UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K10-K
(Mark One) | |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended March 31 | |
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or | |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to | |
Commission file number 001‑15957001-15957
CAPSTONE TURBINEGREEN ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | |
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(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
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(Address of principal executive offices) | | (Zip Code) |
(818) 734‑5300(818) 734-5300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of exchange on which registered |
Common Stock, par value $.001 per share | | CGRN | | NASDAQ Capital Market |
Series B Junior Participating Preferred Stock Purchase Rights | | | | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well‑knownwell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑TS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑acceleratednon-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and, “smaller reporting company” and “emerging growth company” in Rule 12b‑212b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer |
| Smaller reporting company ☒ |
Emerging growth company ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the shares of Common Stock of the registrant held by non‑affiliatesnon-affiliates on September 30, 20152021 was approximately $113.9$51.7 million.
As of June 3, 2016,July 11, 2022, there were 28,293,68815,315,565, shares of the registrant’s Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the registrant’s 20162022 annual meeting of stockholders are incorporated by reference into Part III of this report to the extent described therein.
CAPSTONE TURBINEGREEN ENERGY CORPORATION
FORM 10‑K10-K
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 56 | |
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| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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| Certain Relationships and Related Transactions, and Director Independence |
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains or refers to certain statements that are not historical fact and are “forward-looking” statements as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. Words such as “expect,” “anticipate,” “should,” “believe,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend” and variations of these terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements contain these identifying words.
These statements are based largely on our current expectations, estimates and forecasts and are subject to a number of risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K, which could cause actual results, performance and achievements to differ materially from those anticipated by these forward-looking statements. Furthermore, new risks may emerge from time to time and it is not possible for us to predict all risks, nor can we assess the impact of all factors on the business or the extent to which any factor, or combination of factors, may cause actual results, performance or achievement to differ materially from those contained in any forward-looking statements.
Forward-looking statements speak only as of the date when made and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Factors to consider when evaluating these forward-looking statements include, but are not limited to:
| ● | the ongoing effects of the COVID-19 pandemic on our business, financial condition, results of operations and cash flows, and the fact that many of the other factors discussed below may be amplified by the COVID-19 pandemic and the restrictions that have been instituted as a result of the pandemic; |
| ● | the availability of credit and compliance with the agreements governing our indebtedness; |
| ● | risks related to our history of net losses and ability to raise additional capital and fund future operating requirements; |
| ● | the development of the market for and customer uses of our microturbines, including our Energy as a Service solutions; |
| ● | our ability to develop new products and enhance existing products; |
| ● | our ability to produce products on a timely basis in a high quality manner; |
| ● | availability of sources for and costs of component parts; |
| ● | competition in the markets in which we operate; |
| ● | operational interruption by fire, earthquake and other events beyond our control; |
| ● | federal, state and local regulations of our markets and products; |
| ● | usage of our federal and state net operating loss carryforwards; |
| ● | the financial performance of the oil and natural gas industry and other general business, industry and economic conditions applicable to us; |
| ● | changes to trade regulation, quotas, duties or tariffs, and sanctions caused by the changing U.S. and geopolitical environments, including the ongoing conflict between Russia and Ukraine; |
| ● | our ability to adequately protect our intellectual property rights; and |
| ● | the impact of pending or threatened litigation. |
The above description of risks and uncertainties is by no means all-inclusive, but highlights certain factors that we believe are important for your consideration. For a more detailed description of risk factors, please refer to Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.
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PART I
Overview
Capstone TurbineGreen Energy Corporation (“Capstone”, “We” or the “Company”) develops, manufactures, marketsis a provider of customized microgrid solutions, on-site resilient green Energy as a Service (EaaS) solutions, and serviceson-site energy technology systems focused on helping customers around the globe meet their environmental, energy savings, and resiliency goals. In April 2021, we added additional products to our portfolio and shifted our focus to four key business lines. Our Energy Conversion Products business line 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.
We develop, manufacture, market and service microturbine technology solutions for use in stationary distributed power generation and distribution networks applications, including energy efficient cogeneration (combinedcombined heat and power (“CHP”), integrated combined heat and power (“ICHP”), and combined cooling, heat and power (“CCHP”)), as well as renewable energy, natural resources, and critical power supply. In addition, our microturbines can be used as battery charging generators for hybrid electric vehiclesupply applications. Microturbines allow customers to produce power on‑siteon-site in parallel with the electric grid or stand-alone when no utility grid is available. Several technologies are used to provide “on‑site“on-site power generation” (also called “distributed generation”) such as reciprocating engines,engine (also known as internal combustion engines), solar photovoltaic power (“PV”), wind powered systemsturbines and fuel cells. 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. For customers whothat do not have access to the electric utility grid, microturbines provide clean, on‑on site power with fewer scheduled maintenance intervals and greater fuel flexibility than competing technologies. For customers with access to the electric grid, microturbines provide an additional source of continuous dutyon-site power generation, thereby providing additional reliability and potential cost savings.savings compared to the local utility. With our stand‑alonestand-alone feature, customers can produce their own energy in the event of a utility power outage and can use microturbines as their primary source of power for extended periods.periods of time unlike traditional diesel standby generator sets. Because our microturbines also produce clean, usable heat energy, they provide economic advantages to customers whothat can benefit from the use of hot water, chilled water, air conditioning and heating.steam. In addition, our microturbines have been used as battery charging generators for hybrid electric vehicles and to provide power to a vessel’s electrical loads in marine applications. Our microturbines are sold, installed and serviced primarily through our global distribution network. Together with our distributors, we offer new and remanufactured parts as well as a comprehensive Factory Protection Plan (“FPP”)factory protection plan through long-term service agreements ranging from 5 to 20 years. We also offer our microturbines for rent through our long-term rental program (which form a part of our EaaS business). Successful implementationIn addition to our existing microturbine products, we offer additional energy conversion products in the form of microturbines relies on the quality of the microturbine, marketability for appropriate applications,Baker Hughes 5 MW, 12 MW, and the quality of the installation16 MW industrial gas turbines, where we will purchase and support.resell their product.
We believe we were the first company to offer a commercially available power source using microturbine technology. Capstone offers microturbines designed for commercial, industrial, and utility usersonshore and offshore oil and gas applications with product offerings ranging from 30 kilowatts (“kW”) to one megawatt (“MW”) in electric power output. Our 30 kW (“C30”) microturbineoutput, which can produce enough electricity to power a small convenience store. The 65 kW (“C65”) microturbine can produce enough heat to provide hot water to a 100‑room hotel while also providing about one‑third of its electrical requirements. Our 200 kW (“C200”) microturbine is well suited for larger hotels, office buildings and wastewater treatment plants, among others. By packaging the C200 microturbine power modules into an International Organization for Standardization (“ISO”) sized container, Capstone has created a family of microturbine offerings from 600 kWbe deployed in arrays up to one megawatt in a compact footprint. Our 600kW, 800kW and 1000 kW (“C1000 Series”) microturbines are well suited for utility substations, larger commercial and industrial facilities and remote oil and gas applications.10 MWs. Our microturbines combine patented air‑air bearing technology, advanced combustion technology, and sophisticated power electronics, and advanced software controls to form efficient and ultra‑lowultra-low emission electricity and cooling and heat production systems. Because of our air‑air bearing technology, our microturbines do not require liquid lubricants.lube oil, grease, or traditional coolants. This means they do not require routine maintenance to change and dispose of lube oil, grease, or other liquid lubricants, as do the most common competing products.reciprocating engines.
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We also manufacture and supply controllers that provide complete automated system control, including electrical load following and custom logic to protect against expensive local utility demand charges. These controllers include the legacy Capstone Logic Controllers (CLC) and the Capstone PowerSync family of system controllers.
Our microturbines can be fueled by various sources, including natural gas, propane, butane, various sour gas,gases, renewable fuels such as renewable natural gas, landfill gas, biogas or digester gas, kerosene, diesel and biodiesel. The C65 and C200Our microturbines are available with integrated unit mounted heat exchangers, making them easy to engineer and install in applications where hot water, chilled water, air conditioning and steam is used. Our products produce exceptionally clean power. Our natural gas‑fueled C65 and C200 microturbines were certified by the California Air Resources Board (“CARB”) as meeting its stringent 2007 emissions requirements—the same emissions standard used to certify fuel cellsdesired. Alternative fuels, in particular hydrogen, are increasingly important and the same emissions levels asCompany recently released a state‑of‑the‑art central power plant. Our C65 and C200 Landfill and Digester Gas systems were certified by the CARB as meeting its 2008 waste gas emissions requirements for landfill and digester gas applications.
On February 1, 2010, we acquired the 100 kW (“TA100”)commercial microturbine product line from Calnetix Power Solutions, Inc. (“CPS”). The TA100 microturbine is most similar to the Capstone product design compared to other microturbine products in the industry. During the quarter ended March 31, 2016, we decided to limit the production of TA100 systemsthat can reliably run on a case-by-case basis for key customers. We will continue30% hydrogen / 70% natural gas mix. This is a promising milestone on the development roadmap to remanufacture engines and provide spare parts to our existing TA100 customers.100% hydrogen solutions.
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We sell complete microturbine units, subassemblies, components and various accessories. We also remanufacture microturbine engines and provide after‑market parts and services. Our microturbines are sold primarily through distributors and Original Equipment Manufacturers (“OEMs”). Distributors purchase our products for sale to end users and also provide service, application engineering and installation support. Distributors are also required to provide a variety of additional services, including engineering, the applicationsapplication, and air permit support services in which the microturbines will be used, installation support of the products at the end users’ sites, commissioning the installed applications and providing post‑post commissioning service, including a comprehensive FPP. Our distributors perform as value‑addedindependent value-added resellers. OEMs integrate Capstone’sour products into their own product solutions.
To assure proper installation of Capstone microturbine systems, we have instituted a Factory Trained Installer (“FTI”) training and certification program. Personnel from our distributors and OEMs, as well as design engineering firms, contractors and end users attend this FTI training. We offer to assist all customers by reviewing their installation designs to confirm that the technical requirements for proper operation have been met, such as electrical interconnections, load requirements, fuel type and pressure, cooling air flow and turbine exhaust routing. As part of the microturbine commissioning process, we also receive a checklist to confirm that the final installation adheres to Capstone technical requirements before we accept any warranty obligations. This is aimed at providing the end user with a proper installation that will operate as expected for the life of the equipment.
Through our global distribution network, we offer a comprehensive FPP for a fixed annual fee to perform regularly scheduled and unscheduled maintenance as needed. Capstone provides factory and on‑site training to certify all personnel that are allowed to perform service on our microturbines. Individuals who are certified are called Authorized Service Providers (“ASPs”), and must be employed by a distributor in order to perform work pursuant to a Capstone FPP. The majority of our distributors provide these services.
This Annual Report on Form 10‑K10-K (this “Form 10‑K”10-K”) refers to Capstone’sour fiscal years ending March 31 as its “Fiscal” years.
Our ProductsInitiative to Shift Towards Energy as a Service and Reduce Operating Costs
In March 2022, we implemented an expense reduction plan and announced our efforts to reduce operating costs and modify our operating model to better match our expanding EaaS business. In order to implement the expense reduction plan, we undertook a holistic review of our operations, taking the growing EaaS business into account. Beginning on February 28, 2022, we furloughed 17 employees for a period of 120 days, eliminated the position of Chief Revenue Officer, held by Jim Crouse, effective April 15, 2022, instituted 15% temporary pay cuts for approximately 36 employees and 25% temporary pay cuts for members of our senior leadership team, among other actions.
We believe that the implementation of the expenses reduction plan will help better align our current cost structure to support our higher margin EaaS revenues, which serves customers that are looking to outsource their energy management, while also lowering energy costs.
Company Response to COVID-19
In March 2020, we began commercial salesto 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 us, stay-at-home orders were imposed in the state of California on March 20, 2020.
On March 23, 2020 we enacted a Business Continuity Plan in response to COVID-19. Beginning March 30, 2020, we furloughed 52 employees, leaving behind only staff deemed essential for day-to-day administrative operations for a minimum period of 45 days. Our senior 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 scheduled to return in a staggered manner through to the end of September. Additionally, in March 2020, our board of directors (the “Board”) voted to take a temporary 25% reduction in base cash retainer in support of our C30Business Continuity Plan. 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 in 1998, targetingbut 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 emerging distributed generation industry that was being driven by fundamental changes in power requirements. In September 2000,pandemic; however, we shippedhave been able to maintain sufficient supply flow to continue operations as of the first commercial unitdate hereof.
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On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was replacednecessary to support the Company’s ongoing operations. Under the PPP, the Company could obtain a U.S. Small Business Administration loan in an amount equal to the average of the Company’s monthly payroll costs (as defined under the PPP) for calendar 2019 multiplied by 2.5 (approximately 10 weeks of payroll costs). Section 1106 of the CARES Act contains provisions for the forgiveness of all or a portion of a PPP loan, subject to the satisfaction of certain requirements. The amount eligible for forgiveness is, subject to certain limitations, the sum of the Company’s payroll costs, rent and utilities paid by the C65 modelCompany during the quarter ended March 31, 2006. We began shippingeight-week period beginning on the C60 ICHP solutionfunding date of the PPP loan.
On April 24, 2020, the Company closed on a PPP loan in 2003. Our C60 microturbinethe amount of $2,610,200, which was the first combustion power generation product to be certifiedtransferred by the CARBCompany into an account dedicated to allowable uses of the PPP loan proceeds. On May 13, 2020, the Company repaid $660,200 of the loan in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs Specialty Lending Group, L.P. In February 2021, the Company applied for forgiveness in full of the original balance of the PPP loan and the loan was forgiven in full on June 30, 2021. The Company received a refund of $660,200 and recorded these amounts within other income on the Company’s Consolidated Statements of Operations.
Despite the introduction of COVID-19 vaccines and improvements in the global economy as meetinga whole during Fiscal 2022, the pandemic remains volatile and continues to evolve, including the emergence of variants of the virus, such as the Omicron variant. We will continue to assess our operations, considering the guidance of local governments and global health organizations.
Products
Our 65 kW (“C65”) microturbine can produce enough heat to provide hot water to a 100 room hotel while also providing about one third of its stringent distributed generation emissions standards that went into effect in 2003. The firstelectrical requirements. Our 200 kW (“C200”) microturbine is well suited for larger hotels, office, commercial and industrial buildings, and wastewater treatment plants, among others. By packaging the C200 microturbine was shipped on August 28, 2008.power modules into single enclosures which are available in multiple sizes and are built in similar dimensions to a standard shipping container, we have created an upgradable family of microturbine offerings from 400 kW up to 1000 kW or 1 MW in a compact footprint engineered to function as a single source of power. Our C1000 Series product was developed based on Capstone’s C200 microturbine engine. The C1000 Series product can be configured into 1,000400 kW, 600 kW, 800 kW and 6001000 kW solutions in a single ISO‑sized container. The first(“C1000S Series”) microturbines are well suited for utility substations, larger commercial shipment of our C1000 Series product was on December 29, 2008. We began shipping TA100 microturbines in March 2010.
