Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes included in this Form 10-Q and in our Annual Report on Form 10-K for Fiscal 2019. When used in this Form 10-Q, and in the following discussion, the words “believes”, “anticipates”, “intends”, “expects” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. These risks include those under Risk Factors in our Annual Report on Form 10-K for Fiscal 2019 and in other reports we file with the Securities and Exchange Commission (“SEC”). Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We assume no obligation to update any of the forward-looking statements contained herein after the filing of this Form 10-Q to conform such statements to actual results or changes in expectations except as may be required by law. All dollar amounts are approximate.
Overview
We are the market leader in microturbines based on the number of microturbines sold. Generally, power purchased from the electric utility grid is less costly than power produced by distributed generation technologies. Utilities may also charge fees to interconnect to their power grids. However, we can provide economic benefits to end users in instances where the waste heat from our microturbine has value (combined heat and power (“CHP”) and combined cooling, heat and power (“CCHP”)), where fuel costs are low (renewable energy/renewable fuels), where the costs of connecting to the grid may be high or impractical (such as remote power applications), where reliability and power quality are of critical importance, or in situations where peak shaving could be economically advantageous because of highly variable electricity prices. Our microturbines can be interconnected to other distributed energy resources to form “microgrids” (also called “distribution networks”) located within a specific geographic area and provide power to a group of buildings. Because our microturbines can provide a reliable source of power and can operate on multiple fuel sources, management believes they offer a level of flexibility not currently offered by other technologies such as reciprocating engines.
Our goals for Fiscal 2020 are to improve cash flow, working capital, and our balance sheet; grow revenue through accelerating global product sales; diversify into additional market verticals and geographies; and increase aftermarket sales absorption. During the third quarter of Fiscal 2020 our net loss was $4.9 million and our basic and diluted loss per share was $0.59 compared to $3.5 million and $0.50, respectively, in the same period of the previous year. Product revenue was lower primarily due to weakening in the United States natural resources market. We build to a fixed number of production slots for our microturbines each quarter and during the third quarter of Fiscal 2020, we allocated two C1000 Signature Series systems production slots to our long-term rental program, resulting in lower product revenue. Additionally, although the U.S. dollar has somewhat weakened against other currencies, it continues to be an issue in select markets as the strong dollar makes our products more expensive in those markets, as we sell in U.S. dollars. Total service revenue increased approximately 14% during the third quarter of Fiscal 2020 primarily attributable to increases in revenue from our FPP service contracts and new long-term rental program compared to the same period last year. The increase in FPP service revenue was primarily the result of not recognizing revenue in the third quarter of Fiscal 2019 on certain reassigned FPP service contracts. The increase in operating expense was primarily attributable to higher marketing and labor costs. On February 4, 2019, we entered into a $30.0 million three-year term note with Goldman Sachs to replace the existing $15.0 million revolving credit facility with Bridge Bank, which resulted in higher interest expense during the third quarter of Fiscal 2020 as compared to the same period last year.
Our products continue to gain interest in all six of the major vertical markets (energy efficiency, renewable energy, natural resources, critical power supply, microgrid and transportation). In the energy efficiency market, we continue to expand our market presence in hotels, office buildings, hospitals, retail and industrial applications globally. The renewable energy market is fueled by landfill gas, biodiesel, and biogas from sources such as food processing, agricultural waste and livestock manure. Our product sales in the oil and gas and other natural resources market is driven by our microturbines’ reliability, emissions profile and ease of installation. Given the volatility of the oil and gas market, our business strategy is to target projects within the energy efficiency and renewal energy markets. We also continue to see interest in critical power supply applications as customers want solutions that can handle both primary and backup power. Transportation is a developing market segment for us and currently transportation products were only for customer demonstrations.
We continue to focus on improving our products based on customer input, building brand awareness and new channels to market by developing a diversified network of strategic distribution partners. Our focus is on products and solutions that provide near term opportunities to drive repeatable business rather than discrete projects for niche markets. In addition, management closely monitors operating expenses and strives to improve manufacturing efficiencies while simultaneously lowering direct material costs and increasing average selling prices. The key drivers to our success are revenue growth, higher average selling prices, lower direct material costs, positive new order flow and reduced cash usage.
An overview of our direction, targets and key initiatives are as follows:
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1.
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Focus on Vertical Markets Within the distributed generation markets that we serve, we focus on vertical markets that we identify as having the greatest near-term potential. In our primary products and applications (energy efficiency, renewable energy, natural resources, critical power supply, microgrid and transportation products), we identify specific targeted vertical market segments. Within each of these segments, we identify what we believe to be the critical factors to success and base our plans on those factors. Given the volatility of the oil and gas market, we have refocused our business strategy to target projects within the energy efficiency, renewable energy and microgrid markets.
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The following table summarizes our product shipments by vertical markets:
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Three Months Ended
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Nine Months Ended
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December 31,
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December 31,
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2019
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2018
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2019
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2018
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Energy efficiency
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54%
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40%
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54%
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40%
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Natural resources
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22%
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42%
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31%
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48%
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Renewable energy
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24%
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12%
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15%
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8%
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Microgrid
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—
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6%
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—
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4%
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Energy Efficiency—CHP/CCHP
Energy efficiency refers to the proper utilization of both electrical and thermal energies in the power production process. In such applications, our microturbines are able to maximize the availability of usable energy which we believe provides a significant economic advantage to our customers while reducing their onsite emissions. CHP and CCHP can improve site economics by capturing the waste heat created from a single combustion process to increase the efficiency of the total system, from approximately 30 percent to 80 percent or more. Compared with more traditional, independent generation sources, the increase in operational efficiency also reduces greenhouse gas emissions through the displacement of other separate systems, which can also reduce operating costs.
Natural Resources—Oil, Natural Gas, Shale Gas & Mining
Our microturbines are installed in the natural resource market for use in both onshore and offshore applications, including exploration, production, compression and transmission sites as a highly efficient and reliable source of prime power. In some cases, these oil and gas or mining operations have no electric utility grid and rely solely on power generated onsite. There are numerous locations, on a global scale, where the drilling, production, compression and transportation of oil and gas and other extraction and production processes create fuel byproducts, which are traditionally burned or released into the atmosphere. Our microturbines can turn these fuel byproducts, flare gas or associated gas, into a useable fuel to provide power to these remote oil and gas sites.
Renewable Energy
There is a growing transition to renewable energy sources and technologies happening on a global scale. Our microturbines run efficiently on renewable fuels such as methane and other biogases from landfills, wastewater treatment facilities and other small biogas applications like food processing plants, livestock farms and agricultural waste operations. Microturbines can burn these renewable fuels with minimal emissions, thereby, and in some cases, avoiding the imposition of penalties incurred for pollution while simultaneously producing
electricity from this “free” fuel source for use at the site or in the surrounding areas. Our microturbines have demonstrated effectiveness in these smaller applications and may outperform conventional combustion engines in some situations, including when the gas contains a high amount of sulfur, as the sulfur can contaminate combustion engines lube oil leading to equipment breakdowns and higher lifecycle costs.
Critical Power Supply
Because of the potentially catastrophic consequences of system failure, momentary or otherwise, certain high demand power users, including high technology, health care and information systems facilities require higher levels of reliability in their power generation service. The majority of microturbine based distributed generation installations have powered through hurricanes with little or no downtime. To meet these customer requirements, traditional solutions utilize Uninterruptible Power Supplies (“UPS”) to protect critical loads from power disturbances along with back-up diesel generators for extended outages. We offer an alternative solution that can both meet customer reliability requirements and reduce operating costs. We have seen continued development in the critical market segment as it relates to health care facilities.
Microgrid
A microgrid is a group of interconnected loads and distributed energy resources that acts as a single controllable energy entity with respect to the grid. Distributed energy resources typically include other dual-mode microturbines, reciprocating engines, solar photovoltaic (“PV”), wind turbine, fuel cells and battery storage. Microgrids can be connected to larger electricity grids; however, in the event of a widespread outage, the microgrid will disconnect from the main grid and continue to operate independently to maintain the electricity supply to the homes and businesses that are connected to the microgrid’s electricity network. Our microturbines have the ability to meet the needs of microgrid end users by lowering their overall cost to operate and by providing a versatile dispatchable technology that is fuel flexible and scalable enough to fit a wide variety of applications.
Transportation
Our technology also can be used in hybrid electric vehicle (“HEV”) applications. Our customers have applied our products in HEV applications such as transit buses and Class 7 and 8 work trucks. In these applications, the microturbine acts as an onboard battery charger to recharge the battery system as needed. The benefits of microturbine-powered HEV hybrids include extended range, fuel economy gains, quieter operation and reduced emissions when compared with traditional internal combustion engines. Internal combustion diesel engine manufacturers have been challenged for the last several years to develop technology improvements, prior to aftertreatment that reduce emissions to levels specified by the EPA and CARB 2007 and 2010 standards. Many manufacturers are incorporating aftertreatment that increases upfront equipment costs, vehicle weight and life cycle costs, which may reduce overall engine efficiency.
Additionally, our technology is also used in marine applications. Our customers have applied our products in the commercial vessel and luxury yacht market segments. The application for our marine products is for use as a ship auxiliary generator set. In this application, the microturbines provide power to the vessel’s electrical loads and, in some cases, the vessel is able to utilize the exhaust energy to increase the overall efficiency of the application, reducing overall fuel consumption and emissions. Another feasible application is similar to our HEV application where the vessel is driven by an electric propulsion system and the microturbine serves as an on board battery charger and range extender. Our marine customers use both liquid fueled and natural gas microturbine products. Liquefied natural gas (“LNG”) is in its early stages as a marine fuel, and the number of vessels powered by LNG is forecasted to double every two years over the next decade. Vessel owners can receive the same benefits as users of stationary products: low emissions with no exhaust aftertreatment, long maintenance intervals, high reliability, low noise and no vibration. Transportation is a developing market segment for us. In Fiscal 2019, transportation products were only for customer demonstrations.
