Item 7. |
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Executive Overview
We are a leading system provider of megawatt-scale power resiliency solutions that Orchestrate the Rhythm and Harmony of Power on the Grid™, and protect and expand the capability of our Navy's fleet. Our solutions enhance the performance of the power grid, protect our Navy’s fleet, and lower the cost of wind power. In the power grid market, we enable electric utilities, industrial facilities, and renewable energy project developers to connect, transmit and distribute smarter, cleaner and better power through our transmission planning services and power electronics and superconductor-based systems. In the wind power market, we enable manufacturers to field highly competitive wind turbines through our advanced power electronics and control system products, engineering, and support services. Our power grid and wind products and services provide exceptional reliability, security, efficiency and affordability to our customers.
Our power system solutions help to improve energy efficiency, alleviate power grid capacity constraints, improve system resiliency, and increase the adoption of renewable energy generation. Demand for our solutions is driven by the growing needs for modernized smart grids that improve power reliability, security and quality, the U.S. Navy's effort to upgrade in-board power systems to support fleet electrification, and the need for increased renewable sources of electricity, such as wind and solar energy. Concerns about these factors have led to increased spending by corporations and the military, as well as supportive government regulations and initiatives on local, state, and national levels, including renewable portfolio standards, tax incentives and international treaties.
We manufacture products using two proprietary core technologies: PowerModule™ programmable power electronic converters and our Amperium® high temperature superconductor ("HTS") wires. These technologies and our system-level solutions are protected by a broad and deep intellectual property portfolio consisting of hundreds of patents and licenses worldwide.
We operate our business under two market-facing business units: Grid and Wind. We believe this market-centric structure enables us to more effectively anticipate and meet the needs of power generation project developers, the Navy's ship protection systems, electric utilities and wind turbine manufacturers.
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• |
Grid. Through our Gridtec™ Solutions, our Grid business segment enables electric utilities and renewable energy project developers to connect, transmit and distribute power with exceptional efficiency, reliability, security and affordability. We provide transmission planning services that allow us to identify power grid congestion, poor power quality, and other risks, which help us determine how our solutions can improve network performance. These services often lead to sales of our grid interconnection solutions for wind farms and solar power plants, power quality systems and transmission and distribution cable systems. We also sell ship protection products to the U.S. Navy through our Grid business segment. |
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• |
Wind. Through our Windtec™ Solutions, our Wind business segment enables manufacturers to field wind turbines with exceptional power output, reliability and affordability. We supply advanced power electronics and control systems, license our highly engineered wind turbine designs, and provide extensive customer support services to wind turbine manufacturers. Our design portfolio includes a broad range of drivetrains and power ratings of 2 MW and higher. We provide a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility. |
Our fiscal year begins on April 1 and ends on March 31. When we refer to a particular fiscal year, we are referring to the fiscal year beginning on April 1 of that same year. For example, fiscal 2022 refers to the fiscal year beginning on April 1, 2022. Other fiscal years follow similarly.
On October 31, 2018, we entered into a Subcontract Agreement with Commonwealth Edison Company (“ComEd”) (the “Subcontract Agreement”) for the manufacture and installation of the Company’s resilient electric grid ("REG") system within ComEd’s electric grid in Chicago, Illinois (the “Project”), which became effective on June 20, 2019. Under the terms of the Subcontract Agreement, we agreed, among other things, to provide the REG system and to supervise ComEd’s installation of the REG system in Chicago. As part of our separate cost sharing arrangement with DHS under the Prime Contract, we received funding provided by DHS in connection with the Subcontract Agreement of approximately $10.0 million, which represents the total amount of revenue we recognized over the term of the Subcontract Agreement and includes $1.0 million that we agreed to reimburse ComEd for costs incurred by ComEd while undertaking its tasks under the Subcontract Agreement (the “Reimbursement Amount”). In addition, we were required to deliver an irrevocable letter of credit in the amount of $5.0 million to secure certain Company obligations under the Subcontract Agreement, which we did, and deposited $5.0 million in an escrow account as collateral to secure such letter of credit. This irrevocable letter of credit was terminated and the full $5.0 million was returned from escrow to us during the fiscal year ended March 31, 2023.
We are experiencing substantial inflationary pressure in our supply chain and some delays in sourcing materials needed for our products, resulting in some production disruption both of which have increased our cost of revenues and decreased gross margin. Changes in macroeconomic and market conditions arising from the COVID-19 pandemic, or for other reasons, such as the ongoing war between Russia and Ukraine, inflation, rising interest rates, instability of financial institutions, political instability in the United States, including failure to raise the federal debt ceiling, labor force availability, sourcing, material delays and global supply chain disruptions could have a material adverse effect on our business, financial condition and results of operation.
From time-to-time we may undertake restructuring activities in order to align our global organization in a manner that we believe will better position us to achieve our long-term goals. In January 2023, we undertook a reduction in force that involved approximately 5% of our global workforce. This restructuring will cause us to incur $1.0 million of cash expense and is expected to result in annualized cost savings of approximately $5 million, beginning in fiscal 2023.
In February 2023, we completed the process of determining and verifying our eligibility and amount of payroll tax credits known as the Employee Retention Credit (“ERC”) under the CARES Act which Congress enacted as part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020. This resulted in filing certain amended payroll tax forms for eligible quarters in 2020 and 2021, which, in the aggregate, totaled $3.3 million. We have accordingly recognized a receivable in prepaid expenses and other current assets and a benefit to cost of revenues and operating expenses in the quarter ended March 31, 2023.
Results of Operations
Fiscal Years Ended March 31, 2023 and March 31, 2022
Revenues
Total revenues decreased by 2% to $106.0 million in fiscal 2022 from $108.4 million in fiscal 2021. Our revenues are summarized as follows (in thousands):
|
|
Fiscal Years Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Revenues: |
|
|
|
|
|
|
|
|
Grid |
|
$ |
94,631 |
|
|
$ |
98,876 |
|
Wind |
|
|
11,353 |
|
|
|
9,559 |
|
Total |
|
$ |
105,984 |
|
|
$ |
108,435 |
|
Revenues in our Grid business unit are derived from our D-VAR product sales, NEPSI product sales, Neeltran product sales, HTS wire sales, ship protection systems ("SPS"), government-sponsored electric utility projects and other prototype development contracts. We also engineer, install and commission our products on a turnkey-basis for some customers. The Grid business unit accounted for 89% of total revenues in fiscal 2022 and 91% in fiscal 2021. Grid revenues decreased 4% to $94.6 million in fiscal 2022 from $98.9 million in fiscal 2021. The decrease in revenues was driven by lower D-VAR revenues than in the prior year period.
Revenues in our Wind business unit are derived from wind turbine electrical control systems and core components, wind turbine license and development contracts, service contracts and consulting arrangements. Our Wind business unit accounted for 11% of total revenues in fiscal 2022 and 9% in fiscal 2021. Revenues in the Wind business unit increased 19% to $11.4 million in fiscal 2022 from $9.6 million in fiscal 2021. The increase over the prior year period was primarily driven by shipments of electrical control systems ("ECS") to INOX in fiscal 2022, compared to fiscal 2021.
Cost of Revenues and Gross Margin
Cost of revenues increased by 3% to $97.5 million in fiscal 2022, compared to $94.9 million in fiscal 2021. Gross margin decreased to 8% in fiscal 2022 from 12% in fiscal 2021. The decrease in gross margin in fiscal 2022 was due to an unfavorable product mix, inflation pressure in our supply chain, and additional expenses incurred to complete and deliver certain projects from the preacquisition Neeltran backlog. Included in cost of revenues is a $1.8 million benefit from the ERC recognized in fiscal 2022. Cost of revenues in fiscal 2022 and fiscal 2021 includes total amortization expense of less than $0.1 million as a result of the acquired backlog intangible assets from our acquisitions of Northeast Power Systems, Inc. and related assets ("NEPSI") and Neeltran, Inc. and related assets ("Neeltran").
Operating Expenses
Research and development
Research and development (“R&D”) expenses decreased by 14% to $9.0 million, or 8% of revenue in fiscal 2022, compared to $10.5 million, or 10% of revenue, in fiscal 2021. Included in R&D is a $0.7 million benefit from the ERC recognized in fiscal 2022. The decrease in R&D expenses is primarily a result of lower total compensation expense.
Selling, general, and administrative
Selling, general and administrative (“SG&A”) expenses increased by 4% to $28.7 million, or 27% of revenue in fiscal 2022 from $27.5 million, or 25% of revenue, in fiscal 2021. Included in SG&A is a $0.8 million benefit from the ERC recognized in fiscal 2022.
Amortization of acquisition related intangibles
We recorded $2.7 million in fiscal 2022 and $2.5 million in fiscal 2021 in amortization expense related to our core technology and know-how, customer relationships, and other intangible assets. The increase in amortization expense is primarily a result of the Neeltran acquisition.
Change in fair value of contingent consideration
The change in fair value of our contingent consideration for the earnout payment on the NEPSI acquisition resulted in a loss of $
0.1 million in fiscal 2022. The change in the fair value of our contingent consideration for the earnout payment on the NEPSI acquisition resulted in a gain of $5.9 million in fiscal 2021. The change in the fair value was primarily driven by the change in our stock price and assumptions on likelihood of achieving revenue targets.
Restructuring
We recorded restructuring charges of $1.0 million in fiscal 2022 for severance pay as a result of the reduction in force announced on January 24, 2023. There were no restructuring charges recorded in fiscal 2021.
Operating loss
Our operating loss is summarized as follows (in thousands):
|
|
Fiscal Years Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Grid |
|
$ |
(24,615 |
) |
|
$ |
(20,725 |
) |
Wind |
|
|
(2,547 |
) |
|
|
(1,554 |
) |
Unallocated corporate expenses |
|
|
(5,847 |
) |
|
|
1,190 |
|
Total |
|
$ |
(33,009 |
) |
|
$ |
(21,089 |
) |
The Grid segment generated an operating loss of $24.6 million in fiscal 2022 and $20.7 million in fiscal 2021. The increase in the Grid business unit operating loss was due to lower gross margins driven by a less favorable product mix and additional expenses incurred to deliver on the Neeltran acquired backlog. In addition, Grid segment operating loss includes a $3.3 million benefit from the ERC that was recognized in fiscal 2022.
The Wind segment generated an operating loss of $2.5 million in fiscal 2022 and $1.6 million in fiscal 2021. The increase in the Wind business unit operating loss was due to lower gross margins in fiscal 2022, compared to fiscal 2021.
Unallocated corporate expenses in fiscal 2022 consisted of a loss on contingent consideration of $0.1 million, stock-based compensation expense of $4.7 million and a restructuring charge of $1.0 million. Unallocated corporate expenses in fiscal 2021 consisted of a gain on contingent consideration of $5.9 million offset by stock-based compensation expense of $4.7 million.
Interest income, net
Interest income, net was $0.3 million in fiscal 2022 compared to $0.1 million for fiscal 2021. The increase in interest income, net, was due to increased interest rates in fiscal 2022.
China dissolution
China dissolution expense was $1.9 million in fiscal 2022 compared to no activity in fiscal 2021. The China dissolution expense during fiscal 2022, was driven by the liquidation of our China entity, resulting in a foreign currency loss from the cumulative translation release of $1.9 million in fiscal 2022 in which there was no similar transaction in fiscal 2021.
Other expense, net
Other expense, net was $0.1 million in fiscal 2022, compared to other expense, net of less than $0.1 million in fiscal 2021. The increase in other expense was driven by the impacts of fluctuations in foreign currencies in fiscal 2022.
Income Taxes
We recorded an income tax expense of $0.2 million in fiscal 2022 compared to income tax benefit of $1.8 million in fiscal 2021. The increase in income tax expense is a result of purchase accounting for the acquired intangible assets and the resulting deferred tax liability from the NEPSI Acquisition in the prior year. The Company recorded a deferred tax liability of $2.3 million, primarily for the difference in book and tax basis on the intangible assets acquired in fiscal 2021. As a result, the Company was able to benefit from additional deferred tax assets and therefore released a corresponding valuation allowance of $2.3 million during the fiscal year ended March 31, 2022. The tax benefit was offset during fiscal 2021 by income tax expense in foreign jurisdictions.
Net loss
Net loss was $35.0 million in fiscal 2022, compared to net loss of $19.2 million in fiscal 2021. The increase in net loss was driven primarily by lower gross margins, the impact of the China dissolution in fiscal 2022 and partially offset by the ERC benefit.
Please refer to the “Risk Factors” section in Part I, Item 1A, for a discussion of certain factors that may affect our future results of operations and financial condition.
Non-GAAP Measures
Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). The non-GAAP measures included in this Form 10-K, however, should be considered in addition to, and not as a substitute for or superior to the comparable measure prepared in accordance with GAAP.
We define non-GAAP net loss as net loss before stock-based compensation, amortization of acquisition-related intangibles, acquisition costs, changes in fair value of contingent consideration, China dissolution, ERC tax benefit, and other non-cash or unusual charges. We believe non-GAAP net loss assists management and investors in comparing our performance across reporting periods on a consistent basis by excluding these non-cash charges and other items that we do not believe are indicative of our core operating performance. In addition, we use non-GAAP net loss as a factor to evaluate the effectiveness of our business strategies. A reconciliation of GAAP to non-GAAP net loss is set forth in the table below (in thousands, except per share data):
|
|
Year ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Net loss |
|
$ |
(35,041 |
) |
|
$ |
(19,193 |
) |
Stock-based compensation |
|
|
4,729 |
|
|
|
4,661 |
|
Amortization of acquisition-related intangibles |
|
|
2,784 |
|
|
|
2,623 |
|
Acquisition costs |
|
|
- |
|
|
|
681 |
|
Change in fair value of contingent consideration |
|
|
70 |
|
|
|
(5,850 |
) |
China dissolution |
|
|
1,921 |
|
|
|
— |
|
ERC tax benefit |
|
|
(3,283 |
) |
|
|
— |
|
Non-GAAP net loss |
|
|
(28,820 |
) |
|
|
(17,078 |
) |
|
|
|
|
|
|
|
|
|
Non-GAAP net loss per share |
|
$ |
(1.03 |
) |
|
$ |
(0.63 |
) |
Weighted average shares outstanding - basic and diluted |
|
|
27,848 |
|
|
|
27,203 |
|
We incurred non-GAAP net losses of $28.8 million or $1.03 per share for fiscal 2022, compared to $17.1 million, or $0.63 per share, for fiscal 2021. The increase in non-GAAP net loss in fiscal 2022 compared to fiscal 2021 was due to a higher operating loss driven by lower gross margins.
Liquidity and Capital Resources
We have experienced recurring operating losses and as of March 31, 2023 had an accumulated deficit of $1,055.5 million.
Our cash requirements depend on numerous factors, including the successful completion of our product development activities, our ability to commercialize our REG and ship protection system solutions, the rate of customer and market adoption of our products, collecting receivables according to established terms, the continued availability of U.S. government funding during the product development phase of our superconductor-based products and whether Inox is successful in executing on Solar Energy Corporation of India Limited orders or in obtaining additional orders under the new central and state auction regime. We continue to closely monitor our expenses and, if required, expect to reduce our operating and capital spending to enhance liquidity
In February 2021, we filed a shelf registration statement on Form S-3 that will expire in February 2024 (the “Form S-3”). The Form S-3 allows us to offer and sell from time-to-time up to $250 million of common stock, debt securities, warrants or units comprised of any combination of these securities. The Form S-3 is intended to provide us flexibility to conduct registered sales of our securities, subject to market conditions, in order to fund our future capital needs. The terms of any future offering under the Form S-3 will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering.