During Fiscal 2016, we booked total net orders of $53.9 million for 273 units, or 54.7 megawatts, compared to $84.5 million for 587 units, or 86.0 megawatts, during Fiscal 2015. We shipped 281 units with an aggregate of 60.0 megawatts, generating revenue of $58.4 million compared to 620 units with an aggregate of 91.4 megawatts, generating revenue of $90.4 million during Fiscal 2015. Total backlog as of March 31, 2016 decreased $56.2 million, or 34%, to $109.6 million from $165.7 million at March 31, 2015. As of March 31, 2016, we had 593 units, or 113.7 megawatts, in total backlog compared to 787 units, or 182.8 megawatts, at the same date last year. Ending backlog as of March 31, 2016, includes the removal of approximately $51.6 million for 186 units, or 63.8 megawatts, from BPC Engineering (“BPC”), one of the Company’s Russian distributors. This removal, which occurred during the three months ended September 30, 2015, was a proactive measure taken to align our backlog to management’s expectations because of the unsteady global macroeconomic environment experienced during Fiscal 2015, such as the softness of the globaland industrial facilities and remote oil and gas market,applications. Our 600 kW and 800 kW systems can be shipped in a substantially stronger U.S. dollar (making our productsfive-bay configuration which allows the end-use customer to add one to two more expensive overseas) and on-going geopolitical tensions in Russia. In addition, a portion of our TA100 backlog of approximately $2.4 million for 17 units, or 1.7 megawatts, acquired from CPS was removed during the three months ended March 31, 2016. This impairment aligns our TA100 backlog with management’s decision to limit the production of TA100 systems on a case-by-case basis for key customers. A significant portion of our backlog is concentrated200 kW microturbines in the international oil and gas market which may
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impactfuture to increase their total onsite power production from 600 kW to 1000 kW without any change to the overall timing of shipments orexisting site footprint, as 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. 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.customer’s business power demands expand over time.
The following table summarizes our backlog:
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| As of March 31, |
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| 2015 |
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| Megawatts |
| Units |
| Megawatts |
| Units |
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C30 |
| 2.4 |
| 79 |
| 2.9 |
| 97 |
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C65 |
| 26.1 |
| 402 |
| 32.6 |
| 502 |
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TA100 |
| 0.2 |
| 2 |
| 1.9 |
| 19 |
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C200 |
| 3.0 |
| 15 |
| 2.4 |
| 12 |
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C600 |
| 7.2 |
| 12 |
| 7.2 |
| 12 |
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C800 |
| 4.8 |
| 6 |
| 9.8 |
| 12 |
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C1000 |
| 69.0 |
| 69 |
| 125.0 |
| 125 |
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Waste heat recovery generator |
| 1.0 |
| 8 |
| 1.0 |
| 8 |
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Total Backlog |
| 113.7 |
| 593 |
| 182.8 |
| 787 |
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CapstoneOur microturbines are compact, lightweight and environmentally friendly generators of electricity and heat compared to competing technologies. They operate on the same principle as a jet engine with the added capability of using a variety of commercially available fuels. For example, our microturbines can operate on low British Thermal Unit (“BTU”) gas, which is gas with lower energy content, and can also operate on gas with a high amount of sulfur, known in the industry as sour gas. Examples of these fuel sources include methane from facilities such as wastewater treatment plants, landfills and anaerobic digesters. Our microturbines’ multi-fuel capability provides competitive advantages with respect to some of our selected vertical markets. The combustor system remains the same for all fuels except for the fuel injectors, which currently vary between liquid and multiple gaseous fuels.
Our microturbines incorporate four major design features: advanced combustion technology, patented air‑air bearing technology, digital power electronics and proprietary remote monitoring capability.systems.
| ● | Our advanced combustion technology allows our microturbines to achieve low emissions. Our natural gas fueled C65, C200S and C1000S series microturbines were certified by the California Air Resources Board (“CARB”) as meeting its stringent 2007 emissions requirements—the same emissions standard used to certify fuel cells and the same emissions levels that a central power plant must satisfy. Our C65 and C200 Landfill and Digester Gas systems were certified by the CARB as meeting its 2008 waste gas |
Our advanced combustion technology allows Capstone microturbines to achieve low emissions with a design geared towards manufacturability. These low emission levels not only provide an environmentally friendly product, but also eliminate permitting requirements in several municipalities for continuously operated onsite power generation. The air‑bearing system allows the microturbine’s single moving assembly to produce power without the need for typical petroleum‑based lubrication. Air‑bearings use a high‑pressure field5
| emissions requirements for landfill and digester gas applications. These low emission levels not only provide an environmentally friendly product, but also eliminate permitting requirements in several municipalities for continuously operated onsite power generation. |
| ● | Our patented air bearing system allows the microturbine’s single moving assembly to produce power without the need for typical petroleum-based lubrication. Air bearings use a high pressure field of air rather than petroleum lubricants. This improves reliability and reduces maintenance such as oil changes. |
| ● | Our digital power electronics manage critical functions and monitor operations of the microturbine. Our electronic controls manage the microturbine’s speed, temperature and fuel flow and communication with external networks and building management systems. The digital power electronics coordinate with the grid when the units are operated in a grid connect mode and with the onboard battery when equipped for standalone mode. The digital power electronics also include the functionality of seamless transfer capabilities, ensuring the end-users’ critical loads do not experience any interruption to their operation in the event of a utility power outage. All control functions are performed digitally. Performance is optimized, resulting in low emissions, high reliability, and high efficiency over a variable power range. |
| ● | Our proprietary Capstone Remote Monitoring Software |
Our electronic controls manage microturbines using our proprietary software and advanced algorithms. The controls start the turbogenerator and manage its load, coordinate the functioning of the microturbine with the grid, manage the speed, fuel flow and exhaust temperature of the microturbine, convert the variable frequency, and provide digital communications to externally maintain and control the equipment.
The electrical output of our units can be paralleled in multiple unit configurations through our Advanced Power Server product and a digital communications cable to serve larger installations requiring electrical loads of up to ten megawatts.
Our products can operate:
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| operate connected to the electric utility grid as a current source, on a standalone basis as a voltage source, multipacked to support larger loads as a “virtual single” unit and in dual mode, where the microturbine operates connected to the electric utility grid or operates independently. |
We also offerwere the first microturbine manufacturer to achieve UL Class I, Division 2 certification and ATEX certification for operation in hazardous area oil and gas applications. These specially packaged systems are applied in oil and gas production areas with potentially explosive environments. Our C65, as well as our C200 and C1000 Signature Series ICHP systems. These systems combine the standard C65, C200 and C1000 microturbine unit with an integrated heat recovery module that provides electricity and heats water.
Our family of products is offered in the following configurations:
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We offer various accessories for our products including rotary gas compressors with digital controls, integrated heat recovery modules for CHP applications, dual mode controllers that allow automatic transition between grid connect and stand‑alone modes, batteries with digital controls for stand‑alone or dual‑mode operations, power servers for large multipacked installations, protocol converters for Internet access, packaging options and miscellaneous parts such as frames, exhaust ducting and installation hardware. We also sell microturbine components and subassemblies.
Our electronic controls manage microturbines using Capstone’s proprietary software and advanced algorithms. The controls:
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The C30 microturbines were initially designed to operate connected to an electric utility grid and to use a high pressure natural gas fuel source. We have expanded our microturbine’s functionality to operate with different fuels. The combustor system remains the same for all fuels except for the fuel injectors, which currently vary between liquid and gaseous fuels. The Capstone microturbine’s multi‑fuel capability provides significant competitive advantages with respect to some of our selected vertical markets.
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Our C65 grid‑connect and stand‑alonestand-alone microturbines are listed by Underwriters Laboratories (“UL”) as meeting the UL 2200 stationary engine generator standards and the UL 1741 utility interconnection requirements.
Our products are manufacturedC65 microturbine is certified by processes that are ISO 9001:2008 and ISO 14001:2004 certified.
In 2002, the California Energy Commission certified our C30 and C60 microturbines aswere the first products to comply with the requirements of its “Rule 21” grid interconnection standard. This standard streamlines the process for connecting distributed generation systems to the grid in California. The benefits of achieving this standard include avoiding both costly external equipment procurement requirements and extensive site‑by‑site by site and utility‑by‑utility by utility analysis. Our protective relay functionality has also been recognized by the State of New York, which has pre‑clearedallows our microturbines for connectionto be connected to New York’s electric utility grid.
The TA100 microturbine offers aWe offer various accessories for our products including rotary gas compressors with digital communication interface which can be connected to an external controller (not sold by Capstone) to provide multiple unit andcontrols, integrated heat recovery modules for CHP applications, dual mode dispatching functionality. An external synchronization board is provided to parallel the electrical output in multiple unit configurations for stand‑alone operation.
We are the first microturbine manufacturer to achieve UL Class I, Division 2 certification for operation in hazardous‑area oil and gas applications. These specially packaged systems are applied in oil and gas production areas with potentially explosive environments. In September 2009, we received UL certification for our C200 grid‑controllers that allow automatic transition between grid connect and stand‑alonestand-alone modes, batteries with digital controls for stand-alone or dual mode operations, power servers for large multipack installations, protocol converters for Internet access, packaging options and miscellaneous parts such as frames, exhaust ducting, backflow dampers and installation hardware.
In addition to our existing microturbine as meetingproducts, we offer additional energy conversion products in the UL 2200 stationary engine generator standardsform of Baker Hughes 5 MW, 12 MW, and the UL 1741 utility interconnection requirements. In June 2010,16 MW industrial gas turbines, where we received UL certification for our C1000 Series grid‑connectwill purchase and stand‑alone microturbine as meeting the UL 2200 stationary engine generator standards and the UL 1741 utility interconnection requirements.resell their product.
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Applications
Applications
Worldwide, stationaryStationary power generation applications can vary from hugegreatly depending on load size and demand location. From small 2 kW back-up generators to several large 1,000 MW central stationary generating facilities, up to 1,000 MW to back‑up generators as small as 2 kW.stationary power systems can offer superior fuel efficiency for the customer while also meeting strict emissions regulations. Historically, power generation in most developed countries such as the United States has been part of a regulated utility system. AHowever, a number of developments related primarily to the deregulation of the utility industry as well as significant technology advances have broadenedhelped to broaden the range of power supply choicesoptions available to all typesinterested parties.
Our full line of customers.
Capstone products servemicroturbine energy solutions target multiple vertical markets worldwide. Within the markets served, we focus on vertical markets that we have identified as having the greatest near‑term potential. In the markets we are focusing on, which areworldwide, including energy efficiency, renewable energy, natural resources, critical power supply, microgrid and transportation. Within these vertical markets, we focus on applications that we believe have the greatest near-term potential for the customer based on various different factors such as energy load demand, available fuels, economic payback and for some, government incentives. The critical power supply, microgrid and transportation and marine,verticals do not currently generate significant revenues for us, however, we have identified specific targetedexperienced continued development in these verticals and remain focused on the development of applications in these verticals. We also target smaller sub segments that fall within these vertical market segments.markets that may not otherwise be considered for on-site generation.
Energy Efficiency—CHP/CCHP
Energy efficiency maximizesrefers to the useproper 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 produced by the microturbines, reduces emissions compared with traditional power generation and enhances thewhich we believe provides a significant economic advantage to customers. Energy efficiency uses bothour customers while reducing their onsite emissions. CHP and CCHP can improve site economics by capturing the waste heat and electric energy produced in the power generation process. Using the heat and electricity created from a single combustion process increasesto increase the efficiency of the total system, from approximately 30%30 percent to 80%approximately 85 percent for hot water and chilled water to as much as 90 percent or more. The increased operatingmore for some steam and direct drying applications. Compared with more traditional, independent generation sources, the increase in operational efficiency also reduces overall greenhouse gas emissions compared with traditional independent sources such as power generation and local thermal generation and, through the displacement of other separate systems, which can also reduce operating costs. Our microturbines’ emissions of
When compared to onsite boilers, microturbines generally produce fewer commonly found air pollutants (“criteria pollutants”), such as nitrogen oxides (“NOx”), carbon monoxide (“CO”) and volatile organic compounds (“VOCs”), are lower than those from the on‑site boilers that. In fact, our CHP or CCHP system displaces, meaning thatcan displace local boiler emissions of these pollutants are actually reduced when a Capstone energyaltogether. A high efficiency CHP or CCHP system is installed. This high CHP efficiency also means more efficient use of fuel and can reduceallow for reduced net utility costs for end users.users as well as improved fuel consumption. The most common uses of heatfor captured thermal energy include space heating and air conditioning, water heating and cooling water as well as dryingchilling, direct-drying and othersteam for industrial applications. For example, weIn CCHP applications, the microturbine exhaust drives an absorption chiller, which produces the chilled water necessary for air conditioning and local use. Organizations of all sizes have used the heat generated by our microturbines at the microturbines to supply hot water solutions formany different types of commercial and industrial applications they serve, including hotels and resorts, hospitals, and medical centers, as well as office buildings and large retail commercialfacilities.
During Fiscal 2022, we continued to expand and industrial customers. Whendevelop our microturbine exhaust drives an absorption chiller,new hydrogen products with the chiller produces chilled waterrelease of a commercially available hydrogen-based Combined Heat and Power (CHP) product, which can reliably run on a 30% hydrogen-70% natural gas mix. We are continuing our research and development partnership with Argonne National Laboratory and are already testing higher hydrogen blend configurations, with the goal of a 100% hydrogen microturbine. Argonne National Laboratory is a national science and technology research laboratory operated by the University of Chicago Argonne, LLC for air conditioningthe United States Department of Energy.
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 uses.
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There are energy efficiency markets for CHP and CCHP applications worldwide. Many governments have encouraged more efficient use of the power generation process to reduce pollution, lower dependence on fossil fuels and control the cost of locally produced goods. To access these markets, we have entered into agreements with distributors which have engineered energy efficiency CHP packages that utilize the hot exhaust air of the microturbine for heating water and also use the hot exhaust to run an absorption chiller for air conditioning. We also offer our own integrated energy efficiency CHP and CCHP product for the C65, C200 and C1000 Series products.
Each dual-mode microturbine can operate as a microgrid with the ability to run with or independent of a traditional grid or utility. The use of microgrids to serve local loads helps to reduce energy losses in transmission and distribution, further increasing the efficiency of the microgrid. Our microturbines have the ability to meet the needs of microgrid end users by lowering their overall cost to operate and provide versatile technology that runs on varying fuels and scales to fit a wide variety of applications.
Renewable Energy
Our microturbines can use renewable methane gasesbiogases from landfills, wastewater treatment facilities and renewable natural gas. They also run efficiently on other small biogas applications such aslike food processing plants, livestock farms and agricultural waste, referred to as green waste and cow, pig and chicken manure. Theyoperations. Microturbines can burn these renewable waste gasesfuels 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. TheOur microturbines have
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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.sulfur, as the sulfur can contaminate combustion engines lube oil leading to equipment breakdowns and higher lifecycle costs.