Backlog
Net product orders were approximately negative $6.2 million and $8.6 million for the three months ended December 31, 2019 and 2018, respectively. At December 31, 2019, net product orders were negative due to the removal of BPC backlog of $15.8 million as discussed further below. Ending backlog was approximately $45.6 million at December 31, 2019 compared to $76.3 million at December 31, 2018. The gross book-to-bill ratio was 1.2:1 and 1.3:1 for the three months ended December 31, 2019 and 2018, respectively. Book-to-bill ratio is the ratio of new orders we received to units shipped and billed during a period.
During the second quarter of Fiscal 2020, we removed from product backlog orders related to Green Energy Sustainable Solutions, Inc. (“GESS”) of approximately $10.6 million. This removal was the result of Capstone’s findings following further review of GESS’s ability to meet its obligations under their national account agreement.
During the first quarter of Fiscal 2019, we removed from product backlog orders related to Regatta Solutions, our former California distributor (“Regatta”) for approximately $3.8 million. This removal was the result of the reassignment of the California sales territory to Cal Microturbine, our new exclusive distribution partner in California.
On October 13, 2017, we entered into an Accounts Receivable Assignment Agreement (the “Assignment Agreement”) and Promissory Note (the “Note”) with Turbine International, LLC (“TI”).
Pursuant to the terms of the Assignment Agreement, we agreed to assign to TI the right, title and interest to receivables owed to us from BPC Engineering, our former Russian distributor (“BPC”), upon TI’s payment to us of $2.5 million in three payments by February 1, 2018. We received payments from TI of approximately $1.0 million under the Assignment Agreement during Fiscal 2018 which was recorded as bad debt recovery.
In connection with the terms of the Note, we granted TI the sole distribution rights for our products and services in the Russian oil and gas sector. As a result of this appointment, TI agreed to pay us $3.8 million over a three-year period in 35 equal monthly installments starting in August 2018.
On October 13, 2017, we and Hispania Petroleum, S.A. (the “Guarantor”), entered into a Guaranty Agreement (the “Guaranty Agreement”) whereby the Guarantor guarantees TI’s obligations under the Agreement and Note. However, due to our limited business relationship with TI and the missed payments on the Assignment Agreement, we deferred recognition of the Assignment Agreement and Note until collectability is reasonably assured.
On June 5, 2018, we entered into an amendment to the Assignment Agreement (the “Amended Assignment Agreement”) and the Note (the “Amended Note”) with TI. Pursuant to the terms of the Amended Assignment Agreement, the right, title and interest to receivables owed to us from BPC was contingent upon TI’s payment to us of the remaining approximately $1.5 million in five payments by September 20, 2019. The payments of $0.4 million, $0.3 million, and $0.3 million due March 20, 2019, June 20, 2019, and September 20, 2019, respectively, under the Amended Assignment Agreement, have not been received at the time of this filing. Under the terms of the Amended Note, TI agreed to pay us $3.8 million over a three-year period in 13 equal quarterly installments starting on December 20, 2019. In September 2019, we sent TI a notice to cure default with a deadline of October 31, 2019. TI failed to cure the noticed default and we have since terminated TI’s distributor agreement. As a result, the BPC accounts receivable and related accounts receivable reserve of $4.8 million were written off as of December 31, 2019.
As a result of the above amendments, during the three months ended March 31, 2018 we removed product orders related to BPC from backlog for approximately $7.2 million. This removal was the result of product pricing that we no longer would honor. Additionally, for Fiscal 2019, we removed product orders related to BPC from backlog for approximately $20.7 million. During the three months ended June 30, 2019 we removed approximately $4.6 million. These removals were the result of our continuous review of BPC related backlog with TI which resulted in us no longer honoring the product pricing. Due to the cancellation of our distributor agreement with TI, we removed product orders related to BPC from backlog for approximately $15.8 million
during the three months ended December 31, 2019. There are no remaining backlog related to BPC as of December 31, 2019.
A portion of our backlog is concentrated in the international oil and gas market which may impact the overall timing of shipments or the conversion of backlog to revenue. The timing of the backlog is based on the required delivery dates requested by our customers. Based on historical experience, management expects that a significant portion of our backlog may not be shipped within the next 18 months. Additionally, the timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and customer delivery schedule changes), most of which are not in our control and can affect the timing of our revenue. As a result, management believes the book-to-bill ratio demonstrates the current demand for our products in the given period.
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2.
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Sales and Distribution Channels We seek out distributors that have business experience and capabilities to support our growth plans in our targeted markets. A significant portion of our revenue is derived from sales to distributors who resell our products to end users. We have a total of 69 distributors, Original Equipment Manufacturers (“OEMs”) and national accounts. In the United States and Canada, we currently have 15 distributors, OEMs and national accounts. Outside of the United States and Canada, we currently have 54 distributors, OEMs and national accounts. We continue to refine our distribution channels to address our specific targeted markets.
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Effective January 1, 2018, we launched our Distributor Support System (“DSS program”) to provide additional support for distributor business development activities, customer lead generation, brand awareness and tailored marketing services for each of our major geography and market vertical. This new program is funded by our distributors and was developed to provide improved worldwide distributor training, sales efficiency, website development, company branding and provide funding for increased strategic marketing activities. See Note 13—Revenue Recognition for additional discussion of revenue recognition for this program.
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3.
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Service We provide service primarily through our global distribution network. Together with our global distribution network we offer a comprehensive FPP for a fixed fee to perform regularly scheduled and unscheduled maintenance as needed. We provide factory and on-site training to certify all personnel that are allowed to perform service on our microturbines. FPPs are generally paid quarterly in advance.
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Our FPP backlog as of December 31, 2019 was approximately $83.7 million, which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2034. Our FPP backlog as of December 31, 2018 was approximately $72.8 million, which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2031.
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4.
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Product Robustness and Life Cycle Maintenance Costs We continue to invest in enhancements that relate to high performance and high reliability. An important element of our continued innovation and product strategy is to focus on the engineering of our product hardware and electronics to make them work together more effectively and deliver improved microturbine performance, reliability and low maintenance cost to our customers.
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5.
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New Product Development Our new product development is targeted specifically to meet the needs of our selected vertical markets. We expect that our existing product platforms, the C30, C65, C200 and C1000 Series microturbines, will be our foundational product lines for the foreseeable future. Our research and development project portfolio is centered on enhancing the features of these base products.
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During Fiscal 2019, we received support from the Department of Energy Technology Commercialization to refine Argonne National Laboratory’s (“Argonne”) high-efficiency, fast-charging and fast-discharging thermal energy-storage system (“TESS”) for use in CHP systems. The new Capstone CHP system will incorporate Argonne’s high-efficiency, fast-charging, and fast-discharging TESS for waste heat recovery and reuse in projects that require process heat and industrial manufacturing environments. This new project focuses on integrating Argonne’s TESS into a C200 CHP system, specifically, using thermal modeling and simulations to optimize system design; fabricating and integrating the TESS into the C200 system; testing the performance of the integrated TESS-C200 CHP system and conducting both a technology and economic analysis to establish performance and cost benefits of the new integrated microturbine and thermal battery solution.
Our product development activities during Fiscal 2019 included the successful launch of the new family of PowerSync controllers used for Capstone microturbines. We also continued development and testing of a new self-cleanable severe environment air filtration system for our Signature Series line of microturbine products. Capstone has also embarked upon a project to modernize electronics to today’s standards, providing common functionality and enabling long term support. In addition, our product development activities during Fiscal 2019 included certification of our C65, C200S, and C1000S series microturbines to the latest UL 1741 interconnection standards.
We are also developing a more efficient microturbine CHP system with the support of the DOE, which awarded us a grant of $5.0 million in support of this development program, of which $4.2 million was allocated to us and was used through September 30, 2015. We successfully completed the first phase of the development program on September 30, 2015 and achieved 270 kW with a prototype C250 microturbine in our development test lab. Management intends to continue with the next phase of development and commercialization after we achieve profitability. The next phase will be to continue development of the C250 product architecture as well as the associated power electronics and software controls required for successful commercialization.
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6.
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Cost and Core Competencies We believe that the core competencies of our products are air bearing technology, advanced combustion technology and sophisticated power electronics to form efficient and ultra-low emission electricity and cooling and heat production systems. Our core intellectual property is contained within our air bearing technology. We continue to review avenues for cost reduction by sourcing to the best value supply chain option. In order to utilize manufacturing facilities and technology more effectively, we are focused on continuous improvements in manufacturing processes. Additionally, considerable effort is being directed to manufacturing cost reduction through process improvement, product design, advanced manufacturing technology, supply management and logistics. Management expects to be able to leverage our costs as product volumes increase.
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Our manufacturing designs include the use of conventional technology, which has been proven in high volume automotive and turbocharger production for many years. Many components used in the manufacture of our products are readily fabricated from commonly available raw materials or off the shelf items available from multiple supply sources; however, certain items are custom made to meet our specifications that require longer lead time. We believe that in most cases, adequate capacity exists at our suppliers and that alternative sources of supply are available or could be developed within a reasonable period of time. However, single source suppliers with long lead times may be more challenging to transition to another supplier. We have an ongoing program to develop alternative back up suppliers for sole source parts wherever possible, however this has been challenging with low production volumes and increased pricing. We regularly reassess the adequacy and abilities of our suppliers to meet our future needs.
During the first quarter of Fiscal 2019, we identified a defect in one of the component parts for microturbine systems from one of our single source suppliers. As a result of this defect we have identified several new suppliers with greater engineering expertise and robust quality management systems. The transition is complex, lengthy and may result in an interruption in our manufacturing process. An interruption in our manufacturing process for this component part would adversely impact our results of operations. The efforts to qualify and dual source these components was completed in the fourth quarter of Fiscal 2019.
