Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under “Note Regarding Forward-Looking Statements” and Item 1A (Risk Factors) in this Form 10-K. The following section is qualified in its entirety by the more detailed information, including our financial statements and the notes thereto, which appears elsewhere in this Form 10-K.
Overview
We are the market leader in microturbines based on the number of microturbines sold. Generally, power purchased from the electric utility grid is less costly than power produced by distributed generation technologies. Utilities may also charge fees to interconnect to their power grids. However, we can provide economic benefits to end users in instances where the waste heat from our microturbine has value (CHP) and (CCHP), where fuel costs are low (renewable energy/renewable fuels), where the costs of connecting to the grid may be high or impractical (such as remote power applications), where reliability and power quality are of critical importance, or in situations where peak shaving could be economically advantageous because of highly variable electricity prices. Our microturbines can be interconnected to other distributed energy resources to form “microgrids” (also called “distribution networks”) located within a specific geographic area and provide power to a group of buildings. Because our microturbines can provide a reliable source of power and can operate on multiple fuel sources, management believes they offer a level of flexibility not currently offered by other technologies such as reciprocating engines. In addition to our existing microturbine products, we offer additional energy conversion products in the form of Baker Hughes 5 MW, 12 MW, and 16 MW industrial gas turbines, where we will purchase and resell their product. The Company is currently exploring energy conversion options for the smaller end of the power spectrum. We will begin to manufacture modular hybrid energy stations and lithium-ion BESS to be sold either individually or combined as part of a custom microturbine-battery storage solution. We added a new Energy Storage Products business line in Fiscal 2022 and thus there has been no revenue to date.
Our goals for Fiscal 2021 were to improve cash flow, working capital, and our balance sheet generally; grow revenue through accelerating global product sales; diversify into additional market verticals and geographies; increase aftermarket sales absorption; and continue to grow our rental fleet. During Fiscal 2021 our net loss was $18.4 million and our basic and diluted net loss per share was $1.63, compared to $22.0 million and $2.70, respectively, in the same period of the previous fiscal year. Our net loss improved during Fiscal 2021 primarily because of lower overhead and operating expenses incurred as a result of implementing our COVID-19 Business Continuity Plan, as well as lower FPP costs as our reliability improved due to the reduced impact of the part defect from a supplier first identified during the first quarter of Fiscal 2019, partially offset by lower overall gross margins from lower revenue levels and increased discounting driven by the COVID-19 pandemic and loss on extinguishment of debt of $4.3 million. On October 1, 2020, the Company entered into an Amended & Restated Note Purchase Agreement (the “A&R Note Purchase Agreement”), and issued $20.0 million in additional Notes. See Note 11—Term Note Payable, in the Notes to Consolidated Financial Statements for discussion with respect to this A&R Note Purchase Agreement.
On July 15, 2020, we entered into an amended Sales Agreement with H.C. Wainwright & Co., LLC with respect to an at-the-market offering program (the “ATM Program”) pursuant to which we may offer and sell, from time to time at our sole discretion, shares of our common stock. On March 19, 2021, we entered into a second amendment to the Sales Agreement, which modified the Sales Agreement to, among other things, reflect the Company’s filing of a new Registration Statement on Form S-3 with the SEC on March 22, 2021 and set the maximum number of shares of our Common Stock that we may offer and sell through or to H.C. Wainwright at $50,000,000, subject to certain limitations set forth in the amendment. See Note 9—Stockholders’ Equity, in the Notes to Consolidated Financial Statements for discussion with respect to the Sales Agreement.
Our products continue to gain interest in all our major vertical markets (energy efficiency, renewable energy, natural resources, critical power supply, microgrid and transportation). In the energy efficiency market, we continue to expand our market presence in hotels, office buildings, hospitals, retail, and industrial applications globally. The renewable energy market is fueled by landfill gas, biodiesel, and biogas from sources such as food processing, agricultural waste and
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livestock manure. Our product sales in the oil and gas and other natural resources market is driven by our microturbines’ reliability, emissions profile and ease of installation. Given the volatility of the oil and gas market, our business strategy is to target projects within the energy efficiency and renewable energy markets.
We continue to focus on improving our products based on customer input, building brand awareness and new channels to market by developing a diversified network of strategic distribution partners. Our focus is on products and solutions that provide near term opportunities to drive repeatable business rather than discrete projects for niche markets. In addition, management closely monitors operating expenses and strives to improve manufacturing efficiencies while simultaneously lowering direct material costs and increasing average selling prices. The key drivers to our success are revenue growth, higher average selling prices, lower direct material costs, positive new order flow and reduced cash usage.
An overview of our direction, targets and key initiatives follows:
Focus on Vertical Markets Within the distributed generation markets that we serve, we focus on vertical markets that we identify as having the greatest near-term potential. In our primary products and applications (energy efficiency, renewable energy, natural resources, critical power supply, microgrid and transportation products), we identify specific targeted vertical market segments. Within each of these segments, we identify what we believe to be the critical factors to success and base our plans on those factors. Given the volatility of the oil and gas market, we have refocused our business strategy to target projects within the energy efficiency and renewable energy markets.
The following table summarizes our product shipments by vertical markets:
Year Ended
March 31,
Energy efficiency 61 % 54 %
Natural resources 25 % 32 %
Renewable energy 13 % 14 %
Critical Power Supply — —
Microgrid 1 % —
Transportation — —
Energy Efficiency—CHP/CCHP
Energy efficiency refers to the proper utilization of both electrical and thermal energies in the power production process. In such applications, our microturbines are able to maximize the availability of usable energy to provide a significant economic advantage to customers while reducing their onsite emissions. CHP and CCHP can improve site economics by capturing the waste heat created from a single combustion process to increase the efficiency of the total system, from approximately 30 percent to 80 percent or more. Compared with more traditional, independent generation sources, the increase in operational efficiency also reduces greenhouse gas emissions through the displacement of other separate systems, which can also reduce operating costs.
Natural Resources—Crude Oil, Natural Gas, Shale Gas & Mining
Our microturbines are installed in the natural resource market for use in both onshore and offshore applications, including oil and gas exploration, production, and at compression and transmission sites as a highly efficient and reliable source of power. In some cases, these oil and gas or mining operations have no electric utility grid and rely solely on power generated onsite. There are numerous locations, on a global scale, where the drilling, production, compression and transportation of natural resources and
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other extraction and production processes create fuel byproducts, which are traditionally burned or released into the atmosphere. Our microturbines can turn these fuel byproducts - flare gas, or associated gas, into a useable fuel to provide prime power to these sites.
Renewable Energy
There is a growing transition to renewable energy sources and technologies on a global scale. Our microturbines run efficiently on renewable fuels such as methane and other biogases from landfills, wastewater treatment facilities and renewable natural gas. They also run efficiently on other small biogas applications like food processing plants, livestock farms and agricultural green waste operations. Microturbines can burn these renewable fuels with minimal emissions, thereby, and in some cases, avoiding the imposition of penalties incurred for pollution while simultaneously producing electricity from this “free” renewable fuel source for use at the site or in the surrounding areas. Our microturbines have demonstrated effectiveness in these smaller applications and may outperform conventional combustion engines in some situations, including when the gas contains a high amount of sulfur, as the sulfur can contaminate combustion engines lube oil leading to equipment breakdowns and higher lifecycle costs.
Critical Power Supply
Because of the potentially catastrophic consequences of system failure, momentary or otherwise, certain high demand power users, including high technology, health care and information systems facilities require higher levels of reliability in their power generation service. To meet these customer requirements, traditional solutions utilize Uninterruptible Power Supplies (“UPS”) to protect critical loads from power disturbances along with back-up diesel generators for extended outages. We offer an alternative solution that can both meet customer reliability requirements and reduce operating costs. We have seen continued development in the critical market segment as it relates to heath care facilities.
Microgrid
Microgrid is a group of interconnected loads and distributed energy resources that acts as a single controllable energy entity with respect to the grid. Distributed energy resources typically include other dual-mode microturbines, reciprocating engines, solar photovoltaic (PV), wind turbine, fuel cells and battery storage. Microgrids can be connected to larger electricity grids; however, in the event of a widespread outage, the microgrid will disconnect from the main grid and continue to operate independently to maintain the electricity supply to the homes and businesses that are connected to the microgrid’s electricity network. Our microturbines have the ability to meet the needs of microgrid end-users by lowering their overall cost to operate and by providing a versatile dispatchable technology that is fuel flexible and scalable enough to fit a wide variety of applications. We have seen continued development in the microgrid market segment.
Transportation
Our technology is also used in Hybrid Electric Vehicle (“HEV”) applications. Our customers have applied our products in HEV applications such as transit buses and Class 7 and 8 work trucks. In these applications, the microturbine acts as an onboard battery charger to recharge the battery system as needed. The benefits of microturbine-powered HEV hybrids include extended range, fuel economy gains, quieter operation, reduced emissions, and higher reliability when compared with traditional internal combustion engines.