At March 31, 2023, we had cash, cash equivalents and restricted cash of $25.7 million, compared to $49.5 million at March 31, 2022, a decrease of $23.8 million. As of March 31, 2023, we had approximately $1.9 million of cash, cash equivalents and restricted cash in foreign bank accounts. Our cash, cash equivalents and restricted cash are summarized as follows (in thousands):
|
|
March 31, 2023 |
|
|
March 31, 2022 |
|
Cash and cash equivalents |
|
$ |
23,360 |
|
|
$ |
40,584 |
|
Restricted cash |
|
|
2,315 |
|
|
|
8,902 |
|
Total cash, cash equivalents and restricted cash |
|
$ |
25,675 |
|
|
$ |
49,486 |
|
Net cash used in operating activities was $22.5 million and $19.0 million in fiscal 2022 and 2021, respectively. The increase in net cash used in operations in fiscal 2022 compared to fiscal 2021 was driven primarily by purchases of inventory and decreased cash collections in fiscal 2022.
Net cash used in investing activities was $1.5 million and $7.2 million in fiscal 2022 and 2021, respectively. The decrease in net cash used in investing activities in fiscal 2022 compared to fiscal 2021 was due primarily to the Neeltran acquisition in fiscal 2021, in which no similar transaction occurred in fiscal 2022.
Net cash provided by financing activities was $0.2 million and $0.1 million in fiscal 2022 and 2021, respectively. The increase in net cash provided by financing activities in fiscal 2022 compared to fiscal 2021 was primarily due to the repurchase of treasury stock in fiscal 2021, in which no similar transaction occurred in fiscal 2022.
.
At March 31, 2023, we had $0.6 million of restricted cash included in long-term assets and $1.7 million of restricted cash in short-term assets. At March 31, 2022, we had $6.1 million of restricted cash included in long-term assets and $2.8 million of restricted cash in short-term assets. These amounts included in restricted cash primarily represent collateral deposits to secure surety bonds and letters of credit for various customer contracts. These deposits are held in interest bearing accounts. The restricted cash held in escrow in long-term assets at the end of March 31, 2022 securing the letter of credit with Com Ed on the REG project was released back to us in the fourth quarter of fiscal 2022.
We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the consolidated balance sheet as of March 31, 2023, while others are considered future commitments. We have various contractual arrangements, under which we have committed to purchase certain minimum quantities of goods or services on an annual basis. For information regarding our other contractual obligations, refer to Note 12, "Contingent Consideration," Note 14, "Debt," Note 15, "Leases" and Note 17, "Commitments and Contingencies" to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
We believe we have sufficient available liquidity to fund our operations and capital expenditures for the next twelve months. In addition, we may seek to raise additional capital, which could be in the form of loans, convertible debt or equity, to fund our operating requirements and capital expenditures. Our liquidity is highly dependent on our ability to increase revenues, control our operating costs, and our ability to raise additional capital, if necessary. There can be no assurance that we will be able to raise additional capital on favorable terms or at all, or execute on any other means of improving our liquidity as described above. Additionally, the impact of the COVID-19 pandemic or other sources of instability, including the ongoing war between Russia and Ukraine, instability of financial institutions and political instability in the United States, on the global financial markets may reduce our ability to raise additional capital, if necessary, which could negatively impact our liquidity. We also continue to closely monitor our expenses and, if required, we intend to reduce our operating and capital spending to enhance liquidity.
Legal Proceedings
From time to time, we are involved in legal and administrative proceedings and claims of various types. We record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. We review these estimates each accounting period as additional information is known and adjust the loss provision when appropriate. If a matter is both probable to result in liability and the amounts of loss can be reasonably estimated, we estimate and disclose the possible loss or range of loss to the extent necessary to make the consolidated financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in our consolidated financial statements.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in ASU 2016-13 provide more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Following the release of ASU 2019-10 in November 2019, the new effective date, as long as we remain a smaller reporting company, would be annual reporting periods beginning after December 15, 2022. We evaluated the impact of the adoption of ASU 2016-13, and we do not expect it to have a material impact on our consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in ASU 2021-08 will improve the accounting for acquired revenue contracts with customers in a business combination. Following the release of ASU 2021-08 in October 2021, the new effective date will be annual reporting periods beginning after December 15, 2022. We evaluated the impact of the adoption of ASU 2021-08, and we do not expect it to have a material impact on our consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The amendments in ASU 2021-10 will improve financial reporting by requiring disclosures that increase the transparency of transactions with government accounted for by applying a grant or contribution accounting model by analogy. Following the release of ASU 2021-10 in November 2021, the new effective date will be annual reporting periods beginning after December 15, 2021. As of April 1, 2022, we adopted ASU 2021-10 and noted no material impact on our consolidated financial statements.
We do not believe that, outside of those disclosed here, there are any other recently issued accounting pronouncements that will have a material impact on our consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ under different assumptions or conditions. Our accounting policies that involve the most significant judgments and estimates are as follows:
Revenue recognition
For certain arrangements, such as contracts to perform research and development, prototype development contracts and certain customized product sales, we record revenues using the over-time method, measured by the relationship of costs incurred to total estimated contract costs. Over-time revenue recognition accounting is predominantly used on certain turnkey power systems installations for electric utilities and long-term prototype development contracts with the U.S. government. In addition, some contracts contain an element of variable consideration, including liquidated damages and/or penalties, which requires payment to the customer in the event that delivery timelines or milestones are not met. We estimate the total consideration payable by the customer when the contracts contain variable consideration provisions, based on the most likely amount anticipated to be recognized for transferring the promised goods or services. As a result, we may constrain revenue to the extent that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Significant judgement is required to estimate the total expected costs and variable consideration for projects that typically have a timeline of 12-24 months. Any increase or decrease in estimated costs to complete a performance obligation without a corresponding change to the contract price could impact the calculation of cumulative revenue to date and gross profit on the project. Similar, if we recognize revenue based upon our current estimate of variable consideration, and our estimate is later adjusted, we may be required to increase or decrease cumulative revenue to date and gross profit on the project. Factors that may result in a change to our estimate include delays in manufacturing, unforeseen engineering problems, the performance of subcontractors and material suppliers, among others.
We have a long history of working with multiple types of projects and preparing cost estimates, and we rely on the expertise of key personnel to prepare what we believe are reasonable best estimates given available facts and circumstances. Due to the nature of the work involved, however, judgment is involved to estimate the total costs to complete, and the amounts estimated could have a material impact on the revenue we recognize in each accounting period. We cannot estimate unforeseen events and circumstances which may result in actual results being materially different from previous estimates.
See Note 4, “Revenue Recognition,” for additional information.
Business Acquisitions
We account for acquisitions using the purchase method of accounting in accordance with ASC 805, Business Combinations. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Intangible assets, if identified, are also recorded.
Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions as well as the use of specialists as needed. The Company utilizes management estimates and an independent third-party valuation firm to assist in determining the fair values of assets acquired, including intangible assets and liabilities assumed. The primary intangible assets acquired include customer relationship and trade names. Intangible assets are initially valued using a methodology commensurate with the intended use of the asset. The fair value of customer relationships is measured using the multi-period excess earnings method (“MPEEM”). The fair value of the trade names is measured using a relief-from-royalty (“RFR”) approach. The basis for future sales projections for both the MPEEM and RFR are based on internal revenue forecasts which the Company believes represents reasonable market participant assumptions. The future cash flows are discounted using an applicable discount rate. The key uncertainties in the calculations, as applicable, are the selection of an appropriate royalty rate, assumptions used in developing estimates of future cash flows, including revenue growth and expense forecasts, assumed customer attrition rates, as well as perceived risks associated with those forecasts in determining the discount rate. There is inherent uncertainty in forecasted cash flows and therefore, actual results may differ and could result in a subsequent impairment charge of acquired intangibles and/or goodwill.
The consideration for our acquisitions may include future payments that are contingent upon the occurrence of a particular event. We record a contingent consideration obligation for such contingent consideration payments at fair value on the acquisition date. We estimate the fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and the likelihood of making related payments. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the fair value of contingent consideration recorded at each reporting period. See Note 3, "Acquisitions," for additional information.
Valuation of long-lived assets
We periodically evaluate our long-lived assets, consisting principally of fixed and amortizable intangible assets for potential impairment. We evaluate our long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable from the estimated undiscounted future cash flows.
Our judgments regarding the existence of impairment indicators are based on market and operational performance. Indicators of potential impairment include:
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• |
a significant change in the manner in which an asset group is used; |
|
• |
a significant decrease in the market value of an asset group; |
|
• |
identification of other impaired assets within a reporting unit; |
|
• |
a significant adverse change in its business or the industry in which it is sold; |
|
• |
a current period operating cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the asset group; and |
|
• |
significant advances in our technologies that require changes in our manufacturing process. |
We evaluate recoverability of long-lived assets and definite-lived intangible assets by estimating the undiscounted future cash flows associated with the expected uses and disposition of those assets. When those comparisons indicate that the carrying value of those assets is greater than the undiscounted cash flows, we recognize an impairment loss for the amount that the carrying value exceeds the fair value. The Company has not made any material changes to the method of evaluating for impairment during the last three years. There were no indicators requiring further impairment testing on our long-lived assets during the fiscal years ended March 31, 2023 or 2022.
Goodwill
Goodwill represents the excess of cost over net assets of acquired businesses that are consolidated. We perform our annual assessment of goodwill on February 28th of each fiscal year and whenever events or changes in circumstances or a triggering event indicate that the carrying amount may not be recoverable. An entity is permitted to first assess qualitatively whether it is necessary to perform a goodwill impairment test. Significant judgment is required to determine if an indication of impairment has taken place. Factors to be considered include the following: adverse change in operating results, decline in strategic business plans, significantly lower future cash flows, and sustainable declines in market data such as market capitalization. The quantitative impairment test is required only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. We determine the fair value of a reporting unit, using a methodology which combines an income approach, using a discounted cash flow method, with a market approach. The income approach includes estimates and assumptions about revenue growth rates, operating margins and terminal growth rates, discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. These estimates are based on historical experiences, our projects of future operating activity and our weighted-average cost of capital. A significant change in events, circumstances or any of these assumptions could adversely affect these estimates, which could result in an impairment.
We performed our annual assessment of goodwill on February 28, 2023 and noted no triggering events from the analysis date to March 31, 2023 and determined that there was no impairment to goodwill. See Note 5, “Goodwill,” for further information regarding our goodwill valuation assumptions.
Income taxes
Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current fiscal year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards using expected tax rates in effect in the years during which the differences are expected to reverse. All deferred tax assets and liabilities are presented as non-current in the Consolidated Balance Sheet.
We regularly assess our ability to realize our deferred tax assets. Assessments of the realization of deferred tax assets require that management consider all available evidence, both positive and negative, and make significant judgments about many factors, including the amount and likelihood of future taxable income. Based on all the available evidence, we have recorded valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realizable due to the taxable losses that have been incurred since our inception and uncertainty around our future profitability.
Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. See Note 13, “Income Taxes,” of our consolidated financial statements for further information regarding our income tax assumptions and expenses.
Item 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of American Superconductor Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of American Superconductor Corporation and its subsidiaries (the Company) as of March 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated May 31, 2023 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involve especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
As described in Notes 2 and 4 of the consolidated financial statements, a significant portion of the Company’s revenue is generated pursuant to nonstandard written contractual arrangements to design, develop, and/or manufacture products, and to provide related technical and other services according to the specifications of the customers. Because of the uniqueness of the terms and conditions in the customer contracts, there is significant analysis, and at times significant judgments, that are made by management when evaluating the contracts for proper revenue recognition. The Company’s performance obligations under these contractual agreements are satisfied over time. For performance obligations satisfied over time, revenue is generally recognized by measuring progress through costs incurred to date relative to total estimated costs at completion, which requires management to estimate both total expected project costs and expected gross margin, including evaluating customer change orders, to determine the appropriate amount of revenue to recognize, which can require significant management judgment.
We identified revenue recognition pertaining to customer contracts satisfied over time as a critical audit matter as there are significant judgments exercised by management in determining revenue recognition. Given the high degree of management judgment involved in analyzing the terms and conditions of the Company’s unique customer contracts and the various management estimates that are used in the revenue calculations, the audit effort required to evaluate management’s judgments in determining revenue recognition for the Company’s contracts was extensive and required a high degree of auditor judgment.
Our audit procedures related to revenue recognition included the following, among others:
|
● |
We obtained an understanding of the relevant controls related to revenue recognition and tested controls specific to management’s analysis of customer contract terms and application of relevant accounting guidance as well as determination of significant assumptions used in computing revenue for design and operating effectiveness, |
|
● |
We selected a sample of contracts with customers and related revenue transactions and performed the following audit procedures: |
|
o |
Obtained customer contract, related invoices, purchase orders, and management revenue recognition analysis for each testing selection, to evaluate if relevant contractual terms and transaction price were appropriately considered by management and conclusions on revenue recognition method were in accordance with the relevant accounting guidance; and |
|
o |
Evaluated management’s estimations of total contract cost and contract profit by assessing actual costs to date against projections made throughout the course of the contract term. |
Goodwill Impairment
As described in Notes 2 and 5 to the consolidated financial statements, the Company’s goodwill balance was $43.5 million as of March 31, 2023. Management tests goodwill for impairment, at the reporting unit level, as of February 28 of each fiscal year, or more frequently if events or changes in circumstances indicate the asset might be impaired. To test goodwill for impairment, management compares the estimated fair value of each reporting unit with the carrying amount of each reporting unit, including the recorded goodwill. In estimating the fair value of each reporting unit, management uses a methodology which combines an income approach, using a discounted cash flows method, with a market approach, using a peer-based guideline company method based on the average of published multiples of earnings of comparable entities with similar operations and economic characteristics.
We identified the goodwill impairment assessment for the Company’s reporting units with material goodwill as a critical audit matter because of the significant estimates and assumptions used by management when estimating the fair value of the these reporting units, including management’s forecasts of revenue and expense growth rates and management’s selection of the discount rates for the income approaches and management’s estimates of the multiples of earnings of comparable entities with similar operations and economic characteristics for the market approaches. Auditing management’s estimates and assumptions involved a high degree of auditor judgment and increased audit effort, including the use of our fair value specialists, due to the impact these assumptions have on the goodwill impairment assessment.
Our audit procedures related to the assessment of goodwill impairment included the following, among others:
|
● |
We obtained an understanding of the relevant controls relating to management's goodwill impairment assessment and tested such controls for design and operating effectiveness, including controls over management's review of the significant assumptions used in the estimate of fair value, such as forecasted revenue growth rates, gross margin, and selected discount rates. |
|
● |
We evaluated the reasonableness of management's forecasts of revenue and expense growth rates, including comparing projections to historical results. |
|
● |
We tested the underlying data used by management in their development of forecasts of revenue and expense growth rates for accuracy and completeness. |
|
● |
We evaluated the reasonableness of management's selection of comparable entities with similar operations and economic characteristics. |
|
● |
With the assistance of our valuation specialists, we evaluated the reasonableness of the Company's valuation methodology and significant assumptions by: |
|
o |
Evaluating the reasonableness of the discount rate and multiples of earnings by comparing the underlying source information to publicly available market data and verifying the accuracy of the calculations. |
|
o |
Evaluating the appropriateness of the valuation methods used by management and testing their mathematical accuracy. |
/s/ RSM US LLP
We have served as the Company's auditor since 2013.
