of adjustments; and other unusual cash flows or items. We believe non-GAAP operating cash flow assists management and investors in comparing our operating cash flow across reporting periods on a consistent basis by excluding these non-recurring cash items that it does not believe are indicative of our core operating cash flow. A reconciliation of GAAP to non-GAAP operating cash flow is set forth in the table below (in thousands).
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
March 31, 2019
|
|
Operating cash flow
|
|
$
|
(5,866
|
)
|
|
$
|
42,714
|
|
Sinovel settlement (net of legal fees and expenses)
|
|
|
1,000
|
|
|
|
(52,740
|
)
|
Tax effect of adjustments
|
|
|
0
|
|
|
|
2,377
|
|
Non-GAAP operating cash flow
|
|
$
|
(4,866
|
)
|
|
$
|
(7,649
|
)
|
Liquidity and Capital Resources
We have experienced recurring operating losses, and as of
June 30, 2019
, had an accumulated deficit of $
965.1
millio
n.
Our cash requirements depend on numerous factors, including whether Inox is successful in executing on SECI orders or in obtaining additional orders under the new central and state auction regime, the successful completion of our product development activities, our ability to commercialize our REG and ship protection system solutions, the rate of customer and market adoption of our products, collecting receivables according to established terms, and the continued availability of U.S. government funding during the product development phase of our superconductor-based products. We continue to closely monitor our expenses and, if required, expect to further reduce our operating and capital spending to enhance liquidity.
As of
June 30, 2019
, we had cash, cash equivalents, and restricted cash of
$
74.7
million, compared to $78.2 million as of
March 31, 2019
, a decrease of $
3.5
million. As of
June 30, 2019
, we had approximately $
29.5
million of cash, cash equivalents, and restricted cash in foreign bank accounts. Our cash and cash equivalents, and restricted cash are summarized as follows (in thousands):
|
|
June 30, 2019
|
|
|
March 31, 2019
|
|
Cash and cash equivalents
|
|
$
|
73,952
|
|
|
$
|
77,483
|
|
Restricted cash
|
|
|
715
|
|
|
|
715
|
|
Total cash, cash equivalents, and restricted cash
|
|
$
|
74,667
|
|
|
$
|
78,198
|
|
For the
three
months ended
June 30, 2019
, net cash used in operating activities was $
5.9
million compared to $6.9 million of net cash used for the
three
months ended
June 30, 2018
. T
he decrease in net cash used in operations was due primarily to the timing of our receipt of milestone payments on several Grid projects.
For the
three
months ended
June 30, 2019
, net cash provided by investing activities was $
2.3
million, compared to net cash used in investing activities of $0.2 million for the
three
months ended
June 30, 2018
. The increase in net cash provided by investing activities was due primarily to the receipt of the second installment payment under the Notes Receivable from the Devens facility sale, partially offset by higher purchases of property, plant and equipment in the three months ended June 30, 2019 related to improvements to the Ayer facility and factory equipment to support the Navy and REG projects.
For the
three
months ended
June 30, 2019
, net cash used in financing activities was $
0.3
million compared to net cash used in financing activities of $0.2 million in the
three
months ended
June 30, 2018
. The increase in net cash used in financing activities was due primarily to increased employee taxes paid related to net settlement of equity awards.
As of
June 30, 2019
, we had $
0.7
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.
We believe we have sufficient available liquidity to fund our operations and capital expenditures for the next twelve months. In addition, we may seek to raise additional capital, which could be in the form of loans, convertible debt or equity, to fund our operating requirements and capital expenditures. Our liquidity is highly dependent on our ability to increase revenues, including our ability to collect revenues under our agreements with Inox, control our operating costs, and our ability to raise additional capital, if necessary. There can be no assurance that we will be able to raise additional capital, on favorable terms or at all, or execute on any other means of improving our liquidity as described above.
Legal Proceedings
We are involved in legal and administrative proceedings and claims of various types. See Part II, Item 1, “Legal Proceedings,” for additional information. We record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. We review these estimates each accounting period as additional information is known and adjust the loss provision when appropriate. If a matter is both probable to result in liability and the amounts of loss can be reasonably estimated, we estimate and disclose 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 our consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating transactions that are not required to be reflected on our balance sheet except as discussed below.
We occasionally enter into construction contracts that include a performance bond. As these contracts progress, we continually assess the probability of a payout from the performance bond. Should we determine that such a payout is probable, we would record a liability.
In addition, we have various contractual arrangements in which minimum quantities of goods or services have been committed to be purchased on an annual basis.
Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("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 and its amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
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In July 2018, the FASB issued ASU 2018-10,
Codification improvements to Topic 842, Leases.
The amendments in ASU 2018-10 provide more clarification in regards to the application and requirements of ASU 2016-02.
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In July 2018, the FASB issued ASU 2018-11,
Topic 842, Leases - Targeted improvements.
The amendments in ASU 2018-11 provide for the option to adopt the standard prospectively and recognize a cumulative-effect adjustment to the opening balance of retained earnings as well as offer a new practical expedient that will allow us to elect, by class of underlying asset, to not separate non-lease and lease components in certain circumstances and instead to account for those components as a single item.
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ASU 2016-02 became effective on April 1, 2019, and we adopted the standard using the modified retrospective transition method, which will impact all leases existing at, or entered into after, the period of adoption. For all leases existing at the time of adoption we recognized a right-of-use asset and lease liability on the balance sheet. See Note 14 "Leases" for additional information.
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 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. We are currently evaluating the impact, if any, the adoption of ASU 2016-13 may have on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11,
Earnings per Share (Topic
260),
Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815)
. The amendments in ASU 2017-11 provide guidance for freestanding equity-linked financial instruments, such as warrants and conversion options in convertible debt or preferred stock, and should no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods. As of April 1, 2019 we have adopted ASU 2017-11 and noted no significant impact on our consolidated financial statements, primarily due to the put option feature which requires continued liability classification under ASC 840.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
. The amendments in ASU 2017-12 provide improved financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods. As of April 1, 2019 we have adopted ASU 2017-12 and noted no significant impact on our consolidated financial statements, primarily due to the fact that there are no longer any hedging instruments included in our results.
In June 2018, the FASB issued ASU 2018-08,
Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
. The amendments in ASU 2018-08 assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) determining whether a contribution is conditional. The ASU is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those periods. As of April 1, 2019, we have adopted ASU 2018-08 and noted additional disclosures within our revenue footnote to appropriately present the revenue related to our grant revenue.
In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement
. The amendments in ASU 2018-13 provide for increased effectiveness of the disclosures made around fair value measurements while including consideration for costs and benefits. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those periods. We are currently evaluating the impact the adoption of ASU 2018-13 may have on our consolidated financial statements.
We do not believe that, outside of those disclosed here, there are any other recently issued accounting pronouncements that will have a material impact on our consolidated financial statements.