Additionally, our technology is used in marine applications. Our customers have applied our products in the commercial vessel and luxury yacht market segments. The application for our marine products is for use as a ship auxiliary engine. In this application, the microturbines provide power to the vessel’s electrical loads and, in some cases, the vessel can utilize the exhaust energy to increase the overall efficiency of the application, thereby reducing overall fuel consumption and emissions. Another feasible
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application is similar to our HEV application where the vessel is driven by an electric propulsion system and the microturbine serves as an on board range extender. Transportation is a developing market segment for us. In Fiscal 2020 and Fiscal 2021, transportation products were only for customer demonstrations. We have experienced continued development in these vertical markets and remain focused on the development of these applications.
Backlog
Net product orders were approximately $25.9 million and $33.8 million for Fiscal 2021 and Fiscal 2020, respectively. Ending backlog was approximately $29.4 million at March 31, 2021 compared to $37.7 million at March 31, 2020. Book-to-bill ratio was 1.1:1 and 1.4:1 for Fiscal 2021 and 2020, respectively. Book-to-bill ratio is the ratio of new orders we received to units shipped and billed during a period.
A portion of our backlog is concentrated in the oil and gas market which may impact the overall timing of shipments or the conversion of backlog to revenue. The timing of the backlog is based on the requirement date indicated by our customers. However, based on historical experience, management expects that a significant portion of our backlog may not be shipped within the next 18 months. Additionally, the timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and customer delivery schedule changes), most of which are not in our control and can affect the timing of our revenue. As a result, management believes the book-to-bill ratio demonstrates the current demand for our products in the given period.
Effective January 1, 2018, we launched our Distributor Support System (“DSS program”) to provide additional support for distributor business development activities, customer lead generation, brand awareness and tailored marketing services for each of our major geography and market verticals. This program is funded by our distributors and was developed to provide improved worldwide distributor training, sales efficiency, website development and company branding and provide funding for increased strategic marketing activities. See Note 2—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements for additional discussion of revenue recognition for this program.
Our FPP backlog at the end of Fiscal 2021 and Fiscal 2020 was approximately $75.1 million and $82.4 million, respectively, which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2041. Additionally, we offer new and remanufactured parts through our global distribution network. Service revenue in Fiscal 2021 was approximately 32% of total revenue.
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During Fiscal 2020, we introduced and expanded our PowerSync family of controllers, easily customizable for our microturbine systems. Additionally, we delivered our first production self-cleanable severe environment air filtration system for our Signature Series line of microturbine products.
We continue to modernize electronics to today’s standards, providing common functionality and enabling long term support. To support our global fleet during Fiscal 2020, we achieved Australian AS4777 certification for our C200 product line, and UK G99 Grid Interconnect type approval for our C65 and C200 product lines. In addition, Germany released VDE 4110 for Medium Voltage Grid Interconnection, to augment the BDEW certification. We achieved “Prototype Confirmation” for this new specification that enables continued operability in Germany.
In partnership with one of our long-term EMEA distributors, we developed a marine C65 for a private yacht manufacturer and in Fiscal 2020 we delivered the product and also received certification from Lloyd’s Register EMEA for Lloyd’s Register Rules and Regulations for the Classification of Special Service Craft 2018 - Part 6.
We are also developing a more efficient microturbine CHP system with the support of the DOE, which awarded us a grant of $5.0 million in support of this development program, of which $4.2 million was allocated to us and was used through September 30, 2015. We successfully completed the first phase of the development program on September 30, 2015 and achieved 270 kW with a prototype C250 microturbine in our development test lab. Management intends to continue with the next phase of development and commercialization after we achieve profitability. The next phase will be to continue development of the C250 product architecture, as well as the associated power electronics and software controls required for successful commercialization.
During Fiscal 2021, we continued to expand and develop our new hydrogen products. We released our first commercially available hydrogen-based combined heat and power (CHP) product, which can safely run on a 10% hydrogen-90% natural gas mix, and we are targeting a commercial release of a product that will run on a 30% hydrogen-70% natural gas mix product by March 31, 2022. In furtherance of those efforts, we are testing a 70% hydrogen-30% natural gas configuration through our research and development partnership with Argonne National Laboratory.
Our manufacturing designs include the use of conventional technology, which has been proven in high- volume automotive and turbocharger production for many years. Many components used in the manufacture of our products are readily fabricated from commonly available raw materials or off the shelf items available from multiple supply sources; however, certain items are custom made to meet our specifications that require longer lead time. We believe that in most cases, adequate capacity exists at our suppliers and that alternative sources of supply are available or could be developed within a reasonable period of time; however, single source suppliers with long lead times may be more challenging to transition to another supplier. We regularly reassess the adequacy and abilities of our suppliers to meet our future needs.
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We believe that effective execution in each of these key areas will be necessary to leverage our promising technology and early market leadership into achieving positive cash flow with growing market presence and improving financial performance.
We currently occupy warehouse and office space in Van Nuys, California with a production capacity of approximately 2,000 units per year, depending on product mix. We believe we will be able to support this production capacity level by adding additional shifts, which would increase working capital requirements, and making some additional capital expenditures when necessary.
Reverse Stock Split At the annual meeting of stockholders of the Company held on August 29, 2019, the Company’s stockholders approved an amendment to our Second Amended and Restated Certificate of Incorporation (the “Amendment”) to effect a reverse stock split of our common stock at a ratio in the range of one-for-five (1:5) to one-for-ten (1:10). Pursuant to such authority granted by the stockholders, the Company’s board of directors approved a one-for-ten (1:10) reverse stock split (the “Reverse Stock Split”) of the common stock and the filing of the Amendment. The Certificate of Amendment was filed with the Secretary of State of Delaware, effective on October 21, 2019 and the Reverse Stock Split became effective as of that date. Accordingly, all references to numbers of shares of common stock, including the number of shares of common stock on an as-if-converted basis, per-share data and share prices and exercise prices in the accompanying condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent liabilities. On an on-going basis, we evaluate our estimates, including but not limited to those related to long-lived assets, including finite-lived intangible assets and fixed assets, bad debts, inventories, warranty obligations, stock-based compensation, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe 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 from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
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The use of Black-Scholes model requires us to make estimates of the following assumptions:
The amount of stock-based compensation cost is recorded on a straight-line basis over the vesting period.
Results of Operations
Year Ended March 31, 2021 Compared to Year Ended March 31, 2020
Certain reclassifications have been made to the prior year’s financial statements to enhance comparability with the current year’s financial statements. As a result, certain line items have been amended in the Consolidated Statements of Operations and the related notes to the consolidated financial statements. Comparative figures have been adjusted to conform to the current year’s presentation. The items were reclassified as follows (in thousands):
Previously Reported After Reclassification
Year Ended March 31, 2020 Year Ended March 31, 2020
Product, accessories and parts $ 48,143 Product and accessories $ 35,338
Total revenue $ 68,926 Total revenue $ 68,926
The following table summarizes our revenue by geographic markets (amounts in millions):
Year Ended March 31,
Revenue Revenue
United States and Canada $ 32.8 $ 32.2
Europe and Russia 17.2 16.5
Latin America 7.2 9.1
Asia and Australia 9.3 8.6
Middle East and Africa 1.1 2.5
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Revenue for Fiscal 2021 decreased $1.3 million, or 2%, to $67.6 million from $68.9 million for Fiscal 2020. The change in revenue for Fiscal 2021 compared to Fiscal 2020 included decreases in revenue of $1.9 million from the Latin American markets and $1.4 million from the Middle East and African markets. These overall decreases in revenue were offset by increases in revenue of $0.7 million from the European and Russian markets, $0.7 million from the Asian and Australian markets, and $0.6 million from the United States and Canadian markets. The slight decrease in revenue in all geographic markets during Fiscal 2021 compared to the same period the previous year was primarily because of (i) lower parts revenue due to the COVID-19 pandemic, which affected the timing of customer demand for our products; (ii) as well as weakness in the oil and gas market as a result of a decline in oil prices and (iii) continued movement towards clean energy and away from fossil fuels, which impacted capital expenditures in the natural resources market during Fiscal 2021.
The following table summarizes our revenue (revenue amounts in millions):
Year Ended March 31,
Revenue Megawatts Units Revenue Megawatts Units
Accessories 2.4 1.5
Total Product and Accessories 36.5 35.3
Parts and Service 31.1 33.6
Total $ 67.6 $ 68.9
For Fiscal 2021, revenue from microturbine products and accessories increased $1.2 million, or 3%, to $36.5 million from $35.3 million for Fiscal 2020. The increase in revenue was primarily because of an increase in product volume and a strengthening of the United States and Canadian markets compared to the same period last year. Megawatts shipped during Fiscal 2021 increased 0.3 megawatts, or 1%, to 33.5 megawatts from 33.2 megawatts during Fiscal 2020. Average revenue per megawatt shipped was approximately $1.0 million in both Fiscal 2021 and 2020. The timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and delivery schedule changes), most of which are not within our control and can affect the timing of our revenue.