Boston, Massachusetts
May 31, 2023
AMERICAN SUPERCONDUCTOR CORPORATION
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands)
| | March 31, | | | March 31, | |
| | 2023 | | | 2022 | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 23,360 | | | $ | 40,584 | |
Accounts receivable | | | 30,665 | | | | 20,280 | |
Inventory | | | 36,986 | | | | 23,666 | |
Prepaid expenses and other current assets | | | 13,429 | | | | 7,052 | |
Restricted cash | | | 1,733 | | | | 2,754 | |
Total current assets | | | 106,173 | | | | 94,336 | |
| | | | | | | | |
Property, plant and equipment, net | | | 12,309 | | | | 13,656 | |
Intangibles, net | | | 8,527 | | | | 11,311 | |
Right-of-use asset | | | 2,857 | | | | 3,502 | |
Goodwill | | | 43,471 | | | | 43,471 | |
Restricted cash | | | 582 | | | | 6,148 | |
Deferred tax assets | | | 1,114 | | | | 1,224 | |
Other assets | | | 528 | | | | 239 | |
Total assets | | $ | 175,561 | | | $ | 173,887 | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 38,383 | | | $ | 29,140 | |
Lease liability, current portion | | | 808 | | | | 740 | |
Debt, current portion | | | 75 | | | | 72 | |
Contingent consideration | | | 1,270 | | | | 1,200 | |
Deferred revenue, current portion | | | 43,572 | | | | 22,812 | |
Total current liabilities | | | 84,108 | | | | 53,964 | |
| | | | | | | | |
Deferred revenue, long term portion | | | 7,188 | | | | 7,222 | |
Lease liability, long term portion | | | 2,184 | | | | 2,900 | |
Deferred tax liabilities | | | 243 | | | | 297 | |
Debt, long-term portion | | | 15 | | | | 90 | |
Other liabilities | | | 26 | | | | 25 | |
Total liabilities | | | 93,764 | | | | 64,498 | |
| | | | | | | | |
Commitments and contingencies (Note 17) | | | | | | | | |
| | | | | | | | |
Stockholders' equity: | | | | | | | | |
Common stock, $0.01 par value, 75,000,000 shares authorized; 29,937,119 and 28,919,990 shares issued and 29,539,488 and 28,522,359 shares outstanding at March 31, 2023 and 2022, respectively | | | 299 | | | | 289 | |
Additional paid-in capital | | | 1,139,113 | | | | 1,133,536 | |
Treasury stock, at cost, 397,631 at March 31, 2023 and 2022, respectively | | | (3,639 | ) | | | (3,639 | ) |
Accumulated other comprehensive income (loss) | | | 1,571 | | | | (291 | ) |
Accumulated deficit | | | (1,055,547 | ) | | | (1,020,506 | ) |
Total stockholders' equity | | | 81,797 | | | | 109,389 | |
Total liabilities and stockholders' equity | | $ | 175,561 | | | $ | 173,887 | |
The accompanying notes are an integral part of the consolidated financial statements.
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
Fiscal Year Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Revenues |
|
$ |
105,984 |
|
|
$ |
108,435 |
|
Cost of revenues |
|
|
97,463 |
|
|
|
94,943 |
|
Gross profit |
|
|
8,521 |
|
|
|
13,492 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
8,966 |
|
|
|
10,470 |
|
Selling, general and administrative |
|
|
28,700 |
|
|
|
27,494 |
|
Amortization of acquisition related intangibles |
|
|
2,746 |
|
|
|
2,467 |
|
Change in fair value on contingent consideration |
|
|
70 |
|
|
|
(5,850 |
) |
Restructuring |
|
|
1,048 |
|
|
|
— |
|
Total operating expenses |
|
|
41,530 |
|
|
|
34,581 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(33,009 |
) |
|
|
(21,089 |
) |
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
252 |
|
|
|
75 |
|
China dissolution |
|
|
(1,921 |
) |
|
|
- |
|
Other expense, net |
|
|
(148 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
Loss before income tax expense (benefit) |
|
|
(34,826 |
) |
|
|
(21,042 |
) |
Income tax expense (benefit) |
|
|
215 |
|
|
|
(1,849 |
) |
Net loss |
|
$ |
(35,041 |
) |
|
$ |
(19,193 |
) |
|
|
|
|
|
|
|
|
|
Net loss per common share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.26 |
) |
|
$ |
(0.71 |
) |
Diluted |
|
$ |
(1.26 |
) |
|
$ |
(0.71 |
) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
27,848 |
|
|
|
27,203 |
|
Diluted |
|
|
27,848 |
|
|
|
27,203 |
|
The accompanying notes are an integral part of the consolidated financial statements.
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
|
|
Fiscal Year Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Net loss |
|
$ |
(35,041 |
) |
|
$ |
(19,193 |
) |
Other comprehensive (loss) gain, net of tax: |
|
|
|
|
|
|
|
|
China dissolution |
|
|
1,921 |
|
|
|
- |
|
Foreign currency translation loss |
|
|
(59 |
) |
|
|
(14 |
) |
Total other comprehensive (loss) gain, net of tax |
|
|
1,862 |
|
|
|
(14 |
) |
Comprehensive loss |
|
$ |
(33,179 |
) |
|
$ |
(19,207 |
) |
The accompanying notes are an integral part of the consolidated financial statements.
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
Total |
|
|
|
Number of Shares |
|
|
Par Value |
|
|
Paid-in Capital |
|
|
Treasury Stock |
|
|
Comprehensive Income (Loss) |
|
|
Accumulated Deficit |
|
|
Stockholders' Equity |
|
Balance at March 31, 2021 |
|
|
27,988 |
|
|
$ |
280 |
|
|
$ |
1,121,495 |
|
|
$ |
(3,593 |
) |
|
$ |
(277 |
) |
|
$ |
(1,001,313 |
) |
|
$ |
116,592 |
|
Issuance of common stock - ESPP |
|
|
28 |
|
|
|
— |
|
|
$ |
241 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
241 |
|
Issuance of common stock - Bonus payments |
|
|
158 |
|
|
|
2 |
|
|
|
2,278 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,280 |
|
Issuance of common stock - restricted shares |
|
|
404 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
4,661 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,661 |
|
Issuance of stock for 401(k) match |
|
|
40 |
|
|
|
— |
|
|
|
481 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
481 |
|
Issuance of common stock - Neeltran acquisition |
|
|
302 |
|
|
|
3 |
|
|
|
4,384 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,387 |
|
Repurchase of treasury stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(46 |
) |
|
|
— |
|
|
|
— |
|
|
|
(46 |
) |
Cumulative translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14 |
) |
|
|
— |
|
|
|
(14 |
) |
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,193 |
) |
|
|
(19,193 |
) |
Balance at March 31, 2022 |
|
|
28,920 |
|
|
$ |
289 |
|
|
$ |
1,133,536 |
|
|
$ |
(3,639 |
) |
|
$ |
(291 |
) |
|
$ |
(1,020,506 |
) |
|
$ |
109,389 |
|
Issuance of common stock - ESPP |
|
|
60 |
|
|
|
1 |
|
|
|
234 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
235 |
|
Issuance of common stock - restricted shares |
|
|
827 |
|
|
|
8 |
|
|
|
(8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
4,729 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,729 |
|
Issuance of stock for 401(k) match |
|
|
130 |
|
|
|
1 |
|
|
|
622 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
623 |
|
Cumulative translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,862 |
|
|
|
— |
|
|
|
1,862 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(35,041 |
) |
|
|
(35,041 |
) |
Balance at March 31, 2023 |
|
|
29,937 |
|
|
$ |
299 |
|
|
$ |
1,139,113 |
|
|
$ |
(3,639 |
) |
|
$ |
1,571 |
|
|
$ |
(1,055,547 |
) |
|
$ |
81,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
) |
|
|
|
|
|
|
|
) |
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
AMERICAN SUPERCONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Fiscal Year Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(35,041 |
) |
|
$ |
(19,193 |
) |
Adjustments to reconcile net loss to net cash used in operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,361 |
|
|
|
5,341 |
|
Stock-based compensation expense |
|
|
4,729 |
|
|
|
4,661 |
|
Provision for excess and obsolete inventory |
|
|
1,467 |
|
|
|
1,902 |
|
Deferred income taxes |
|
|
24 |
|
|
|
(2,403 |
) |
Change in fair value of contingent consideration |
|
|
70 |
|
|
|
(5,850 |
) |
China dissolution |
|
|
1,921 |
|
|
|
— |
|
Non-cash interest income |
|
|
— |
|
|
|
(49 |
) |
Other non-cash items |
|
|
600 |
|
|
|
525 |
|
Unrealized foreign exchange gain on cash and cash equivalents |
|
|
(226 |
) |
|
|
(186 |
) |
Changes in operating asset and liability accounts: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(10,360 |
) |
|
|
(3,760 |
) |
Inventory |
|
|
(14,796 |
) |
|
|
(3,307 |
) |
Prepaid expenses and other current assets |
|
|
(5,757 |
) |
|
|
(420 |
) |
Accounts payable and accrued expenses |
|
|
8,660 |
|
|
|
4,695 |
|
Deferred revenue |
|
|
20,863 |
|
|
|
(933 |
) |
Net cash used in operating activities |
|
|
(22,485 |
) |
|
|
(18,977 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(1,236 |
) |
|
|
(938 |
) |
Cash paid for acquisition, net of cash received |
|
|
— |
|
|
|
(11,479 |
) |
Proceeds from the maturity of marketable securities |
|
|
— |
|
|
|
5,189 |
|
Change in other assets |
|
|
(281 |
) |
|
|
65 |
|
Net cash used in investing activities |
|
|
(1,517 |
) |
|
|
(7,163 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repurchase of treasury stock |
|
|
— |
|
|
|
(46 |
) |
Repayment of debt |
|
|
(73 |
) |
|
|
(53 |
) |
Proceeds from exercise of employee stock options and ESPP |
|
|
235 |
|
|
|
241 |
|
Net cash provided by financing activities |
|
|
162 |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
29 |
|
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
Net decrease in cash, cash equivalents and restricted cash |
|
|
(23,811 |
) |
|
|
(26,053 |
) |
Cash, cash equivalents and restricted cash at beginning of year |
|
|
49,486 |
|
|
|
75,539 |
|
Cash, cash equivalents and restricted cash at end of year |
|
$ |
25,675 |
|
|
$ |
49,486 |
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds |
|
|
350 |
|
|
$ |
531 |
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the purchase of Neeltran, Inc. |
|
|
— |
|
|
|
4,387 |
|
Issuance of common stock to settle liabilities |
|
|
623 |
|
|
|
2,761 |
|
The accompanying notes are an integral part of the consolidated financial statements.
1. Nature of the Business and Operations and Liquidity
Nature of the Business and Operations
American Superconductor Corporation (together with its subsidiaries, “AMSC®” or the “Company”) was founded on April 9, 1987. The Company is a leading system provider of megawatt-scale power resiliency solutions that Orchestrate the Rhythm and Harmony of Power on the Grid™ and protect and expand the capability of the Navy's fleet. The Company’s products leverage its proprietary “smart materials” and “smart software and controls” to provide enhanced resiliency and improved performance of megawatt-scale power flow.
The Company’s consolidated financial statements have been prepared on a going concern basis in accordance with United States generally accepted accounting principles (“GAAP”) and the Securities and Exchange Commission’s (“SEC”) instructions to Form 10-K. The going concern basis of presentation assumes that the Company will continue operations and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.
Liquidity
The Company has historically experienced recurring operating losses and as of March 31, 2023, the Company had an accumulated deficit of $1,055.5 million. In addition, the Company has historically experienced recurring negative operating cash flows. At March 31, 2023, the Company had cash and cash equivalents of $23.4 million. Cash used in operations for the year ended March 31, 2023 was $22.5 million.
In February 2021, the Company filed a shelf registration statement on Form S-3 that will expire in February 2024 (the “Form S-3”). The Form S-3 allows the Company to offer and sell from time-to-time up to $250 million of common stock, debt securities, warrants or units comprised of any combination of these securities. The Form S-3 is intended to provide the Company flexibility to conduct registered sales of the Company's securities, subject to market conditions, in order to fund the Company's future capital needs. The terms of any future offering under the Form S-3 will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering.
The Company is experiencing substantial inflationary pressure in its supply chain and some delays in sourcing materials needed for its products resulting in some disruption, both of which have increased the Company's cost of revenues and decreased gross margin. Changes in macroeconomic conditions arising from the COVID-19 pandemic or for other reasons, such as ongoing war between Russia and Ukraine, inflation, rising interest rates, instability of financial institutions and political instability in the United States, including failure to raise the federal debt ceiling, labor force availability, sourcing, material delays and global supply chain disruptions could have a material adverse effect on the Company's business, financial condition and results of operation.
From time-to-time the Company may undertake restructuring activities in order to align the global organization in a manner that the Company believes will better position it to achieve its long-term goals. In January 2023, the Company undertook a reduction in force that involved approximately 5% of the global workforce. This restructuring will cause the Company to incur $1.0 million of cash expense and is expected to result in annualized cost savings of approximately $5 million, beginning in fiscal 2023.
The Company believes that based on the information presented above and its annual management assessment, it has sufficient liquidity to fund its operations and capital expenditures for the next
twelve months following the issuance of the financial statements for the year ended
March 31, 2023. The Company’s liquidity is highly dependent on its ability to increase revenues, its ability to control its operating costs, and its ability to raise additional capital, if necessary. The impact of the COVID-
19 pandemic and other sources of instability, including the war between Russia and Ukraine, instability of financial institutions and political instability in the United States on the global financing markets
may reduce the Company's ability to raise additional capital, if necessary, which could negatively impact the Company's liquidity. There can be
no assurance that the Company will be able to continue to raise additional capital, on favorable terms or at all, from other sources or execute on any other means of improving liquidity described above.
2. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, collectability of receivables, realizability of inventory, goodwill and intangible assets, contingent consideration, warranty provisions, stock-based compensation, tax reserves, and deferred tax assets. Provisions for depreciation are based on their estimated useful lives using the straight-line method. Some of these estimates can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by the Company’s management there may be other estimates or assumptions that are reasonable, the Company believes that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements.
Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities of three months or less that are regarded as high quality, low risk investments and are measured using such inputs as quoted prices, and are classified within Level 1 of the valuation hierarchy. Cash equivalents consist principally of certificates of deposits and money market accounts.