During the fourth quarter of Fiscal 2018, we received notification from one of our single source suppliers that they were at maximum capacity and would require prepayment and a significant increase in the price of multiple components in order to fulfill our supply requirements for Fiscal 2019. Due to their capacity issues, it is uncertain if we will experience an interruption in parts from this supplier or be able to fully offset or recover any resulting component price increases. This could impact margins or sales in future quarters. During the first quarter of Fiscal 2019, we issued a prepayment of approximately $2.2 million to this single source supplier. As of December 31, 2019, there were gradual improvement trends in the capacity issues at the supplier. A new supplier has been identified and has been fully qualified and is now working towards increasing its capacity and is expected to meet our production volumes during Fiscal 2020.
We believe that effective execution in each of these key areas will be necessary to leverage Capstone’s promising technology and early market leadership into achieving positive cash flow with growing market presence and improving financial performance. Based on our recent progress and assuming achievement of targeted cost reductions
and product mix, pricing and performance and our increasing accessories, parts and service revenue with improved gross margins, our financial model indicates that we will achieve positive cash flow when we generate $25 million in quarterly revenue with a 25% gross margin. We expect to have costs and operating expenses increase in certain areas in Fiscal 2020, including sales and marketing, which if not offset by an increase in revenue, would reduce margins and profitability as we have limited ability to further reduce costs.
During the third quarter of Fiscal 2018, we consolidated our operations and offices into our Van Nuys location and we believe that our production capacity is approximately 2,000 units per year, depending on product mix. We believe we will be able to support this production capacity level by adding additional shifts, which would increase working capital requirements, and making some additional capital expenditures when necessary.
Critical Accounting Policies and Estimates
The preparation of our condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Management believes the most complex and sensitive judgments, because of their significance to the condensed consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from management’s estimates. Management believes the critical accounting policies listed below affect our more significant accounting judgments and estimates used in the preparation of the condensed consolidated financial statements. These policies are described in greater detail in our Annual Report on Form 10-K for Fiscal 2019 and continue to include the following areas:
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·
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Impairment of long-lived assets, including intangible assets with finite lives;
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·
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Inventory write-downs and classification of inventories;
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·
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Estimates of warranty obligations;
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·
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Accounts receivable allowances;
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·
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Deferred tax assets and valuation allowance; and
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·
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Stock-based compensation expense.
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Results of Operations
Three Months Ended December 31, 2019 and 2018
The following table summarizes our revenue by geographic markets (amounts in millions):
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Three Months Ended December 31,
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2019
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2018
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Revenue
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Revenue
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United States and Canada
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$
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7.1
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$
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9.6
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Europe and Russia
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5.2
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3.0
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Latin America
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1.9
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2.8
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Asia and Australia
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3.0
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2.6
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Middle East and Africa
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0.2
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—
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Total
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$
|
17.4
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$
|
18.0
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Revenue Revenue for the three months ended December 31, 2019 decreased $0.6 million, or 3%, to $17.4 million from $18.0 million for the three months ended December 31, 2018. The change in revenue for the three months ended December 31, 2019 compared to the three months ended December 31, 2018 included decreases in revenue of $2.5 million from the United States and Canadian markets and $0.9 million from the Latin American markets. These overall decreases in revenue were offset by increases in revenue of $2.2 million from the Europe and Russian markets, $0.4 million from the Asian and Australian markets, and $0.2 million from the Middle East and African markets. The decrease in revenue in the United States and Canadian markets was primarily because of a decline in product revenue in
the United States natural resources market vertical. Additionally, we deployed a 0.8 megawatt C1000 Signature Series system under our long-term rental program. The increase in revenue in the Europe and Russian markets was primarily the result of our continued investment in key growth initiatives in the Energy Efficiency market vertical in those markets. The decrease in revenue in the Latin American markets was primarily because of a decrease in product shipments compared to the same period last year. The increase in revenue in the Asian and Australian markets and Middle East and African markets was primarily of higher accessories, parts and service sales compared to the same period last year.
The following table summarizes our revenue (revenue amounts in millions):
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Three Months Ended December 31,
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2019
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2018
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Revenue
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Megawatts
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Units
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|
Revenue
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|
Megawatts
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Units
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Microturbine Product
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$
|
7.9
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8.1
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50
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$
|
10.1
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10.3
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|
66
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Accessories and Parts
|
|
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4.1
|
|
|
|
|
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3.2
|
|
|
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Service
|
|
|
5.4
|
|
|
|
|
|
|
4.7
|
|
|
|
|
Total Accessories, Parts and Service
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|
|
9.5
|
|
|
|
|
|
|
7.9
|
|
|
|
|
Total
|
|
$
|
17.4
|
|
|
|
|
|
$
|
18.0
|
|
|
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For the three months ended December 31, 2019, revenue from microturbine products decreased $2.2 million, or 22%, to $7.9 million from $10.1 million for the three months ended December 31, 2018. The decrease in revenue and megawatts shipped was primarily because of a decrease in product volume due to weakness in the United States natural resources market vertical and because we deployed a 0.8 megawatt C1000 Signature Series system under our long-term rental program during the three months ended December 31, 2019. Megawatts shipped was 8.1 megawatts and 10.3 megawatts during the three months ended December 31, 2019 and 2018, respectively. Average revenue per megawatt shipped was approximately $1.0 million during the three months ended December 31, 2019 and 2018. The timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and delivery schedule changes), most of which are not within our control and can affect the timing of our revenue.
For the three months ended December 31, 2019, revenue from our accessories and parts increased $0.9 million, or 28%, to $4.1 million from $3.2 million for the three months ended December 31, 2018. The increase in revenue from accessories and parts was primarily due to parts from higher powerhead and engine shipments during the three months ended December 31, 2019 compared to the prior year.
Service revenue for the three months ended December 31, 2019 increased $0.7 million, or 15%, to $5.4 million from $4.7 million for the three months ended December 31, 2018. The increase in service revenue was due to increases in revenue from our new long-term rental program, new FPP service agreements, and the result of not recognizing revenue on certain FPP service contracts because of the reassignment of those service contracts during the same period last year. Effective January 1, 2018 we launched our DSS program to provide additional support for distributor business development, customer lead generation, brand awareness and tailored marketing services for each of our major geography and market vertical. This new program is funded by our distributors and was developed to provide improved worldwide distributor training, sales efficiency, website development, company branding and provide funding for increased strategic marketing activities. Earned revenue from our DSS program for the three months ended December 31, 2019 and 2018 was $0.7 million for each period and has been included under the caption “Service revenue” in the accompanying condensed consolidated statements of operations.
Sales to Optimal Group Australia Pty Ltd, one of our Australian distributors, accounted for 11% of revenue for the three months ended December 31, 2019. Sales to E-Finity Distributed Generation, LLC (“E-Finity”) and Cal Microturbine (“CAL”), two of our domestic distributors and DTC Soluciones Inmobiliarias S.A. de C.V., one of the Company’s Mexican distributors (“DTC”), accounted for 14%, 13% and 13%, respectively, of revenue for the three months ended December 31, 2018.
Gross Margin Cost of goods sold includes direct material costs, production and service center labor and overhead, inventory charges and provision for estimated product warranty expenses. The gross margin was $2.6 million, or 15% of revenue, for the three months ended December 31, 2019 compared to a gross margin of $2.2 million, or 12% of revenue, for the three months ended December 31, 2018. The increase in gross margin of $0.4 million during the three months ended December 31, 2019 compared to the three months ended December 31, 2018 was primarily due to
decreases in warranty expense of $0.7 million, and production and service center labor and overhead expense decreases of $0.4 million, partially offset by a $0.7 million decrease in our direct material costs margin. Management continues to implement initiatives to improve gross margin in Fiscal 2020 by further reducing manufacturing overhead and direct material costs, and improving product performance as we work to achieve profitability.
Direct material costs margin, calculated as total revenue less our direct material costs, decreased $0.7 million during the three months ended December 31, 2019 compared to the three months ended December 31, 2018 primarily because of lower product margin due to volume, partially offset by higher service margins.
Warranty expense is a combination of a standard warranty provision recorded at the time revenue is recognized and changes, if any, in estimates for reliability repair programs. Reliability repair programs are based upon estimates that are recorded in the period that new information becomes available, including design changes, cost of repair and product enhancements, which can include both in-warranty and out-of-warranty systems. The decrease in warranty expense of $0.7 million during the three months ended December 31, 2019 compared to the three months ended December 31, 2018 was primarily because of a higher than normal standard warranty provision in the nine months ended December 31, 2018 due to the supplier defect identified during the prior year period. Management expects warranty expense in Fiscal 2020 to be lower than Fiscal 2019 primarily because of the higher standard warranty provision in Fiscal 2019 due to a supplier defect identified during the first quarter of Fiscal 2019.
Production and service center labor and overhead expense decreased $0.4 million during the three months ended December 31, 2019 compared to the three months ended December 31, 2018 primarily because of $0.1 million in overhead allocated to finished goods inventory, decreases of $0.1 million in labor costs, $0.1 million in consulting expense and $0.1 million in supplies.
On July 25, 2018, we and Carrier entered into a Second Amendment to the Development and License Agreement (“Second Amendment”) whereby we agreed to pay Carrier approximately $3.0 million to conclude our current royalty obligation under the Development and License Agreement, dated as of September 4, 2007, as amended (“Development Agreement”) and release us from any future royalty payment obligations. The Second Amendment also removed non-compete provisions from the Development Agreement, allowing us to design, market or sell our C200 System in conjunction with any energy system and compete with Carrier products in the CCHP market. On September 19, 2018, we paid in full the negotiated royalty settlement of $3.0 million to Carrier, and as such, there is no further royalty obligation to Carrier. The prepaid royalty of $3.0 million has been recorded under the caption “Prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheets and will be amortized in the accompanying condensed consolidated statement of operations over a 15-year amortization period through September 2033 using an effective royalty rate. The effective royalty rate is calculated as the prepaid royalty settlement divided by total projected C200 System units over the 15-year amortization period. Royalty expense increased $8,000, to $30,000 during the three months ended December 31, 2019 compared to $38,000 during the three months ended December 31, 2018.