Parts and service revenue for Fiscal 2021 decreased $2.5 million, or 7%, to $31.1 million from $33.6 million for Fiscal 2020. The decrease in revenue was primarily a result of lower parts revenue due to COVID-19 shutdowns and movement restrictions in all of our global markets, partially offset by higher service revenue due to increases in our Energy as a Service business line, which includes revenue from our FPP contracts and other service revenue.
Sales to CAL and E-Finity accounted for 15% and 12%, respectively, of our revenue for the fiscal year ended March 31, 2021. Sales to E-Finity accounted for 12% of our revenue for the year ended March 31, 2020.
Gross Margin Cost of goods sold includes direct material costs, production and service center labor and overhead, inventory charges and provision for estimated product warranty expenses. Gross margin was approximately $6.9 million, or 10% of revenue, for Fiscal 2021, compared to gross margin of $9.1 million, or 13% of revenue, for Fiscal 2020. The decrease in gross margin of $2.2 million during Fiscal 2021 compared to Fiscal 2020 was primarily because of an incremental increase of $5.3 million in warranty expense, partially offset by a $1.0 million increase in our direct material costs margin, a decrease in production and service center labor and overhead expense of $1.7 million, and lower inventory charges of $0.4 million. Management continues to implement initiatives to improve gross margin in Fiscal 2022 by further reducing manufacturing overhead and direct material costs and improving product performance as we work to achieve profitability.
Direct material costs margin, calculated as total revenue less our direct material costs, increased $1.0 million during Fiscal 2021 compared to Fiscal 2020 primarily because of higher product margin due to higher volume.
The increase in warranty expense of $5.3 million during Fiscal 2021 compared to Fiscal 2020 was primarily due to the establishment of a reserve related to reliability programs to account for the replacement of remaining high risk failure parts in some of our fielded units due to a supplier defect.
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Production and service center labor and overhead expense decreased $1.7 million during Fiscal 2021 compared to Fiscal 2020 primarily because of decreases of approximately $1.1 million in labor costs from our COVID-19 Business Continuity Plan actions, $0.7 million in facilities costs, $0.3 million in consulting expense, $0.3 million in supplies expense and $0.1 million in import tax costs, partially offset by $0.8 million in overhead allocated to finished goods inventory.
Inventory charges decreased $0.4 million during Fiscal 2021 compared to Fiscal 2020 primarily as the result of a decrease in the provision for excess and obsolete inventory.
The following table summarizes our gross margin (in millions except percentages):
Year Ended March 31,
Gross Margin
Product and accessories $ (5.5) $ —
As a percentage of product and accessories revenue (15) % — %
Parts and service $ 12.4 $ 9.1
As a percentage of parts and service revenue 40 % 27 %
Total Gross Margin $ 6.9 $ 9.1
As a percentage of total revenue 10 % 13 %
Product and accessories gross margin decreased $5.5 million during Fiscal 2021 compared to Fiscal 2020 primarily due to: (i) the establishment of a warranty reserve to replace high-risk parts in fielded units affected by sub-optimal parts initially provided by a former strategic parts supplier; (ii) a decrease in volume of product shipments from weakness in the oil and gas market due to a decline in oil price; (iii) the continued movement towards clean energy and away from fossil fuels, which impacted capital expenditures in the natural resources market during Fiscal 2021; and (iv) the COVID-19 pandemic, which has affected the timing of customer demand for our products compared to the same period last year. Parts and service gross margin improved $2.5 million during Fiscal 2021 compared to Fiscal 2020 primarily due to lower FPP costs as our reliability improves as we work through the part defect from a supplier first identified during the first quarter of Fiscal 2019.
Product and accessories gross margin as a percentage of product and accessories revenue decreased to (15)% during Fiscal 2021 from 0% during Fiscal 2020, primarily driven by the warranty reserve mentioned above. Parts and service gross margin as a percentage of parts and service revenue improved to 40% for Fiscal 2021 compared to 27% for Fiscal 2020 primarily due to Fiscal 2020 being burdened by higher FPP costs as we worked through the part defect from a supplier identified during the first quarter of Fiscal 2019.
Research and Development Expenses (“R&D”) R&D expenses for Fiscal 2021 decreased $1.2 million, or 34%, to $2.4 million from $3.6 million for Fiscal 2020, as a result of lower costs from our COVID-19 Business Continuity Plan.
Selling, General and Administrative (“SG&A”) Expenses SG&A expenses for Fiscal 2021 decreased $3.8 million, or 17%, to $18.4 million from $22.2 million for Fiscal 2020. The net decrease in SG&A expenses was primarily due to cost savings from our COVID-19 Business Continuity Plan which comprised of decreases of approximately $1.5 million in labor costs, $1.1 million in travel and entertainment expense, $0.1 million in consulting expense and $0.1 million in supplies expense, additionally there was a $1.0 million decrease in facilities costs driven by our consolidation of facilities.
Interest Expense Interest expense for Fiscal 2021 and 2020 were each $5.2 million. See Liquidity and Capital Resources below for additional discussion on our interest expense.
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Loss on Extinguishment of Debt We recognized a loss on extinguishment of debt of approximately $4.3 million during Fiscal 2021. The loss on extinguishment of debt comprised of the write-off of approximately $1.5 million of unamortized debt issuance costs, a facility fee in the amount of $1.0 million paid to the lender, an accrual of $1.0 million for anticipated exit fees due upon repayment of the principal balance to the lender, and the fair value of common stock warrants issued to the warrant holder in connection with Amendment No. 3 to the Purchase Warrant of $0.8 million.
Income Tax Provision Income tax expense increased $6,000, or 50%, to $19,000 during Fiscal 2021 from $12,000 during Fiscal 2020. Income tax expense incurred was related to state and foreign taxes. The effective income tax rate of -0.1% differs from the federal and state blended statutory rate of approximately 23.2% primarily as a result of maintaining a full valuation allowance against net deferred tax assets. At March 31, 2021, we had federal and state net operating loss carryforwards of approximately $592.7 million and $163.0 million, respectively, which may be utilized to reduce future taxable income, subject to any limitations under Section 382 of the Internal Revenue Code of 1986. We provided a valuation allowance for 100% of our net deferred tax asset of $159.7 million at March 31, 2021 because the realization of the benefits of these favorable tax attributes in future income tax returns is not deemed more likely than not. Similarly, at March 31, 2020, the net deferred tax asset was fully reserved.
Quarterly Results of Operations
The following table presents unaudited quarterly financial information. This information was prepared in accordance with GAAP, and, in the opinion of management, contains all adjustments necessary for a fair presentation of such quarterly information when read in conjunction with the financial statements included elsewhere herein. Our operating results for any prior quarters may not necessarily indicate the results for any future periods.
(In thousands, except per share data)
Fourth Third Second First Fourth Third Second First
(Unaudited) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
Operating expenses:
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Liquidity and Capital Resources
Our cash requirements depend on many factors, including the execution of our business strategy and plan. Our cash and cash equivalents balances increased $34.4 million during Fiscal 2021, compared to a decrease of $14.6 million during Fiscal 2020. The increase in cash and cash equivalents during Fiscal 2021 compared to the decrease in cash and cash equivalents during Fiscal 2020 was primarily the result of net cash of $19.0 million received from the issuance of $20.0 million in additional senior secured notes under the A&R Note Purchase Agreement with Goldman Sachs Specialty Lending Group, L.P. (“Goldman Sachs”) entered into during the third quarter of Fiscal 2021, net cash proceeds from the sale of our common stock of approximately $15.9 million after deducting commissions paid of approximately $0.5 million and approximately $2.0 million net cash received from the PPP Loan after deducting amounts subsequently repaid, entered into in the first quarter of Fiscal 2021, as described below. Additionally, during the fourth quarter of Fiscal 2021, we received a financial settlement in the amount of $5.0 million arising out of claims pursued in confidential arbitration with such former strategic parts supplier.
During Fiscal 2022, in addition to funding our operations and sustaining capital expenditures, our significant cash requirements include approximately $8.0 million to build our long-term rental fleet to 21.1 MW in accordance with covenants in our Note Purchase Agreement with Goldman Sachs, approximately $5.0 million in interest payments to service the Goldman Sachs Notes, and approximately $5.0 million to replace high-risk parts in fielded units affected by the sub-optimal parts initially provided by the former strategic parts supplier.