Capstone introduced theWe offer C65 and C200 stand‑alonestand-alone digester products into the renewable energy market segmentsegment. With these products, we can target many different types of renewable energy applications, including biogas producing facilities in 2007 and 2013, respectively. These products are targeted at remote villages in third‑third world countries with wastewater treatment facilitiesand in remote locations that offer a valuable fuel source for the generation of fuel which can be converted to electricity. A joint applications and engineering team evaluated theThe performance of the existingour C65 digester gas system has been routinely evaluated to ensure that the combustion system would beis stable from 0zero to 100%100 percent power output. Minor controls changes werehave been implemented to increase stability at low power levels. The ability to convert this low BTU fuel to electricity along with the high reliability and low maintenance features of this product make it well suited for this market.market segment.
Natural Resources—Crude Oil, Natural Gas, Shale Gas & Mining
On a worldwide basis, there are thousands of locations where the drilling, production, compression and transportation of natural resources and other extraction and production processes create fuel byproducts, which traditionally have been released or burned into the atmosphere. Our microturbines are installed in the natural resource market to be usedfor use in oilboth onshore and gasoffshore applications, including exploration, production, compression, and transmission sites both onshore and offshore as a highly efficient and reliable source of power generation. In addition, our microturbines can use flare gas as a fuel to provide prime power. In some cases, these oil and gas or mining operations have no electric utility grid and rely solely on Capstone’s microturbine for reliable low emission power supply.
Many majorgenerated onsite. There are numerous locations, on a global scale, where the drilling, production, compression and transportation of oil and gas companiesand other extraction and production processes create fuel byproducts, which are exploring large shale reserves,traditionally burned or plays, in the United States. In mid‑2010 Capstone sold its first microturbinesreleased into the U.S. shaleatmosphere. Our microturbines can turn these fuel byproducts, flare gas market in the Eagle Fordor associated gas, into a useable fuel to provide power to these remote oil and Marcellus shale plays. gas sites.
The addressable market for Capstoneour microturbines in thisthe United States shale reserves industry is significant. The shale gas market for microturbines may grow as demand for natural gas continues to rise andin the U.S. as the Environmental Protection Agency (“EPA”), the Department of the Interior and other federal and state agencies work to reduce emissionsthe emission of methane, volatile organic compounds and hazardous air pollutants associated with natural gas development. Capstone has been invited to participate in numerous Natural Gas STAR workshopsdevelopment, including limitations on the flaring of excess gases. Our product sales in the United Statesnatural resources market are driven by our microturbines’ reliability, emissions profile and foreign markets to demonstrateease of installation. However, any growth in the emissions reductionsoil and gas sector within our technology can provide.natural resources market is primarily driven by oil prices.
The C65 and C200 productmicroturbines can be configured to meet Class 1 Zone 2 hazardous location requirements for the oil and gasnatural resources market. Hazardous location requirements are met through package ventilation changes for purging and pressurizing package air to avoid potential flammable mixtures as well as controls for emergency disconnect of fuel and electrical sources. The package is upgraded to stainless steel construction to withstand the often corrosive offshore environments where
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these units are installed. Oil and gas customers often prefer thepower generation systems that offer low maintenance and high reliability attributes offered by our turbinesin order to ensure continued production. Capstone also offers C30 and C65 microturbine products in similar configurations.
Critical Power Supply
Because of the potentially catastrophic consequences of even momentary system failure, momentary or otherwise, certain high demand power users, such asincluding high technology, health care and information systems facilities require particularly highhigher levels of reliability in their power generation service. The majority of microturbine based distributed generation installations have powered through hurricanes with little or no downtime. To meet these customer requirements, traditional solutions utilize Uninterruptible Power Supplies (“UPS”) to protect critical loads from momentary power disturbances along with backupback-up diesel generators for extended outages. Capstone offersWe offer an alternative solution that can both meet customer reliability requirements and reduce operating costs.
Capstone hasWe have developed the world’s only microturbine-powered UPS solutions that offer clean, IT‑IT grade power and can completely displace the need for traditional UPS and backupback-up diesel generators. We offer two microturbine‑UL listed microturbine powered UPS solutions. The Capstone UPSource microturbine‑powered UPS solution provides prime or emergency power solutions. Capstone’ssolutions: our Hybrid UPS microturbine-powered solution, which provides power when dispatched in high efficiency, standard UPS and emergency power solutions. Both critical power supply products offer 99.999999% availability in an n+1 configuration when the product has at least one independent backup. Our microturbine‑powered UPS solutions are UL listed.power. These integrated solutions are idealwell suited for new facility construction or facility expansion and have beencan be installed with absorption chillers or other heat recovery systems to obtain high efficiency and reducelevels while reducing operating costs, compared with traditional solutions.
Dual mode8
Dual-mode units operating in a prime power configuration can support a 150%150 percent overload for up to 10 seconds during transient conditions. Dual modeDual-mode units operating in grid parallel mode can provide customers a back‑upback-up power system with an economic return. These systems offer high on-site energy efficiency when combined with a heat exchanger (CHP) to create hot water, or with a chiller (CCHP) for air conditioning at these facilities. This configuration, when combined with the Capstoneour Dual Mode Controller, can transition from the grid parallel mode to prime power mode in less than ten10 seconds. CapstoneOur microturbines can also be installed along with a rotary UPS to provide a complete line‑line interactive continuous power solution. In this case, the microturbines remain in grid connect mode while the rotary UPS stabilizes the utility voltage and provides a seamless transfer from operation connected to the grid to operation isolated from the grid.
TransportationMicrogrid
Our technologyA microgrid is also used in hybrid electric vehicle (“HEV”) applications. Our customers have applied our products in HEVs such as transit busesa group of interconnected loads and trucks. In these applications the microturbinedistributed energy resources that acts as an onboarda single controllable energy entity with respect to the grid. Distributed energy resources typically include other dual-mode microturbines, reciprocating engines, PV, wind turbine, fuel cells and battery chargerstorage. Microgrids can be connected to recharge the battery system as needed. The benefits of microturbine hybrids include extended range, fuel economy gains, quieter operation, reduced emissions and higher reliability compared with traditional internal combustion engines. Internal combustion diesel engine manufacturers have been challenged for the last several years to develop technology improvements, prior to aftertreatment that reduce emissions to levels specified by the EPA and CARB 2007 and 2010 standards. Many manufacturers are incorporating aftertreatment that increases upfront equipment costs, vehicle weight and life cycle costs and may reduce overall engine efficiency.
Marine
Our technology is also used in marine applications. Our customers have applied our productslarger electricity grids; however, in the commercial vesselevent of a widespread outage, the microgrid will disconnect from the main grid and luxury yacht markets. The most immediate market for our marine products is for use as a ship auxiliary engine. In this application,continue to operate independently to maintain the microturbines provide powerelectricity supply to the vessel’s electricalhomes 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.
Additionally, we have our own programmable logic control system and sensors, which interface with other building automation systems and are a key aspect of monitoring a microgrid. The use of microgrids to serve local loads helps to reduce energy losses in transmission and in some cases,distribution, further increasing the vessel is able to utilize the exhaust energy to increase the overall efficiency of the application, reducing overall fuel consumptionmicrogrid. We have been a part of numerous successful microgrid installations worldwide ranging from a wind turbine manufacturer, ski resort, university, industrial farm, utility software company, brewery and emissions. The other applicationelectrical distribution utility. Our microturbines’ functionality is similar to our HEV application whereensure energy availability for advanced microgrids before and during disasters, such as hurricanes. They may also help reduce electrical expenditures in the vessel is driven by anyears following a disaster when electric propulsion systemutility rates may be increased to pay for the expenses for grid infrastructure repairs and the microturbine serves as an on board range extender. Our marine customers use both our liquid fueledimprovements associated with these disasters.
Sales and natural gas products. Liquefied natural gas (“LNG”) is in its early stages as a marine fuel, and the number of vessels powered by LNG is forecasted to double every two years over the next decade. Vessel owners can
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receive the same benefits as users of stationary Capstone products: low emissions with no aftertreatment, long maintenance intervals, high reliability, low noise and no vibration.
Sales, Marketing and Distribution
We primarily sell and market our microturbine product, parts, and service through distributors. our global network of authorized distributors and our direct sales team, which focuses on OEMs and national accounts.
Our world‑widesales and marketing team operate as two separate organizations. Our marketing team is focused on developing and managing our existing worldwide distribution channel and leading all marketing and advertising activities as we continue building our Company into a strong and recognizable worldwide brand. Our direct solutions sale team is responsible for growing our Company's national account business and long-term rental fleet. Under the terms of the A&R Note Purchase Agreement with Goldman Sachs, we were required to grow our rental fleet to 21.1 MW by March 31, 2022. Our rental fleet was 21.1 MW as of March 31, 2022. We have continued to fulfill rental contracts beyond the 21.1 MW by renting unused equipment from our distributors and then re-renting them to our customers, and are looking at other solutions, including additional capital to continue to grow the rental fleet. Additionally, this team is responsible for business development, licensing, new product partnerships, and new fuels, such as hydrogen, and further growing our renewable market segment participation. We believe this sales strategy better enables us to capture market share with large, global customers, where we see greater potential at dozens of their facilities worldwide. Our existing distribution network isremains our most valuable intangible asset that we have proudlyworldwide feet-on-the-ground and our local presence, while the internal salesforce will build strong, long-term relationships with larger, more diverse customers.
Our worldwide distribution network was developed from the ground up.up and has become a valuable asset, because we can reach end use customers globally. Each one of our distributors is a strategically placed independent partner of Capstone marketingthat markets, sells, and selling the Capstoneprovides applications engineering support for our products and services on our behalf. In addition, distributors provide remote monitoring services, warranty support, local spare parts support, and customer training and long-term service support. Through our global distribution network, we offer a comprehensive factory protection plan (“FPP”) for a fixed fee to perform regularly scheduled and unscheduled maintenance as needed. We provide factory and onsite training to certify all
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personnel that perform sales, applications, commissioning, and long-term service on our microturbines. Individuals who are certified are called Authorized Service Providers and must be employed by a distributor or an end user in order to perform work pursuant to a FPP. To assure proper application and installation of our microturbine systems, we offer an installer training and an application engineering certification program. We offer to assist all customers by reviewing their installation designs in relation to the technical requirements for proper operation of our products, such as electrical interconnections, load requirements, fuel type and pressure, cooling air flow and turbine exhaust routing. As part of the microturbine commissioning process, we also receive a checklist to confirm that the final installation adheres to our technical requirements before we accept our standard manufacturer warranty obligations. Our typical terms of sale include shipment of the products with title, care, custody, and control transferring at our dock, payment terms ranging from full payment in advance of shipment to payment in 90 days, and warranty periods of approximately 15 to 24 months from shipment depending on the product type. We typically do not have customer acceptance provisions in our agreements.
Our Distributor Support System (“DSS program”) provides 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, online documentation library, paperless service software, sales efficiency, website development, company branding and funding for increased strategic business-to-business marketing activities.
Our Geographic Markets
United States and Canada
We have distribution agreements with a number ofseveral companies throughout North America for the resale of our products. Many of these distributors serve multiple markets in their select geographic regions. The primary markets served in this region have been energy efficiency, renewable energy, and natural resources critical power and mobile products. The energy efficiency and natural resources vertical markets are expected to grow as a result of an increased domestic production of hydrocarbons, the low downstream price of natural gas, andas well as public and regulatory acceptance of distributed generation.
In developing our sales opportunities, we have identified the need to address various requirements present in our target localities. These requirements include electric grid interconnection standards, gas utility connection requirements, emissions standards, building and fire safety codes and various inspections and approvals. The costs and scheduling ramifications of these various approvals, in conjunction with normal bidding process requirements and construction delays, can be significant to the completion of an installation. Our goal is to work with the applicable regulating entities to establish compliant standards for the installation of our microturbines so that the costs and installation timelines are minimized for our customers. Management believes that we can create market advantages for our products through enhancing the ease of deploying our distributed generation solutions.
Latin America
Our target markets in Latin America are energy efficiency, renewable energy, and natural resources. Oil and gas production projects continue to be a growing market in Latin America.
Recent energyEnergy reform in Mexico, for example, has opened new market opportunities for us by allowing competition among multiple players and enabling power generation companies to sell directly to consumers instead of only to the state‑ownedstate-owned Federal Electricity Commission. Capstone’sOur strategy in Mexico is to leverage our distribution network in Mexico across various market verticals.
South America constitutes a diverse group of markets that vary greatly in potential capture for Capstoneus based on a number ofseveral factors, including availability of oil and gas production and transmission, energy pricing and political and investment climate. While Capstone haswe have distributors in nearly all South American countries, management is focused on what we consider to be the top national markets, such aswhich include Colombia, Brazil, ChileBolivia, and Ecuador. Our historical sales in South America have primarily been in the natural resources market.Chile.
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Asia and Australia
Our sales and marketing strategy in Asia and Australia has been to develop and strengthen distributor relationships throughout these continents.
Our target markets in Asia and Australia are energy efficiency, renewable energy, and natural resources. Our historical sales in Southeast Asia and Australia have primarily been in the CHP, CCHPenergy efficiency and the oil and gas market.markets. Other
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areas in Asia and the Pacific Rim offer attractive opportunities as well. China is expected to see growth in the oil and gas market, while biogas recovery is showing signs of growth in Southeast Asia.
Middle East and Africa
Our target market in the Middle East and Africa is primarily oil and gas. FlareThis includes flare gas to power projects which are a particularly attractive market opportunity given the volume of gas being flared and the acute and chronic need for stable power in the region. Management has targeted distributors and customers involved in the capture and use of flare gas in the oil and gas market. However, the geopolitical environment in this region is still volatile, which can have an impact on our sales.
Europe and Russia
To address the European market, including Russia, we are strengthening our relationships with existing and new distributors and have increased Capstone local sales and service support. We have an office in Europethe United Kingdom for the purpose of working with our local distributors there on a daily basis to realizeidentify and understand growth opportunities. We have established a spare parts distribution centerupgraded our Integrated Remanufacturing Facility (IRF) in Europethe United Kingdom to make new and remanufactured parts readily available to our distributors. Europe has a history of extensive use of distributed generation technologies. During Fiscal 2016,Following Russia’s military invasion of Ukraine in February 2022, we re-evaluated our efforts in the paceRussian and the surrounding Commonwealth of economic recoveryIndependent States (CIS) markets and have ceased exploring growth opportunities in Europe was slowsuch markets. We do however continue to evaluate customer orders and demand remained softensure that we are in compliance with a decrease in revenue of 43%, primarily from Russia, comparedall laws and regulations upon acceptance and before shipment. Due to Fiscal 2015. Further, the continuation or escalation of the current geopolitical instability inongoing conflict between Russia and Ukraine, could continueand the resulting economic impacts to negatively impact our operations, sales,the European and future growth prospects in that region. For more information, see “Risk Factors” beginning on Page 16 of this Form 10‑K.