The following table summarizes our gross margin (in millions except percentages):
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
Gross Margin
|
|
|
|
|
|
|
|
Product
|
|
$
|
(0.5)
|
|
$
|
(0.6)
|
|
As a percentage of product revenue
|
|
|
(7)
|
%
|
|
(6)
|
%
|
|
|
|
|
|
|
|
|
Accessories, parts and service
|
|
$
|
3.1
|
|
$
|
2.8
|
|
As a percentage of accessories, parts and service revenue
|
|
|
28
|
%
|
|
36
|
%
|
|
|
|
|
|
|
|
|
Total Gross Margin
|
|
$
|
2.6
|
|
$
|
2.2
|
|
As a percentage of total revenue
|
|
|
15
|
%
|
|
12
|
%
|
Product gross margin increased $0.1 million during the three months ended December 31, 2019 compared to the three months ended December 31, 2018. Accessories, parts and service gross margin increased during the three months ended December 31, 2019 compared to the three months ended December 31, 2018 primarily because of higher service revenue resulting from our long-term rental program.
Research and Development (“R&D”) Expenses R&D expenses for the three months ended December 31, 2019 increased $0.1 million, or 11%, to $1.0 million from $0.9 million for the three months ended December 31, 2018. Management expects R&D expenses in Fiscal 2020 to be slightly higher than in Fiscal 2019 as a result of ongoing product development costs.
Selling, General, and Administrative (“SG&A”) Expenses SG&A expenses for the three months ended December 31, 2019 increased $0.7 million, or 15%, to $5.3 million from $4.6 million for the three months ended December 31, 2018. The net increase in SG&A expenses was comprised of a decrease of approximately $0.4 million in bad debt recovery, and increases of approximately $0.1 million in marketing costs because of additional funding from the DSS program, $0.1 million in consulting expense and $0.1 million in legal, accounting and shareholder expense, compared to the same period last year. Management expects SG&A expenses in Fiscal 2020 to be higher than in Fiscal 2019 primarily as a result of increases in salaries expense, marketing expense, and professional services, including legal and accounting expenses.
Interest Expense Interest expense increased $1.1 million to $1.3 million during the three months ended December 31, 2019 from $0.2 million for the three months ended December 31, 2018. Interest expense increased because of higher debt outstanding and a higher interest rate. On February 4, 2019, we entered into a $30.0 million three-year term note with Goldman Sachs to replace the existing $15.0 million revolving credit facility with Bridge Bank. See Liquidity and Capital Resources—Three-year Term Note below for additional discussion on our three-year term note with Goldman Sachs.
Nine Months Ended December 31, 2019 and 2018
The following table summarizes our revenue by geographic markets (amounts in millions):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
|
Revenue
|
|
Revenue
|
|
United States and Canada
|
|
$
|
25.3
|
|
$
|
31.7
|
|
Europe and Russia
|
|
|
14.6
|
|
|
12.2
|
|
Latin America
|
|
|
7.9
|
|
|
8.2
|
|
Asia and Australia
|
|
|
7.6
|
|
|
7.0
|
|
Middle East and Africa
|
|
|
2.0
|
|
|
2.3
|
|
Total
|
|
$
|
57.4
|
|
$
|
61.4
|
|
Revenue Revenue for the nine months ended December 31, 2019 decreased $4.0 million, or 7%, to $57.4 million from $61.4 million for the nine months ended December 31, 2018. The change in revenue for the nine months ended December 31, 2019 compared to the nine months ended December 31, 2018 included decreases in revenue of $6.4 million from the United States and Canadian markets, $0.3 million from the Middle East and African markets and $0.3 million from the Latin American markets. These overall decreases in revenue were offset by increases in revenue of $2.4 million from the European and Russian markets and $0.6 million from the Asia and Australian markets. The decrease in revenue in the United States and Canadian markets during the nine months ended December 31, 2019 compared to the same period last year was primarily because of a decrease in product volume due to weakness in the natural resources market vertical. Additionally, we deployed 3.4 megawatts C1000 Signature Series systems under our long-term rental program and a 0.6 megawatt system as a customer demo unit. The decrease in revenue in the Middle East and African markets was primarily the result of the ongoing geopolitical tensions in these regions and continues to be negatively impacted by the volatility of the global oil and gas markets. The decrease in revenue in the Latin American markets was primarily because of the decrease of product shipments. The increase in revenue in the European and Russian markets was primarily because of an increase in product shipments in the energy efficiency market vertical, as well as an increase in accessories and parts shipments during the nine months ended December 31, 2019 compared to the same period last year. The increase in revenue in the Asian and Australian markets was primarily because of an increase in system shipments into the natural resources market vertical during the nine months ended December 31, 2019 compared to the same period last year.
The following table summarizes our revenue (revenue amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
Revenue
|
|
Megawatts
|
|
Units
|
|
Revenue
|
|
Megawatts
|
|
Units
|
|
Microturbine Product
|
|
$
|
30.0
|
|
29.8
|
|
179
|
|
$
|
38.6
|
|
39.2
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accessories and Parts
|
|
|
12.1
|
|
|
|
|
|
|
10.5
|
|
|
|
|
|
Service
|
|
|
15.3
|
|
|
|
|
|
|
12.3
|
|
|
|
|
|
Total Accessories, Parts and Service
|
|
|
27.4
|
|
|
|
|
|
|
22.8
|
|
|
|
|
|
Total
|
|
$
|
57.4
|
|
|
|
|
|
$
|
61.4
|
|
|
|
|
|
For the nine months ended December 31, 2019, revenue from microturbine products decreased $8.6 million, or 22%, to $30.0 million from $38.6 million for the nine months ended December 31, 2018. The decrease in revenue and megawatts shipped was primarily because of a decrease in volume, as well as the deployment of 3.4 megawatts C1000 Signature Series systems under our factory rental program, and a 0.6 megawatt system deployed as a customer demo unit during the nine months ended December 31, 2019 compared to no rental or demo units the same period last year. Also contributing to the decrease was weakness in the natural resources market vertical. Megawatts shipped during the nine months ended December 31, 2019 decreased 9.4 megawatts, or 24%, to 29.8 megawatts from 39.2 megawatts during the nine months ended December 31, 2018. Average revenue per megawatt shipped was approximately $1.0 million during the nine months ended December 31, 2019 and 2018, respectively. The timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and delivery schedule changes), most of which are not within our control and can affect the timing of our revenue.
For the nine months ended December 31, 2019, revenue from our accessories and parts increased $1.6 million, or 15%, to $12.1 million from $10.5 million for the nine months ended December 31, 2018. The increase in revenue from accessories and parts was primarily due to parts from higher powerhead and engine shipments.
Service revenue for the nine months ended December 31, 2019 increased $3.0 million, or 24%, to $15.3 million from $12.3 million for the nine months ended December 31, 2018. The increase in service revenue was due to increases in revenue from new FPP service contracts and revenue from our long-term rental program, and lower than expected service revenue resulting from reassignment of certain FPP contracts during the same period last year. Earned revenue from our DSS program for the nine months ended December 31, 2019 and 2018 was $1.2 million for each period and has been included under the caption “Service revenue” in the accompanying condensed consolidated statements of operations.
E-Finity accounted for 12% of our revenue for the nine months ended December 31, 2019 and 2018.
Gross Margin Cost of goods sold includes direct material costs, production and service center labor and overhead, inventory charges and provision for estimated product warranty expenses. The gross margin was approximately $8.6 million, or 15% of revenue, for the nine months ended December 31, 2019 compared to a gross margin of $6.1 million, or 10% of revenue, for the nine months ended December 31, 2018. The increase in gross margin of $2.5 million during the nine months ended December 31, 2019 compared to the nine months ended December 31, 2018 was primarily because of decreases in warranty expense of $1.5 million, production and service center labor and overhead expense of $1.1 million and royalty expense of $0.2, partially offset by a $0.3 million decrease in our direct material costs margin. Management continues to implement initiatives to improve gross margin in Fiscal 2020 by further reducing manufacturing overhead and direct material costs, and improving product performance as we work to achieve profitability.
Direct material costs margin decreased $0.3 million during the nine months ended December 31, 2019 compared to the nine months ended December 31, 2018 due to a decrease in product margin from lower volume, partially offset by higher service margin.
Production and service center labor and overhead expense decreased $1.1 million during the nine months ended December 31, 2019 compared to the nine months ended December 31, 2018 primarily because of decreases of approximately $0.5 million in overhead allocated to finished goods inventory, $0.3 million in labor costs, $0.2 million in consulting expense, $0.2 million in supplies, offset by an increase of $0.1 million in facilities expense.
The decrease in warranty expense of $1.5 million during the nine months ended December 31, 2019 compared to the nine months ended December 31, 2018 was primarily because of a higher than normal standard warranty provision in the nine months ended December 31, 2018 due to the supplier defect identified during the nine months ended December 31, 2018. Management expects warranty expense in Fiscal 2020 to be lower than Fiscal 2019 primarily because of the higher standard warranty provision in Fiscal 2019 due to a supplier defect identified during the first quarter of Fiscal 2019.
On July 25, 2018, we and Carrier entered into a Second Amendment to the Development and License Agreement (“Second Amendment”) whereby we agreed to pay Carrier approximately $3.0 million to conclude our current royalty obligation under the Development and License Agreement, dated as of September 4, 2007, as amended (“Development Agreement”) and release us from any future royalty payment obligations. The Second Amendment also removed non-compete provisions from the Development Agreement, allowing us to design, market or sell our C200 System in conjunction with any energy system and compete with Carrier products in the CCHP market. On September 19, 2018, we paid in full the negotiated royalty settlement of $3.0 million to Carrier, and as such, there is no further royalty obligation to Carrier. The prepaid royalty of $3.0 million has been recorded under the caption “Prepaid expenses and other current assets” in the accompanying condensed consolidated balance sheets and will be amortized in the accompanying condensed consolidated statement of operations over a 15-year amortization period through September 2033 using an effective royalty rate. The effective royalty rate is calculated as the prepaid royalty settlement divided by total projected C200 System units over the 15-year amortization period. Royalty expense decreased $0.2 million during the nine months ended December 31, 2019 compared to the nine months ended December 31, 2018 primarily because we concluded our royalty obligation under the Development Agreement during Fiscal 2019.