On October 1, 2020, we entered into an Amended & Restated Note Purchase Agreement (the “A&R Note Purchase Agreement”) with respect to our existing $30.0 million in outstanding Notes (as defined below) issued to Goldman Sachs. The A&R Note Purchase Agreement amended and restated that certain Note Purchase Agreement, as amended, dated February 4, 2019, by and among the Company, the Collateral Agent and the other parties party thereto. Under the A&R Note Purchase Agreement, we issued $20.0 million in additional Notes. We received net cash proceeds of $19.0 million after deducting a $1.0 million facility fee paid to the lender. The entire principal amount of the Notes is due and payable on October 1, 2023. As of March 31, 2021, $51.0 million in borrowing were outstanding under the Notes, which includes the accrual for an exit fee to be paid at maturity or upon pre-payment.
On April 24, 2020, we received an unsecured loan in the principal amount of $2,610,200 from Western Alliance Bank, an Arizona corporation under the Small Business Administration Paycheck Protection Program enabled by the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “PPP Loan”) and on May 13, 2020, we repaid $660,200 of the PPP Loan in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs. On March 23, 2020 the Company enacted the Business Continuity Plan in response to COVID-19. Beginning March 30, 2020, the Company furloughed approximately 52 employees, leaving behind only staff deemed essential for day-to-day administrative operations for a minimum period of 45 days. Our Leadership Team volunteered to take a 25% temporary salary cut. In addition, approximately 25 other top Company managers volunteered to take a similar 15% reduction in salary and the Board voted to take a temporary 25% reduction in base cash retainer. As a result of the continued global economic slowdown due to COVID-19 and the associated decline in global crude oil prices, we eliminated 26 positions on June 1, 2020. During the period of March 30, 2020 to June 1, 2020, we had a limited production capability of new microturbine products but had pre-built approximately 5.9 MW of microturbine finished goods during March 2020, for shipment during this period of suspended production. On September 28, 2020 salaries were returned to 100% and remaining furloughed employees returned to work. Our vendor supply chain has been impacted by the pandemic; however, we have been able to maintain sufficient supply flow to continue operations of the date hereof. We believe these programs will supplement our current and future available capital resources.
Operating Activities During Fiscal 2021, net cash provided by operating activities was $1.7 million, consisting of a net loss for the period of $18.4 million, offset by cash provided from working capital of $6.4 million and non-cash adjustments (primarily warranty provision, accounts receivable allowances, depreciation and amortization, stock based compensation and inventory provision) of $13.7 million. During Fiscal 2020, net cash used in operating activities was $19.7 million, consisting of a net loss for the period of $21.9 million and cash used for working capital of $4.0 million, offset by non-cash adjustments of $6.2 million.
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The following is a summary of the significant sources (uses) of cash from operating activities (amounts in thousands):
Year Ended March 31,
Non-cash operating activities(1) 13,678 6,160
Changes in operating assets and liabilities:
Accounts receivable (4,125) (449)
Accounts payable and accrued expenses 4,652 (2,567)
Prepaid expenses, other current assets and other assets 653 1,215
Other changes in operating assets and liabilities (3,472) (660)
Net cash provided by (used in) operating activities $ 1,701 $ (19,698)
The change in non-cash operating activities during Fiscal 2021 compared to Fiscal 2020 was primarily driven by the loss on extinguishment of debt accounting resulting from entering into the A&R Note Purchase Agreement with Goldman Sachs during Fiscal 2021. Additionally, contributing to the change was warranty expense during Fiscal 2021 as a result of the warranty reserve established related to reliability programs to account for the replacement of remaining high risk failure parts in some of our fielded units due to a supplier defect. The change in accounts receivable during Fiscal 2021 was primarily the result of lower collections from certain customers, compared to Fiscal 2020. The change in inventory was primarily the result of a decrease in both raw materials and finished goods during Fiscal 2021, as we continued to manage inventory alongside the decreases in revenue as a result of the COVID-19 pandemic. The change in accounts payable and accrued expenses was primarily the result of the level of inventory receipts and timing of payments made by us during Fiscal 2021 compared to Fiscal 2020. The change in other operating assets and liabilities during the Fiscal 2021 compared to Fiscal 2020, was primarily the result of decreases in deferred revenue attributable to FPP contracts, customer deposits and our DSS program.
Investing Activities Net cash used in investing activities of $3.2 million and $4.2 million during Fiscal 2021 and 2020, respectively, related primarily to the additions of our rental fleet of approximately $2.4 million and $3.2 million, respectively. The remaining amounts were primarily for sustaining our production and facilities.
Financing Activities During Fiscal 2021, we generated approximately $36.0 million in cash from financing activities compared to cash generated during Fiscal 2020 of approximately $9.2 million. The funds generated from financing activities during the fiscal year ended March 31, 2021 were primarily the result of $19.0 million in net proceeds from our A&R Note Purchase Agreement with Goldman Sachs, net borrowings under the PPP Loan, as well as $15.9 million in proceeds from the at-the-market offering program described below. The funds generated from financing activities during Fiscal 2020 were primarily the result of proceeds from the September 2019 registered direct offering and proceeds from the at-the-market offering program described below.
At-the-market offerings
On June 7, 2018, we entered into a Sales Agreement with H.C. Wainwright & Co., LLC (the “Sales Agreement”) with respect to an at-the-market offering program (the “ATM Program”) pursuant to which we may offer and sell, from time to time at our sole discretion, shares of our common stock, having an aggregate offering price of up to $25.0 million. We will set the parameters for sales of the shares, including the number to be sold, the time period during which sales are requested to be made, any limitation on the number that may be sold in one trading day and any minimum price below which sales may not be made. During Fiscal 2021, we issued approximately 2.0 million shares of our common stock under the ATM program and the net proceeds to us from the sale of our common stock were approximately $15.9 million after deducting commissions paid of approximately $0.5 million. During our fourth fiscal quarter ended March 31, 2021, we issued 1,242,253 shares of our common stock under the ATM program and the net proceeds to us were approximately $14.5 million after deducting commissions paid of approximately $0.5 million. On July 15, 2020, we entered into an
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amendment to the Sales Agreement, which modified the Sales Agreement to, among other things, amend the termination provisions of the Agreement and amend the maximum amount of shares of our common stock that we may offer and sell through or to H.C. Wainwright & Co., LLC from time to time under the ATM Program On March 19, 2021, we entered into a second amendment to the Sales Agreement, which modified the Sales Agreement to, among other things, reflect the Company’s filing of a new Registration Statement on Form S-3 with the SEC on March 22, 2021 and set the maximum amount of shares of our common stock that we may offer and sell through or to H.C. Wainwright at $50.0 million, subject to certain limitations set forth in the amendment. As of March 31, 2021, approximately $3.9 million remained available for issuance with respect to this ATM Program. As of April 14, 2021, upon the effectiveness of the Registration Statement on Form S-3, approximately $50.0 Million remained available for issuance with respect to this ATM Program.
Warrants
Series A Warrants
As of March 31, 2021, there were 271,875 Series A warrants outstanding. 217,875 Series A warrants were issued with an exercise price of $25.50 per share of common stock, are exercisable into an aggregate amount of up to 217,875 shares of our common stock, and have an expiration date of October 25, 2021. 54,000 Series A warrants with anti-dilution provisions were issued with an initial exercise price of $13.40 per share of common stock, are exercisable into an aggregate amount of up to 54,000 shares of our common stock, and have an expiration date of April 22, 2021. As of March 31, 2021, because of the anti-dilution provisions, these warrants had an adjusted exercise price of $1.15 per share of common stock.
Goldman Warrant
On February 4, 2019, we sold to Goldman Sachs & Co. LLC (the “Holder”), a Purchase Warrant for shares of our common stock (the “Warrant”) pursuant to which the Holder may purchase shares of the Company’s common stock in an aggregate amount of up to 404,634 shares (the “Warrant Shares”). Our common stock and warrant transactions during Fiscal 2021 triggered certain anti-dilution provisions in the warrants outstanding. As of March 31, 2021, the Holder may purchase shares of the Company’s common stock in an aggregate amount of up to 463,067 shares at an exercise price of $2.61.
Goldman “2020 Warrant”
On October 1, 2020, the Company entered into an Amendment No. 3 to the Purchase Warrant for shares of our common stock (the “Amendment No. 3”) with Special Situations Investing Group II, LLC (as successor in interest to Goldman Sachs & Co. LLC) (the “Warrant Holder”) that amended that certain Purchase Warrant for shares of our common stock originally issued by the Company to Goldman Sachs & Co. LLC, dated February 4, 2019, as amended (the “Original Warrant”). As of March 31, 2021, the holder may purchase shares of the Company’s common stock in an aggregate amount of up to 291,295 shares at an exercise price of $4.76.