Accounts Receivable
Accounts receivable consist of amounts owed by commercial companies and government agencies. Accounts receivable are stated net of allowances for doubtful accounts. The Company’s accounts receivable relate principally to a limited number of customers. As of March 31, 2023, Anovion LLC and Fuji Bridex PTE Ltd accounted for approximately 21% and 15% of the Company's accounts receivable balance, respectively, with no other customers accounting for greater than 10% of the balance. As of March 31, 2022, Fuji Bridex PTE Ltd accounted for approximately 31% of the Company's accounts receivable balance, with no other customers accounting for greater than 10% of the balance. Changes in the financial condition or operations of the Company’s customers may result in delayed payments or non-payments which would adversely impact its cash flows from operating activities and/or its results of operations. As such, the Company may require collateral, advanced payment or other security based upon the customer history and/or creditworthiness. In determining the allowance for doubtful accounts, the Company evaluates the collectability of accounts receivable based primarily on the probability of recoverability based on historical collection and write-off experience, the age of past due receivables, specific customer circumstances, and current economic trends. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances may be required. Failure to accurately estimate the losses for doubtful accounts and ensure that payments are received on a timely basis could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.
Inventory
Inventories include material, direct labor and related manufacturing overhead, and are stated at the lower of cost, determined on a first-in, first-out basis, or net realizable value determined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The Company records inventory when it takes delivery and title to the product according to the terms of each supply contract.
Program costs may be deferred and recorded as inventory on contracts on which costs are incurred in excess of approved contractual amounts and/or funding, if future recovery of the costs is deemed probable.
At each balance sheet date, the Company evaluates its ending inventories for excess quantities and obsolescence. Inventories that management considers excess or obsolete are reserved. Management considers forecasted demand in relation to the inventory on hand, competitiveness of product offerings, market conditions and product life cycles when determining excess and obsolescence and net realizable value adjustments. Once inventory is written down and a new cost basis is established, it is not written back up if demand increases.
For the fiscal years ended March 31, 2023 and 2022, the Company recorded inventory reserves of approximately $1.5 million and $1.9 million, respectively, based on evaluating its ending inventory on hand for excess quantities and obsolescence.
Leases
Leases include all agreements in which the Company obtains control of a physical asset. Leases are captured on the balance sheet as both a right of use asset and associated lease liability and are valued based on the commencement of the Company's control of the asset, after being discounted by its incremental borrowing rate. The Company's lease portfolio is made up primarily of real estate leases for its various offices, but also include items such as vehicles, IT equipment and other miscellaneous tools and equipment needed for manufacturing. The Company's incremental borrowing rate was determined through an analysis to identify what rates it could obtain if the Company were to secure external financing for similar transactions, and includes considerations of both the market and its current credit ratings. An analysis is performed annually, or upon execution of any individually material agreement, to ensure that the rates being applied to newly acquired leases are still accurate.
The majority of the Company's leases are classified as operating leases, and therefore the expense is captured in income from operations each period.
We have elected to exclude all leases of less than twelve months from the balance sheet presentation. We have also elected a policy in which we will not segregate lease components from non-lease components, so in the event we execute an agreement which includes a non-lease component our asset and liability recorded to the balance sheet will include the value of that non-lease component as well. This policy will be applied to all classifications of leases.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated depreciation and amortization. The Company accounts for depreciation and amortization using the straight-line method to allocate the cost of property, plant and equipment over their estimated useful lives as follows:
Asset Classification | | Estimated Useful Life in Years | |
Machinery and equipment | | 3-10 | |
Furniture and fixtures | | 3-5 | |
Leasehold improvements | | Shorter of the estimated useful life or the remaining lease term | |
Expenditures for maintenance and repairs are expensed as incurred. Upon retirement or other disposition of assets, the costs and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in operating expenses.
Valuation of Long-Lived Assets
The Company periodically evaluates its long-lived assets, consisting principally of fixed assets and amortizable intangible assets, for potential impairment. In accordance with the applicable accounting guidance for the treatment of long-lived assets, the Company reviews the carrying value of its long-lived assets or asset group that is held and used, including intangible assets subject to amortization, for impairment whenever events and circumstances indicate that the carrying value of the assets may not be recoverable. Under the held and used approach, the asset or asset group to be tested for impairment should represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The Company evaluates its long-lived assets whenever events or circumstances suggest that the carrying amount of an asset or group of assets may not be recoverable from the estimated undiscounted future cash flows.
There were no indicators requiring impairment testing on the Company's long-lived assets during the fiscal years ended March 31, 2023 and 2022.
Goodwill
Goodwill represents the excess of cost over net assets of acquired businesses that are consolidated. The Company performs its annual assessment of goodwill on February 28th of each fiscal year and whenever events or changes in circumstances or a triggering event indicate that the carrying amount may not be recoverable. Determining whether a triggering event has occurred often involves significant judgment from management. An entity is permitted to first assess qualitatively whether it is necessary to perform a goodwill impairment test. The quantitative impairment test is required only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The Company determines the fair value of a reporting unit, using a methodology which combines an income approach, using a discounted cash flow method, with a market approach. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity should consider the totality of all relevant events or circumstances that affect the fair value or carrying amount of a reporting unit. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, then an impairment charge is recognized reducing the goodwill by the excess of the carrying amount over the fair value, not to exceed the total amount of the goodwill allocated to the that reporting unit. See Note 5, "Goodwill" for further information and discussion.
The Company performed its annual assessment of goodwill on February 28, 2023 and noted no triggering events from the analysis date to March 31, 2023 and determined that there was no impairment to goodwill. Additionally, there was no impairment identified for the fiscal year ended March 31, 2022 based on the assessment performed in the prior fiscal year.
42
Revenue Recognition
Revenue contracts are defined as an arrangement that creates enforceable rights and obligations of both parties where collection of the contract price is deemed probable. The Company records revenue based on a five-step model which includes confirmation of contract existence, identifying the performance obligations, determining the transaction price, allocating the contract transaction price to the performance obligations, and recognizing the revenue when (or as) control of goods or services is transferred to the customer. The transfer of control can occur at the time of delivery, installation or post-installation where applicable.
The Company's equipment and system product line includes certain contracts which do not meet the requirements of an exchange transaction and therefore do not fall within the scope of ASC 606. As these non-exchange transaction contracts are considered grant revenue and do not fall within any specific accounting literature, the Company follows guidance within ASC 606 by analogy to recognize grant revenue over time.
For certain arrangements, such as contracts to perform research and development, prototype development contracts and certain customized product sales, the Company records revenues using the over-time method, measured by the relationship of costs incurred to total estimated contract costs. Over-time revenue recognition accounting is predominantly used on certain turnkey power systems installations for electric utilities and long-term prototype development contracts with the U.S. government. The Company follows this method when any of the three following criteria are met: when the customer receives the benefits as they are performed, control transfers to the customer as the work is performed, or there is no alternative use to the Company and there is an enforceable right to payment through the life of the contract. However, the ability to reliably estimate total costs at completion is challenging, especially on long-term prototype development contracts, and could result in future changes in contract estimates. For contracts where reasonably dependable estimates of the revenues and costs cannot be made, the Company follows the point in time method.
The Company enters into sales arrangements that may provide for multiple performance obligations to a customer. Sales of certain products may include extended warranty and support or service packages, and at times include performance bonds. As these contracts progress, the Company continually assesses the probability of a payout from the performance bond. Should the Company determine that such a payout is likely, the Company would record a liability. The Company would reduce revenue to the extent a liability is recorded. In addition, the Company enters into licensing arrangements that include training services.
Performance obligations are separated into more than one unit of accounting when (1) the delivered element(s) have value to the customer on a stand-alone basis, and (2) the Company's promise to transfer the goods or services to the customer is separately identifiable from other promises in the contract. In general, revenues are separated between the different product shipments which have stand-alone value, and the various services to be provided. Revenue for product shipments is generally recognized at a point in time where control of the product is transferred to the customer, while revenues for the services are generally recognized over the period of performance. The Company identifies all goods and/or services that are to be delivered separately under a sales arrangement and allocates the transaction price to each distinct performance obligation using the respective standalone selling price ("SSP") which is determined primarily using the cost plus expected margin approach for products and a relief from royalty method for licenses. Revenue allocated to each performance obligation is recognized when, or as, the performance obligation is satisfied. The Company reviews SSP and the related margins at least annually.
43
The Company’s license agreements provide either for the payment of contractually determined paid-up front license fees or milestone based payments in consideration for the grant of rights to manufacture and/or sell products using its patented technologies or know-how. Some of these agreements provide for the release of the licensee from past and future intellectual property infringement claims. When the Company can determine that it has no further obligations other than the grant of the license and that the Company has fully transferred the technology know-how, the Company recognizes the revenue under a point in time model. In other license arrangements, the Company may also agree to provide training services to transfer the technology know-how. In these arrangements, the Company has determined that the licenses have no standalone value to the customer and are not separable from training services as the Company can only fully transfer the technology know-how through the training component. Accordingly, the Company accounts for these arrangements as a single unit of accounting, and recognizes revenue over the period of its performance using the over-time method. Costs for these arrangements are expensed as incurred.
Existing customers are subject to ongoing credit evaluations based on payment history and other factors. If it is determined that collectability of any portion of the contract value is not probable, an analysis of variable consideration will be performed using either the most likely amount or expected value method to determine the amount of revenue that must be constrained until the scenario causing the variability has been resolved. For contractual arrangements that involve variable consideration, the Company recognizes revenue for these amounts upon reaching the constraining event successfully. The Company does not generally provide for extended payment terms or provide its customers with a right of return.
Infrequently, the Company receives requests from customers to hold product being purchased from us for a valid business purpose. The Company recognizes revenues for such arrangements provided the transaction meets, at a minimum, the following criteria: a valid business purpose for the arrangement exists; risk of ownership of the purchased product has been transferred to the buyer; there is a fixed delivery date that is reasonable and consistent with the buyer’s business purpose; the product is ready for shipment; there are no continuing performance obligation in regards to the purchased product and these products have been segregated from the Company's inventories and cannot be used to fill other orders received. Revenue for the fiscal year ended March 31, 2023 included $0.6 million from such held transactions. Revenues for the fiscal year ended March 31, 2022 included $1.2 million from such held transactions.
The Company has elected to record taxes collected from customers on a net basis and does not include tax amounts in revenue or costs of revenue.
The Company’s contract assets and liabilities primarily relate to the timing differences between cash received from a customer in connection with contractual rights to invoicing and the timing of revenue recognition following completion of performance obligations. The Company's accounts receivable balance is made up entirely of customer contract related balances.
Business Acquisitions
The Company accounts for acquisitions using the purchase method of accounting in accordance with ASC 805, Business Combinations. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Intangible assets, if identified, are also recorded at fair value. The excess purchase price over the estimated fair value of the net assets acquired is recorded as goodwill.
Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions as well as the use of specialists as needed.
The consideration for its acquisitions may include future payments that are contingent upon the occurrence of a particular event. The Company records a contingent consideration obligation for such contingent consideration payments at fair value on the acquisition date. The Company estimates the fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and the likelihood of making related payments. Each period the Company revalues the contingent consideration obligations associated with the acquisition to fair value and records changes in the fair value within the operating expenses in its consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration obligations can result from changes in assumed revenue risk premium and volatility, as well as changes in the stock price and assumed probability with respect to the attainment of certain financial and operational metrics, among others. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the fair value of contingent consideration recorded at each reporting period. See Note 3, "Acquisitions," for additional information.
Product Warranty
Warranty obligations are incurred in connection with the sale of the Company’s products. The Company provides assurance-type warranties on all product sales for a term of typically one to three years, and extended service-type warranties at the customers’ option for an additional term ranging up to four additional years. The Company accrues for the estimated warranty costs for assurance warranties at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure. For all extended service-type warranties, the Company recognizes the revenue ratably over time during the effective period of the service. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. Future warranty costs are estimated based on historical performance rates and related costs to repair given products. The accounting estimate related to product warranty involves judgment in determining future estimated warranty costs. Should actual performance rates or repair costs differ from estimates, revision to the estimated warranty liability would be required.
Research and Development Costs
Research and development costs are expensed as incurred.
44
Income Taxes
The Company’s provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current fiscal year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carry-forwards using expected tax rates in effect in the years during which the differences are expected to reverse.
Deferred income taxes are recognized for the tax consequences in future fiscal years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each fiscal year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount expected to be realized. The Company has provided a valuation allowance against its U.S. and Romania deferred income tax assets since the Company believes that it is more likely than not that these deferred tax assets are not currently realizable due to uncertainty around profitability in the future.
Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. The Company includes interest and penalties related to gross unrecognized tax benefits within the provision for income taxes. See Note 14, “Income Taxes,” for further information regarding its income tax assumptions and expenses.
Stock-Based Compensation
The Company accounts for stock-based payment transactions using a fair value-based method and recognizes the related expense in the results of operations.
Stock-based compensation is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the award. The fair value of restricted stock awards is determined by reference to the fair market value of the Company’s common stock on the date of grant. The Company uses the Black-Scholes option pricing model to estimate the fair value of option awards with service and performance conditions. For awards with service conditions only, the Company recognizes compensation cost on a straight-line basis over the requisite service/vesting period. For awards with performance conditions, estimates of compensation cost are made based on the probable outcome of the performance conditions. The cumulative effect of changes in the probability outcomes are recorded in the period in which the changes occur.
Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatilities of the Company’s common stock and expected terms. The expected volatility rates are estimated based on historical and implied volatilities of the Company’s common stock. The expected term represents the average time that the options that vest are expected to be outstanding based on the vesting provisions and the Company’s historical exercise, cancellation and expiration patterns.
The Company estimates pre-vesting forfeitures when recognizing compensation expense based on historical and forward-looking factors. Changes in estimated forfeiture rates and differences between estimated forfeiture rates and actual experience may result in significant, unanticipated increases or decreases in stock-based compensation expense from period to period. The termination of employment of certain employees who hold large numbers of stock-based awards may also have a significant, unanticipated impact on forfeiture experience and, therefore, on stock-based compensation expense. The Company will update these assumptions on at least an annual basis and on an interim basis if significant changes to the assumptions are warranted.
The Company accounts for share-based payments made to non-employees in the same manner as other share-based payments for employees, with the measurement being based on the fair value at the grant date. The non-employee share based payments will be included within the Company's stock compensation currently reported.
45
Computation of Net Loss per Common Share
Basic net loss per share (“EPS”) is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing the net loss by the weighted-average number of common shares and dilutive common equivalent shares outstanding during the period, calculated using the treasury stock method. Common equivalent shares include the effect of restricted stock, exercise of stock options and warrants and contingently issuable shares. For the fiscal years ended March 31, 2023 and 2022, common equivalent shares of 1,421,771, and 1,495,402, respectively, were not included in the calculation of diluted EPS as they were considered antidilutive. Of these, 1.0 million relate to shares tied to the derivative liability for which the contingency has not yet been met. The following table reconciles the numerators and denominators of the EPS calculation for the fiscal years ended March 31, 2023 and 2022 (in thousands except per share amounts):
| | Fiscal year ended March 31, | |
| | 2023 | | | 2022 | |
Numerator: | | | | | | | | |
Net loss | | $ | (35,041 | ) | | $ | (19,193 | ) |
Denominator: | | | | | | | | |
Weighted-average shares of common stock outstanding | | | 29,038 | | | | 28,293 | |
Weighted-average shares subject to repurchase | | | (1,190 | ) | | | (1,090 | ) |
Shares used in per-share calculation ― basic | | | 27,848 | | | | 27,203 | |
Shares used in per-share calculation ― diluted | | | 27,848 | | | | 27,203 | |
Net loss per share ― basic | | $ | (1.26 | ) | | $ | (0.71 | ) |
Net loss per share ― diluted | | $ | (1.26 | ) | | $ | (0.71 | ) |
Foreign Currency Translation
The functional currency of all the Company’s foreign subsidiaries is the U.S. dollar, except for AMSC Austria, for which the local currency (Euro) is the functional currency. The assets and liabilities of AMSC Austria are translated into U.S. dollars at the exchange rate in effect at the balance sheet date and income and expense items are translated at average rates for the period. Cumulative translation adjustments are excluded from net loss and shown as a separate component of stockholders’ equity. Net foreign currency gains and losses are included in other income (expense), net on the consolidated statements of operations was $0.1 million and less than $0.1 million, for the fiscal years ended March 31, 2023 and 2022, respectively. The Company has no restrictions on the foreign exchange activities of its foreign subsidiaries, including the payment of dividends and other distributions.