The following table summarizes our gross margin (in millions except percentages):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended December 31,
|
|
|
|
2019
|
|
2018
|
|
Gross Margin
|
|
|
|
|
|
|
|
Product
|
|
$
|
(0.1)
|
|
$
|
(0.2)
|
|
As a percentage of product revenue
|
|
|
0
|
%
|
|
(1)
|
%
|
|
|
|
|
|
|
|
|
Accessories, parts and service
|
|
$
|
8.7
|
|
$
|
6.3
|
|
As a percentage of accessories, parts and service revenue
|
|
|
31
|
%
|
|
28
|
%
|
|
|
|
|
|
|
|
|
Total Gross Margin
|
|
$
|
8.6
|
|
$
|
6.1
|
|
As a percentage of total revenue
|
|
|
15
|
%
|
|
10
|
%
|
Product gross margin increased $0.1 million during the nine months ended December 31, 2019 compared to the nine months ended December 31, 2018. Accessories, parts and service gross margin increased during the nine months ended December 31, 2019 compared to the nine months ended December 31, 2018 primarily because of increases in revenue from our long-term rental program and FPP service agreements. The increase in FPP service revenue was primarily the result of not recognizing revenue during Fiscal 2019 on certain reassigned FPP service contracts.
R&D Expenses R&D expenses for the nine months ended December 31, 2019 increased $0.1 million, or 3%, to $2.8 million from $2.7 million for the nine months ended December 31, 2018. Management expects expenses in Fiscal 2020 to be slightly higher than in Fiscal 2019 as a result of ongoing product development costs.
SG&A Expenses SG&A expenses for the nine months ended December 31, 2019 increased $1.5 million, or 1%, to $17.0 million from $15.5 million for the nine months ended December 31, 2018. The net increase in SG&A expenses was comprised of a decrease of approximately $0.3 million in bad debt recovery, and increases of approximately $0.7 million in marketing expense, $0.3 million in salaries expense, including non-cash stock based compensation expense, $0.2 million in shareholder costs, and $0.2 million in allocated costs for shared-services facilities expense. These increases were partially offset by a decrease of approximately $0.2 million in supplies and travel during the nine months ended December 31, 2019 compared to the same period last year. Management expects SG&A expenses in Fiscal 2020 to be higher than in Fiscal 2019 primarily as a result of increases in salaries expense, marketing expense, and professional services, including legal and accounting expenses.
Interest Expense Interest expense increased $3.3 million to $3.9 million during the nine months ended December 31, 2019 from $0.5 million for the nine months ended December 31, 2018. Interest expense increased because
of higher debt outstanding and a higher interest rate. On February 4, 2019, we entered into a $30.0 million three-year term note with Goldman Sachs to replace the existing $15.0 million revolving credit facility with Bridge Bank. See Liquidity and Capital Resources—Three-year Term Note below for additional discussion on our three-year term note with Goldman Sachs.
Liquidity and Capital Resources
Our cash requirements depend on many factors, including the execution of our plan. We expect to continue to devote substantial capital resources to running our business and implementing the strategic changes summarized herein. Our planned capital expenditures for the year ending March 31, 2020 include approximately $1.0 million for plant and equipment costs related to manufacturing and operations, and approximately $3.0 million for systems under our factory rental program. During the nine months ended December 31, 2019, we deployed approximately $2.7 million of our C1000 Signature Series systems under our factory rental program. We have invested our cash in institutional funds that invest in high quality short term money market instruments to provide liquidity for operations and for capital preservation.
Our cash and cash equivalents balances decreased $13.0 million during the nine months ended December 31, 2019, compared to a decrease of $2.7 million during the nine months ended December 31, 2018. The decrease in cash and cash equivalents during the nine months ended December 31, 2019 compared to the same period last year was primarily the result of higher cash used in operating activities and cash used for rental assets, as well as lower cash generated from the issuance of common stock through the at-the-money offering program, partially offset by the September 2019 registered direct offering described below.
Operating Activities During the nine months ended December 31, 2019, we used $15.7 million in cash in our operating activities, which consisted of a net loss for the period of $14.9 million and cash used for working capital of $5.2 million, offset by non-cash adjustments (primarily warranty provision, accounts receivable allowance, depreciation and amortization, stock based compensation and inventory provision) of $4.4 million. During the nine months ended December 31, 2018, we used $12.6 million in cash in our operating activities, which consisted of a net loss for the period of $12.7 million and cash used for working capital of $3.9 million, offset by non-cash adjustments (primarily warranty provision, accounts receivable allowances, depreciation and amortization, stock based compensation and inventory provision) of $4.0 million. The following is a summary of the significant sources (uses) of cash from operating activities (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
Net loss
|
|
$
|
(14,948)
|
|
$
|
(12,704)
|
|
Non-cash operating activities(1)
|
|
|
4,379
|
|
|
4,032
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,522)
|
|
|
3,088
|
|
Inventories
|
|
|
(827)
|
|
|
(3,401)
|
|
Accounts payable and accrued expenses
|
|
|
1,956
|
|
|
2,185
|
|
Prepaid expenses, other current assets and other assets
|
|
|
591
|
|
|
(3,821)
|
|
Other changes in operating assets and liabilities
|
|
|
(3,349)
|
|
|
(1,976)
|
|
Net cash used in operating activities
|
|
$
|
(15,720)
|
|
$
|
(12,597)
|
|
|
(1)
|
|
Represents change in warrant valuation, warranty provision, depreciation and amortization, stock-based compensation expense, inventory provision and accounts receivable allowances.
|
The change in non-cash operating activities during the nine months ended December 31, 2019 compared to the same period the previous year was primarily because of the amortization of debt issuance costs from the Goldman Sachs term note payable. The change in accounts receivable during the nine months ended December 31, 2019 was primarily due to delayed collection from certain customers, compared to the same period the previous year. The change in inventory was primarily the result of a decrease in raw materials offset by an increase in finished goods during the nine months ended December 31, 2019 compared to an increase in raw materials offset by a reduction in finished goods during the nine months ended December 31, 2018. The change in accounts payable and accrued expenses was primarily the result of the timing of payments made by us during the nine months ended December 31, 2019 compared to the same period the previous fiscal year. The change in prepaid expenses, other current assets and other assets during the nine
months ended December 31, 2019, was primarily because of a supplier prepayment obligation in the nine months ended December 31, 2018, described below, and a marketing demonstration unit accounted for as a deferred marketing cost in the nine months ended December 31, 2019. The change in other operating assets and liabilities during the nine months ended December 31, 2019 was primarily the result of decrease in deferred revenue attributable to deposits.
Investing Activities During the nine months ended December 31, 2019, we used cash of $3.9 million in investing activities compared to $3.1 million during the nine months ended December 31, 2018. The increase was primarily due to the deployment of rental units and the acquisition of fixed assets and leasehold improvements made to our Van Nuys location.
Financing Activities During the nine months ended December 31, 2019, we generated cash of approximately $6.6 million from financing activities compared to cash generated during the nine months ended December 31, 2018 of approximately $12.9 million. The funds generated from financing activities during the nine months ended December 31, 2019 were primarily the result of proceeds from the September 2019 registered direct offering and proceeds from the at-the-market offering program described below, offset by repayment of notes payable and capital lease obligations. The funds generated from financing activities during the nine months ended December 31, 2018 were primarily the result of proceeds from the at-the-market offering program described below and net borrowings under the credit facility, offset by repayment of notes payable and capital lease obligations.
At-the-market offerings
Effective August 28, 2015, we entered into a sales agreement with Cowen and Company, LLC with respect to an at-the-market offering program pursuant to which the Company offered and sold, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $30.0 million. During the nine months ended December 31, 2018, the Company issued 0.3 million shares of the Company’s common stock under this at-the-market offering program and the net proceeds to the Company from the sale of the Company’s common stock were approximately $4.0 million after deducting commissions paid of approximately $0.1 million. As of June 30, 2018, 2.6 million shares of the Company’s common stock were cumulatively sold pursuant to the at-the-market offering program and the net proceeds to the Company from the sale of the common stock were approximately $28.6 million after deducting commissions paid of approximately $0.8 million. This at-the-market offering program expired on May 29, 2018.
On June 7, 2018, we entered into a sales agreement with H.C. Wainwright & Co., LLC with respect to an at-the-market offering program pursuant to which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, having an aggregate offering price of up to $25.0 million. The Company will set the parameters for sales of the shares, including the number to be sold, the time period during which sales are requested to be made, any limitation on the number that may be sold in one trading day and any minimum price below which sales may not be made. During the three months ended December 31, 2019, we issued approximately 0.4 million shares of our common stock under the at-the-market offering program and the net proceeds to us from the sale of our common stock were approximately $1.2 million after deducting commissions paid of approximately $41,400. During the nine months ended December 31, 2019, we issued 0.6 million shares of our common stock under this at-the-market offering program and the net proceeds to us from the sale of our common stock were approximately $2.7 million after deducting commissions paid of approximately $0.1 million. As of December 31, 2019, approximately $15.0 million remained available for issuance with respect to this at-the-market offering program.
Warrants
On April 13, 2018, a warrant holder exercised its rights to the warrant agreement to exercise on a cashless basis 576,000 Series A warrants at an exercise price of $6.00 per share under the warrant agreement. In accordance with terms of the warrant agreement, after taking into account the shares withheld to satisfy the cashless exercise option, the Company issued 380,625 shares of common stock.