September 2019 Pre-Funded and Series D Warrants
On September 4, 2019, we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain institutional and accredited investors pursuant to which we agreed to issue and sell in a registered direct offering (the “Registered Direct Offering”) an aggregate of 580,000 shares of our common stock at a negotiated purchase price of $5.00 per share, and pre-funded warrants to purchase up to an aggregate of 440,000 shares of our common stock at a negotiated purchase price of $5.00 per Pre-Funded Warrant, for aggregate gross proceeds of approximately $5.1 million (580,000 shares of common stock plus 440,000 pre-funded warrants at a $5.00 per share purchase price), before deducting placement agent fees and other offering expenses.
In a concurrent private placement, we agreed to issue to the purchasers warrants to purchase 765,000 shares of common stock, which represent 75% of the number of shares of common stock and shares underlying the Pre-Funded Warrants purchased in the Registered Direct Offering, pursuant to the Securities Purchase Agreement. The Common Warrants are exercisable for shares of common stock at an initial exercise price of $6.12 per share for a period of five years, starting on April 2, 2020 and expiring on April 2, 2025. In January 2021, three warrant holders exercised their rights to the warrant agreement to exercise on a cashless basis 690,000 Series D warrants at an exercise price of $6.12 per share
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under the warrant agreement. In accordance with terms of the warrant agreement, after taking into account the shares withheld to satisfy the cashless exercise option, we issued 352,279 shares of common stock. As of March 31, 2021, there were 75,000 Series D warrants outstanding at an exercise price of $6.12.
There were no stock options exercised during Fiscal 2021 and 2020. Repurchases of shares of our common stock for employee taxes due upon vesting of restricted stock units, net of employee stock purchases, resulted in approximately $0.1 million of net cash used during Fiscal 2021 and 2020.
Three-year Term Note On February 4, 2019, we entered into a Note Purchase Agreement, by and among us, certain subsidiaries of us as guarantors, Goldman Sachs Specialty Lending Holdings, Inc., as collateral agent and any other Purchasers party thereto from time to time , in connection with the sale of senior secured notes of us in a private placement exempt from registration under the Securities Act of 1933, as amended. Under the Note Purchase Agreement, we sold to the Purchaser $30.0 million aggregate principal amount of senior secured notes (the “Notes”). The first interest payment on the Notes was on March 31, 2019. On October 1, 2020, pursuant to A&R Note Purchase Agreement, we increased the amount of borrowing under the Notes by $20.0 million to $50.0 million, and all outstanding Notes bear interest at the Adjusted (London Interbank Offer) LIBO Rate (as defined in the A&R Note Purchase Agreement) plus 8.75% per annum. The Notes do not amortize and the entire principal balance is due in a single payment on the maturity date. As of March 31, 2021, $51.0 million in borrowings were outstanding under the Notes, which includes the accrual for an exit fee to be paid at maturity or upon pre-payment. Pursuant to the First Amendment to the A&R Note Purchase dated as of May 13, 2021, the minimum consolidated liquidity requirement increased from $9.0 million to $12.0 million. As of March 31, 2021, we were in compliance with the covenants contained in the A&R Note Purchase Agreement.
Paycheck Protection Program Loan On April 15, 2020, we applied for an unsecured PPP Loan in the principal amount of $2,610,200 under the Small Business Administration Paycheck Protection Program enabled by the Coronavirus Aid, Relief and Economic Security Act of 2020. On April 24, 2020, we entered into a promissory note with Western Alliance Bank. The Company received the full amount of the PPP Loan on April 24, 2020. In accordance with the requirements of the CARES Act, we intend to use proceeds from the PPP Loan to support fixed costs such as payroll costs, rent and utilities. On May 13, 2020, we repaid $660,200 of the PPP Loan in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs Specialty Lending Group, L.P.
The advance under the PPP Loan bears interest at a rate per annum of 1%. The PPP Loan matures on April 24, 2022.
The PPP Loan may be forgiven partially or fully if the funding received is used for payroll costs, interest on mortgages, rent, and utilities, provided that at least 75% of the forgiven amount has been used for payroll costs. Forgiveness is based on the Company maintaining, or quickly rehiring employees and maintaining applicable salary levels.
Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease. Any forgiveness of the PPP Loan shall be subject to approval of the SBA and will require the Company and Western Alliance to apply to the SBA for such treatment in the future.
In January 2021, management applied for forgiveness on the PPP Loan. Management will account for forgiveness on the PPP Loan in accordance with ASC 470 and record a gain on extinguishment of debt on its condensed consolidated financial statements and related footnote disclosures, provided forgiveness be approved by the SBA. In February 2021, the Company applied for forgiveness of the original balance in full and is awaiting for review and approval. No assurance can be provided that forgiveness of any portion of the PPP loan will be obtained.
Working Capital Cash provided from working capital was $6.4 million during Fiscal 2021, an improvement of $10.4 million from the cash used for working capital of $4.0 million during Fiscal 2020. These decreases in cash used for working capital and other operating assets and liabilities were primarily due to reductions in inventory and accounts payable payments, partially offset by an increase in accounts receivable and changes in customer deposits.
Evaluation of Ability to Maintain Current Level of Operations In connection with preparing the consolidated financial statements for the fiscal year ended March 31, 2021, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about our ability to meet our obligations as they became
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due for the next twelve months from the date of issuance of our Fiscal 2021 consolidated financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, negative cash flows from operating activities, the continued negative impact by the volatility of the global oil and gas markets, a strong U.S. dollar in certain markets making our products more expensive in such markets, the COVID-19 pandemic, and ongoing global geopolitical tensions. We incurred a net loss of $18.4 million and provided cash from operating activities of $1.7 million during the Fiscal 2021. Our working capital requirements during Fiscal 2021 were in-line with management’s expectations, which included reductions in inventory and accounts payable primarily due to our lower revenue levels. Our net loss improved during Fiscal 2021 primarily due to reduced overhead and operating expenses resulting from our COVID-19 Business Continuity Plan, as well as reduced FPP costs as our reliability improved due to the reduced impact of the part defect from a supplier first identified during the first quarter of Fiscal 2019. As of March 31, 2021, we had cash and cash equivalents of $49.5 million, and outstanding debt of $51.0 million at fair value (see Note 11–Term Note Payable in the Notes to the Consolidated Financial Statements for further discussion of the outstanding debt).
Depending on the timing of our future sales and collection of related receivables, managing inventory costs and the timing of inventory purchases and deliveries required to fulfill the backlog, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will require us to achieve significantly increased sales volume which is dependent on many factors, including:
● the market acceptance of our products and services;
● our business, product and capital expenditure plans;
● capital improvements to new and existing facilities;
● our competitors’ response to our products and services;
● our customers’ ability to afford and/or finance our products.
Our accounts receivable balance, net of allowances, was $20.6 million and $16.2 million as of March 31, 2021 and 2020, respectively. Days sales outstanding in accounts receivable, (“DSO”), increased to 105 days as of March 31, 2021, compared to 85 days as of March 31, 2020 due to delayed collections in all markets due to the COVID-19 pandemic and the weakening oil and gas markets. We recorded net bad debt recovery of approximately $0.2 million and net bad debt expense of approximately $0.4 million, for Fiscal 2021 and 2020, respectively. Our allowance for doubtful accounts, was $0.3 million and $0.7 million as of March 31, 2021 and 2020, respectively.
No assurances can be given that future bad debt expense will not increase above current operating levels. Increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on cash flows and results of operations. In addition, our ability to access the capital markets may be severely restricted or made very expensive at a time when we need, or would like, to do so, which could have a material adverse impact on our liquidity and financial resources. Certain industries in which our customers do business and certain geographic areas have been and could continue to be adversely affected by the previously referenced economic and geopolitical considerations.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
Impact of Recently Issued Accounting Standards
Refer to Note 2 – Summary of Significant Accounting policies in the Notes to Consolidated Financial Statements for information regarding new accounting standards.
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this Item.
Item 8. Financial Statements and Supplementary Data.
Our Consolidated Financial Statements included in this Form 10-K beginning at page F-1 are incorporated in this Item 8 by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
In connection with the preparation of this Form 10-K for the fiscal year ended March 31, 2021, an evaluation was performed under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of March 31, 2021 and provided reasonable assurance that the information required to be disclosed by us in reports we submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms prescribed by the SEC and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our CEO and CFO and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
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We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, management concluded that we maintained effective internal control over financial reporting as of March 31, 2021.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors
The information required by this Item will be included in the Company’s 2021 Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for the Company’s 2021 Annual Meeting of Shareholders (“2021 Proxy Statement”) and is incorporated herein by reference. Such Proxy Statement will be filed with the SEC within 120 days after the end Fiscal 2021.
Delinquent Section 16(a) Reports
The information required regarding our directors’ and executive officers’ compliance with Section 16(a) of the Exchange Act will be included in the Company’s 2021 Proxy Statement under the heading “Delinquent Section 16(a) Reports” and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item will be included in the Company’s 2021 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item will be included in the Company’s 2021 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item will be included in the Company’s 2021 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Firm Fees and Services.