Risks and Uncertainties
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates and would impact future results of operations and cash flows.
The Company invests its available cash in high credit, quality financial instruments and invests primarily in investment-grade marketable securities, including, but not limited to, government obligations, money market funds and corporate debt instruments.
Several of the Company’s government contracts are being funded incrementally, and as such, are subject to the future authorization, appropriation, and availability of government funding. The Company has a history of successfully obtaining financing under incrementally-funded contracts with the U.S. government and it expects to continue to obtain additional contract modifications in the year ending March 31, 2024 and beyond as incremental funding is authorized and appropriated by the government.
Contingencies
From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information is known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If, with respect to a matter, it is not both probable to result in liability and the amount of loss cannot be reasonably estimated, an estimate of possible loss or range of loss is disclosed unless such an estimate cannot be made. The Company does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred. See Note 17, “Commitments and Contingencies,” for further information.
Disclosure of Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and derivatives. The carrying amounts of cash and cash equivalents, accounts receivable, short-term debt, accounts payable, and accrued expenses due to their short nature approximate fair value at March 31, 2023 and 2022. The estimated fair values have been determined through information obtained from market sources and management estimates. Changes in fair value are recorded to other income (expense), net. The fair value for the contingent consideration is estimated using a Monte Carlo simulation and subject to revaluation at each balance sheet date. The fair value for the warrant arrangements was historically estimated by management based on various assumptions in a lattice model and was subject to revaluation at each balance sheet date. The Company classifies the estimates used to fair value these instruments as Level 3 inputs. See Note 6, “Fair Value Measurements” for a full discussion on fair value measurements.
46
3. Acquisitions
2021 Acquisition of Neeltran
On May 6, 2021, the Company entered into a Purchase and Sale Agreement (the "Real Property Purchase Agreement") and a Stock Purchase Agreement (the "Neeltran Stock Purchase Agreement") with the selling equity holders named therein.
Pursuant to the terms of the Neeltran Stock Purchase Agreement, the Company purchased all of the issued and outstanding shares of capital stock of Neeltran, Inc., a Connecticut corporation ("Neeltran") and Neeltran International, Inc., a Connecticut corporation ("International") for $1.0 million in cash and 301,556 shares of the Company's common stock, $.01 par value per share ("AMSC Shares"), that were paid and issued, respectively, to the Neeltran selling stockholders (the "Neeltran Acquisition"). The Company also paid $1.1 million to International selling stockholders to pay off previous loans made by them to Neeltran.
Also on May 6, 2021, pursuant to the terms of the Real Property Purchase Agreement, the Company's wholly-owned Connecticut limited liability company, AMSC Husky LLC ("AMSC Husky"), purchased the real property that serves as Neeltran's headquarters for $4.3 million, of which (a) $2.4 million was paid in immediately available funds by AMSC Husky to the owners of such real property, and (b) $1.9 million was paid directly to TD Bank as full payment for the outstanding indebtedness secured by the mortgage on such real property.
Additionally, the Company paid approximately $7.6 million, including $1.9 million of indebtedness secured by the mortgage on the real property as described above, directly to Neeltran lenders at closing to extinguish outstanding Neeltran indebtedness to third parties. The total purchase price of $16.4 million includes cash paid, the fair value of the AMSC Shares issued at closing and the debt payoff on behalf of the sellers as follows (in millions):
Cash payment | | $ | 4.4 | |
Issuance of 301,556 shares of Company's common stock | | | 4.4 | |
Debt payment to third party lenders on behalf of sellers | | | 7.6 | |
Total consideration | | $ | 16.4 | |
The Neeltran Acquisition completed by the Company during the fiscal year ended March 31, 2022, has been accounted for under the purchase method of accounting in accordance with ASC 805, Business Combinations. The Company allocated the purchase price to the assets acquired and liabilities assumed at their estimated fair values as of the date of Neeltran Acquisition. The excess of the purchase price paid by the Company over the estimated fair value of net assets acquired has been recorded as goodwill. As Neeltran was previously a private company, the adoption of Accounting Standards Codification 842 ("ASC 842") was completed as part of the Neeltran Acquisition. See Note 16 "Leases" for further details. Neeltran had previously adopted Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606") as part of prior year audited financial statements.
The following table summarizes the allocation of the purchase price based on the estimated fair value of the assets acquired and liabilities assumed in connection with the Neeltran Acquisition (in millions):
Cash and short-term investments | | $ | 0.5 | |
Net working capital (excluding inventory and deferred revenue) | | | (0.9 | ) |
Inventory | | | 9.0 | |
Property, plant and equipment | | | 6.5 | |
Deferred revenue | | | (10.0 | ) |
Deferred tax liability | | | (2.3 | ) |
Net tangible assets/(liabilities) | | | 2.8 | |
| | | | |
Backlog | | | 0.1 | |
Trade names and trademarks | | | 1.2 | |
Customer relationships | | | 3.5 | |
Net identifiable intangible assets/(liabilities) | | | 4.8 | |
| | | | |
Goodwill | | | 8.8 | |
| | | | |
Total purchase consideration | | $ | 16.4 | |
Inventory includes a $0.6 million adjustment to step up the inventory balance to fair value consistent with the purchase price allocation. The fair value was based on the estimated selling price of the inventory, less the remaining manufacturing and selling cost and a normal profit margin on those manufacturing and selling efforts. The inventory step up adjustment increased cost of revenue by $0.6 million in the twelve month period ended March 31, 2022 as the inventory was sold. This increase is not reflected in the pro forma condensed consolidated statements of operations because it does not have a continuing impact beyond the first year.
Backlog of $0.1 million was evaluated using the multi period excess earnings method under the income approach. The contracts with customers do not provide for any guarantees to source all future requirements from the Company. The amortization method being utilized is economic consumption estimated over a two year period with the expense being allocated to cost of revenues.
Customer relationships of $3.5 million relates to customers currently under contract and was determined based on a multi period excess earnings method under the income approach. The method of amortization being utilized is the economic consumption over 7 years with the expense being allocated to selling, general and administrative ("SG&A").
Trade names and trademarks of $1.2 million were reviewed using the assumption that the Company would continue to utilize the Neeltran trade name indefinitely. The relief from royalty method was utilized using a 1% royalty rate on revenues with a 24.5% discount rate over 15 years.
The goodwill represents the value associated with the acquired workforce and expected synergies related to the Neeltran Acquisition. Goodwill resulting from the Neeltran Acquisition was assigned to the Company's Grid business segment. Goodwill recognized in the Neeltran Acquisition is not deductible for tax purposes.
Unaudited Pro Forma Operating Results
The unaudited pro forma condensed consolidated statement of operations for the years ended
March 31, 2023 and
2022 are presented as if the Neeltran Acquisition had occurred on
April 1, 2021.
| | Twelve Months Ended March 31, | |
| | 2023 | | | 2022 | |
Revenues | | $ | 105,984 | | | $ | 111,265 | |
Operating loss | | | (33,022 | ) | | | (20,975 | ) |
Net loss | | $ | (35,056 | ) | | $ | (19,355 | ) |
| | | | | | | | |
Net loss per common share | | | | | | | | |
Basic | | $ | (1.26 | ) | | $ | (0.71 | ) |
Diluted | | $ | (1.26 | ) | | $ | (0.71 | ) |
Shares - basic | | | 27,848 | | | | 27,234 | |
Shares - diluted | | | 27,848 | | | | 27,234 | |
The pro forma amounts include the historical operating results of the Company, and Neeltran, with appropriate adjustments that give effect to acquisition related costs, income taxes, intangible amortization resulting from the Neeltran Acquisition and certain conforming accounting policies of the Company. The pro forma amounts are not necessarily indicative of the operating results that would have occurred if the Neeltran Acquisition and related transactions had been completed at the beginning of the applicable periods presented. In addition, the pro forma amounts are not necessarily indicative of operating results in future periods.
Acquisition of NEPSI
On October 1, 2020 (the “NEPSI Acquisition Date”), the Company entered into a Stock Purchase Agreement (the “NEPSI Stock Purchase Agreement”) with the selling stockholders named therein. Pursuant to the terms of the Stock Purchase Agreement and concurrently with entering into such agreement, the Company acquired all of the issued and outstanding (i) shares of capital stock of Northeast Power Systems, Inc., a New York corporation (“NEPSI”), and (ii) membership interests of Northeast Power Realty, LLC, a New York limited liability company, which holds the real property that serves as NEPSI’s headquarters (the "NEPSI Acquisition"). NEPSI is a U.S.-based global provider of medium-voltage metal-enclosed power capacitor banks and harmonic filter banks for use on electric power systems. NEPSI is a wholly-owned subsidiary of the Company and is operated by its Grid business unit. The purchase price was $26.0 million in cash and 873,657 restricted shares of common stock of the Company. As part of the transaction, the selling stockholders may receive up to an additional 1,000,000 shares of common stock of the Company upon the achievement of certain specified revenue objectives during varying periods of up to four years following closing of the NEPSI Acquisition.
4. Revenue Recognition
The Company’s revenues in its Grid segment are derived primarily through enabling the transmission and distribution of power, providing planning services that allow it to identify power grid needs and risks, and developing ship protection systems for the U.S. Navy. The Company’s revenues in its Wind segment are derived primarily through supplying advanced power electronics and control systems, licensing its highly engineered wind turbine designs, and providing extensive customer support services to wind turbine manufacturers. The Company records revenue based on a five-step model in accordance with ASC 606. For its customer contracts, the Company identifies the performance obligations, determines the transaction price, allocates the contract transaction price to the performance obligations, and recognizes the revenue when (or as) control of goods or services is transferred to the customer. As of March 31, 2023, 80% of revenue was recognized at the point in time when control transferred to the customer, with the remainder being recognized over time. In the fiscal year ended March 31, 2022, 76% of revenue was recognized at the point in time when control transferred to the customer, with the remainder being recognized over time.
In the Company's equipment and system product line, each contract with a customer summarizes each product sold to a customer, which typically represents distinct performance obligations. A contract's transaction price is allocated to each distinct performance obligation using the respective standalone selling price which is determined primarily using the cost plus expected margin approach and recognized as revenue when, or as, the performance obligation is satisfied. The majority of the Company’s product sales transfer control to the customer in line with the contracted delivery terms and revenue is recorded at the point in time when title and risk transfer to the customer, as the Company has determined that this is the point in time that control transfers to the customer.
The Company's equipment and system product line includes certain contracts which do not meet the requirements of an exchange transaction and therefore do not fall within the scope of ASC 606. As these non-exchange transaction contracts are considered grant revenue and do not fall within any specific accounting literature, the Company follows guidance within ASC 606 by analogy to recognize grant revenue over time. In the year ended March 31, 2023, the Company recorded no grant revenue. There was $1.1 million in grant revenue recorded in the year ended March 31, 2022, which is included in the Company's Grid revenue.
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In the Company's service and technology development product line, there are several different types of transactions and each begins with a contract with a customer that summarizes each product sold to a customer, which typically represents distinct performance obligations. The technology development transactions are primarily for activities that have no alternative use and for which a profit can be expected throughout the life of the contract. In these cases, the revenue is recognized over time, but in the instances where the profit cannot be assured throughout the entire contract then the revenue is recognized at a point in time. Each contract's transaction price is allocated to each distinct performance obligation using the respective standalone selling price which is determined primarily using the cost plus expected margin approach. The ongoing service transactions are for service contracts that provide benefit to the customer simultaneously as the Company performs its obligations, and therefore this revenue is recognized ratably over time throughout the effective period of these contracts. The transaction prices on these contracts are allocated based on an adjusted market approach which is re-assessed annually for reasonableness. The field service transactions include contracts for delivery of goods and completion of services made at the customer's requests, which are not deemed satisfied until the work has been completed and/or the requested goods have been delivered, so all of this revenue is recognized at the point in time when the control changes, and at allocated prices based on the adjusted market approach driven by standard price lists. The royalty transactions are related to certain contract terms on transactions in the Company's equipment and systems product line based on activity as specified in the contracts. The transaction prices of these agreements are calculated based on an adjusted market approach as specified in the contract. The Company reports royalty revenue for usage-based royalties when the sales have occurred. In circumstances when collectability is not assured and a contract does not exist under ASC 606, revenue is deferred until a non-refundable payment has been received for substantially all the amount that is due and there are no further remaining performance obligations.
The Company's service contracts can include a purchase order from a customer for specific goods in which each item is a distinct performance obligation satisfied at a point in time at which control of the goods is transferred to the customer which occurs based on the contracted delivery terms or when the requested service work has been completed. The transaction price for these goods is allocated based on the adjusted market approach considering similar transactions under similar circumstances. Service contracts are also derived from ongoing maintenance contracts and extended service-type warranty contracts. In these transactions, the Company is contracted to provide an ongoing service over a specified period of time. As the customer is consuming the benefits as the service is being provided the revenue is recognized over time ratably.
The Company’s policy is to not accept volume discounts, product returns, or rebates and allowances within its contracts. In the event a contract was approved with any of these terms, it would be evaluated for variable consideration, estimated and recorded as a reduction of revenue in the same period the related product revenue was recorded.
The Company provides assurance-type warranties on all product sales for a term of typically one to three years, and extended service-type warranties at the customers’ option for an additional term ranging up to four additional years. The Company accrues for the estimated warranty costs for assurance warranties at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure. For all extended service-type warranties, the Company recognizes the revenue ratably over time during the effective period of the services.
The Company records revenue net of sales tax, value added tax, excise tax and other taxes collected concurrent with revenue-producing activities. The Company has elected to recognize the cost for freight and shipping when control over the products sold passes to customers and revenue is recognized. The Company has elected to recognize incremental costs of obtaining a contract as expense when incurred except in contracts where the amortization period would exceed twelve months; in such cases the long term amount will be assessed for materiality. The Company has elected to not adjust the promised amount of consideration for the effects of a significant financing component if the period of financing is twelve months or less.
The Company monitors costs to meet its obligations on its customer contracts. When it is evident that there is a loss expected on a contract, a contract loss is accrued in the period. During the year ended March 31, 2023, several long-term contracts that were acquired from Neeltran were impacted by higher than planned costs due to required design changes and the impact of inflation on material costs, resulting in an increase to the contract loss accrual of $2.7 million in the year ended March 31, 2023 which negatively impacted the Company's gross margins.
The Company’s contracts with customers do not typically include extended payment terms and may include milestone billing over the life of the contract. Payment terms vary by contract type and type of customer and generally range from 30 to 60 days from delivery.