As of December 31, 2019, there were 271,875 Series A warrants outstanding and there are no Series B warrants outstanding. Of the total Series A warrants outstanding, 217,875 Series A warrants were issued with an exercise price of $25.50 per share of common stock, and have an expiration date of October 25, 2021, and 54,000 Series A warrants with anti-dilution provisions were issued with an initial exercise price of $13.40 per share of common stock, and have an expiration date of April 22, 2021. As of December 31, 2019, because of the anti-dilution provisions, these warrants had an adjusted exercise price of $3.05 per share of common stock.
On February 4, 2019, we sold to Goldman Sachs & Co. LLC (the “Holder”), a Purchase Warrant for Common Shares (the “Warrant”) pursuant to which the Holder may purchase shares of the Company’s common stock, par value $0.001 per share (the “Common Shares”) in an aggregate amount of up to 404,634 shares (the “Warrant Shares”). The Warrant was sold to the Holder at a purchase price of $150,000, in a private placement exempt from registration under the Securities Act. The Warrant may be exercised by the Holder at any time after August 4, 2019 at an exercise price equal to $8.86 and will expire on February 4, 2024. The Warrant contains standard adjustment provisions in the event of additional stock issuances below the exercise price of the warrant, stock splits, combinations, rights offerings and similar transactions. The value of the Warrant was $2.3 million, and has been classified as an equity instrument in additional paid in capital in our consolidated balance sheets. Our common stock and warrant transactions during second quarter of Fiscal 2020 triggered certain anti-dilution provisions in the warrants outstanding, resulting in an additional 29,654 warrants issued, which were treated as a deemed dividend in the amount of $74,989.
On December 9, 2019, we entered into Amendment No. 1 to the Purchase Warrant for Common shares (the “Amendment No. 1”) with Special Situations Investing Group II, LLC (as successor in interest to Goldman Sachs & Co. LLC) (the “Warrant Holder”) that amends the Warrant. The Amendment No. 1 amends the first paragraph of the Warrant to increase the number of Warrant Shares issuable under the Warrant (on a post-reverse split basis) and to decrease the exercise price from $8.86 per share (on a post-reverse split basis) to $3.80 per share (the “Per Share Warrant Exercise Price”). The Amendment No. 1 also amends Section 2.1 of the Warrant such that the Per Share Anti-Dilution Price is equal to the Per Share Warrant Exercise Price.
On September 4, 2019, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain institutional and accredited investors pursuant to which we agreed to issue and sell in a registered direct offering (the “Registered Direct Offering”) an aggregate of 580,000 shares of our common stock, par value $0.001 per share at a negotiated purchase price of $5.00 per share, and pre-funded warrants to purchase up to an aggregate of 440,000 shares of our common stock at a negotiated purchase price of $5.00 per Pre-Funded Warrant, for aggregate gross proceeds of approximately $5.1 million (580,000 shares of our common stock plus 440,000 pre-funded warrants at a $5.00 per share purchase price), before deducting placement agent fees and other offering expenses. Net proceeds from the offering were $4.6 million. The offering closed on September 9, 2019. On October 24, 2019, a warrant holder exercised its rights to the warrant agreement to exercise on a cash basis 440,000 pre-funded warrants at an exercise price of $0.001 per share under the warrant agreement.
In a concurrent private placement, we agreed to issue to the purchasers warrants to purchase 765,000 shares of Common Stock, which represent 75% of the number of shares of Common Stock and shares underlying the Pre-Funded Warrants purchased in the Registered Direct Offering, pursuant to the Securities Purchase Agreement. The Common Warrants will be exercisable for shares of Common Stock at an initial exercise price of $6.12 per share for a period of five years, starting on April 2, 2020 and expiring on April 2, 2025.
There were no stock options exercised during the nine months ended December 31, 2019 and 2018, respectively. Repurchases of shares of our common stock for employee taxes due on vesting of restricted stock units, net of employee stock purchases, resulted in approximately $44,000 and $73,000 of net cash used during the nine months ended December 31, 2019 and 2018, respectively.
Former Credit Facility Upon closing with the Purchaser and Goldman Sachs Specialty Lending Holdings, Inc., our existing credit facilities with Bridge Bank were paid off in full.
Three-year Term Note On February 4, 2019 (the “Closing Date”), we entered into a Note Purchase Agreement (as amended, the “Note Purchase Agreement”), by and among us, certain subsidiaries of us as guarantors, Goldman Sachs Specialty Lending Holdings, Inc. and any other purchasers party thereto from time to time (collectively, the “Purchaser”) and Goldman Sachs Specialty Lending Holdings, Inc., as collateral agent, in connection with the sale of senior secured notes of us in a private placement exempt from registration under the Securities Act of 1933, as amended. Under the Note Purchase Agreement, we sold to the Purchaser $30.0 million aggregate principal amount of senior secured notes (the “Notes”), which bear interest at a rate of 13.0% per annum, computed on the basis of a 360-day year composed of twelve 30-day months, and payable quarterly on March 31, June 30, September 30 and December 31 of each year until maturity. The first interest payment on the Notes was on March 31, 2019. The entire principal amount of the Notes is due and payable on February 4, 2022 (the “Maturity Date”). The Notes do not amortize and the entire principal balance is due in a single payment on the Maturity Date. As of March 31, 2019, $30.0 million in borrowings were outstanding under the three-year term note. Under the three-year term note with Goldman Sachs we are not
permitted to allow our cash and cash equivalents to be less than $12.0 million through the first anniversary date of February 4, 2020, and $9.0 million thereafter. On December 9, 2019, we entered into a Second Amendment (the “Second Amendment”) to the Note Purchase Agreement. Under the Second Amendment, Section 6.21 of the Note Purchase Agreement was amended to increase the Section 382 Ownership Shift threshold to not exceed 40.0%. In addition to the Note Purchase Agreement, on February 4, 2019, the Company sold the Warrant pursuant to which the Holder may purchase shares of the Company’s Common Shares of the Warrant Shares. The Warrant was sold to the Holder at a purchase price of $150,000, in a private placement exempt from registration under the Securities Act. The Warrant may be exercised by the Holder at any time after August 4, 2019 at an exercise price equal to $8.86 and will expire on February 4, 2024. The Warrant contains standard adjustment provisions in the event of additional stock issuances below the exercise price of the warrant, stock splits, combinations, rights offerings and similar transactions. The value of the Warrant was $2.3 million, and has been classified as an equity instrument in additional paid in capital in our consolidated balance sheets. Our common stock and warrant transactions during second quarter of Fiscal 2020 triggered certain anti-dilution provisions in the warrants outstanding, resulting in an additional 29,654 warrants issued, which were treated as a deemed dividend in the amount of $74,989. On December 9, 2019, the Company entered into Amendment No. 1 with the Warrant Holder that amends the Warrant. The Amendment No. 1 amends the first paragraph of the Warrant to increase the number of Warrant Shares issuable under the Warrant (on a post-reverse split basis) and to decrease the exercise price from $8.86 per share (on a post-reverse split basis) to Per Share Warrant Exercise Price. The Amendment No. 1 also amends Section 2.1 of the Warrant such that the Per Share Anti-Dilution Price is equal to the Per Share Warrant Exercise Price.
Working Capital and Other Operating Assets and Liabilities Cash used for working capital was $5.2 million during the nine months ended December 31, 2019, an increase of $1.3 million from the cash used for working capital of $3.9 million during the nine months ended December 31, 2018. We attribute the increase in our working capital requirements during the nine months ended December 31, 2019 compared to December 31, 2018 primarily to an increase in cash used for accounts receivable due to delayed collection from certain customers. These increases in cash used for working capital and other operating assets and liabilities were partially offset by an increase in accounts payable payments and a marketing demonstration unit accounted for as a deferred marketing cost during the nine months ended December 31, 2019 compared to the same period last year.
Evaluation of Ability to Maintain Current Level of Operations In connection with preparing the condensed consolidated financial statements for the nine months ended December 31, 2019, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about our ability to meet our obligations as they became due for the next twelve months from the date of issuance of our third quarter of Fiscal 2020 interim condensed consolidated financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, negative cash flows from operating activities, the continued negative impact by the volatility of the global oil and gas markets, a strong U.S. dollar in certain markets making our products more expensive in such markets and ongoing global geopolitical tensions. We incurred a net loss of $14.9 million and used cash in operating activities of $15.7 million for the nine months ended December 31, 2019. Our working capital requirements during the nine months ended December 31, 2019 were higher than management’s expectations, which included higher accounts receivable due to delayed collections and higher inventory. Our net loss expanded during the nine months ended December 31, 2019 compared to the same period the previous year primarily because of higher interest expense and higher selling, general and administrative expense, partially offset by higher gross margins from our accessories, parts and service business. As of December 31, 2019, we had cash and cash equivalents of $16.7 million, and outstanding debt of $30.0 million.
Management evaluated these conditions in relation to our ability to meet our obligations as they become due. Our ability to continue current operations and to execute on management’s plan is dependent on our ability to generate cash flows from operations. Management believes that we will continue to make progress on our path to profitability by continuing to maintain low operating expenses and develop our geographical and vertical markets. We may seek to raise funds by selling additional securities (through at-the-market offering or otherwise). There is no assurance that we will be able to obtain additional funds on commercially favorable terms or at all. If we raise additional funds by issuing additional equity, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity that we would issue may have rights, preferences or privileges senior to those of the holders of our common stock.
Based on our current operating plan, management anticipates that, given current working capital levels, current financial projections and the term note payable with Goldman Sachs, we will be able to meet our financial obligations as
they become due over the next twelve months from the date of issuance of our third quarter of Fiscal 2020 financial statements.