Revenue
For geographic and segmentRussia region, we expect revenue information, please see Note 2—Summary of Significant Accounting Policies—Segment Reporting in the “Notesregion to Consolidated Financial Statements.”be negatively impacted in Fiscal 2023.
Customers
Sales to Horizon Power SystemsE-Finity Distributed Generation, LLC (“Horizon”E-Finity”), oneour domestic distributor, accounted for 18% of the Company’sour revenue for Fiscal 2022. Sales to Cal Microturbine (“CAL”) and E-Finity, our domestic distributors, accounted for 15%, 17% and 12%, respectively, of our revenue for the years ended March 31, 2016, 2015 and 2014, respectively. Sales to E‑Finity Distributed Generation, LLC (“E‑Finity), one of the Company’s domestic distributors,Fiscal 2021. Additionally, E-Finity accounted for 11%28% and 19% of our revenue for the years ended March 31, 2016 and 2014. Sales to Dtc Soluciones Inmobiliarias S.A. de C.V. (“DTC”), one of the Company’s Mexican distributors, accounted for 10% of revenue for the year ended March 31, 2016. Sales to Optimal Group Australia Pty Ltd (“Optimal”), one of the Company’s Australian distributors, accounted for 10% of revenue for the year ended March 31, 2016. Sales to BPC Engineering (“BPC”), one of the Company’s Russian distributors, accounted for 2%, 11% and 17% of our revenue for the years ended March 31, 2016, 2015 and 2014, respectively. Additionally, DTC, Optimal, Reliable Secure Power Systems, one of the Company’s domestic distributors (“RSP”), and Regale Energy Zrt, the Company’s Hungarian distributor (“Regale”), accounted for 28%, 11%, 10% and 10%, respectively,13% of net accounts receivable as of March 31, 2016. Optimal accounted for 17% of net accounts receivable as of2022 and March 31, 2015.2021, respectively.
We recorded net bad debt expense of approximately $1.1 million during Fiscal 2022 and a net bad debt recovery of approximately $1.5 million during Fiscal 2016. We recorded bad debt expense of approximately $10.1 million and $0.2 million during Fiscal 2015 and 2014, respectively. During Fiscal 2015, we recorded approximately $7.1 million and $2.6 million with respect to the accounts receivable allowances from BPC and Electro Mecanique Industries (“EMI”), one of the Company’s distributors in the Middle East and Africa, respectively.2021.
Competition
The market for our products is highly competitive. Our microturbines compete with existing technologies such as reciprocating engines and may also compete with emerging distributed generation technologies, including solar-powered systems, wind‑poweredwind-powered systems, fuel cells and other microturbines. Many potential customers rely on the utility grid for their electrical power. Many of our distributed generation competitors are large, well‑established
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well-established companies that derive competitive advantages from production economies of scale, worldwide presence, brand recognition and greater financial resources whichthat they can devote to product development or promotion.
Generally,Often power purchased from the electric utility grid iscan be 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. Because Capstoneour microturbines
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can provide a reliable source of power and can operate on multiple fuel sources, management believes theywe offer a level of flexibility not currently offered by other technologies such as reciprocating engines.
Our reciprocating engine competitors have products and markets that are well developed and technologies that have been proven for some time. A reciprocating engine, also known as an internal combustion engine, is similar to those used in automotive applications. Reciprocating engines are popular for primary and back‑upback-up power applications despite higher levels of emissions, noise, and maintenance. These technologies, which in many cases have a lower up‑up front cost than microturbines, are currently produced by American DG Energy Inc., Caterpillar Inc., Cummins Inc. (which recently entered into a joint venture with Eaton), Deutz Corporation, GE Gas Engines (whichInnio (who recently bought the General Electric gas engine business, which now includes Waukesha and Jenbacher)Jenbacher gas engines), MAN SE, and Tecogen, Inc. and Wärtsilä Corporation,(which now includes American DG Energy Inc.), among others.
Our microturbinesproducts may also compete with other distributed generation technologies, including solar-powered systems, wind-powered systems, fuel cells and fly wheel. Solar and wind powered systems produce no emissions.emissions and benefit from above market contracts provided by state mandates. The main drawbacks to solar and wind powered systems are that they may not be dispatchable because of their dependence on weather conditions, the utility grid andor high capital costs that can often make these systems uneconomical without government subsidies depending upon geographic locale and application of the technology. Although the market for fuel cells is still developing, a number of companiesfuel cell providers are also focused on markets similar to ours, including Active Power Inc. (a division of Piller Power Systems Inc.), Ballard Power Systems Inc., Bloom Energy Corporation, FuelCell Energy Inc., LG Fuel Cell Systems, a business unit of LG Electronics, and Plug Power Inc. Fuel cells have slightly lower levels of NOx, CO, VOCs and other criteria pollutant emissions than our microturbines. Fuel cells, like solar and wind powered systems, have received higher levels of incentives for the same type of applications as microturbines. Management believes that, absent these higherHowever, with equivalent government incentives, microturbines would provide a better economic value to end users in most applications. However, over the medium‑to‑long term, fuel cell technology companies may introduce products that compete more directly with our microturbines.
We also compete with other companies who havethat offer microturbine products, including FlexEnergy and Turbec S.p.A.
Overall, we compete with end users’ other options for electrical power and heat generation on the basis of our microturbine’sproduct’s ability to:
| provide power when a utility grid is not available or goes out of service; |
| reduce total cost of purchasing electricity and fuel; |
| improve electric power availability and provide high power quality; |
| operate on multiple fuel types; |
| reduce emissions (both criteria pollutants and greenhouse gases); |
| simplify operation; and |
| control maintenance costs and associated disposal of hazardous materials. |
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Governmental and Regulatory Impact
Our markets can be positively or negatively impacted by the effects of governmental and regulatory matters. We have systems installed in 73 countries around the world, each of which has its own policies and regulatory framework, which are subject to change. We are affected not only by energy policy, laws, regulations and incentives of governments in the markets in which we sell, but also by rules, regulations and costs imposed by utilities. Utility companies or governmental entities may place barriers on the installation or interconnection of our product with the electric grid. Further, utility companies may charge additional fees to customers whothat install on‑siteon-site power generation; thereby reducing the electricity they take from the utility, or for having the capacity to use power from the grid for back‑upback-up or standby purposes. These types of restrictions, fees or charges could hamper the ability to install or effectively use our product, or increase the cost to our potential customers for using our systems. This could make our systems less desirable, economical for our customers,
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thereby adversely affecting our sales and ultimately our revenue and profitability. In addition, utility rate reductions can make our products less competitive which would have a material adverse effect on our operations. These costs, incentives and rules are not always the same as those faced by technologies with which we compete. However, rules, regulations, laws and incentives could also provide an advantage to our distributed generation solutions as compared with competing technologies if we are able to achieve required compliance in a lower cost, more efficient manner. Additionally, reduced emissions and higher fuel efficiency could help our customers combat the effects of global warming.climate change. Accordingly, we may benefit from increased government regulations that impose tighter emission standards particularly on burning coal and fuel oil and fuel efficiency standards.as long as gas combustion technology solutions are not excluded.
Capstone continues to engage with federal and state policymakers to develop government programs to promote the deployment of Capstone’s low emission and energy efficient products. In California, A.B. 1530 recently was approved by the Senate Energy Committee and will be heard next by the Senate Environmental Quality Committee. This bill may stimulate the market in California for Capstone products by revising utility charges and standby rates that apply to distributed generation projects. We cannot provide assurance that any such legislation will be enacted, however. In the wake of numerous destructive storms, several state and local governments are putting greater value in resilient distributed generation resources, including CHP and microgrids, and even reassessing the traditional utility model. However, utilities in other states have asked public utility commissioners to revisit incentive programs and exemptions from grid usage charges for distributed generation technologies, arguing that these policies shift costs to other rate payers.
The United States Government is focused on promoting exports of American products with a specific emphasis on clean energy goods. Capstone participates in export promotion activities such as trade missions which help us enter new markets by facilitating interactions with foreign buyers and distributors. Government funding can impact the rate of development of new technologies or improvements to existing technologies. We continue to engage with federal and state policymakers to support government programs that promote the deployment of our low emission and energy efficient products. Competing new technologies generally receivehave historically received larger incentives and development funding than do microturbines. ThereHowever, the U.S. Department of Energy continues to fund the development of cost-effective, high efficiency CHP that is responsive to site demands and grid requirements. Flexible CHP could provide additional generating capacity when grid demand increases or renewable resources are certain recent federal funding solicitations that may supportnot available. As more intermittent renewable resources are added to the electric grid, grid operators need access to additional dispatchable generation capacity to ensure an adequate and stable power supply. Capstone’s PowerSync controller could provide this automated response capability to allow for participation in grid services markets, where permitted. Our addition of battery energy storage products to our portfolio of solutions opens our customers’ access to some of the higher incentives available to these technologies as well as allowing us to provide an integrated microturbine development. We cannot provide any assurance that any proposal Capstone submits will be funded. Thesolution.
In the United States, a 10% Federal Investment Tax Credit (ITC)(“ITC”) for certain clean energy technologies, including CHP and microturbines was extended and fuel cells among others, is set to expire atnow available through the end of calendar year 2016. There are bipartisan efforts underway2023. In addition, bonus depreciation rules allow businesses to extend the ITC an additional five years, similarimmediately deduct 100% of eligible property placed in service after September 27, 2017 and before January 1, 2023. The deduction percentage will phase down from 100% to the extension provided for solar energy technology projects. Unless it is extended,0% by 2027. As a result, we may see ana positive impact on our sales in the United States due to the lossavailability of this 10%these tax credit.incentives. However, other CHP and gas-firedgas-powered distributed energy technology-providers will facealso benefit from the same financial hurdlereturn of these tax incentives, and the loss of the ITC would level the playing field with fuel cell technologies which currentlywill receive a 30% ITC.26% ITC level with a phase down to 22% by 2023 and expiration in 2024. At the state level, slow approvals for natural gas pipeline infrastructure may impact gas availability in some areas, and efforts to incentivize building electrification over natural gas-fueled heat and power sources may inhibit sales. However, electricity demand spikes may also lead to higher electricity prices thereby improving project economics for on-site distributed power generation.
In global markets, European governments continue to support efficient CHP and are beginning to act on reducing local air pollution through regulations like the EU’s Medium Combustion Plant and EcoDesign Directives. Our low emission systems’ ability to meet these programs’ requirements may have a positive impact on our sales as implementation progresses. However, the EU’s push for decarbonization may also leave natural gas-fueled, highly efficient systems in limbo despite their near-term carbon reduction potential and long term viability with the uptake of renewable and decarbonized gas alternatives. In the oil and gas market, many producers have committed to reduce methane emissions from their operations. Our low maintenance, reliable systems, and our ability to run on a range of fuels could fit their needs and result in a positive impact on our sales.
Sourcing and Manufacturing
We are focused on continuously improving our supply chain effectiveness, strengthening our manufacturing processes, and increasing operational efficiencies within our organization. Our microturbines are designed to achieve high volume and low cost production objectives. 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‑off the shelf items available from multiple supply sources; however, certain items are custom made to meet our specifications.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.period. However, single source suppliers with long lead times may be more challenging to transition to another supplier. We have an on‑goingongoing program to develop alternative back‑back up suppliers for sole source parts.parts wherever possible, but this has been challenging with low production volumes and increased pricing. We regularly reassess the adequacy and abilities of our suppliers to meet our future needs.
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We continue to evaluate and implement new systems designed to provide improved quality, reliability, service, greater efficiency, and lower supply chain costs.
During Fiscal 2022, we remained focused on mitigating supply chain issues, such as the costs of commodities and delayed lead times, related to the ongoing global COVID-19 pandemic and other macroeconomic conditions. Localization of the vast majority our immediate supply chain within a 300-mile radius of our factory located in Van Nuys, California mitigates much of the global stressors associated with a typical geographically dispersed supply chain, as many of our suppliers were sharing similar experiences of the pandemic in the same magnitude we were experiencing in parallel. Our strategy of locating dual-sources and establishing long-term purchasing agreements helped to mitigate interruptions in our supply chain. Global freight delays, tariffs and costs remain a concern from a logistics perspective. With a highly localized supply chain, however, much of these effects are limited. To address delays, we increased planning fence lead-times within our ERP system to drive material purchases earlier, and we attempt to source products locally as much as possible. We are keeping in place proactive measures in the form of safety stocks and dual sourcing to prevent potential interruptions to our supply chain. Despite these efforts we did experience both supply chain related delays and cost increases in the second half of Fiscal 2022 and expect this to continue into the first half of Fiscal 2023.
We have substantially increased our focus on process controls and validations, supplier
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controls, distribution controls and providing our operations teams with the training and tools necessary to drive continuous improvement in product quality. In addition, we remain focused on examining our operations and general business activities to identify cost‑cost improvement opportunities in order to enhance our operational effectiveness.effectiveness and use lean manufacturing processes. Our ability to leverage these capabilities may be affected by the current variability in our demand volumes and forecasting. Our demand volumes and forecasting could continue to be negatively impacted by the softnessvolatility of the global oil and gas markets, a substantially strongerstrong U.S. dollar (making our products more expensive overseas), tariffs and/or import taxes, and ongoing global geopolitical tensions in Russia, North Africa and the Middle East.tensions. Our strategy is to identify primary and secondary sources for critical components, both domestic and international, for when available to minimize factoryproduction line down time due to unavailability of such parts, which could affect our ability to meet manufacturing schedules.schedules on build or a linear basis.
We have a combined total ofan approximately 102,00042,300 square foot manufacturing footprint running on a single shift in the San Fernando Valley area of Southern California. We assemble and test units as well as manufacture air‑bearings and certain combustion system components at our facility in Chatsworth, California. Additionally, we assemble and test our C200 and C1000 Series products and manufacture recuperator cores at our facility in Van Nuys California. Management believes our manufacturing facilities locatedlocation in Chatsworth and Van Nuys,Southern California have a combinedwith production capacity of approximately 2,000 units per year, depending on product mix. Excluding working capital requirements, management believes we can expand our combined production capacity to approximately 4,000 units per year, depending on product mix, with approximately $10 to $15 million of capital expenditures. We have not committed to this expansion nor identified a source for its funding, if available.
Solar Turbines Incorporated (“Solar”), a wholly owned subsidiary of Caterpillar Inc., was our sole supplier of recuperator cores prior to 2001. In 2000, we exercised an option to license Solar’s technology, which allows us to manufacture these cores ourselves and we began manufacturing them in June 2001. The cores are subject to a per‑unit royalty fee which continues for the duration of Solar’s intellectual property that underlies the licensing agreement. As of March 31, 2016, cumulative royalties of $0.6 million have been paid under the terms of the licensing agreement with Solar.