The following tables disaggregate the Company’s revenue by product line and by shipment destination:
| | Year Ended March 31, 2023 | |
Product Line: | | Grid | | | Wind | |
Equipment and systems | | $ | 88,311 | | | $ | 9,282 | |
Services and technology development | | | 6,320 | | | | 2,071 | |
Total | | $ | 94,631 | | | $ | 11,353 | |
| | | | | | | | |
Region: | | | | | | | | |
Americas | | $ | 67,664 | | | $ | 19 | |
Asia Pacific | | | 20,326 | | | | 11,199 | |
EMEA | | | 6,641 | | | | 135 | |
Total | | $ | 94,631 | | | $ | 11,353 | |
| | Year Ended March 31, 2022 | |
Product Line: | | Grid | | | Wind | |
Equipment and systems | | $ | 91,704 | | | $ | 6,169 | |
Services and technology development | | | 7,172 | | | | 3,390 | |
Total | | $ | 98,876 | | | $ | 9,559 | |
| | | | | | | | |
Region: | | | | | | | | |
Americas | | $ | 73,955 | | | $ | 145 | |
Asia Pacific | | | 19,397 | | | | 9,346 | |
EMEA | | | 5,524 | | | | 68 | |
Total | | $ | 98,876 | | | $ | 9,559 | |
| | | | | | | | |
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In the fiscal years ended March 31, 2023, and 2022, 45% and 38% of the Company’s revenues, respectively, were recognized from sales outside the United States. The Company maintains operations in Austria and the United States and sales and service support centers around the world.
As of March 31, 2023 and March 31, 2022, the Company’s contract assets and liabilities primarily relate to the timing differences between cash received from a customer in connection with contractual rights to invoicing and the timing of revenue recognition following completion of performance obligations. The Company's accounts receivable balance is made up entirely of customer contract related balances. Changes in the Company’s contract assets, which are included in “Unbilled Accounts Receivable” and “Deferred program costs” (see Note 7, “Accounts Receivable” and Note 8, “Inventory” for a reconciliation to the condensed consolidated balance sheet) and contract liabilities, which are included in the current portion and long term portion of “deferred revenue” in the Company’s condensed consolidated balance sheets, are as follows:
| | Unbilled AR | | | Deferred Program Costs | | | Contract Liabilities | |
Beginning balance as of March 31, 2022 | | $ | 6,492 | | | $ | 858 | | | $ | 30,034 | |
Increases for costs incurred to fulfill performance obligations | | | — | | | | 2,476 | | | | — | |
Increase (decrease) due to customer billings | | | (14,373 | ) | | | — | | | | 77,489 | |
Decrease due to cost recognition on completed performance obligations | | | — | | | | (1,189 | ) | | | — | |
Increase (decrease) due to recognition of revenue based on transfer of control of performance obligations | | | 17,839 | | | | — | | | | (56,643 | ) |
Other changes and foreign currency exchange impact | | | — | | | | (9 | ) | | | (120 | ) |
Ending balance as of March 31, 2023 | | $ | 9,958 | | | $ | 2,136 | | | $ | 50,760 | |
| | Unbilled AR | | | Deferred Program Costs | | | Contract Liabilities | |
Beginning balance as of March 31, 2021 | | $ | 5,765 | | | $ | 977 | | | $ | 21,257 | |
Increases for balances acquired | | | — | | | | 634 | | | | 10,048 | |
Increases for costs incurred to fulfill performance obligations | | | — | | | | 4,814 | | | | — | |
Increase (decrease) due to customer billings | | | (16,125 | ) | | | — | | | | 68,895 | |
Decrease due to cost recognition on completed performance obligations | | | — | | | | (5,551 | ) | | | — | |
Increase (decrease) due to recognition of revenue based on transfer of control of performance obligations | | | 16,852 | | | | — | | | | (70,141 | ) |
Other changes and foreign currency exchange impact | | | — | | | | (16 | ) | | | (25 | ) |
Ending balance as of March 31, 2022 | | $ | 6,492 | | | $ | 858 | | | $ | 30,034 | |
The Company’s remaining performance obligations represent the unrecognized revenue value of the Company’s contractual commitments. The Company’s performance obligations may vary significantly each reporting period based on the timing of major new contractual commitments. As of March 31, 2023, the Company had outstanding performance obligations on existing contracts under ASC 606 to be recognized in the next twelve months of approximately $125.7 million. There are also approximately $31.7 million of outstanding performance obligations to be recognized over a period of thirteen to sixty months. The remaining performance obligations are subject to customer actions and therefore the timing of revenue recognition cannot be reasonably estimated.
The following table sets forth customers who represented 10% or more of the Company’s total revenues for the years ended March 31, 2023 and 2022:
| | | Year Ended | |
| Reportable | | March 31, | |
| Segment | | 2023 | | | 2022 | |
Fuji Bridex Pte Ltd | Grid | | | 15 | % | | | 14 | % |
5. Goodwill
The guidance under ASC 805-30 provides for the recognition of goodwill on the acquisition date measured as the excess of the aggregate consideration transferred over the net of the acquisition date amounts of net assets acquired and liabilities assumed. The Company's goodwill balance relates to the Neeltran Acquisition in fiscal 2021, the NEPSI Acquisition in fiscal 2020, and Infinia Technology Corporation in fiscal 2017 and is reported in the Grid business segment.
Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized but reviewed for impairment. Goodwill is reviewed annually on February 28th and whenever events or changes in circumstances indicate that the carrying value of the goodwill might not be recoverable.
The following table provides a roll forward of the changes in the Company's Grid business segment goodwill balance:
| | Goodwill | |
March 31, 2021 | | $ | 34,634 | |
Neeltran Acquisition | | | 8,837 | |
March 31, 2022 | | $ | 43,471 | |
Less impairment loss | | | - | |
March 31, 2023 | | $ | 43,471 | |
The Company performed its annual assessment of goodwill on February 28, 2023 and noted no triggering events from the analysis date to March 31, 2023 and determined that there was no impairment to goodwill. Additionally, no impairment resulted from the assessment performed in the fiscal year ended March 31, 2022.
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6. Fair Value Measurements
A valuation hierarchy for disclosure of the inputs to valuation used to measure fair value has been established. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 | - | Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
| | |
Level 2 | - | Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs). |
| | |
Level 3 | - | Unobservable inputs that reflect the Company’s assumptions that market participants would use in pricing the asset or liability. The Company develops these inputs based on the best information available, including its own data. |
The Company provides a gross presentation of activity within Level 3 measurement roll-forward and details of transfers in and out of Level 1 and 2 measurements. A change in the hierarchy of an investment from its current level is reflected in the period during which the pricing methodology of such investment changes. Disclosure of the transfer of securities from Level 1 to Level 2 or Level 3 is made in the event that the related security is significant to total cash and investments. The Company did not have any transfers of assets and liabilities from Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the year ended March 31, 2023.
A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Valuation Techniques
Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities of three months or less that are regarded as high quality, low risk investments and are measured using such inputs as quoted prices, and are classified within Level 1 of the valuation hierarchy. Cash equivalents consist principally of certificates of deposits and money market accounts.
Contingent Consideration
Contingent consideration relates to the earnout payment for the NEPSI Acquisition. See Note 3 "Acquisitions" and Note 12, "Contingent Consideration" for further discussion. The Company relied on a Monte Carlo simulation pricing method to determine the fair value of the contingent consideration on the NEPSI Acquisition Date and will continue to revalue the fair value of the contingent consideration at each subsequent balance sheet date until the final settlement date, with the resulting gain or loss recorded in operating expenses.
The following table provides the assets and liabilities carried at fair value on a recurring basis, measured as of March 31, 2023 and 2022 (in thousands):
| | Total Carrying Value | | | Quoted Prices in Active Markets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
March 31, 2023: | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Cash equivalents | | $ | 7,913 | | | $ | 7,913 | | | $ | — | | | $ | — | |
Derivative liabilities: | | | | | | | | | | | | | | | | |
Contingent Consideration | | $ | 1,270 | | | $ | — | | | $ | — | | | $ | 1,270 | |
| | Total Carrying Value | | | Quoted Prices in Active Markets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
March 31, 2022: | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Cash equivalents | | $ | 17,641 | | | $ | 17,641 | | | $ | — | | | $ | — | |
Derivative liabilities: | | | | | | | | | | | | | | | | |
Contingent Consideration | | $ | 1,200 | | | $ | — | | | $ | — | | | $ | 1,200 | |
The table below reflects the activity for the Company’s major classes of liabilities measured at fair value on a recurring basis (in thousands):
| | Acquisition Contingent Consideration | |
Balance at March 31, 2021 | | $ | 7,050 | |
Change in fair value | | | (5,850 | ) |
Balance at March 31, 2022 | | $ | 1,200 | |
Change in fair value | | | 70 | |
Balance at March 31, 2023 | | $ | 1,270 | |
7. Accounts Receivable
Accounts receivable at March 31, 2023 and March 31, 2022 consisted of the following (in thousands):
| | March 31, 2023 | | | March 31, 2022 | |
Accounts receivable (billed) | | $ | 20,707 | | | $ | 13,788 | |
Accounts receivable (unbilled) | | | 9,958 | | | | 6,492 | |
Accounts receivable | | $ | 30,665 | | | $ | 20,280 | |
8. Inventory
Inventory, net of reserves, at March 31, 2023 and March 31, 2022 consisted of the following (in thousands):
| | March 31, 2023 | | | March 31, 2022 | |
Raw materials | | $ | 16,654 | | | $ | 11,020 | |
Work-in-process | | | 15,200 | | | | 10,462 | |
Finished goods | | | 2,996 | | | | 1,326 | |
Deferred program costs | | | 2,136 | | | | 858 | |
Inventory | | $ | 36,986 | | | $ | 23,666 | |
The Company recorded inventory reserves of $1.5 million and $1.9 million for the fiscal years ended March 31, 2023 and 2022, respectively. These reserves were based on evaluating its inventory on hand for excess quantities and obsolescence.
Deferred program costs as of March 31, 2023 and March 31, 2022 primarily represent costs incurred on programs accounted for upon completion of the project when control has transferred to the customer before revenue and costs will be recognized.
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9. Prepaid and Other Current Assets
During fiscal 2022, the Company conducted an analysis as to whether it was entitled to employee retention credits (“ERC”) under the CARES Act as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Plan Act of 2021. Based on the analysis, the Company determined that it was entitled to an ERC of approximately $3.3 million related to payroll taxes paid in the first and second quarters of 2021 and the first quarter of 2020. The Company determined it met all the criteria required under the gross receipts test of the applicable Internal Revenue Service regulations related to ERCs.
As accounting for payroll tax credits are not within the scope of ASC 740, Income Taxes, the Company has chosen to account for the ERCs by analogizing to the International Accounting Standards Board IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. In accordance with IAS 20, an entity recognizes government grants only when there is reasonable assurance that the entity will comply with the conditions attached to them and the grants will be received. The Company evaluated its eligibility for the ERC and determined that it met all the criteria to claim a refundable tax credit against the employer portion of Social Security taxes for up to 70% of the qualified wages the Company paid to employees for the three month periods ended March 31, 2021 and June 30, 2021 and for up to 50% of the qualified wages the Company paid to employees for the three month period ended March 31, 2020.
The Company recorded a $3.3 million receivable in Prepaid expenses and other current assets and a benefit of $1.8 million to Cost of revenues, $0.8 million to SG&A and $0.7 million to Research and development in the fiscal year ended March 31, 2023 for the ERC that is expected to be received based on the amended filings.
10. Property, Plant and Equipment
The cost and accumulated depreciation of property and equipment at March 31, 2023 and 2022 are as follows (in thousands):
| | March 31, 2023 | | | March 31, 2022 | |
Land | | $ | 980 | | | $ | 980 | |
Construction in progress - equipment | | | 748 | | | | 573 | |
Buildings | | | 5,416 | | | | 5,270 | |
Equipment and software | | | 43,156 | | | | 43,668 | |
Finance lease - right of use asset | | | 1 | | | | 8 | |
Furniture and fixtures | | | 1,535 | | | | 1,379 | |
Leasehold improvements | | | 6,815 | | | | 6,634 | |
Property, plant and equipment, gross | | | 58,651 | | | | 58,512 | |
Less accumulated depreciation | | | (46,342 | ) | | | (44,856 | ) |
Property, plant and equipment, net | | $ | 12,309 | | | $ | 13,656 | |
Depreciation expense was $2.6 million and $2.7 million, for the fiscal years ended March 31, 2023 and 2022, respectively.
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11. Intangible Assets
Intangible assets at March 31, 2023 and 2022 consisted of the following (in thousands):
| | 2023 | | | 2022 | | | | | |
| | Gross Amount | | | Accumulated Amortization | | | Net Book Value | | | Gross Amount | | | Accumulated Amortization | | | Net Book Value | | | Estimated Useful Life | |
Licenses | | $ | 3,610 | | | $ | (3,610 | ) | | $ | — | | | $ | 3,610 | | | $ | (3,610 | ) | | $ | — | | | | 7 | |
Backlog | | | 681 | | | | (675 | ) | | | 6 | | | | 681 | | | | (631 | ) | | | 50 | | | | 2 | |
Trade names and trademarks | | | 1,800 | | | | - | | | | 1,800 | | | | 1,800 | | | | - | | | | 1,800 | | | | Indefinite | |
Customer relationships | | | 9,600 | | | | (4,980 | ) | | | 4,620 | | | | 9,600 | | | | (2,723 | ) | | | 6,877 | | | | 7 | |
Core technology and know-how | | | 5,970 | | | | (3,869 | ) | | | 2,101 | | | | 5,970 | | | | (3,386 | ) | | | 2,584 | | | | 5-10 | |
Intangible assets | | $ | 21,661 | | | $ | (13,134 | ) | | $ | 8,527 | | | $ | 21,661 | | | $ | (10,350 | ) | | $ | 11,311 | | | | | |
The Company recorded intangible amortization expense of $2.8 million and $2.5 million, for the fiscal years ended March 31, 2023 and 2022, respectively. Additionally, the Company recorded less than $0.1 million and $0.2 million related to intangible amortization related to backlog that is reported in cost of revenues for the fiscal years ended March 31, 2023, and 2022, respectively.
Expected future amortization expense related to intangible assets is as follows (in thousands):
Fiscal years ending March 31, | | Total | |
2024 | | $ | 2,158 | |
2025 | | | 1,648 | |
2026 | | | 1,221 | |
2027 | | | 1,085 | |
Thereafter | | | 615 | |
Total | | $ | 6,727 | |
The Company's intangible assets relate entirely to the Grid business segment operations in the United States.
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12. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at March 31, 2023 and March 31, 2022 consisted of the following (in thousands):
| | March 31, 2023 | | | March 31, 2022 | |
Accounts payable | | $ | 13,935 | | | $ | 13,192 | |
Accrued inventories in-transit | | | 2,267 | | | | 2,212 | |
Accrued other miscellaneous expenses | | | 3,870 | | | | 2,824 | |
Accrued contract loss | | | 3,464 | | | | 778 | |
Advanced deposits | | | 5,653 | | | | 3,021 | |
Accrued compensation | | | 5,430 | | | | 4,642 | |
Income taxes payable | | | 409 | | | | 405 | |
Accrued product warranty | | | 2,638 | | | | 2,066 | |
Accrued restructuring | | | 717 | | | | - | |
Total | | $ | 38,383 | | | $ | 29,140 | |
The Company generally provides a one to three year warranty on its products, commencing upon installation. A provision is recorded upon revenue recognition to cost of revenues for estimated warranty expense based on historical experience.