The information required by this Item will be included in the Company’s 2021 Proxy Statement and is incorporated herein by reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) 1. and 2. Financial statements and financial statement schedule
The financial statements and notes are listed in the Index to Consolidated Financial Statements on page F-1 of this Report. Financial statement schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits
The exhibits filed as part of this Form 10-K are set forth on the Exhibit Index immediately preceding the signatures of this Form 10-K. The Exhibit Index is incorporated herein by reference.
Item 16. Form 10-K Summary.
Not applicable.
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CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2021 and 2020 F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders’ Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
Financial statement schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Capstone Green Energy Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Capstone Green Energy Corporation (the “Company”) as of March 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended March 31, 2021 and 2020, and the related notes (collectively referred to as 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, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
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 Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the 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 audit[s] to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
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 provides 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) involved our 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.
Accounts Receivable Allowances
Description of Matter
As described in Note 2 to the consolidated financial statements, management maintains allowances for estimated losses resulting from the inability of customers to make required payments and other accounts receivable allowances.
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The principal considerations for our determination that performing procedures relating to the accounts receivable allowances is a critical audit matter are (i) the significant judgement by management when determining the estimate for the accounts receivable allowances; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s estimate and significant assumptions related to the customers continued ability to make required payments.
How We Addressed the Matter
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, testing management’s process for determining the accounts receivable allowances. Procedures related to management’s estimate included evaluating the appropriateness of the method used by management, the completeness, accuracy, and relevance of underlying data used in the estimate, and the reasonableness of significant assumptions used by management in estimating the customers continued ability to make required payments. Evaluating management’s assumptions relating to customers’ credit worthiness, historical payment experience with the customer, and the customers’ new business opportunities.
Extended Warranty – Powerhead Failure
Description of Matter
As described in Note 6 to the consolidated financial statements, management accrued an extended warranty to account for the replacement of high risk failure parts in fielded systems due to a supplier defect. Management’s estimate of this extended warranty liability is generally affected by historical failure rates within a certain population of components, repair costs, and the point of failure within the product life cycle.
The principal considerations for our determination that performing procedures relating to the extended warranty liability is a critical audit matter are (i) the significant judgement by management when determining the estimate for the extended warranty liability; and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s estimate and significant assumptions related to historical failure rates, repair costs, and the point of failure within the product life cycle.
How We Addressed the Matter
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, testing management’s process for determining the extended warranty liability. Procedures related to management’s estimate included evaluating the appropriateness of the method used by management, the completeness, accuracy, and relevance of underlying data used in the warranty estimate, and the reasonableness of significant assumptions used by management in estimating the extended warranty liability related to the component failure rates, repair costs, and the point of failure within the product life cycle. Evaluating management’s assumptions relating to the component failure rates, repair costs, and the point of failure within the product life cycle involved evaluating whether the assumptions were reasonable considering historical product experience of the Company.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2017.
Costa Mesa, California
June 11, 2021
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CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, March 31,
Assets
Current Assets:
Prepaid expenses and other current assets 4,953 3,987
Property, plant, equipment and rental assets, net 9,630 7,749
Non-current portion of inventories 1,845 1,221
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses $ 19,767 $ 15,000
Accrued salaries and wages 1,889 1,644
Current portion of notes payable and lease obligations 576 477
Deferred revenue - non-current 765 944
Long-term portion of notes payable and lease obligations 4,762 5,074
Commitments and contingencies (Note 12)
Stockholders’ Equity:
Total liabilities and stockholders' equity $ 106,022 $ 73,955
See accompanying notes to consolidated financial statements.
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CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Year Ended
March 31,
Revenue:
Cost of goods sold:
Operating expenses:
Research and development 2,417 3,649
Selling, general and administrative 18,391 22,211
Interest income 30 8
Loss on debt extinguishment (4,282) —
Loss before provision for income taxes (18,368) (21,886)
Provision for income taxes 19 12
Less: Deemed dividend on purchase warrant for common shares 15 87
Net loss attributable to common stockholders $ (18,402) $ (21,985)
See accompanying notes to consolidated financial statements.
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CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Additional Total
Common Stock Paid-in Accumulated Treasury Stock Stockholders’
Shares Amount Capital Deficit Shares Amount Equity
Purchase of treasury stock — — — — 31,338 (103) (103)
Vested restricted stock awards 73,983 — 102 — — — 102
Stock-based compensation — — 913 — — — 913
Exercise of employee stock purchases 522 — 3 — — — 3
Stock awards to Board of Directors 26,315 — (24) — — — (24)
Warrants exercised 440,000 1 — — — — 1
Change in warrants valuation — — 291 — — — 291
Purchase of treasury stock — — — — 16,377 (74) (74)
Vested restricted stock awards 71,767 — 74 — — — 74
Stock-based compensation — — 937 — — — 937
Stock awards to Board of Directors 57,098 — (38) — — — (38)
Warrants issued — — 761 — — — 761
Warrants exercised 352,279 — — — — — —
Change in warrants valuation — — 99 — — — 99
See accompanying notes to consolidated financial statements.
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CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended March 31,
Cash Flows from Operating Activities:
Depreciation and amortization 1,452 1,616
Amortization of financing costs and discounts 623 1,155
Amortization of right-of-use assets 378 870
Loss on debt extinguishment 4,282 —
Provision for (reduction in) accounts receivable allowances (228) 431
Inventory provision 305 564
Provision for warranty expenses 5,930 594
(Gain) loss on disposal of equipment (1) 17
Stock-based compensation 937 913
Changes in operating assets and liabilities:
Accounts receivable (4,125) (449)
Prepaid expenses, other current assets and other assets 653 1,215
Accounts payable and accrued expenses 4,652 (2,567)
Accrued salaries and wages and long term liabilities 245 8
Accrued warranty reserve (2,014) (1,274)
Deferred revenue (1,703) 606
Net cash provided by (used in) operating activities 1,701 (19,698)
Cash Flows from Investing Activities:
Net cash used in investing activities (3,209) (4,207)
Cash Flows from Financing Activities:
Net proceeds from term note payable 20,833 —
Repayment of notes payable and lease obligations (691) (613)
Cash used in employee stock-based transactions (74) (100)
Net proceeds from issuance of common stock and warrants 15,905 9,959
Net cash provided by financing activities 35,973 9,246
Net increase (decrease) in Cash and Cash Equivalents 34,465 (14,659)
Cash and Cash Equivalents, Beginning of Year 15,068 29,727
Cash and Cash Equivalents, End of Year $ 49,533 $ 15,068
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Income taxes $ 14 $ 17
Supplemental Disclosures of Non-Cash Information:
Acquisition of property and equipment through accounts payable $ 36 $ 72
Deemed dividend $ 15 $ 87
See accompanying notes to consolidated financial statements.
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CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Basis of Presentation
Capstone Green Energy Corporation (“Capstone”, “We” or the “Company”) is a provider of customized microgrid solutions and on-site energy technology systems focused on helping customers around the globe meet their environmental, energy savings, and resiliency goals. These solutions include stationary distributed power generation applications and distribution networks, including cogeneration (combined heat and power (“CHP”), integrated combined heat and power (“ICHP”), and combined cooling, heat and power (“CCHP”), renewable energy, natural resources, and critical power supply. In April 2021, we added additional products to our portfolio and shifted our focus to four key business lines. Our Energy Conversion Products business lines is driven by the Company’s industry-leading, highly efficient, low-emission, resilient microturbine energy systems offering scalable solutions in addition to a broad range of customer-tailored solutions, including hybrid energy systems and larger frame industrial turbines. Through our Energy as a Service business line, we offer rental solutions utilizing our microturbine energy systems and battery storage systems, comprehensive factory protection plan service contracts that guarantee life-cycle costs, as well as aftermarket spare parts. Our two emerging business lines are Energy Storage Products and Hydrogen Energy Solutions. Our Energy Storage Products business line designs and installs microgrid storage systems creating customized solutions using a combination of battery technologies and monitoring software. Through our Hydrogen Energy Solutions business line, we offer customers a variety of hydrogen products, including the Company’s microturbine energy systems. Because these are new offerings, Energy Storage Products and Hydrogen Energy Solutions revenue has been immaterial to date. The Company was organized in 1988 and has been commercially producing its microturbine generators since 1998.
On April 22, 2021, the Company filed with the Secretary of State of the State of Delaware a Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of the Company for the sole purpose of changing the Company’s name to Capstone Green Energy Corporation effective as of 12:01 a.m. Eastern Time on April 22, 2021 (the “Corporate Name Change”). In addition, the Company amended and restated its Fourth Amended and Restated Bylaws, effective as of April 22, 2021, solely to reflect the Corporate Name Change.