The Company is a party to a Development and License Agreement (“Development Agreement”) with Carrier Corporation (“Carrier”) regarding the payment of royalties on the sale of each of the Company’s C200 microturbines. As of March 31, 2016, cumulative royalties of $16.6 million have been paid under the terms of the Development Agreement with Carrier will continue until the obsolescence of the C200 microturbine product line.
Research and Development (“R&D”)
We devote substantial resourcesIn Fiscal 2022 we continued supporting business operational goals and enhancing system availability to ensure continuity during the global pandemic and other macroeconomic factors. While these successful efforts became our primary objectives, we continued to emphasize the expansion of our existing suite of products, focusing on alternative fuels and technologies and continuing development in the global evolution of new products and the improvement of existing products.grid interconnection requirements. We focus our engineering efforts on coordinating our product design and manufacturing processes to bring our products to market in a cost-effective, reliable and timely manner. For the fiscal years ended March 31, 2016, 2015Fiscal 2022 and 2014,2021, R&D expenses were $10.2 million, $9.7$3.4 million and $9.0$2.4 million, respectively, which amounts are equivalent to 12%, 8%representing 5% and 7%4% of total revenue, respectively, for these fiscal years. R&D expenses are reported net of benefits
We own two patents related to fuel injection and emissions. The first patent issued is for a multi-staged lean pre-vaporizing, pre-mixing fuel injector providing ultra-low emissions that meet EPA Tier 4 requirements for power generation. Under this program, exhaust emissions from cost‑sharing programs, such as DOE grants. Benefits from cost‑sharing programs were $0.2 million, $0.5 millionthese engines will be required to decrease by more than 90%. The second patent is for a multiple-fuel capable, pre-mixed, low emission injector for high flame speed fuel combustion. This patent is the foundation for continued development in achieving high reliability and $1.4 million for Fiscal 2016, 2015 and 2014, respectively. Our R&D activities enabled us to become one of the first companies to develop a commercially available microturbine that operates in parallelperformance with the grid. We were the first company to successfully demonstrate a commercially available microturbine that operates on a stand‑alone basis.hydrogen content fuels.
During Fiscal 2016,2022 we unveiledcontinued to partner with Argonne National Laboratory and University of California, Irvine on the development of a 30% Hydrogen-70% natural gas configuration, which was commercially launched in March 2022. Capstone C1000 Signature (“C1000S’)and Argonne National Laboratory are also partnering on a microturbine as partderivative utilizing Argonne’s high-efficiency, fast-charging, and fast discharging Thermal Energy Storage System. This effort is funded through the Department of our new C1000S microturbine energy systems which also includes an 800kW (“C800S”) or 600kW (“C600S”) microturbine.Energy’s Technology Commercialization Fund. The C1000S microturbine incorporates over 70 components,thermal storage system and design upgrades intendedis expected to improve the microturbine’s overall product qualityefficiency increasing value to the customer. The Thermal Energy Storage System modeling and enhancesimulation was completed towards the microturbine ownership experience in all applications but specifically for CHPend of Fiscal 2020. During Fiscal 2021 design was completed on the assembly of
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the small scale system to be installed at Argonne using their C65 test system. In Fiscal 2022, we initiated procurement and CCHP applications. A fewassembly of the key upgrades include integrated heat recoveryhardware for CHP and CCHP applications, two-stage air filtration system, improved enclosure, relocated engine exhaust stack and redesigned discharge for enclosure cooling air. The C1000S is oneArgonne to validate the models that were developed.
We continue support of the world’s most integratedUniversity of California, Irvine (“UCI”) through their Advanced Power and compact 1MW CHP solutions.Energy Program, which works to evaluate microturbine operation using hydrogen and other fuel blends. The 8-foot widetesting completed in Fiscal 2022 demonstrated the outstanding performance of our patented hydrogen injector design on up to 100% hydrogen across broad operating regimes. We and UCI continue to be key partners in advancing academic research while furthering commercialization of hydrogen technology.
Leveraging off this partnership, UCI has embarked on the second phase of analysis in associated gas combustion in catalog Capstone products. Associated gas is represented by 30-foot long 1MWhigher hydrocarbons, which are more challenging to maintain in gaseous state. As more pressure is placed on flaring at oil and gas locations, the expansion of our fuel acceptability limits enables customers a reliable, resilient, and environmentally conscientious way of handling waste gases. The importance of our collaboration has been demonstrated in Fiscal 2022 with our growing Energy-as-a-Service bitcoin rental fleet which utilize waste gas at expired oil and gas sites to provide high value to these power plant reaches approximately 82% total system efficiencyintensive operations.
Grid interconnection standards have continued to evolve, with more emphasis being placed on reactive power support and is significantly quieter thanharmonization of requirements. VDE-4105 German low voltage directive certification for the original C1000 for installationC65 was able to be completed in low-noise urban environments.
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During Fiscal 2015 we made significant development in variants of2022. Additionally, Capstone’s products were certified to meet the C1000 Series product line. A liquid fuel version of the C1000 Series was producedIEEE 2030.5 and California Rule 21 standards enabling communication with grid operators. Through the use of Capstone’s lean premix combustion technology baseda third party gateway, Capstone controllers can now report and be adjusted by utilities to balance power quality on the development work done previouslygrid during times of variable output of renewables, and in response to emergencies. The remaining TUV Rheinland witness test efforts planned during Fiscal 2023 will focus on the complying with the C200 liquid fuel system. Liquid fuel products are well suited for markets where customers do not have access to gaseous fuels but still demand the low emissions, low maintenance,updated certification requirements including German (VDE-4110 Medium Voltage), Australian (AS-4777), and high reliability benefits offered by Capstone’s microturbine products. Additionally, a dual‑mode (grid connect & stand-alone capability) Digester gas C1000 was produced to run off the Palm Oil Milling Effluent (“POME”) biogas produced as a byproduct of the palm oil extraction process. Advancement realized in both of these products opens up new markets for USA (UL1741-SB) standards.
Capstone and also allows for further development possibilities in the areas of liquid fuel and biogas.
During Fiscal 2014 we achieved compliance with the German low voltage requirements, which have been adopted throughout much of Europe. During Fiscal 2015 we continued to make improvements to all our microturbine products to be compliant with other widely adopted European low and medium voltage grid inter‑connect requirements for decentralized power generation. During Fiscal 2016 our C65, C200 and C1000 Series microturbines were certified for multiple European Grid Interconnection standards. These new standards, which are Verband der Elektrotechnik (“VDE”), Bundesverband der Energie - und Wasserwirtschaft (BDEW) and Comitato Electtrotecnico Italiano (“CEI”), were attained following the development and implementation of new microturbine system software architecture. With this certification, Capstone’s C200 and C1000 Series microturbines are capable of operating through periods of lower grid voltage, also known as low voltage ride through (“LVRT”), without any adverse effects on performance or reliability. LVRT capability is important because it ensures that the microturbines can ‘ride through’ the low voltage period, especially for mission critical facilities, such as hospitals and data centers. The VDE, BDEW and CEI requirements for power generation products and plants are based on unit behavior during cases of grid disturbances.
In addition, we continuecontinues to work both cost reduction and performance enhancement activities to improve the value of our microturbine products for our customer base.base, and to enhance our return on investment in Energy-as-a-Service offerings. Cost reduction activities are focused on leveraging the capabilities of our supply base and internal design lean manufacturing improvements. Product enhancements are focused on reducing the already very low maintenance requirements for our products, while at the same time improving operational efficiency, thereby reducing our customers’ total cost of ownership. While both of these activities have been affected by post-pandemic supply chain constraints in availability and lead-time, it has also opened up some new opportunities in support of these goals.
Because of Capstone’sour single moving assembly, manufacturers believe there is also the opportunity to produce a lower cost product in larger automotive volumes. Our focus is on a next generation product that would include existing components and a liquid‑liquid cooled set of electronics that are consistent with the size, cost and cooling strategiesadvances that are employed on vehicles today. Although we believe the hybrid electric bus and truck market has the potential to be a beneficial option for the bus and truck manufacturers, we temporarily suspended our development efforts with respect to C30 microturbines targeted at this market in response to our lower than expected revenue during Fiscal 2016 compared to Fiscal 2015. Management intends to continue with the next phase of development after we achieve profitability.revenue.
Capstone is working with the Kenworth Truck Company to demonstrate a Class 7 series hybrid delivery truck with funding support from the South Coast Air Quality Management District and the San Joaquin Valley Air Pollution Control District. This truck will be operated on actual customer delivery routes in both air districts to quantify the performance, emissions, fuel economy, and other benefits of a microturbine‑based hybrid solution. The Kenworth Class 7 hybrid truck is currently being retrofitted with a refrigerated box body and should be ready for track testing at Kenworth facilities later in the year. The truck will then be used in a demonstration phase to a large commercial customer within the San Joaquin Valley in California. Capstone expects to collect and utilize information from the Kenworth Class 7 hybrid truck’s road testing and demonstration processes for future product developments and enhancements. A prototype or concept vehicle may take several years to go into commercial production following completion of rigorous testing.
Capstone also worked with Peterbilt Motors to develop a series hybrid drivetrain as part of a concept Class 8 tractor for Walmart. The Walmart Advanced Vehicle Experience (“WAVE”) concept truck is the latest in Walmart’s fleet efficiency program. The WAVE concept truck has advanced aerodynamics and is powered by a Capstone C30 range‑extending microturbine in its hybrid powertrain. This futuristic concept truck was unveiled at the Mid America Trucking Show in March 2014. Future development efforts will be based on the lessons learned from these programs. As such, Capstone is working with both Peterbilt and Walmart as they continue to showcase the WAVE truck at various expos and hybrid vehicle shows around the country.
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Capstone’sOur liquid fuel microturbines have demonstrated emissions levels which meet the CARB 2010 standards for Heavy Duty Diesel Engines (“HDDE”). The liquid fuel microturbine is able to meet these extremely low emissions requirements using its lean premix combustion technology with no exhaust aftertreatment. Competitive reciprocating engine technologies require aftertreatment components that increase system cost, require frequent maintenance, and impact engine efficiency. Capstone’sOur compressed natural gas (“CNG”) fueled microturbines also meet extremely lowstrict emission standards, including the U.S. Environmental Protection Agency and CARB 2010 emissions requirements for On‑On Road HDDE for Urban Bus. Test emissions from our natural gas microturbines measured dramatically less than the emissions levels set forth by the CARB standard including NOx at 75% and CO at 96% less than the required levels.
Capstone’sOur marine products can behave been used to provide hybrid electric marine propulsion, “hotel power,” CHP, or CCHP. They are especiallymay be ideal for small‑small and mid‑sizemid-size commercial ships that travel inland waterways and emissions controlled areas (“ECAs”). In partnership with one of our long-term EMEA distributors, Capstone has also working with majordeveloped a marine certifying bodies (Lloyd’s RegisterC65 for a private yacht manufacturer and DNV‑GL) on Type Approval for its marine products. Type Approval provides independent product verification thatin Fiscal 2020 we delivered the product conforms to recognized industry quality standards, International Conventions and/or Marine Classification Societyand also received certification from Lloyd’s Register EMEA for Lloyd’s Register Rules through a process of independent design review, sample testing and verification of production controls. Although we believe the marine sector has the potential to be a beneficial optionRegulations for the vessel owners, we temporarily suspended our development efforts with respectClassification of Special Service Craft 2018 - Part 6. In Fiscal
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2021, the private yacht power system was land tested, sea trialed, and launched, enabling the owner to C30 microturbines targeted at this market in response to lower than expected revenue during Fiscal 2016 compared to Fiscal 2015. Management intends to continue with the next phase of development after we achieve profitability.
Capstone’s C65 Hybrid UPS product line has been evolving over the years. After having received the 2011 NOVA Award from the Construction Innovation Forum for the C65 Hybrid UPS Microturbine at Syracuse University’s data center—labeled one of the greenest data centers in the world, Capstone’s C65 Hybrid UPS system has continued development and has recent installations at Sempra in Monterey Park, California and Capstone’s own data center in Chatsworth, California. The product utilizes Capstone’s inverter electronics and controls technology to provide continuous power quality to meet the customer’s critical load. The load inverter is connected through a central power bus to provide power from one of three available power sources including the utility grid, battery storage system, or microturbine generator. Power to the critical load is synchronized to an available utility grid to allow direct bypass of the critical load to the utility grid. This redundant functionality is provided in a single integrated package that can be scaled to a larger seamless power unit through Capstone’s multipack feature. These units can also be combined with a heat recovery module or an absorption chiller to provide higher total output efficiency. Unlike current UPS products combinedeliminate onboard ship vibrations associated with reciprocating engines, for backup, thewhile also having low emissions without after treatment. Capstone Hybrid UPS product allowsreceived a follow-on certification from Lloyd’s for continuous operation year-round allowing customers the ability to receive a payback on their capital equipment investment. Although we believe the industrial UPS market has the potential to be a beneficial option for businesses that require constant supplyClassification of reliable energy, we temporarily suspended our development efforts with respect to C65 microturbines targeted at this market in response to lower than expected revenue during Fiscal 2016 compared to Fiscal 2015. Management intends to continue with the next phase of development after we achieve profitability.Special Service Craft 2018, Part 10, Chapter 2.
Capstone is working with the DOE on two next generation technology roadmap programs, including a High Efficiency Microturbine with integrated heat recovery and advanced AFA (Alumina Forming Austenitic) stainless steel material program in partnership with Oak Ridge National Laboratory (“ORNL”). The High Efficiency Microturbine with integrated heat recovery is focused on improving microturbine electrical efficiency and overall system efficiency utilizing heat recovery. In March 2013, Capstone successfully completed proof‑of‑concept testing of the low pressure spool also known as the C250 that produced >270 kW as part of the first phase of development. This allowed Capstone to proceed with high pressure spool development which was completed during Fiscal 2016. Capstone also demonstrated an increased capability of the power electronics and electrical system required to support this higher power generator. 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. The final phase of the program will incorporate further engine efficiency improvements, resulting in a product design with a projected electrical efficiency of 42% and targeted power output of 370 kW. Improvements in efficiency are key to all markets as improved fuel efficiency benefits end users through lower operating costs. AFA stainless steel is a material that offers superior oxidation and creep resistance to commercial heat‑resistant steel alloys used in Capstone microturbines at a significantly reduced cost. In Fiscal 2015, we successfully completed the first of two long term endurance tests and have engaged industry partners on commercialization viability.
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Protecting our Intellectual Property Rights and Patents
We rely on a combination of patent, trade secret, copyright, “know how”, and trademark lawlaws and nondisclosure agreements to establish and protect our intellectual property rights in our products. In this regard, we have obtained 10229 U.S. and 28 international patents (in certain cases covering the same technology in multiple jurisdictions).active patents. The patents we have obtained will expire between 2016calendar years 2022 and 2027.2037. We actively evaluate our patent portfolio and pursue new patent applications as we develop new technological innovations, as needed.