Product warranty activity was as follows (in thousands):
| | Fiscal Years Ended March 31, | |
| | 2023 | | | 2022 | |
Balance at beginning of period | | $ | 2,066 | | | $ | 2,053 | |
Acquired Warranty Obligation | | | - | | | | 248 | |
Change in accruals for warranties during the period | | | 2,276 | | | | 618 | |
Settlements during the period | | | (1,704 | ) | | | (853 | ) |
Balance at end of period | | $ | 2,638 | | | $ | 2,066 | |
13. Contingent Consideration
Contingent Consideration
The Company evaluated the NEPSI Acquisition earnout payment set forth in the Stock Purchase Agreement (see Note 3, "Acquisitions" for further details), which may require settlement in the Company's common stock, and determined the contingent consideration qualified for liability classification and derivative treatment under ASC 815, Derivatives and Hedging. As a result, for each period, the fair value of the contingent consideration will be remeasured and the resulting gain or loss will be recognized in operating expenses until the share amount is fixed.
The following is a summary of the key assumptions used in a Monte Carlo simulation to calculate the fair value of the contingent consideration related to the NEPSI Acquisition:
Fiscal Year 2022 | | March 31, 2023 | | | December 31, 2022 | | | September 30, 2022 | | | June 30, 2022 | |
Revenue risk premium | | 5.30 | % | | 5.30 | % | | 5.20 | % | | 6.60 | % |
Revenue volatility | | 25 | % | | 25 | % | | 25 | % | | 30 | % |
Stock Price | | $4.91 | | | $3.68 | | | $4.38 | | | $5.18 | |
Payment delay (days) | | 80 | | | 80 | | | 80 | | | 80 | |
Fair value (millions) | | $1.3 | | | $0.9 | | | $1.1 | | | $1.4 | |
Fiscal Year 2021 | | March 31, 2022 | | | December 31, 2021 | | | September 30, 2021 | | | June 30, 2021 | |
Revenue risk premium | | | 6.50 | % | | | 6.60 | % | | | 6.60 | % | | | 6.60 | % |
Revenue volatility | | | 33 | % | | | 33 | % | | | 30 | % | | | 30 | % |
Stock Price | | $ | 7.61 | | | $ | 10.88 | | | $ | 14.58 | | | $ | 17.39 | |
Payment delay (days) | | | 80 | | | | 80 | | | | 80.00 | | | | 80.00 | |
Fair value (millions) | | $ | 1.2 | | | $ | 2.6 | | | $ | 4.7 | | | $ | 7.2 | |
The Company recorded a net loss of $0.1 million for the increase in the fair value of the contingent consideration in the twelve months ended March 31, 2023. The change in the fair value of the Company's contingent consideration for the earnout payment on the NEPSI Acquisition resulted in a gain of $5.9 million in the year ended March 31, 2022.
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14. Income Taxes
(Loss) income before income taxes for the fiscal years ended March 31, 2023, and 2022 are provided in the table as follows (in thousands):
| | Fiscal years ended March 31, | |
| | 2023 | | | 2022 | |
Income/(Loss) before income tax expense: | | | | | | | | |
U.S. | | $ | (33,924 | ) | | $ | (21,639 | ) |
Foreign | | | (902 | ) | | | 597 | |
Total | | $ | (34,826 | ) | | $ | (21,042 | ) |
The components of income tax expense (benefit) attributable to continuing operations consist of the following (in thousands):
| | Fiscal years ended March 31, | |
| | 2023 | | | 2022 | |
Current | | | | | | | | |
Federal | | $ | 62 | | | $ | 252 | |
Foreign | | | 129 | | | | 302 | |
Total current | | | 191 | | | | 554 | |
| | | | | | | | |
Deferred | | | | | | | | |
Federal | | | (54 | ) | | | (2,270 | ) |
Foreign | | | 78 | | | | (133 | ) |
Total deferred | | | 24 | | | | (2,403 | ) |
| | | | | | | | |
Income tax expense (benefit) | | $ | 215 | | | $ | (1,849 | ) |
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The reconciliation between the statutory federal income tax rate and the Company’s effective income tax rate is shown below.
| | Fiscal years ended March 31, | |
| | 2023 | | | 2022 | |
Statutory federal income tax rate | | | (21 | )% | | | (21 | )% |
State income taxes, net of federal benefit | | | (2 | ) | | | 4 | |
Foreign income tax rate differential | | | 0 | | | | 1 | |
True-up of NOLs | | | 34 | | | | 81 | |
Other | | | 1 | | | | (8 | ) |
Valuation allowance | | | (9 | ) | | | (66 | ) |
Effective income tax rate | | | 1 | % | | | (9 | )% |
The following is a summary of the principal components of the Company’s deferred tax assets and liabilities (in thousands):
| | March 31, 2023 | | | March 31, 2022 | |
Deferred tax assets: | | | | | | | | |
Net operating loss carryforwards | | $ | 163,674 | | | $ | 171,274 | |
Research and development and other tax credit carryforwards | | | 13,837 | | | | 13,464 | |
Capitalized research and development costs | | | 2,186 | | | | - | |
Accruals and reserves | | | 5,644 | | | | 5,366 | |
Fixed assets and intangible assets | | | 638 | | | | 565 | |
Other | | | 1,993 | | | | 1,432 | |
Gross deferred tax assets | | | 187,972 | | | | 192,101 | |
Valuation allowance | | | (183,567 | ) | | | (186,618 | ) |
Total deferred tax assets | | | 4,405 | | | | 5,483 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Amortization | | | (2,011 | ) | | | (2,721 | ) |
Other | | | (1,523 | ) | | | (1,835 | ) |
Total deferred tax liabilities | | | (3,534 | ) | | | (4,556 | ) |
Net deferred tax assets | | $ | 871 | | | $ | 927 | |
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Under the Tax Cuts and Jobs Act of 2017, taxpayers are required to capitalize and amortize expenses related for research and experimental as classified under Section 174 beginning in 2022. Amortization recovery for such costs are five years for domestic expenditures and fifteen for foreign expenditures. As of March 31, 2023, the Company had approximately $9.2 million of research and experimental expenses that had been capitalized under Section 174.
The Company has provided a full valuation allowance against its net deferred income tax assets in the U.S. and Romania since it is more likely than not that its deferred tax assets will not be realizable. After consideration of all the available evidence, both positive and negative, the Company has determined that a $183.6 million valuation allowance at March 31, 2023 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized which is a $3.1 million decrease from the $186.6 valuation allowance as of March 31, 2022.
At March 31, 2023, the Company had aggregate net operating loss carryforwards in the U.S. for federal and state income tax purposes of approximately $718.9 million and $204.2 million, respectively, which expire in the years ending March 31, 2024 through 2040. For U.S. federal tax purpose, approximately $101.7 million of federal net operating losses have an indefinite carryforward period. Included in the U.S. net operating loss are $3.5 million of acquired losses from Power Quality Systems, Inc. and $0.3 million of acquired losses from Infinia Technology Corporation. Research and development and other tax credit carryforwards amounting to approximately $11.1 million and $3.5 million are available to offset federal and state income taxes, respectively, and will expire in the years ending through 2040.
During the year ended March 31, 2023, AMSC China was dissolved, so all deferred tax assets for AMSC China have been written off as of March 31, 2023. The Company had established a full valuation allowance against its deferred tax assets in China as the future tax benefit was not expected to reverse in the foreseeable future.
As of March 31, 2023, AMSC Romania has aggregate net operating loss carryforwards of approximately $0.7 million, which will begin to expire at March 31, 2028.
Section
382 of the U.S. Internal Revenue Code of
1986, as amended (the “IRC”), provides limits on the extent to which a corporation that has undergone an ownership change (as defined) can utilize any net operating loss ("NOL") and general business tax credit carryforwards it
may have. The Company updated its study in
2020 to determine whether Section
382 could limit the use of its carryforwards in this manner. After completing this study, the Company has concluded that the limitation will
not have a material impact on its ability to utilize its NOL carryforwards. If there were material ownership changes subsequent to the study, such changes could limit the Company's ability to utilize its NOL carryforwards.
The total amount of undistributed foreign earnings available to be repatriated at March 31, 2023 was $1.9 million resulting in the recording of a $0.2 million deferred tax liability for foreign withholding taxes.
The Company has not recorded a deferred tax asset for the temporary difference associated with the excess of the tax greater than the book basis in its Romanian subsidiary as the future tax benefit is not expected to reverse in the foreseeable future.
Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. The Company did not identify any uncertain tax positions at March 31, 2023. The Company did not have any gross unrecognized tax benefits at March 31, 2023 or 2022.
There were no reversals of uncertain tax positions in the fiscal years ended March 31, 2023 and 2022.
The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes. Any unrecognized tax benefits, if recognized, would favorably affect its effective tax rate in any future period. The Company does not expect that the amounts of unrecognized benefits will change significantly within the next twelve months.
The Company conducts business globally and, as a result, its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Major tax jurisdictions include the U.S. and Austria. All U.S. income tax filings for fiscal years ended March 31, 1996 through 2022 remain open and subject to examination.
All fiscal years from the fiscal year ended March 31, 2021 through 2023 remain open and subject to examination in Austria. Tax filings in Romania for the fiscal years ended March 31, 2018 through 2023 remain open and subject to examination.
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15. Debt
As part of the Neeltran Acquisition, the Company identified four equipment financing agreements that Neeltran had entered into prior to the acquisition on May 6, 2021. The Company determined to account for these agreements as a debt transaction and recorded current and long-term debt liabilities of $0.1 million each during the twelve months ended March 31, 2022. The current and long-term debt balance is $0.1 million and less than $0.1 million, respectively, as of March 31, 2023.
16. Leases
The Company determines whether a contract is or contains a lease at inception of a contract. The Company defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property or equipment (an identified asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that the Company have both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.
The discount rate was calculated using an incremental borrowing rate based on an assessment prepared by the Company through the use of Company credit ratings, consideration of its lease populations potential risk to its total capital structure, and a market rate for a collateralized loan for its risk profile, calculated by a third party.
Following the Neeltran Acquisition, the Company evaluated all open Neeltran contracts at the date of the acquisition to determine if any applied under ASC 842 as Neeltran, a private company, had deferred adopting ASC 842 prior to the Neeltran Acquisition, as permitted. The Company identified nine lease contracts with terms greater than twelve months and evaluated them under ASC 842 guidance. As part of the implementation, the Company identified one lease contract that classified as a financing lease. The Company does not expect a material impact to the financial statements on an ongoing basis resulting from the adoption of the ASC 842 standard for the Neeltran business and Neeltran will follow the existing policies below.
Operating Leases
All significant lease arrangements are recognized at lease commencement. Operating lease right–of-use assets and lease liabilities are recognized at commencement. The operating lease right-of-use asset includes any lease payments related to initial direct cost and prepayments and excludes any lease incentives. Lease expense is recognized on a straight-line basis over the lease term. The Company enters into a variety of operating lease agreements through the normal course of its business, but primarily real estate leases to support its operations. The real estate lease agreements generally provide for fixed minimum rental payments and the payment of real estate taxes and insurance. Many of these real estate leases have one or more renewal options that allow the Company, at its discretion, to renew the lease for varying periods up to five years or to terminate the lease. Only renewal options or termination rights that the Company believed were likely to be exercised were included in the lease calculations.
The Company also enters into leases for vehicles, IT equipment and service agreements, and other leases related to its manufacturing operations that are also included in the right-of-use assets and lease liability accounts if they are for a term of longer than twelve months. However, many of these leases are either short-term in nature or immaterial. The Company has made the policy election to exclude short-term leases from the balance sheet.
Finance Leases
As part of the adoption of ASC 842 at Neeltran, the Company identified one lease contract that is classified as a financing lease. In February 2020, Neeltran entered into a contract to lease a copy machine for an initial term of 39 months, or through May 2023. The Company concluded that the lease should be classified and accounted for as a finance lease as the total value of the lease payments are greater than fair value of the asset. Accordingly, on May 6, 2021, the Company recognized a finance lease right-of-use asset and a finance lease liability of $13.2 thousand on the Neeltran opening balance sheet. As of March 31, 2023, the right-of-use asset related to the finance lease was $1.0 thousand, net of accumulated amortization of $12.2 thousand, and is included in the property and equipment, net on the Company's consolidated balance sheet.
Finance lease right-of-use assets and lease liabilities are recognized similar to an operating lease, at the lease commencement date or the date the lessor makes the leased asset available for use. Finance lease right-of-use assets are generally amortized on a straight-line basis over the lease term, and the carrying amount of the finance lease liabilities are (1) accreted to reflect interest using the incremental borrowing rate if the rate implicit in the lease is not readily determinable, and (2) reduced to reflect lease payments made during the period. Amortization expense for finance lease right-of-use assets and interest accretion on finance lease liabilities are recorded to depreciation expense and interest expense, respectively in the Company's consolidated statement of operations.
Supplemental balance sheet information related to leases at March 31, 2023 and 2022 are as follows:
| | March 31, 2023 | | | March 31, 2022 | |
Leases: | | | | | | | | |
Right-of-use assets - Financing | | | 1 | | | | 8 | |
Right-of-use assets - Operating | | | 2,857 | | | | 3,502 | |
Total right-of-use assets | | $ | 2,858 | | | $ | 3,510 | |
| | | | | | | | |
Lease liabilities - ST Financing | | | 1 | | | | 7 | |
Lease liabilities - ST Operating | | | 807 | | | | 740 | |
Lease liabilities - LT Financing | | | - | | | | 1 | |
Lease liabilities - LT Operating | | | 2,184 | | | | 2,900 | |
Total lease liabilities | | $ | 2,992 | | | $ | 3,648 | |
| | | | | | | | |
Weighted-average remaining lease term | | | 3.95 | | | | 4.93 | |
Weighted-average discount rate | | | 6.46 | % | | | 6.36 | % |
The costs related to the Company's finance lease are not material. The costs related to the Company's operating leases for the fiscal years ended March 31, 2023 and 2022, are as follows (in thousands):
| | Year ended | | | Year ended | |
| | March 31, 2023 | | | March 31, 2022 | |
Operating Lease: | | | | | | | | |
Operating lease costs - fixed | | $ | 1,026 | | | $ | 944 | |
Operating lease costs - variable | | | 156 | | | | 134 | |
Short-term lease costs | | | 127 | | | | 258 | |
Total lease costs | | $ | 1,309 | | | $ | 1,336 | |
The Company’s estimated minimum future lease obligations under the Company's leases are as follows:
| | Operating Leases | |
Year ended March 31, | | | | |
2024 | | $ | 972 | |
2025 | | | 781 | |
2026 | | | 720 | |
2027 | | | 580 | |
2028 | | | 357 | |
Total minimum lease payments | | | 3,410 | |
Less: interest | | | (418 | ) |
Present value of lease liabilities | | $ | 2,992 | |
17. Stockholders’ Equity
Stock-Based Compensation Plans
As of March 31, 2023, the Company had two active stock plans: the Amended and Restated 2007 Director Stock Plan (the “2007 Director Plan”) and the 2022 Stock Incentive Plan (the "2022 Plan"). On August 2, 2022, the Company's stockholders approved the 2022 Plan and amendments to the Company's 2007 Director Plan. The 2022 Plan authorizes the issuance of 1,150,000 shares of common stock. The amendment to the 2007 Director Plan increased the total number of shares of common stock authorized for issuance under the 2007 Director Plan from 280,000 shares to 430,000 shares.