This Annual Report on Form 10-K (this “Form 10-K”) refers to the Company’s fiscal years ended March 31 as its “Fiscal” years.
The consolidated financial statements include the accounts of the Company, Capstone Turbine International, Inc., its wholly owned subsidiary that was formed in June 2004, Capstone Turbine Singapore Pte., Ltd., its wholly owned subsidiary that was formed in February 2011, and Capstone Turbine Financial Services, LLC, its wholly owned subsidiary that was formed in October 2015, after elimination of inter-company transactions. The Company closed its wholly owned subsidiary, Capstone Turbine Singapore Pte., Ltd and the corporate structure related to this entity was dissolved in September 2018.
Certain reclassifications have been made to the prior year’s financial statements to enhance comparability with the current year’s financial statements. As a result, certain line items have been amended in the Consolidated Statements of Operations and the related notes to the consolidated financial statements. Comparative figures have been adjusted to conform to the current year’s presentation. The items were reclassified as follows (in thousands):
Previously Reported After Reclassification
Year Ended March 31, 2020 Year Ended March 31, 2020
Product, accessories and parts $ 48,143 Product and accessories $ 35,338
Total revenue $ 68,926 Total revenue $ 68,926
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies
Cash Equivalents The Company considers only those investments that are highly liquid and readily convertible to cash with original maturities of three months or less at date of purchase as cash equivalents.
Fair Value of Financial Instruments The carrying value of certain financial instruments, including cash equivalents, accounts receivable, accounts payable, revolving credit facility and notes payable approximate fair market value based on their short-term nature. See Note 10—Fair Value Measurements, for disclosure regarding the fair value of other financial instruments.
Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and are typically non-interest bearing. The Company maintains allowances for estimated losses resulting from the inability of customers to make required payments and other accounts receivable allowances. Changes in the accounts receivable allowances are as follows (in thousands):
Reductions charged to costs and expenses 431
Bad debt write-off (5,026)
Additions charged to costs and expenses (228)
Bad debt write-off (161)
Inventories The Company values inventories at the lower of cost (determined on a first in first out (“FIFO”) basis) or net realizable value. The composition of inventory is routinely evaluated to identify slow-moving, excess, obsolete or otherwise impaired inventories. Inventories identified as impaired are evaluated to determine if write-downs are required. Included in the assessment is a review for obsolescence as a result of engineering changes in the Company’s products. All inventories expected to be used in more than one year are classified as long-term.
Depreciation and Amortization Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the related assets, ranging from two to ten years. Leasehold improvements are amortized over the lease term or the estimated useful lives of the assets, whichever is shorter. Intangible assets that have finite useful lives are amortized over their estimated useful lives using the straight-line method.
Long-Lived Assets The Company reviews the recoverability of long-lived assets, including intangible assets with finite lives, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest charges) are less than the carrying value, the Company may be required to record a write-down, which is determined based on the difference between the carrying value of the assets and their estimated fair value. The Company performed an analysis as of March 31, 2021 and determined that no impairment was necessary. See Note 5—Intangible Assets.
Deferred Revenue Deferred revenue consists of deferred product and service revenue and customer deposits. Deferred revenue will be recognized when earned in accordance with the Company’s revenue recognition policy. The Company has the right to retain all or part of customer deposits under certain conditions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue On April 1, 2018, the Company adopted the new revenue standard ASU 2014-09 and applied it to all contracts using the modified retrospective method. The Company determined there was no change in applying the new revenue standard, therefore no adjustment to the opening balance of accumulated deficit was needed.
The Company derives its revenues primarily from system sales, service contracts and professional services. Revenues are recognized when control of the systems and services is transferred to the Company’s customers in an amount that reflects the consideration it expects to be entitled to in exchange for those services.
The Company determines revenue recognition through the following steps:
● Identification of the contract, or contracts, with a customer
● Identification of the performance obligations in the contract
● Determination of the transaction price
The Company recognizes revenue when performance obligations identified under the terms of contracts with its customers are satisfied, which generally occurs, for systems, upon the transfer of control in accordance with the contractual terms and conditions of the sale. The majority of the Company’s revenue associated with systems is recognized at a point in time when the system is shipped to the customer. Revenue from service contracts and post-shipment performance obligations is recognized when or as those obligations are satisfied. The Company primarily offers assurance-type standard warranties that do not represent separate performance obligations and will separately offer and price extended warranties that are separate performance obligations for which the associated revenue is recognized over-time based on the extended warranty period. The Company records amounts billed to customers for reimbursement of shipping and handling costs within revenue. Shipping and handling costs associated with outbound freight after control over a system has transferred to a customer are accounted for as fulfillment costs and are included in cost of goods sold. Sales taxes and other usage-based taxes are excluded from revenue.
Comprehensive factory protection plan service contracts require payment at the beginning of the contract period. Advance payments are not considered a significant financing component as they are typically received less than one year before the related performance obligations are satisfied. These payments are treated as a contract liability and are classified in deferred revenue in the Consolidated Balance Sheets. Once control transfers to the customer and the Company meets the revenue recognition criteria, the deferred revenue is recognized in the Consolidated Statement of Operations. The deferred revenue relating to the annual maintenance service contracts is recognized in the Consolidated Statement of Operations on a straight line basis over the expected term of the contract.
Significant Judgments - Contracts with Multiple Performance Obligations
The Company enters into contracts with its customers that often include promises to transfer multiple products, parts, accessories, FPP and services. A performance obligation is a promise in a contract with a customer to transfer products or services that are distinct. Determining whether products and services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting may require significant judgment.
Products, parts and accessories are distinct as such services are often sold separately. In determining whether FPP and service contracts are distinct, the Company considers the following factors for each FPP and services agreement: availability of the services from other vendors, the nature of the services, the timing of when the services contract was signed in comparison to the product delivery date and the contractual dependence of the product on the customer’s
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
satisfaction with the professional services work. To date, the Company has concluded that all of the FPP and services contracts included in contracts with multiple performance obligations are distinct.
The Company allocates the transaction price to each performance obligation on a relative standalone selling price (“SSP”) basis. The SSP is the price at which the Company would sell a promised product or service separately to a customer. Judgment is required to determine the SSP for each distinct performance obligation.
The Company determines SSP by considering its overall pricing objectives and market conditions. Significant pricing practices taken into consideration include the Company’s discounting practices, the size and volume of the Company’s transactions, the customer demographic, the geographic area where systems and services are sold, price lists, its go-to-market strategy, historical sales and contract prices. The determination of SSP is made through consultation with and approval by the Company’s management, taking into consideration the go-to-market strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes to SSP.
In certain cases, the Company is able to establish SSP based on observable prices of products or services sold separately in comparable circumstances to similar customers. The Company uses a single amount to estimate SSP when it has observable prices.
If SSP is not directly observable, for example when pricing is highly variable, the Company uses a range of SSP. The Company determines the SSP range using information that may include market conditions or other observable inputs. The Company typically has more than one SSP for individual products and services due to the stratification of those products and services by customer size and geography.
Unsatisfied Performance Obligations
The Company has elected the practical expedient to disclose only the value of unsatisfied performance obligations for contracts with an original expected length greater than one year. The majority of the Company’s revenues resulted from sales of inventoried systems with short periods of manufacture and delivery and thus are excluded from this disclosure.
As of March 31, 2021, the FPP backlog was approximately $75.1 million, which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2041.
Practical Expedients
We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.
Warranty The Company provides for the estimated costs of warranties at the time revenue is recognized. The specific terms and conditions of those warranties vary depending upon the product sold and geography of sale. The Company’s product warranties generally start from the delivery date and continue for up to twenty-four months. Factors that affect the Company’s warranty obligation include product failure rates, anticipated hours of product operations and costs of repair or replacement in correcting product failures. These factors are estimates that may change based on new information that becomes available each period. Similarly, the Company also accrues the estimated costs to address reliability repairs on products no longer in warranty when, in the Company’s judgment, and in accordance with a specific plan developed by the Company, it is prudent to provide such repairs. The Company assesses the adequacy of recorded warranty liabilities quarterly and makes adjustments to the liability as necessary. When the Company has sufficient evidence that product changes are altering the historical failure occurrence rates, the impact of such changes is then taken into account in estimating future warranty liabilities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Research and Development (“R&D”) The Company accounts for grant distributions and development funding as offsets to R&D expenses and both are recorded as the related costs are incurred. There were no offsets to R&D during Fiscal 2021 and 2020.
Income Taxes Deferred income tax assets and liabilities are computed for differences between the consolidated financial statement and income tax basis of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized.
ASC Topic 740-10, Income Taxes, clarifies the accounting for uncertainty in income taxes recognized in our financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax potions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as interest and other expense, net in the statements of operations.