Management believesWe believe that a policy of protecting intellectual property is one component of our strategy of being the leader in microturbine system technology and will provide us with a long term competitive advantage. In addition, we implement security procedures at our plants and facilities and have confidentiality agreements with our suppliers, distributors, employees and certain visitors to our facilities.
OrganizationHuman Capital
On February 16, 2021, our Board adopted an amended charter governing our Compensation and EmployeesHuman Capital Committee, after discussing the rapid movement to expand the role of the Compensation Committee beyond traditional compensation-related matters. In accordance with its recently amended charter, our Compensation and Human Capital Committee is responsible for reviewing, monitoring, and providing recommendations to our Board on our workplace policies and practices, including corporate culture and employee engagement, talent management and leadership development, employee diversity and inclusion, ensuring a respectful workplace free of discrimination and harassment.
Diversity
We were organizedare committed to maintaining, and continuing to foster, our diverse and inclusive work environment. We recruit the best people for the job regardless of gender, ethnicity or other protected traits and it is our policy to promote inclusive, nondiscriminatory hiring and employment practices and fully comply with all laws applicable to discrimination in 1988. On June 22, 2000, we reincorporated as a Delaware corporation.the workplace.
Workforce Statistics
As of March 31, 2016,2022, we had 191 employees.133 full-time employees and one part time employee. No employees are covered by collective bargaining arrangements. We consider relations with our employees to be good.
In March 2022, we implemented an expense reduction plan, which included furloughs, employment terminations and pay cuts. See “—Initiative to Shift Towards Energy as a Service and Reduce Operating Costs.”
Corporate Information
We were organized in 1988 in the State of California. Our Company was reincorporated as Capstone Turbine Corporation on June 22, 2000 in the State of Delaware.
On April 21, 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.
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Available Information
This Form 10‑K,10-K, as well as our quarterly reports on Form 10‑Q,10-Q, current reports on Form 8‑K8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are made available free of charge on the Company’sour Internet website (http://www.capstoneturbine.com)www.capstonegreenenergy.com) as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). These filings are also available on the SEC’s website at www.sec.gov.
This document contains certain forward‑looking statements (as such term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange Act) pertaining to, among other things,
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These statements are based largely on our current expectations, estimates and forecasts and are subject to a number of risks and uncertainties. Actual results could differ materially from those anticipated by these forward‑looking statements. Factors that can cause actual results to differ materially include, but are not limited to, those discussed below. Readers are cautioned not to place undue reliance on these forward‑looking statements, which speak only as of the date hereof. The following factors should be considered in addition to the other information contained herein in evaluating Capstone and its business. We assume no obligation to update any of the forward‑looking statements after the filing of this Annual Report to conform such statements to actual results or to changes in our expectations, except as may be required by law.
The following are risk factors that could affect our business, financial condition, results of operations, and cash flows. These risk factors should be considered in connection with evaluating the forward‑lookingforward-looking statements contained in this Annual ReportForm 10-K because these factors could cause actual results, performance, and conditionsachievements to differ materially from those projected in forward‑lookingforward-looking statements. Before you invest in our publicly traded securities, you should know that making such an investment involves some risks, including the risks described below. Additional risks of which we may not be aware or that we currently believe are immaterial may also impair our business operations or our stock price. If any of the risks actually occur, our business, financial condition, results of operations or cash flow could be negatively affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Annual Report,Form 10-K, our quarterly reports on Form 10‑Q10-Q and other documents filed by us from time to time.
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Summary of Risk Factors
The following is a summary of the principal risks that could adversely affect our business, operations and financial results.
Risks Related to Our Business Operations and Financial Results
| ● | The ongoing effects of the COVID-19 pandemic could adversely affect our business, financial condition, results of operations, or cash flows. |
| ● | Our operating history is characterized by net losses. We anticipate further losses and we may never become profitable. |
| ● | Our recently implemented expenses reduction plan and organizational changes undertaken to align to our focus on our EaaS business and achieving profitability may not be successful. |
| ● | If we are unable to either substantially improve our operating results or obtain additional financing, we may be unable to continue to operate at current levels. |
| ● | We may be unable to fund our future operating requirements, which could force us to curtail our operations; we were in breach of our secured note purchase agreement as of May 27, 2022. |
| ● | A sustainable market for microturbines may never develop or may take longer to develop than we anticipate which would adversely affect our results of operations. |
| ● | Product quality expectations may not be met, causing slower market acceptance or warranty cost exposure. |
| ● | Our products involve a lengthy sales cycle, and we may not anticipate sales levels appropriately, which could impair our results of operations. |
| ● | If we do not effectively implement our sales, marketing and service plans, our sales will not grow and our results of operations will suffer. |
| ● | Changes to trade regulation, quotas, duties or tariffs, and sanctions caused by the changing U.S. and geopolitical environments or otherwise, may increase our costs or limit the amount of raw materials and products that we can import, or may otherwise adversely impact our business. |
| ● | We may not be able to retain or develop relationships with OEMs or distributors in our targeted markets, in which case our sales would not increase as expected. |
| ● | If any of our distributor relationships is not successful, we may terminate or choose not to renew the related distributor agreement, which may result in interference with the wind down of the relationship or the transition of end-user service agreements and could potentially negatively impact our distribution channel or result in litigation costs or other expenses. |
| ● | We have substantial accounts receivable and increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on our cash flows and results of operations. |
| ● | Loss of a significant customer could have a material adverse effect on our results of operations. |
| ● | We may not achieve production cost reductions necessary to competitively price our products, which would adversely affect our sales. |
| ● | We have realized reductions in our operating costs and, as a result, our ability to cut costs further and sustain our business initiatives may be limited. |
| ● | We may incur costs and liabilities as a result of product liability claims. |
| ● | Operational restructuring may result in asset impairment or other unanticipated charges. |
| ● | We may not be able to manage our growth effectively, expand our production capabilities or improve our operational, financial and management information systems, which would impair our results of operations. |
| ● | Our success depends in significant part upon the continuing service of management and key employees. |
| ● | Our operations are vulnerable to interruption by fire, earthquake, and other events beyond our control. |
| ● | Activities necessary to integrate any future acquisitions may result in costs greater than current expectations or be less successful than anticipated. |
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Risks Related to Our Product Offerings
| ● | We depend upon the development of new products and enhancements of existing products |
| ● | Our operating results are dependent, in large part, upon the successful commercialization of our products. Failure to produce our products as scheduled and budgeted would materially and adversely affect our business and financial condition. |
| ● | We may not be able to produce our products on a timely basis if we fail to correctly anticipate product supply requirements or if we suffer delays in production resulting from issues with our suppliers. Our suppliers may not supply us with a sufficient number of components or components of adequate quality, or they may provide components at significantly increased prices. |
| ● | Commodity market factors impact our costs and availability of materials. |
| ● | We operate in a highly competitive market among competitors that have significantly greater resources than we have and we may not be able to compete effectively. |
| ● | Our business and financial performances depend in part on the oil and natural gas industry, where a continued movement towards clean energy and away from fossil fuels, as well as a decline in prices for oil and natural gas may have an adverse effect on our revenue, cash flows, profitability, and growth. |
| ● | Our sales and results of operations could be materially and adversely impacted by risks inherent in international markets. |
| ● | We may not be able to develop sufficiently trained applications engineering, installation, and service support to serve our targeted markets. |
| ● | Changes in our product components may require us to replace parts held at distributors. |
| ● | Utility companies or governmental entities could place barriers to our entry into the marketplace, and we may not be able to effectively sell our products. |
Risks Related to Pending Litigation and Government Regulation
| ● | We operate in a highly regulated business environment, and changes in regulation could impose significant costs on us or make our products less economical, thereby affecting demand for our microturbines. |
| ● | We have significant tax assets, usage of which may be subject to limitations in the future. |
| ● | We may be subject to lawsuits. |
Risks Related to Data, Security, and Intellectual Property
| ● | Our business could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights. |
| ● | We face security and cybersecurity risks related to our electronic processing of sensitive and confidential business and product data. If we are unable to protect our data or the data of our customers, a security breach could damage our reputation and have a material adverse effect on our business. |
Risks Related to Ownership of Our Common Stock
| ● | We cannot be certain of the future effectiveness of our internal controls over financial reporting. If we are unable to maintain effective internal controls over our financial reporting, investors may lose confidence in our ability to provide reliable and timely financial reports and the value of our common stock may decline. |
| ● | Future issuances or sales of our common stock or exercises by holders of our outstanding warrants could lower our stock price and dilute the interests of existing stockholders. |
| ● | The market price of our common stock has been, and may continue to be, highly volatile and you could lose all or part of your investment in our securities. |
| ● | If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline. |
| ● | Provisions in our certificate of incorporation, bylaws and our NOL rights plan, as well as Delaware law, may discourage, delay, or prevent a merger or acquisition at a premium price. |
| ● | We do not intend to pay cash dividends. We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our securities will likely depend on whether the price of our common stock increases. |
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General Risk Factors
| ● | Adverse economic conditions may have an impact on our business and financial condition, including some effects we may not be able to predict. |
| ● | Our business may be impacted by international instability, war, terrorism, and geopolitical events. |
For a more complete discussion of the material risks facing our business, please see below.
Risks Related to Our Business Operations and Financial Results
The ongoing effects of the COVID-19 pandemic could adversely affect our business, financial condition, results of operations, or cash flows.
An infectious disease caused by Severe Acute Respiratory Syndrome Coronavirus 2 (SARS CoV-2) that was first detected in November 2019 in the city of Wuhan, China, known as COVID-19, resulted in an outbreak throughout the world. The subsequent spread of COVID-19 to the U.S. and many other parts of the world led the World Health Organization to characterize COVID-19 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. Governments, public institutions, and other organizations in countries and localities throughout the world have taken and are continuing to take certain emergency measures to combat the spread of COVID-19, including implementation of restrictions on travel and orders that restrict the operations of institutions such as schools and businesses. These conditions have negatively impacted all aspects of our business. Our business is also dependent on the continued health and productivity of our employees, including our manufacturing employees, sales staff, and corporate management teams.
In addition, due to domestic and international governmental orders restricting certain activities in response to COVID-19, including in Van Nuys, California, where our corporate headquarters and many of our operations, including our principal manufacturing facility, are located, we have experienced, and may in the future experience, certain disruptions in our business, including changes to our on-site operations to reduce manufacturing capacity and implement social distancing, reductions in our suppliers’ ability to source, maintain inventory and ship raw materials in alignment with our demands, work stoppages, slowdowns and delays, including having most of our employees working outside of our offices, travel restrictions, reduced access to our customers for product training and case support, and cancellation of events, delays in product development efforts, and other negative impacts on our capacity to manufacture, our suppliers’ capacity to source and ship raw materials and our distributors’ ability to sell and support the use of our products.
The COVID-19 pandemic has also caused significant uncertainty and volatility in global financial markets. Due to such volatility, we may not be able to raise additional capital, if needed, on favorable terms, or at all. Further adverse economic events resulting from the COVID-19 pandemic, including sustained economic downturn, supply chain disruptions, or increasing cost pressures, could materially and adversely affect our business, access to capital markets and the value of our common stock.
Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, and meet our financial obligations.
Despite the introduction of Covid-19 vaccines, the pandemic remains highly volatile and continues to evolve. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential impacts on our business or the global economy as a whole. However, these effects could adversely impact our business, financial condition, results of operations, or cash flows.
Our operating history is characterized by net losses. We anticipate further losses and we may never become profitable.
Since inception, we have incurred annual operating losses. We expect this trend to continue until such time that we can sell a sufficient number of units and achieve a cost structure to become profitable. Our business is such that we have relatively few repeat end use customers and limited repeat business.business compared to our competitors. As a result, we
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may not maintain or increase revenue. We may not have adequate cash resources to reach the point of profitability, and we may never become profitable. Even if we do achieve profitability, we may be unable to increase our sales and sustain or increase our profitability in the future.
Our recently implemented expenses reduction plan and organizational changes undertaken to align to our focus on our EaaS business and achieving profitability may not be successful.
In March 2022, we implemented an expenses reduction plan and announced our efforts to reduce our operating costs and modify our operating model to better match our expanding EaaS business. Beginning on February 28, 2022, we furloughed 17 employees for a period of 120 days, eliminated the position of Chief Revenue Officer, which was held by Jim Crouse, effective April 15, 2022, instituted 15% temporary pay cuts for approximately 36 employees and 25% temporary pay cuts for members of our senior leadership team, among other actions.
We believe these changes were needed to streamline our organization and reallocate our resources to better align with our current strategic goals, including our current focus of achieving profitability and expanding our EaaS business. However, these expense reduction measures have and may continue to yield unintended consequences and costs, such as the loss of institutional knowledge and expertise, attrition beyond our intended reduction-in-force, a reduction in morale among our remaining employees, and the risk that we may not achieve the anticipated benefits, all of which may have an adverse effect on our results of operations or financial condition. In addition, while positions have been eliminated certain functions necessary to our reduced operations remain, particularly with respect to our financial and accounting function, and we may be unsuccessful in distributing the duties and obligations of departed employees among our remaining employees or to external service providers. We may also discover that the reductions in workforce and cost cutting measures will make it difficult for us to pursue new opportunities and initiatives and require us to hire qualified replacement personnel, which may require us to incur additional and unanticipated costs and expenses. We may further discover that, despite the implementation of our expense reduction plan, we may require additional capital to continue expanding our EaaS business and we may be unable to obtain such capital. Moreover, there is no assurance we will be successful in our pursuit of expanding our EaaS business. Our failure to successfully accomplish any of the above activities and goals may have a material adverse impact on our business, financial condition, and results of operations.
We may be unable to fund our future operating requirements, which could force us to further curtail our operations.operations; we were in breach of our secured note purchase agreement as of May 27, 2022.
To the extent that the funds we now have on hand are insufficient to fund our future operating requirements, we would need to raise additional funds, through further public or private equity or debt financings depending upon prevailing market conditions. These financings may not be available or, if available, may be on terms that are not favorable to us and could result in dilution to our stockholders and reduction of the trading price of our stock. The state of worldwide capital markets when we seek to raise additional capital could also impede our ability to raise additional capital on favorable terms or at all. If adequate capital were not available to us, we likely would be required to significantly curtail our operations or possibly even cease our operations. In March 2022, we implemented an expense reduction plan, which included furloughs, employment terminations and pay cuts. See “— Our recently implemented expenses reduction plan and organizational changes undertaken to align to our focus on our EaaS business and achieving profitability may not be successful.”