The 2022 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the IRC of 1986, as amended, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. In the case of options, the exercise price is no less than the fair market value of the common stock, as determined by (or in a manner approved by) the Board of Directors, on the date of grant. The contractual life of options is generally 10 years. Options generally vest over a 3-5 year period while restricted stock generally vests over a 3 year period. The 2022 Plan replaced the Company’s 2007 Stock Incentive Plan, as amended (the “2007 Plan”). No further awards are granted under the 2007 Plan following effectiveness of the 2022 Plan; however, the terms and conditions of the 2007 Plan continue to govern any outstanding awards granted thereunder.
The 2007 Director Plan provides for the grant of nonstatutory stock options and stock awards to members of the Board of Directors who are not also employees of the Company ("outside directors"). Under the terms of the 2007 Director Plan, each outside director is granted an option to purchase shares of common stock with an aggregate grant date value equal to $40,000 upon his or her initial election to the Board with an exercise price equal to the fair market value of the Company’s common stock on the date of the grant. These options vest in equal annual installments over a two-year period. In addition, each outside director is granted an award of shares of common stock on the third business day following the last day of each fiscal year with an aggregate value equal to $50,000 using the closing price of the Company's common stock two business days following the last day of each fiscal year, subject to proration for any partial fiscal year of service.
As of March 31, 2023, the 2022 Plan had 654,610 shares available for future issuance, and the 2007 Director Plan had 176,471 shares available for future issuance. Additionally, any shares which are subject to awards previously granted under the 2007 Plan that are forfeited or lapse unexercised and which following the effectiveness of the 2022 Plan are not issued under the 2007 Plan will become available for issuance under the 2022 Plan.
Stock-Based Compensation
The components of stock-based compensation for the years ended March 31, 2023 and 2022 were as follows (in thousands):
| | Fiscal years ended March 31, | |
| | 2023 | | | 2022 | |
Stock options | | $ | 32 | | | $ | 3 | |
Restricted stock and stock awards | | | 4,656 | | | | 4,615 | |
Employee stock purchase plan | | | 41 | | | | 43 | |
Total stock-based compensation expense | | $ | 4,729 | | | $ | 4,661 | |
The estimated fair value of the Company’s stock-based awards, less expected annual forfeitures, is amortized over the awards’ service period. The total unrecognized compensation cost for unvested outstanding stock options was less than $0.1 million for the fiscal year ended March 31, 2023. The total unrecognized compensation cost for unvested outstanding restricted stock was $4.7 million for the fiscal year ended March 31, 2023. This expense will be recognized over a weighted-average expense period of approximately 1.7 years.
The following table summarizes stock-based compensation expense by financial statement line item for the fiscal years ended March 31, 2023 and 2022 (in thousands):
| | Fiscal years ended March 31, | |
| | 2023 | | | 2022 | |
Cost of revenues | | $ | 283 | | | $ | 209 | |
Research and development | | | 865 | | | | 820 | |
Selling, general and administrative | | | 3,581 | | | | 3,632 | |
Total | | $ | 4,729 | | | $ | 4,661 | |
The following table summarizes the information concerning currently outstanding and exercisable employee and non-employee options:
| | Options / Shares | | | Weighted-Average Exercise Price | | | Weighted-Average Remaining Contractual Term | | | Aggregate Intrinsic Value (thousands) | |
Outstanding at March 31, 2022 | | | 98,013 | | | $ | 28.22 | | | | | | | | | |
Granted | | | 20,564 | | | | 5.92 | | | | | | | | | |
Exercised | | | — | | | | — | | | | | | | | | |
Canceled/forfeited | | | (37,572 | ) | | | 40.42 | | | | | | | | | |
Outstanding at March 31, 2023 | | | 81,005 | | | $ | 16.90 | | | | 3.4 | | | | - | |
Exercisable at March 31, 2023 | | | 60,441 | | | $ | 20.63 | | | | 1.4 | | | | - | |
Fully vested and expected to vest at March 31, 2023 | | | 80,274 | | | $ | 17.00 | | | | 3.3 | | | | - | |
The Company granted 20,564 stock options under the 2007 Director Plan during the fiscal year ended March 31, 2023. The Company did not grant any stock options during the fiscal year ended March 31, 2022. The stock options granted during the fiscal year ended March 31, 2023 will vest over 2 years. The weighted average assumptions used in the Black Scholes valuation model for stock options granted during the fiscal year ended March 31, 2023 are as follows:
| | Fiscal year ended March 31, | | | Fiscal year ended March 31, | |
| | 2023 | | | 2022 | |
Expected volatility | | | 71.4 | % | | | N/A | |
Risk-free interest rate | | | 3.1 | % | | | N/A | |
Expected life (years) | | | 6.14 | | | | N/A | |
Dividend yield | | None | | | | N/A | |
The following table summarizes the restricted stock activity for the year ended March 31, 2023:
| | Shares | | | Weighted Average Grant Date Fair Value | | | Intrinsic Aggregate Value (thousands) | |
Outstanding at March 31, 2022 | | | 1,102,166 | | | $ | 9.62 | | | | | |
Granted | | | 914,306 | | | | 4.84 | | | | | |
Vested | | | (460,973 | ) | | | 9.02 | | | | | |
Forfeited | | | (77,500 | ) | | | 10.39 | | | | | |
Outstanding at March 31, 2023 | | | 1,477,999 | | | $ | 6.81 | | | $ | 7,257 | |
The total fair value of restricted stock that was granted during the fiscal years ended March 31, 2023 and 2022 was $4.7 million and $8.2 million, respectively. The total fair value of restricted stock that vested during the fiscal years ended March 31, 2023 and 2022 was $2.6 million and $7.6 million, respectively.
There were 200,000 performance-based restricted shares awarded during the fiscal year ended March 31, 2023 for which the performance conditions are deemed probable to be met and the expense is being recorded over a three-year vesting period. There were 76,500 performance-based restricted shares awarded during the fiscal year ended March 31, 2022 for which the performance conditions are deemed probable to be met and the expense is being recorded over a three-year vesting period.
The remaining shares awarded vest upon the passage of time. For awards that vest upon the passage of time, expense is being recorded over the vesting period.
Employee Stock Purchase Plan
The Company maintains the 2000 Employee Stock Purchase Plan, as amended (the "ESPP") which provides employees with the opportunity to purchase shares of common stock at a price equal to the market value of the common stock at the end of the offering period, less a 15% purchase discount. As of March 31, 2023, the ESPP had 99,906 shares available for future issuance. The Company recognized less than $0.1 million of compensation expense for both the fiscal years ended March 31, 2023 and 2022, related to the ESPP.
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18. Commitments and Contingencies
Purchase Commitments
The Company periodically enters into non-cancelable purchase contracts in order to ensure the availability of materials to support production of its products. Purchase commitments represent enforceable and legally binding agreements with suppliers to purchase goods or services. The Company periodically assesses the need to provide for impairment on these purchase contracts and records a loss on purchase commitments when required.
Lease Commitments
During the years ended March 31, 2023 and 2022, all lease costs were recorded in selling, general and administrative expense. See Note 15, "Leases" for further details.
Legal Contingencies
From time to time, the Company is involved in legal and administrative proceedings and claims of various types. The Company records a liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews these estimates each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary to make the consolidated financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in its consolidated financial statements.
Other
The Company enters into long-term construction contracts with customers that require the Company to obtain performance bonds. The Company is required to deposit an amount equivalent to some or all the face amount of the performance bonds into an escrow account until the termination of the bond. When the performance conditions are met, amounts deposited as collateral for the performance bonds are returned to the Company. In addition, the Company has various contractual arrangements in which minimum quantities of goods or services have been committed to be purchased on an annual basis.
As of March 31, 2023, the Company had $0.6 million of restricted cash included in long-term assets and $1.7 million of restricted cash in current assets. These amounts included in restricted cash primarily represent deposits to secure letters of credit for various supply contracts or collateral deposits. These deposits are held in interest bearing accounts.
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19. Employee Benefit Plans
The Company has implemented a defined contribution plan (the “Plan”) under Section 401(k) of the IRC. Any contributions made by the Company to the Plan are discretionary. The Company has a stock match program under which the Company matched, in the form of Company common stock, 50% of the first 6% of eligible contributions. The Company recorded expenses of $0.6 million for the fiscal year ended March 31, 2023 and $0.5 million for the fiscal year ended March 31, 2022, and recorded corresponding charges to additional paid-in capital related to this program.
20. Restructuring
The Company accounts for charges resulting from operational restructuring actions in accordance with ASC Topic 420, Exit or Disposal Cost Obligations (“ASC 420”) and ASC Topic 712, Compensation—Nonretirement Postemployment Benefits (“ASC 712”). In accounting for these obligations, the Company is required to make assumptions related to the amounts of employee severance, benefits, and related costs and the time period over which leased facilities will remain vacant, sublease terms, sublease rates and discount rates. Estimates and assumptions are based on the best information available at the time the obligation arises. These estimates are reviewed and revised as facts and circumstances dictate; changes in these estimates could have a material effect on the amount accrued on the consolidated balance sheet.
On January 24, 2023, Daniel P. McGahn, President, CEO and Chairman of the Board, approved a plan to reduce the Company’s global workforce by approximately 5%, effective as of such date. The purpose of the workforce reduction was to reduce operating expenses to better align with the Company’s current revenues. In fiscal 2022, the Company recorded restructuring charges of $1.0 million as a result of this reduction in force, which was comprised of severance pay. All amounts related to these restructuring activities are expected to be paid by March 31, 2024.
The following table presents restructuring charges and cash payments during the year ended March 31, 2023 (in thousands):
| | Severance pay and benefits | |
Accrued restructuring balance at April 1, 2022 | | $ | — | |
Charges to operations | | | 1,048 | |
Cash payments | | | (331 | ) |
Accrued restructuring balance at March 31, 2023 | | $ | 717 | |
All restructuring charges discussed above are included within restructuring in the Company’s consolidated statements of operations. The Company includes accrued restructuring within accounts payable and accrued expenses in the consolidated balance sheets. There was no restructuring activity in the year ended March 31, 2022.
21. Business Segments
The Company reports its financial results in two reportable business segments: Grid and Wind. In accordance with ASC 280, Segment Reporting, we aggregate four operating segments into one reporting segment for financial reporting purposes due to their similar operating and financial characteristics. Our operating segments reflect the way in which internally-reported financial information is used to make decisions and allocate resources.
Through the Company’s power grid offerings, the Grid business segment enables electric utilities, industrial facilities, and renewable energy project developers to connect, transmit and distribute smarter, cleaner and better power through its transmission planning services, power electronics, and superconductor-based systems. The sales process is enabled by transmission planning services that allow it to identify power grid congestion, poor power quality and other risks, which helps the Company determine how its solutions can improve network performance. These services often lead to sales of grid interconnection solutions for wind farms and solar power plants, power quality systems, and transmission and distribution cable systems. The Company also sells ship protection products to the U.S. Navy through its Grid business segment.
Through the Company’s wind power offerings, the Wind business segment enables manufacturers to field highly competitive wind turbines through its advanced power electronics and control system products, engineered designs, and support services. The Company supplies advanced power electronics and control systems, licenses its highly engineered wind turbine designs, and provides extensive customer support services to wind turbine manufacturers. The Company’s design portfolio includes a broad range of drive trains and power ratings of 2 megawatts ("MWs") and higher. The Company provides a broad range of power electronics and software-based control systems that are highly integrated and designed for optimized performance, efficiency, and grid compatibility.
The operating results for the two business segments are as follows (in thousands):
| | Fiscal Years Ended March 31, | |
| | 2023 | | | 2022 | |
Revenues: | | | | | | | | |
Grid | | $ | 94,631 | | | $ | 98,876 | |
Wind | | | 11,353 | | | | 9,559 | |
Total | | $ | 105,984 | | | $ | 108,435 | |
| | Fiscal Years Ended March 31, | |
| | 2023 | | | 2022 | |
Operating income (loss): | | | | | | | | |
Grid | | $ | (24,615 | ) | | $ | (20,725 | ) |
Wind | | | (2,547 | ) | | | (1,554 | ) |
Unallocated corporate expenses | | | (5,847 | ) | | | 1,190 | |
Total | | $ | (33,009 | ) | | $ | (21,089 | ) |
Total assets for the two business segments as of March 31, 2023 and March 31, 2022 are as follows (in thousands):
| | March 31, 2023 | | | March 31, 2022 | |
Grid | | $ | 135,296 | | | $ | 114,053 | |
Wind | | | 14,361 | | | | 9,866 | |
Corporate assets | | | 25,904 | | | | 49,968 | |
Total | | $ | 175,561 | | | $ | 173,887 | |
The accounting policies of the business segments are the same as those for the consolidated Company. The Company’s business segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measures are segment revenues and segment operating loss. The disaggregated financial results of the segments reflect allocation of certain functional expense categories consistent with the basis and manner in which Company management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. In addition, certain corporate expenses which the Company does not believe are specifically attributable or allocable to either of the two business segments have been excluded from the segment operating loss.
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Unallocated corporate expenses primarily consist of a loss on contingent consideration of $0.1 million, stock-based compensation expense of $4.7 million and a restructuring charge of $1.0 million in the fiscal year ended March 31, 2023. Unallocated corporate expenses primarily consist of a gain on contingent consideration of $5.9 million offset by stock-based compensation expense of $4.7 million in the year ended March 31, 2022.
Geographic information about property, plant and equipment associated with particular regions is as follows (in thousands):
| | March 31, | |
| | 2023 | | | 2022 | |
North America | | $ | 12,125 | | | $ | 13,446 | |
Europe | | | 141 | | | | 166 | |
Asia Pacific | | | 43 | | | | 44 | |
Total | | $ | 12,309 | | | $ | 13,656 | |
22. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in ASU 2016-13 will provide more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that year. Following the release of ASU 2019-10 in November 2019, the new effective date, as long as the Company remains a smaller reporting company, would be annual reporting periods beginning after December 15, 2022. The Company evaluated the impact of the adoption of ASU 2016-13, and does not expect it to have a material impact on its consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments in ASU 2021-08 will improve the accounting for acquired revenue contracts with customers in a business combination. Following the release of ASU 2021-08 in October 2021, the new effective date will be annual reporting periods beginning after December 15, 2022. The Company evaluated the impact of the adoption of ASU 2021-08, and does not expect it to have a material impact on its consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The amendments in ASU 2021-10 will improve financial reporting by requiring disclosures that increase the transparency of transactions with government accounted for by applying a grant or contribution accounting model by analogy. Following the release of ASU 2021-10 in November 2021, the new effective date is annual reporting periods beginning after December 15, 2021. As of April 1, 2022, the Company adopted ASU 2021-10 and noted no material impact on its consolidated financial statements.
23. Subsequent Events
The Company has performed an evaluation of subsequent events through the time of filing this Annual Report on Form 10-K with the SEC, and has determined that there are no such events to report.
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Item 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.