Depending on the timing of our future sales and collection of related receivables, managing inventory costs and the timing of inventory purchases and deliveries required to fulfill the backlog, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will require us to achieve significantly increased sales volume which is dependent on many factors, including:
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the market acceptance of our products and services;
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our business, product and capital expenditure plans;
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capital improvements to new and existing facilities;
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our competitors’ response to our products and services;
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our relationships with customers, distributors, dealers and project resellers; and
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our customers’ ability to afford and/or finance our products.
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Our accounts receivable balance, net of allowances, was $19.8 million and $16.2 million as of December 31, 2019 and March 31, 2019, respectively. Days sales outstanding in accounts receivable, (“DSO”), increased by 36 days to 104 days as of December 31, 2019 compared to 68 days as of December 31, 2018. The increase in our DSO was primarily because of delays in collections of certain customer accounts receivable. We recorded net bad debt recoveries of approximately $0.1 and $0.3 million during the nine months ended December 31, 2019 and 2018, respectively.
No assurance can be given that future bad debt expense will not increase above current operating levels. Increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on cash flows and results of operations. In addition, our ability to access the capital markets may be severely restricted or made very expensive at a time when we need, or would like, to do so, which could have a material adverse impact on our liquidity and financial resources. Certain industries in which our customers do business and certain geographic areas have been and could continue to be adversely affected by the previously referenced economic and geopolitical considerations.
New Accounting Pronouncements
Adopted
In June 2018, the FASB issued ASU 2018-07, “Shared-Based Payment Arrangements with Nonemployees” (Topic 505), (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under ASU 2018-07, most of the guidance on such payments to nonemployees will be aligned with the requirements for share-based payments granted to employees. Under the ASU 2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed on the grant date, as defined in ASC 718, and will use the term nonemployee vesting period, rather than requisite service period. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted if financial statements have not yet been issued. We adopted ASU 2018-07 on April 1, 2019 and it did not have a material impact on our condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), (“ASU 2016-02”). The purpose of ASU 2016-02 is to provide financial statement users a better understanding of the amount, timing, and uncertainty of cash flows arising from leases. The adoption of ASU 2016-02 will result in the recognition of a right-of-use asset and a lease liability for most operating leases. New disclosure requirements include qualitative and quantitative information about the amounts recorded in the financial statements. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provides additional implementation guidance on the previously issued ASU 2016-02 Leases (Topic 842). ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. ASU 2016-02 requires a
modified retrospective transition by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effective with the option to elect certain practical expedients. Early adoption is permitted. We adopted ASU 2016-02 on April 1, 2019. See Note 16—Leases for additional discussion of the impact of the adoption of ASU 2016-02.
On August 17, 2018, the SEC issued Release No. 33-10532, “Disclosure Update and Simplification”, (“Release No. 33-10532”) which amends certain redundant, duplicative, outdated, superseded or overlapping disclosure requirements. The amendments in this rule are intended to facilitate the disclosure of information to investors and to simplify compliance without significantly impacting the mix of information provided to investors. The amendments also expand the disclosure requirements regarding the analysis of stockholders’ equity for interim financial statements, in which entities will be required to present a reconciliation for each period for which a statement of comprehensive income is required to be filed. The final rule became effective on November 5, 2018, however the SEC announced that it would not object if a filer’s first presentation of the changes in stockholders’ equity were included in its Form 10-Q for the quarter that begins after the effective date of the amendments. We adopted Release No. 33-10532 on April 1, 2019 and it did not have a material impact on our financial disclosures.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off balance sheet arrangements, as defined under SEC rules.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No material changes have occurred in our quantitative and qualitative market risk disclosure as presented in our Annual Report on Form 10-K for Fiscal 2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. The term “disclosure controls and procedures” means controls and other procedures of ours that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a‑15(f) and 15d‑15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Federal Securities Class Action
Two putative securities class action complaints were filed against us and certain of our current and former officers in the United States District Court for the Central District of California under the following captions: David
Kinney, etc. v. Capstone Turbine, et al., No. 2:15-CV-08914 on November 16, 2015 (the “Kinney Complaint”) and Kevin M. Grooms, etc. v. Capstone Turbine, et al., No. 2:15-CV-09155 on November 25, 2015 (the “Grooms Complaint”).
The Kinney Complaint alleged material misrepresentations and omissions in public statements regarding BPC and the likelihood that BPC would not be able to fulfill many legal and financial obligations to us. The Kinney Complaint also alleged that our financial statements were not appropriately adjusted in light of this situation and were not maintained in accordance with GAAP, and that we lacked adequate internal controls over accounting. The Kinney Complaint alleged that these public statements and accounting irregularities constituted violations by all named defendants of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, as well as violations of Section 20(a) of the Exchange Act by the individual defendants. The Grooms Complaint made allegations and claims that were substantially identical to those in the Kinney Complaint, and both complaints sought compensatory damages of an undisclosed amount. On January 16, 2016, several shareholders filed motions to consolidate the Kinney and Grooms actions and for appointment as lead plaintiff. On February 29, 2016, the Court granted the motions to consolidate, and appointed a lead plaintiff. On May 6, 2016, a Consolidated Amended Complaint with allegations and claims substantially identical to those of the Kinney Complaint was filed in the consolidated action. The putative class period in the Consolidated Amended Complaint was June 12, 2014 to November 5, 2015. Defendants filed a motion to dismiss the Consolidated Amended Complaint on June 17, 2016. On March 10, 2017, the Court issued an order granting Defendants’ motion to dismiss in its entirety with leave to amend. Plaintiffs filed an amended complaint on April 28, 2017. Defendants’ motion to dismiss was filed June 2, 2017. Plaintiffs filed their opposition to the motion to dismiss on July 7, 2017, and Defendants filed their reply in support of the motion to dismiss on July 28, 2017. The court vacated the hearing that was scheduled for August 18, 2017. On February 9, 2018, the Court issued an Order denying Defendants’ motion to dismiss. On March 30, 2018, Defendants filed an answer to the Consolidated Amended Complaint. On May 17, 2018, the Court issued a scheduling order setting a trial date of March 17, 2020. On June 26, 2018, the Court entered an order vacating all deadlines through the end of October 2018 and temporarily staying formal discovery and other proceedings to allow the parties time to conduct a mediation. The parties participated in mediation on September 24, 2018, which did not result in a settlement. On November 16, 2018, after further settlement discussions, the parties advised the Court that they had reached an agreement in principle to settle the action in its entirety. The agreement in principle was subject to several conditions, including the execution of a stipulation of settlement that was satisfactory to all parties, and preliminary and final approval from the court, among other things. Plaintiffs filed a motion seeking preliminary approval of the proposed settlement on April 12, 2019, and filed supplementary declarations in support of the motion on May 2, 2019. Preliminary approval of the settlement was granted on May 17, 2019. On September 24, 2019, our lead counsel filed a motion for attorneys’ fees and reimbursement of litigation expenses. On October 25, 2019, plaintiffs filed a motion for final approval of the settlement. On November 15, 2019, the Court issued an order approving the settlement and the payment of attorneys’ fees, litigation expenses, and class representative payments, and entering final judgment in the action. Our insurance carrier funded the settlement amount. We have not recorded any liability as of December 31, 2019 since the settlement amount is not considered material as it was funded by our insurance carrier.
Federal Individual Securities Action
An individual securities complaint was filed against us, our Chief Executive Officer, and additional unidentified defendants in the United States District Court for the Central District of California under the following caption: FiveT Investment Management LTD, et al., v. Capstone Turbine, et al., No. 2:18-CV-03512 on April 25, 2018. The lawsuit alleged material misrepresentations and omissions regarding our revenue, sales, and operations because of alleged improper revenue recognition and backlog calculations related to BPC. The lawsuit alleged that these statements constituted violations by all named defendants of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, as well as violations of Section 20(a) of the Exchange Act by the individual defendants. The complaint also asserted claims against all named defendants for fraud, negligent misrepresentation, violations of California Civil Code sections 1709 and 1710, and California Corporations Code sections 25400 and 25401. Additionally, the complaint asserted a cause of action against the individual defendants for breach of fiduciary duty. It demanded compensatory damages for the amount of damages allegedly suffered, pre-judgment and post-judgment interest, and fees.
On June 29, 2018, the plaintiffs filed an Amended Complaint for Common Law Fraud and Negligent Misrepresentation. The Amended Complaint asserted claims for common law fraud and negligent misrepresentation, against the Company, Mr. Jamison, and unidentified individual defendants. The Amended Complaint demanded damages in an unspecified amount, plus pre-judgment and post-judgment interest and fees. Defendants filed their answer to the Amended Complaint on August 17, 2018. The parties participated in a mediation on September 24, 2018.
The mediation did not result in a settlement. On October 12, 2018, the plaintiffs filed a motion for leave to amend their complaint, seeking to reinstate the cause of action for violation of California Civil Code section 25401. On November 29, 2018, the Court granted plaintiffs’ motion for leave to amend and plaintiffs filed their Second Amended Complaint, which asserted claims for common law fraud, negligent misrepresentation, and violation of California Civil Code section 25401 against the Company, Mr. Jamison, and unidentified individual defendants. On December 20, 2018, defendants filed their answer to the Second Amended Complaint. On June 6, 2019, the parties reached a confidential settlement of the action and the suit was dismissed with prejudice on July 1, 2019. We have not recorded any liability as of December 31, 2019 as our insurance carrier funded the settlement amount.
State Derivative Lawsuits — California
On February 18, 2016, a purported shareholder derivative action was filed in Los Angeles Superior Court in the State of California against us and certain of our current and former officers and directors under the following caption: Stesiak v. Jamison, et al., No. BC610782. The lawsuit alleges that certain of our current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to us, but allowed us to make false and misleading statements regarding BPC and our financial condition. The complaint also alleges that the defendants failed to timely adjust our account receivables and backlog to reflect BPC’s inability to pay us. The complaint asserts causes of action for breach of fiduciary duty and unjust enrichment. It demands damages for the amount of damage sustained by us as a result of the individual defendants’ alleged breach of fiduciary duties and unjust enrichment, that we institute corporate governance reforms, and disgorgement from the individual defendants. On May 5, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time as the defendants’ motion(s) to dismiss the federal securities class action are either granted with prejudice or denied in whole or in part. On May 10, 2016, the Court entered that proposed order. On March 9, 2018, following the Court’s order denying Defendants’ motion to dismiss in the federal securities class action, the parties filed a stipulation and proposed order seeking to stay this action until the close of fact discovery in the federal securities class action. On March 20, 2018, the Court entered that proposed order. A status conference previously scheduled for December 17, 2019 is now scheduled for February 14, 2020.