We maintain two Creditare party to an Amended and Security AgreementsRestated Note Purchase Agreement (the “Credit Agreements”“A&R Note Purchase Agreement”) dated October 1, 2020 (the “Closing Date”) among the Company, certain subsidiaries of the Company, Goldman Sachs Specialty Lending Group, L.P. (as successor in interest to Goldman Sachs Specialty Lending Holdings, Inc.), with Wells Fargo Bank, National Association,as collateral agent (“Wells Fargo”Goldman” or the “Collateral Agent”), that provide us with a credit facility up and the purchasers party thereto (the “Purchasers”). The A&R Note Purchase Agreement amended and restated our Note Purchase Agreement dated February 4, 2019, by and among the Company, certain subsidiaries of the Company, Goldman Sachs Specialty Lending Holdings, Inc. and the purchasers party thereto under which we sold $30.0 million aggregate principal amount of senior secured notes (the “Notes”) bearing an interest of 13.0% per annum. Pursuant to the A&R Note Purchase Agreement, the Company issued $20.0 million in additional Notes and all outstanding Notes under the aggregate. AtA&R Note Purchase Agreement bear interest at the Adjusted (London Interbank Offer) LIBO Rate (as defined in the A&R Note Purchase Agreement) plus 8.75% per annum, payable on the last day of each interest period of one-, two-, three- or six-months (but, in the case of a six-month interest period, every three-months). The Notes do not amortize and the entire principal balance is due and payable on October 1, 2023. As of March 31, 2016, we had $9.5 2022, $51.0
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million in borrowings were outstanding under this linethe Notes, which includes the accrual for an exit fee to be paid at maturity or upon pre-payment. Obligations under the A&R Note Purchase Agreement are secured by all of credit. Under this credit facility, we are requiredthe Company’s assets, including intellectual property and general intangibles. The A&R Note Purchase Agreement contains customary covenants, including, among others, covenants that restrict our ability to satisfy specified financialincur debt, grant liens, make certain investments and restrictive covenants. Failure to comply with these covenants couldacquisitions, pay dividends, repurchase equity interests, repay certain debt, amend certain contracts, enter into affiliate transactions and asset sales or make certain equity issuances (including equity issuances that would cause an eventownership change within the meaning of default which, if not cured or waived, couldSection 382 of the Internal Revenue Code), and covenants that require us to, repay substantial indebtedness immediately or allow Wells Fargo to terminateamong other things, provide annual, quarterly and monthly financial statements, together with related compliance certificates, maintain our property in good repair, maintain insurance and comply with applicable laws.
On May 13, 2021, the credit facility. In addition, we have pledged our accounts receivable, inventories, equipment,
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patents and other assets as collateral under the Credit Agreements which would be subject to seizure by Wells Fargo if we were in default and unable to repay the indebtedness.
Several times since entering into the Credit Agreements, we have not been in compliance with certain covenants under the Credit Agreements. In connection with each event of noncompliance, Wells Fargo waived the event of default and, on several occasions, we amended the Credit Agreements in responseMay 13, 2021 (the “Amendment”), to the default.A&R Note Purchase Agreement. The Amendment amended certain provisions of the A&R Note Purchase Agreement, including to (a) require the Company to expand its Rental Fleet (as defined in the A&R Note Purchase Agreement) by (i) at least 2.00 MW by the 9-month anniversary of the Closing Date (instead of 6.25 MW as provided in the A&R Note Purchase Agreement prior to the Amendment), and (ii) at least 12.50 MW by the 18-month anniversary of the Closing Date (which is unchanged from the covenant set forth in the A&R Note Purchase Agreement prior to the Amendment), and (b) increase the Company’s minimum consolidated liquidity requirement from $9 million to $12.2 million, for the period from May 13, 2021 to March 31, 2022, and $9 million thereafter. The financial covenants of the A&R Note Purchase Agreement require the Company not to exceed specified levels of Adjusted EBITDA losses relative to its financial model, beginning with the fiscal quarter ending September 30, 2021. As of September 30, 2015,March 31, 2022, we were not in compliance with the annual net income financialAdjusted EBITDA covenant contained in the Credit Agreements,A&R Note Purchase Agreement and did not cure such non-compliance by prepaying the Notes. As a result, we were in breach of the Adjusted EBITDA covenant as amended.of May 27, 2022. On November 2, 2015,July 13, 2022 we received from Wells Fargoentered into the Second Amendment to the A&R Note Purchase Agreement (the “A&R NPA Second Amendment”) with the purchaser thereunder (the “Purchaser”) and Goldman Sachs Specialty Lending Group, L.P. as collateral agent (the “Collateral Agent”), pursuant to which (i) the Purchaser and the Collateral Agent waived our breach of the Adjusted EBITDA covenant and (ii) the A&R Note Purchase Agreement has been amended to, among other things, add certain new covenants, including requirements that we use our commercially reasonable best efforts to both (a) raise at least $10 million through a waiversale of such noncompliance. If we had not obtainedour common stock by September 14, 2022 and (b) refinance the default waivers, or if we are ever again in noncompliance, we would not be able to draw additional funds underNotes by October 1, 2022. See Item 9B “Other Information” for a summary of the credit facility. A&R NPA Second Amendment.
The Credit AgreementsA&R Note Purchase Agreement, as amended, also definedefines an event of default to include a material adverse effect on our business, as, determined by Wells Fargo.among other things, payment default, bankruptcy events, cross defaults, breaches of covenants and representations and warranties, changes of control, judgment defaults and an ownership change within the meaning of Section 382 of the Internal Revenue Code. An event of default, for this or any other reason, if not waived, wouldcould have a material adverse effect on the Company.us.
Our obligations under the credit facility couldA&R Note Purchase Agreement, as amended, have important consequences, including the following:
| We may have difficulty obtaining additional financing at favorable interest rates to meet our requirements for operations, capital expenditures, general corporate or other purposes. |
| We will be required to dedicate a substantial portion of our cash flow to the payment of principal and interest on |
| Goldman Sachs Specialty Lending Holdings, Inc., as collateral agent under the Note Purchase Agreement, may enforce any and all liens and security interests on the collateral we have used to secure the Notes and we may forfeit our right to such collateral. |
| In order to avoid breaches of the Note Purchase Agreement covenant relating to Section 382 changes of ownership, we may be |
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We may be required to repay the section below entitled “Management’s DiscussionNotes immediately if we again default on any of the numerous financial and Analysisother covenants contained in the A&R Note Purchase Agreement, including any of Financial Conditionthose added pursuant to the A&R NPA Second Amendment, and Results of Operations—Liquidity and Capital Resources.”Goldman does not waive such default. It is not certain whether we will have, or will be able to obtain, sufficient funds to make any such accelerated payments. If any outstanding indebtedness under the Notes is accelerated, our assets may not be sufficient to repay such indebtedness.
If we are unable to either substantially improve our operating results or obtain additional financing, we may be unable to continue to operate at current levels.
We have experienced recurring operating losses and as of March 31, 2022, we had an accumulated deficit of approximately $938.4 million. On March 31, 2022, we had cash and cash equivalents of $22.6 million, and working capital of $35.9 million. This compares to $919.3 million, $49.5 million and $52.5 million, respectively, on March 31, 2021. As a going concern.condition of the A&R Note Purchase Agreement with the Purchasers, our consolidated liquidity (defined as the aggregate amount of unrestricted cash and cash equivalents included in the consolidated balance of the Company and our subsidiaries, subject to certain conditions as defined in the A&R Note Purchase Agreement) on any date may not be less than $12.2 million for the period from the Amendment Date to March 31, 2022, and $9.0 million thereafter.
Our business strategy is focused on profitability-oriented initiatives such as reducing operating expenses, increasing sales of products and services, thereby diversifying, and increasing revenue, and improving gross margin. In particular, we are focused on expanding our Energy-as-a-Service business. We may not be able to execute our business strategy successfully and if we are unable to generate positive cash flow, potential customers may choose not to purchase our products or utilize our program. Moreover, the business strategy is based upon projections, which are in turn based upon estimates and assumptions. There can be no assurance as to the accuracy of the projections, estimates and assumptions which underlie the business strategy or as to our ability to execute the business strategy successfully.
Should we be unable to execute our plans to buildincrease sales and margins while controlling costs, we may be unable to continue as a going concernto operate at our current levels on a longer termlonger-term basis. In particular, we must generate positive cash flow from operations and net income and otherwise improve our results of operations substantially on a longer termlonger-term basis. Our available cash and proceeds from future financings, if any, that we may be able to obtain, may not be sufficient to fund our operating expenses, capital expenditures and other cash requirements. Any such lack of funds would affect our ability to continue as a going concern.to operate at current levels. These events and circumstances could have a material adverse effect on our ability to raise additional capital and on the market value of our common stock and our ability to maintain a credit facility acceptable to the Company.Notes financing. Moreover, should we experience a cash shortage that requires us to curtail or cease our operations, or should we be unable to continue as a going concern, youwhich could lose all or part of your investments in our securities.
Impairment charges on our long‑lived assets, including intangible assets with finite lives wouldmaterially adversely affect our financial position and results of operations.
We evaluate the carrying value of long‑lived assets, including intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine whether impairment has occurred, we compare the undiscounted cash flows of the long‑lived asset group with its carrying value. The estimation of future cash flows requires significant estimates of factors that include future sales growth, gross margin performance, including our estimates of reductions in our direct material costs, and reductions in operating expenses. If our sales growth, gross margin performance or other estimated operating results are not achieved at or above our forecasted level, or inflation exceeds our forecast, the carrying valuemarket price of our asset group may prove to be unrecoverable and we may incur impairment charges in the future. In addition, significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, unanticipated competition, loss of key customers
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or changes in technology or markets, could require a charge for impairment that can materially and adversely affect our reported net loss and our stockholders’ equity.common stock.
A sustainable market for microturbines may never develop or may take longer to develop than we anticipate which would adversely affect our results of operations.
Our products represent an emerging market, and we do not know whether our targeted customers will accept our technology or will purchase our products in sufficient quantities to allow our business to grow. To succeed, demand for our products must increase significantly in existing markets, and there must be strong demand for products that we introduce in the future. In addition, as part of our business strategy, we are focusing our marketing efforts on expanding our Energy as a Service business and on the energy efficiency, renewable energy and, natural resources markets. We may be unable to grow our business in these target markets. If a sustainable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we have incurred to develop our products, we may have further impairment of assets, and we may be unable to meet our operational expenses. The development of a sustainable market for our systems may be hindered by many factors, including some that are out of our control. Examples include:
| consumer reluctance to try a new product; |
| regulatory requirements; |
| the cost competitiveness of our microturbines; |
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| costs associated with the installation and commissioning of our microturbines; |
| maintenance and repair costs associated with our microturbines; |
| the future costs and availability of fuels used by our microturbines; |
| economic downturns and reduction in capital spending; |
| consumer perceptions of our microturbines’ safety and quality; |
| the emergence of newer, more competitive technologies and products; |
| growth of the Hybrid Electric Vehicle market; and |
● | decrease in domestic and international incentives. |
Our operating results are dependent, in large part, upon the successful commercialization of our products. Failure to produce our products as scheduled and budgeted would materially and adversely affect our business and financial condition.
We cannot be certain that we will deliver ordered products in a timely manner. Any reliability or quality issues that may arise with our products could prevent or delay scheduled deliveries or adversely impact the performance of our products. Any such delays or costs could significantly impact our business, financial condition and operating results.
We may not be able to produce our products on a timely basis if we fail to correctly anticipate product supply requirements or if we suffer delays in production resulting from issues with our suppliers. Our suppliers may not supply us with a sufficient amount of components or components of adequate quality, or they may provide components at significantly increased prices.
Some of our components are currently available only from a single source or limited sources. We may experience delays in production if we fail to identify alternative suppliers, or if any parts supply is interrupted, each of which could materially adversely affect our business and operations. In order to reduce manufacturing lead times and ensure adequate component supply, we enter into agreements with certain suppliers that allow them to procure inventories based upon criteria defined by us. If we fail to anticipate customer demand properly, an oversupply of parts could result in excess or obsolete inventories, which could adversely affect our business. Additionally, if we fail to
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correctly anticipate our internal supply requirements, an undersupply of parts could limit our production capacity. Our inability to meet volume commitments with suppliers could affect the availability or pricing of our parts and components. A reduction or interruption in supply, a significant increase in price of one or more components or a decrease in demand of products could materially adversely affect our business and operations and could materially damage our customer relationships. Financial problems of suppliers on whom we rely could limit our supply of components or increase our costs. Also, we cannot guarantee that any of the parts or components that we purchase will be of adequate quality or that the prices we pay for the parts or components will not increase. Inadequate quality of products from suppliers could interrupt our ability to supply quality products to our customers in a timely manner. Additionally, defects in materials or products supplied by our suppliers that are not identified before our products are placed in service by our customers could result in higher warranty costs and damage to our reputation. We also outsource certain of our components internationally. As a result of outsourcing internationally, we may be subject to delays in delivery because of regulations associated with the import/export process, delays in transportation or regional instability.
We may not be able to manage our growth effectively, expand our production capabilities or improve our operational, financial and management information systems, which would impair our results of operations.
If we are successful in executing our business plan, we will experience growth in our business that could place a significant strain on our business operations, management and other resources. Our ability to manage our growth will require us to expand our production capabilities, continue to improve our operational, financial and management information systems, and to motivate and effectively manage our employees. We cannot provide assurance that our systems, procedures and controls or financial resources will be adequate, or that our management will keep pace with this growth. We cannot provide assurance that our management will be able to manage this growth effectively.
Adverse economic conditions may have an impact on our business and financial condition, including some effects we may not be able to predict.
Adverse economic conditions may prevent our customers from purchasing our products or delay their purchases, which would adversely affect our business, financial condition 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 adverse economic conditions.
Product quality expectations may not be met, causing slower market acceptance or warranty cost exposure.
In order to achieve our goal of improving the quality and lowering the total costs of ownership of our products, we may require engineering changes. Such improvement initiatives may render existing inventories obsolete or excessive. Despite our continuous quality improvement initiatives, we may not meet customer expectations. Any significant quality issues with our products could have a material adverse effect on our rate of product adoption, results of operations, financial condition, and cash flow. Moreover, as we develop new configurations for our microturbines and as our customers place existing configurations in commercial use, our products may perform below expectations. Any significant performance below expectations could adversely affect our operating results, financial condition and cash flow and affect the marketability of our products.
We sell our products with warranties. There can be no assurance that the provision for estimated product warranty will be sufficient to cover our warranty expenses in the future. We cannot ensure that our efforts to reduce our risk through warranty disclaimers will effectively limit our liability. Any significant incurrence of warranty expense in excess of estimates could have a material adverse effect on our operating results, financial condition and cash flow. Further, we have at times undertaken programs to enhance the performance of units previously sold. For example, our warranty provision was negatively impacted in Fiscal 2019 and Fiscal 2021 because of a supplier defect identified in fielded units. In Fiscal 2021 a warranty reserve in the amount of $4.9 million was 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. These enhancements have at times been provided at no cost or below our cost. If we choose to offer such programs again in the future, such actions could result in significant costs.