Contingencies The Company records an estimated loss from a loss contingency when information available prior to issuance of its financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated.
Risk Concentrations Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. At March 31, 2021, the majority of our cash balances were held at financial institutions located in California. The accounts at these institutions are insured by the Federal Deposit Insurance Corporation up to certain limits. Balances that exceed the insurance coverage aggregate to approximately $48.6 million as of March 31, 2021. The Company places its cash and cash equivalents with high credit quality institutions. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses.
Sales to CAL and E-Finity accounted for 15% and 12%, respectively, of the Company’s revenue for Fiscal 2021. Sales to E-Finity accounted for 12% of Company’s revenue for Fiscal 2020. Additionally, E-Finity accounted for 13% and 14% of net accounts receivable as of March 31, 2021 and March 31, 2020, respectively.
The Company recorded net bad debt recovery of $0.2 million and net bad debt expense of $0.4 million for Fiscal 2021 and 2020, respectively.
Certain components of the Company’s products are available from a limited number of suppliers. An interruption in supply could cause a delay in manufacturing, which would affect operating results adversely.
Estimates and Assumptions The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include accounting for accounts receivable allowances, stock-based compensation, inventory write-downs, valuation of long-lived assets including intangible assets with finite lives, product warranties, income taxes and other contingencies. Actual results could differ from those estimates.
Net Loss Per Common Share Basic loss per common share is computed using the weighted-average number of common shares outstanding for the period. Diluted loss per share is also computed without consideration to potentially dilutive instruments because the Company incurred losses which would make such instruments antidilutive. Outstanding stock options and restricted stock units at March 31, 2021 and 2020 were 0.5 million and 0.3 million, respectively. As of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2021 and 2020, the number of warrants excluded from diluted net loss per common share computations was approximately 1.1 million and 1.5 million, respectively.
Stock-Based Compensation Options or stock awards are recorded at their estimated fair value at the measurement date. The Company recognizes compensation cost for options and stock awards that have a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Leases Effective April 1, 2019, the Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.
In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election and recognizes rent expense on a straight-line basis over the lease term.
Reverse Stock Split At the annual meeting of stockholders of the Company held on August 29, 2019, the Company’s stockholders approved an amendment to the Company’s Second Amended and Restated Certificate of Incorporation (the “Amendment”) to effect a reverse stock split of the Company’s common stock, $0.001 par value per share (“Common Stock”) at a ratio in the range of one-for-five (1:5) to one-for-ten (1:10). Pursuant to such authority granted by the stockholders, the Company’s Board of Directors (the “Board”) approved a one-for-ten (1:10) reverse stock split (the “Reverse Stock Split”) of the Common Stock and the filing of the Amendment. The Certificate of Amendment was filed with the Secretary of State of Delaware, effective on October 21, 2019 and the Reverse Stock Split became effective as of that date. Accordingly, all references to numbers of shares of Common Stock, including the number of shares of Common Stock on an as-if-converted basis, per-share data and share prices and exercise prices in the accompanying condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis.
Evaluation of Ability to Maintain Current Level of Operations In connection with the preparation of these consolidated financial statements for Fiscal 2021, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to meet its obligations as they became due over the next twelve months from the date of issuance of the Company’s Fiscal 2021 consolidated financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, negative cash flows from operating activities, the continued impact of the COVID-19 pandemic, volatility of the global oil and gas markets, a strong U.S. dollar in certain markets making its products more expensive in such markets and ongoing global geopolitical tensions. The Company incurred a net loss of $18.4 million and provided cash from operating activities of $1.7 million during Fiscal 2021. The Company’s working capital requirements during Fiscal 2021 were in-line with management’s expectations, which included reductions in inventory and accounts payable primarily due our lower revenue levels. The Company’s net loss improved during Fiscal 2021 primarily due to reduced overhead and operating expenses resulting from the Company’s COVID-19 Business Continuity Plan described below, as well as reduced FPP costs as the Company’s reliability improved due to the reduced impact of the part defect from a supplier first identified during the first quarter of Fiscal 2019. As of March 31, 2021, the Company had cash and cash equivalents of $49.5 million, and outstanding debt of $51.0 million at fair value (see Note 11–Term Note Payable for further discussion of the outstanding debt).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management evaluated these conditions in relation to the Company’s ability to meet its obligations as they become due over the next twelve months from the date of issuance of these consolidated financial statements. The Company’s ability to continue current operations and to execute on management’s plan is dependent on its ability to generate sufficient cash flows from operations. Management believes that the Company will continue to make progress on its path to profitability by continuing to maintain low operating expenses and develop its geographical and vertical markets. The Company may seek to raise funds by selling additional securities (through the at-the-market offering or otherwise) to the public or to selected investors or by obtaining additional debt financing. There is no assurance that the Company will be able to obtain additional funds on commercially favorable terms or at all. If the Company raises additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced. In addition, any equity or debt securities that the Company would issue may include rights, preferences or privileges senior to those of the holders of its common stock.
Based on the Company’s current operating plan, management anticipates that, given current working capital levels, current financial projections and funds received under debt agreements as further described in Note 11-Term Note Payable, the Company will be able to meet its financial obligations as they become due over at least the next twelve months from the date of issuance of the Company’s Fiscal 2021 consolidated financial statements.
Company Response to COVID-19
In March 2020, the Company began to monitor the global effects of COVID-19, the worldwide spread of which led the World Health Organization (“WHO”) to characterize it as a pandemic on March 11, 2020. Thereafter, most U.S. states imposed “stay-at-home” orders on their populations to stem the spread of COVID-19. Of specific interest to the Company, stay-at-home orders were imposed in the state of California on March 20, 2020.
On March 23, 2020 the Company enacted a Business Continuity Plan in response to COVID-19. Beginning March 30, 2020, the Company furloughed 52 employees, leaving behind only staff deemed essential for day-to-day administrative operations for a minimum period of 45 days. The Company’s Leadership Team volunteered to take a 25% temporary salary cut. In addition, 25 other top Company managers volunteered to take a similar 15% reduction in salary. Several employees returned to work June 1, 2020, most with the 15% voluntary salary cuts, with others returning in a staggered manner through the end of September 2020. Additionally, in March 2020, the Board voted to take a temporary 25% reduction in base cash retainer in support of the Company’s Business Continuity Plan. As a result of the continued global economic slowdown due to COVID-19 and the associated decline in global crude oil prices, the Company eliminated 26 positions on June 1, 2020. During the period of March 30, 2020 to June 1, 2020, the Company had limited production capability of new microturbine products, but had pre-built approximately 5.9 MW of microturbine finished goods during March 2020 for shipment during this period of suspended production. On September 28, 2020 salaries were returned to 100% and remaining furloughed employees returned to work. The Company’s vendor supply chain has also been impacted by the pandemic; however, the Company has been able to maintain sufficient supply flow to continue operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment Reporting The Company is considered to be a single reporting segment. The business activities of this reporting segment are the development, manufacture and sale of turbine generator sets and their related parts and service. Following is the geographic revenue information based on the primary operating location of the Company’s customers (in thousands):
Year Ended March 31,
All other North America 321 1,145
The following table summarizes the Company’s revenue by product (in thousands):
Year Ended March 31,
Unit upgrades — 229
Total Product and Accessories 36,517 35,338
Substantially all of the Company’s operating assets are in the United States.
Impact of Recently Issued Accounting Standards
Not yet adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The new guidance removes certain exceptions to the general principles of ASC 740 in order to simplify the complexities of its application. These changes include eliminations to the exceptions for intraperiod tax allocation, recognizing deferred tax liabilities related to outside basis differences, and year-to-date losses in interim periods, among others. The effective date of this guidance for public companies is for fiscal years, and interim period within those fiscal years, beginning after December 15, 2020. The Company does not anticipate the adoption will have a material impact on its financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management considers the applicability and impact of all Accounting Standards Updates (“ASUs”). The ASUs not listed were assessed and determined by management to be either not applicable or are expected to have minimal impact on our consolidated financial position and/or results of operations.
3. Inventories
Inventories are valued at the lower of cost (determined on a first in first out (“FIFO”) basis) or net realizable value and consisted of the following (in thousands):
March 31, March 31,
Work in process (30) 3
Finished goods — 4,820
Less: inventory reserve (2,051) (2,814)
Less: non-current portion (1,845) (1,221)
Total inventory, net-current portion $ 11,829 $ 21,460
The non-current portion of inventories represents that portion of the inventories in excess of amounts expected to be used in the next twelve months. The non-current inventories are primarily comprised of repair parts for older generation products that are still in operation, but are not technologically compatible with current configurations. The weighted average age of the non-current portion of inventories on hand as of March 31, 2021 is 1.2 years. The Company expects to use the non-current portion of the inventories on hand as of March 31, 2021 over the periods presented in the following table (in thousands):