On June 8, 2016, a purported shareholder derivative action entitled Velma Kilpatrick v. Simon, et al., No. BC623167, was filed in Los Angeles Superior Court in the State of California against us and certain of our current and former officers and directors. The complaint alleges that certain of our current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to us, but allowed us to make false and misleading statements regarding BPC and our financial condition. The complaint also alleges that the defendants failed to timely adjust our account receivables and backlog to reflect BPC’s inability to pay us. The complaint asserts causes of action for breach of fiduciary duty. It demands damages for the amount of damage sustained by us as a result of the individual defendants’ alleged breach of fiduciary duties, and that we institute corporate governance reforms. On August 23, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time as the defendants’ motion(s) to dismiss the federal securities class action are either granted with prejudice or denied in whole or in part. On March 9, 2018, following the Court’s order denying Defendants’ motion to dismiss in the federal securities class action, the parties filed a stipulation and proposed order seeking to stay this action until the close of fact discovery in the federal securities class action. On March 20, 2018 the Court entered that proposed order. A status conference previously scheduled for December 17, 2019 is now scheduled for February 14, 2020.
The parties in both of the above state derivative lawsuits participated in a mediation held on September 24, 2018. On May 6, 2019, the parties reached an agreement in principle regarding corporate governance reforms to be implemented in settlement of the action. The parties have not yet formalized a settlement, however, which is subject to several conditions, including the execution of a stipulation of settlement that is satisfactory to all parties, negotiation regarding an award of attorney fees, and preliminary and final approval from the court, among other things. Settlement discussions are ongoing. We have not recorded any liability as of December 31, 2019 as our insurance carrier will fund the settlement amount.
Federal Derivative Lawsuits
On March 7, 2016, a purported shareholder derivative action was filed in the United States District Court for the Central District of California against us and certain of our current and former officers and directors under the following caption: Haber v. Jamison, et al., No. CV16-01569-DMG (RAOx). The lawsuit alleges that certain of our current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations
to us, but allowed us to make false and misleading statements regarding BPC and our financial condition. The complaint asserts a cause of action for breach of fiduciary duty. It demands damages for the amount of damage sustained by us as a result of the individual defendants’ alleged breach of fiduciary duties, and equitable relief, including that we institute appropriate corporate governance reforms. On May 11, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time as the defendants’ motion(s) to dismiss the federal securities class action are either granted with prejudice or denied in whole or in part. On May 13, 2016, the Court entered that proposed order.
On July 12, 2016 and July 18, 2016, respectively, two additional purported shareholder derivative actions were filed in the United States District Court for the Central District of California against us and certain of our current and former officers and directors, under the caption Tuttle v. Atkinson, et al., No. CV16-05127, and Boll v. Jamison, et al., No. CV16-5282, respectively. The lawsuits allege that certain of our current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to us, but allowed us to make false and misleading statements regarding BPC and our financial condition. The Tuttle complaint asserts causes of action for breach of fiduciary duty, gross mismanagement, and unjust enrichment, and the Boll complaint asserts causes of action for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. Both complaints demand damages sustained by us as a result of the individual defendants’ alleged breaches of fiduciary duties, and equitable relief, including that we institute appropriate corporate governance reforms. The federal derivative actions were stayed until such time as the defendants’ motion(s) to dismiss the federal securities class action are either granted with prejudice or denied in whole or in part. On March 9, 2018, following the Court’s order denying Defendants’ motion to dismiss in the federal securities class action, the parties filed a stipulation and proposed order seeking to stay this action until the close of fact discovery in the federal securities class action. On March 13, 2018, the Court granted the parties’ stipulation.
The parties in the above federal derivative lawsuits participated in a mediation held on September 24, 2018. On May 6, 2019, the parties reached an agreement in principle regarding corporate governance reforms to be implemented in settlement of the action. The parties have not yet formalized a settlement, however, which is subject to several conditions, including the execution of a stipulation of settlement that is satisfactory to all parties, negotiation regarding an award of attorney fees, and preliminary and final approval from the court, among other things. Settlement discussions are ongoing. We have not recorded any liability as of December 31, 2019 as our insurance carrier will fund the settlement amount.
Capstone Turbine Corporation v. Regatta Solutions, Inc.
On August 23, 2018, we initiated arbitration proceedings against its former distributor, Regatta Solutions, Inc. (“Regatta”), with the American Arbitration Association (“AAA”), under the following caption: Capstone Turbine Corp. v. Regatta Solutions, Inc., Case No. 01-18-0003-0860 (the “Capstone-Regatta Arbitration”). We have alleged claims against Regatta for breach of contract and unjust enrichment relating to the parties’ prior distributor relationship, which terminated at the end of March of 2018, and the related wind-down agreement between the parties. As remedies for these claims, we are seeking compensatory, consequential, and punitive damages, along with declaratory relief and attorney’s fees, interest, and costs.
On October 18, 2018, Regatta filed its answer and cross-claims in the Capstone-Regatta Arbitration. In its cross-claims, Regatta has asserted claims for breach of contract, intentional interference with prospective economic advantage, fraud, and intentional interference with contractual relations, relating to the parties’ agreement to wind-down relations and Regatta’s purported sales efforts in California. As remedies for these alleged claims, Regatta is seeking no less than $1.5 million in general and compensatory damages, along with punitive and exemplary damages, as well as attorney’s fees and costs. We have filed and served an answering statement denying Regatta’s counterclaims and asserting several affirmative defenses.
Also on October 18, 2018, Regatta filed a lawsuit in the Superior Court of the State of California, County of Orange, alleging two counts of fraud, and one count of interference with contractual relations, individually against Mr. James Crouse, then Executive Vice President of Sales for the Company, arising out of the same allegations made in Regatta’s counterclaim. As remedies for these alleged claims, Regatta again sought no less than $1.5 million in general and compensatory damages, along with punitive and exemplary damages, as well as attorney’s fees and costs. The case was filed under the caption Regatta Solutions, Inc., v. Jim Crouse, et. al., Case No. 30-2018-01026571-CU-FR-CJC. On December 14, 2018, Regatta stipulated and agreed to arbitrate its claims against Mr. James Crouse and dismissed him from the Superior Court action.
On January 16, 2019, the parties participated in a mediation that did not resolve the dispute. The parties continued their settlement discussions and held a follow-on mediation on April 24, 2019 at which point the parties came to a resolution of the matter. Following initial compliance with the settlement terms, Regatta has since breached its obligations thereunder and Capstone is now engaged in efforts to enforce the settlement agreement, including participating in further dispute resolution proceedings. We continue to negotiate a resolution with Regatta to the remaining dispute. The settlement did not have a material impact on our condensed consolidated financial statements.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for Fiscal 2019 except for the revision of the risk factors set forth below:
Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control.
Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control. Our executive offices, manufacturing facility, and auxiliary inventory storage facility are located in southern California. Because the southern California area is located in an earthquake‑sensitive and high-risk fire area, we are particularly susceptible to the risk of damage to, or total destruction of, our facilities in southern California and the surrounding transportation infrastructure, which could affect our ability to make and transport our products. Any evacuations, power outages or safety issues related to fires or other natural disasters affecting our employees could also adversely impact our business. If an earthquake, fire or other natural disaster occurs at or near our facilities, our business, financial condition, operating results and cash flow could be materially adversely affected.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
None
Item 6. Exhibits
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Exhibit
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Description
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3.1
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Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation (a)
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3.2
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Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation, dated August 30, 2012 (b)
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3.3
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Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation, filed November 6, 2015 (c)
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3.4
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Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Capstone Turbine Corporation, filed October 21, 2019 (d)
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3.5
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Fourth Amended and Restated Bylaws of Capstone Turbine Corporation (e)
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4.1
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Second Amendment to the Note Purchase Agreement, dated as of December 9, 2019, by and among Capstone Turbine Corporation, certain subsidiaries of the company and Goldman Sachs Specialty Lending Group L.P. (a successor in interest to Goldman Sachs Specialty Lending Holdings, Inc.) (f)
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4.2
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Amendment No. 1 to the Purchase Warrant for Common Shares issued in favor of Special Situations Investing Group II, LLC (a successor in interest to Goldman Sachs & Co. LLC), dated December 9, 2019(f)
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31.1
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Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32
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Certification of Chief Executive Officer and Chief Financial Officer 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Schema Document
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101.CAL
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XBRL Calculation Linkbase Document
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101.LAB
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XBRL Label Linkbase Document
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101.PRE
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XBRL Presentation Linkbase Document
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101.DEF
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XBRL Definition Linkbase Document
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(a)Incorporated by reference to Capstone Turbine Corporation’s Registration Statement on Form S-1/A, dated May 8, 2000 (File No. 333-33024)
(b)Incorporated by reference to Appendix B to Capstone Turbine Corporation’s Definitive Proxy Statement, filed on July 17, 2012 (File No. 001-15957)
(c)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on November 6, 2015 (File No. 001-15957)
(d)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on October 21, 2019 (File No. 001-15957)
(e)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on September 1, 2017 (File No. 001-15957)
(f)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on December 9, 2019 (File No. 001-15957)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CAPSTONE TURBINE CORPORATION
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By:
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/s/ FREDERICK S. HENCKEN III
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Frederick S. Hencken III
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Chief Financial Officer& Chief Accounting Officer
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(Principal Financial and Accounting Officer)
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Date: February 6, 2020
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