On February 22, 2021, we announced that we had reached a financial settlement in the amount of $5 million arising out of claims pursued in confidential arbitration with such former strategic parts supplier. We obtained this settlement following a multi-year arbitration process. Any future product quality issues with our parts suppliers could lead to lengthy and costly litigation, even if the outcome is ultimately in our favor. In addition, such quality issues with any of our parts could lead to us to fail to meet the product quality expectations of our own customers, which could adversely affect our operating results, financial condition and cash flow and affect the marketability of our products.
Our products involve a lengthy sales cycle, and we may not anticipate sales levels appropriately, which could impair our results of operations.
The sale of our products typically involves a significant commitment of capital by customers, which can result in the typical delays associated with large capital expenditures. For these and other reasons, the sales cycle associated with our products is typically lengthy and subject to several significant risks over which we have little or no control. We plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If sales in any period fall significantly below anticipated levels, our financial condition, results of operations and cash flow would suffer. If demand in any period increases well above anticipated levels, we may have difficulties in responding, incur greater costs to respond, or be unable to fulfill the demand in sufficient time to retain the
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We operateorder, which would negatively impact our operations. In addition, our operating expenses are based on anticipated sales levels, and a high percentage of our expenses are generally fixed in the short term. As a highly competitive market among competitors who have significantly greater resources thanresult of these factors, a small fluctuation in timing of sales can cause operating results to vary materially from period to period.
Net product orders for Fiscal 2022 were $31.8 million and contributed to an ending backlog of $25.3 million at March 31, 2022. The book-to-bill ratio was 1.1:1 for Fiscal 2022. Book-to-bill ratio is the ratio of new orders we havereceived to units shipped and billed during a period. However, because our backlog represents only the estimated amount of future product revenue to be recognized under negotiated contracts as shipments convert backlog to recognized revenue for accounting purposes, we may not be able to compete effectively.
Capstone microturbines compete with several technologies, including reciprocating engines, fuel cellsfully realize the revenue value reported in our backlog, and solar power. Competing technologiesour backlog may receive certain benefits, like governmental subsidies or promotion, ornot be able to offer consumer rebates or other incentives that we cannot receive or offer to the same extent. This could enhance our competitors’ abilities to fund research, penetrate markets or increase sales. We also compete with other manufacturersindicative of microturbines.
Our competitors include several well‑known companies with histories of providing power solutions. They have substantially greater resources than we do and have established worldwide presence. Because of greater resources, somefuture revenues. A portion of our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, to devote greater resources to the promotion and sale of their products than we can or lobby for governmental regulations and policies to create competitive advantages vis‑à‑vis our products. We believe that developing and maintaining a competitive advantage will require continued investment by us in product development and quality, as well as attention to product performance, our product prices, our conformance to industry standards, manufacturing capability and sales and marketing. In addition, current and potential competitors have established or maybacklog is concentrated in the future establish collaborative relationships among themselvesinternational oil and gas market which may impact the overall timing of shipments or with third parties, including third parties with whom we have business relationships. Accordingly, new competitors or alliancesthe conversion of backlog to revenue. The timing of the backlog is based on the requirement date indicated by our customers. Based on historical experience, management expects that a significant portion of our backlog may emergenot be shipped within the next 18 months. The timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and rapidly acquire significant market share.
Overall,customer delivery schedule changes), most of which are not in our control and can affect the markettiming of our revenue. As a result, management believes the book-to-bill ratio better demonstrates the current demand for our products is highly competitive and is changing rapidly. We believe thatin the primary competitive factors affecting the market for our products, including some that are outside of our control, include:
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There is no assurance that we will be able to successfully compete against either current or potential competitors or that competition will not have a material adverse effect on our business, operating results, financial condition and cash flow.given period.
If we do not effectively implement our sales, marketing and service plans, our sales will not grow and our results of operations will suffer.
Our sales and marketing efforts may not achieve intended results and, therefore, may not generate the revenue we anticipate. As a result of our corporate strategies, we have decided to focus our resources on expanding our Energy as a Service business and further developing selected vertical markets. We may change our focus to other markets or applications in the future. There can be no assurance that our focus or our near term plans will be successful. If we are not able to address markets for our products successfully, we may not be able to grow our business, compete effectively or achieve profitability.
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TableChanges to trade regulation, quotas, duties or tariffs, and sanctions caused by the changing U.S. and geopolitical environments or otherwise, may increase our costs or limit the amount of Contentsraw materials and products that we can import or may otherwise adversely impact our business.
Our salesThe former U.S. administration has voiced strong concerns about imports from countries that it perceives as engaging in unfair trade practices. Any current or future U.S. administration may decide to impose import duties or other restrictions on products, components or raw materials sourced from those countries, which may include China, Mexico, and other countries from which we import components or raw materials. Any such duties or restrictions could have a material adverse effect on our business, results of operations or financial condition.
Moreover, any new tariffs, or other changes in U.S. trade policy, could be materially andtrigger retaliatory actions by affected countries. Certain foreign governments have instituted or are considering imposing trade sanctions on certain U.S. goods. Others are considering the imposition of sanctions that will deny U.S. companies access to critical raw materials. A “trade war” of this nature or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impacted by risks inherent in international markets.
As we expand in international markets, customers may have difficulty or be unable to integrateimpact demand for our products, into their existing systems or may have difficulty complying with foreign regulatory and commercial requirements. As a result, our products may require redesign. Any redesign of the product may delay sales costs, customers, suppliers and/or cause quality issues. In addition, we may be subject to a variety of other risks associated with international business, including import/export restrictions, fluctuations in currency exchange rates and economic or political instability.
The current geopolitical instability in Russia and Ukraine and related sanctions by the U.S. government againsteconomy or certain companiessectors thereof and, individuals may hinder our abilitythus, to conduct business with potential or existing customers and vendors in these countries.
We derived approximately 2% and 11% of our revenue from Russia during Fiscal 2016 and Fiscal 2015, respectively. The continuation or escalation of the current geopolitical instability in Russia and Ukraine could negativelyadversely impact our operations, sales, and future growth prospects in that region. businesses.
The U.S. government imposedimposes sanctions through several executive orders restricting U.S. companies from conducting certain oil and gas production related business activities with specified Russian and Ukrainian individuals and companies, and requiringrequires export licenses for certain of such activities. WhileFollowing Russia’s military invasion of Ukraine in March 2022, we believe that the executive orders currently do not preclude us from conducting business withre-evaluated our current customers in Russia, the sanctions imposed by the U.S. government could be expandedefforts in the futureRussian and the surrounding Commonwealth of Independent States (CIS) markets and have ceased exploring growth opportunities in such markets. We do however continue to restrict us from engagingevaluate customer orders and ensure that we are in compliance with them.all laws and regulations upon acceptance and before shipment. If we are unable to conduct business with new or existing customers or pursue opportunities inwith sanctioned countries, including Russia, or Ukraine or elsewhere, our business, including revenue, profitability, and cash flows, could be materially adversely affected. If we are unable to conduct business with certain vendors, our operations in Russia and Ukraine could be materially adversely affected.
We cannot be certain25
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual reports on Form 10-K our assessment of the effectiveness of our internal controls over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal controls over financial reporting, as well as a statement that our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal controls over financial reporting. Our management concluded that our internal controls over financial reporting were ineffective as of March 31, 2014 because a material weakness was detected which related to our risk assessment process. Management determined that this material weakness was remediated during the 2015 fiscal year. We may in the future identify further material weaknesses in our internal controls over financial reporting that we have not discovered to date. If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and the market price of our securities.
We may not be able to retain or develop relationships with OEMs or distributors in our targeted markets, in which case our sales would not increase as expected.
In order to serve certain of our targeted markets, we believe that we must ally ourselves with companies that have particular expertise or better access to those markets. We believe that retaining or developing relationships with strong OEMs (which to date have typically resold our products under their own brands or packaged our products with other products as part of an integrated unit) or distributors in these targeted markets can improve the rate of adoption as well as reduce the direct financial burden of introducing a new technology and creating a new market. Because of OEMs’ and distributors’ relationships in their respective markets, the loss of an OEM or distributor could adversely impact the ability to penetrate our target markets. We offer our OEMs and distributors stated discounts from list price for the products they purchase. In the future, to attract and retain OEMs and distributors we may provide volume price discounts or otherwise incur significant costs that may reduce the potential revenue from these relationships. We may not be able to retain or develop appropriate OEMs and distributors on a timely basis, and we cannot provide assurance that the OEMs and distributors will focus adequate resources on selling our products or will be successful in selling them. In addition, some of the relationships may require that we grant exclusive distribution rights in defined territories.
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These exclusive distribution arrangements could result in our being unable to enter into other arrangements at a time when the OEM or distributor with whom we form a relationship is not successful in selling our products or has reduced its commitment to market our products. We cannot provide assurance that we will be able to negotiate collaborative relationships on favorable terms or at all. Our inability to have appropriate distribution in our target markets may adversely affect our financial condition, results of operations and cash flow.
Activities necessaryIf any of our distributor relationships is not successful, we may terminate or choose not to integrate any future acquisitionsrenew the related distributor agreement, which may result in interference with the wind down of the relationship or the transition of end-user service agreements, and could potentially negatively impact our distribution channel or result in litigation costs or other expenses.
Successfully managing our distribution channel in excessan effort to reach various potential customer segments for our products and services is a complex process. Each of current expectations or be lessour distributors is a strategically placed independent partner that provides for marketing and selling of our products and services on our behalf. If our distribution relationships are not successful, than anticipated.
During Fiscal 2010, we completed the acquisition of certain assets relating to the microturbine business of CPS, and we may acquire other businesseslose sales opportunities, customers, and revenues. Our agreements with our distribution partners require them to comply with performance conditions that are subject to interpretation, which could result in disagreements. At any given time, we may be in disputes with one or more distribution partners. Any such dispute could result in lengthy and costly litigation, even if the future. The successoutcome is ultimately in our favor. We cannot predict the outcome of these transactions will depend on, among other things,any arbitration or litigation, the effect of any negative judgment against us or the amount of any settlement that we may enter into with such distribution partners. A contractual dispute with a distribution partner may result in our or our distribution partner seeking to terminate the related distribution agreement, even if such termination would be wrongful, which could harm our business, or interfere with a previously agreed wind down of the relationship or transition of end-user service agreements. Any prolonged disruptions of our distribution channels that results from the termination of one or more of our distributions or our failure to renew our distribution agreements with our desired distributors, could negatively affect our ability to develop productive relationships with the corresponding distributorseffectively sell our products and to integrate assetswould materially and personnel, if any, acquired in these transactions and to apply our internal controls processes to these acquired businesses. The integration of any acquired businesses or significant assets may require significant attention from our management, and the diversion of management’s attention and resources could have a material adverse effect on our ability to manage our business. Furthermore, we may not realize the degree or timing of benefits we anticipated when we first enter into these transactions. If actual integration costs are higher than amounts assumed, if we are unable to integrate the assets and personnel acquired in an acquisition as anticipated, or if we are unable to fully benefit from anticipated synergies,adversely affect our business, financial condition, results of operations and cash flows could be materially adversely affected.prospects.
We have substantial accounts receivable, and increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on our cash flows and results of operations.
Our accounts receivable balance, net of allowances, was $13.6$24.7 million and $13.1$20.6 million as of March 31, 20162022 and March 31, 2015,2021, respectively. Days sales outstanding in accounts receivable (“DSO”) at the end of Fiscal 20162022 was 66150 days, compared with 40111 days at the end of Fiscal 2015.2021. We recorded net bad debt recovery of approximately $1.5$0.2 million during Fiscal 2021, and net bad debt expense of approximately $10.1$1.1 million during Fiscal 2016 and Fiscal 2015, respectively.2022. 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.operations and cash flows.
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Loss of a significant customer could have a material adverse effect on our results of operations.
Horizon, E-Finity DTC and Optimal accounted for approximately 15%, 11%, 10% and 10%, respectively,18% of our revenue for Fiscal 2016.2022. Additionally, DTC, Optimal, RSP, and Regale,E-Finity accounted for 28%, 11%, 10% and 10%, respectively, of net accounts receivable as of March 31, 2016.2022. The loss of Horizon, E-Finity DTC, Optimal or any other significant customer could adversely affect our results of operations.
We may not be able to develop sufficiently trained applications engineering, installation and service support to serve our targeted markets.
Our ability to identify and develop business relationships with companies who can provide quality, cost‑effective application engineering, installation and service can significantly affect our success. The application engineering and proper installation of our microturbines, as well as proper maintenance and service, are critical to the performance of the units. Additionally, we need to reduce the total installed cost of our microturbines to enhance market opportunities. Our inability to improve the quality of applications, installation and service while reducing associated costs could affect the marketability of our products.
Changes in our product components may require us to replace parts held at distributors.
We have entered into agreements with some of our distributors requiring that if we render parts obsolete in inventories they own and hold in support of their obligations to serve fielded microturbines, we are required to replace the affected stock at no cost to the distributors. It is possible that future changes in our product technology could involve costs that have a material adverse effect on our results of operations cash flow orand financial position.condition.
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We operate in a highly regulated business environment, and changes in regulation could impose significant costs on us or make our products less economical, thereby affecting demand for our microturbines.
Our products are subject to federal, state, local and foreign laws and regulations, governing, among other things, emissions and occupational health and safety. Regulatory agencies may impose special requirements for the implementation and operation of our products or that may significantly affect or even eliminate some of our target markets. We may incur material costs or liabilities in complying with government regulations. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations and requirements that may be adopted or imposed in the future. Furthermore, our potential utility customers must comply with numerous laws and regulations. The deregulation of the utility industry may also create challenges for our marketing efforts. For example, as part of electric utility deregulation, federal, state and local governmental authorities may impose transitional charges or exit fees, which would make it less economical for some potential customers to switch to our products. We can provide no assurances that we will be able to obtain these approvals and changes in a timely manner, or at all. Non‑compliance with applicable regulations could have a material adverse effect on our operating results.
The market for electricity and generation products is heavily influenced by federal and state government regulations and policies. The deregulation and restructuring of the electric industry in the United States and elsewhere may cause rule changes that may reduce or eliminate some of the advantages of such deregulation and restructuring. We cannot determine how any deregulation or restructuring of the electric utility industry may ultimately affect the market for our microturbines. Changes in regulatory standards or policies could reduce the level of investment in the research and development of alternative power sources, including microturbines. Any reduction or termination of such programs could increase the cost to our potential customers, making our systems less desirable, and thereby adversely affect our revenue and other operating results.
Utility companies or governmental entities could place barriers to our entry into the marketplace, and we may not be able to effectively sell our products.
Utility companies or governmental entities could place barriers on the installation of our products or the interconnection of the products with the electric grid. Further, they may charge additional fees to customers who install on‑site generation or have the capacity to use power from the grid for back‑up or standby purposes. These types of restrictions, fees or charges could hamper the ability to install or effectively use our products or increase the cost to our potential customers for using our systems. This could make our systems less desirable, thereby adversely affecting our revenue and other operating results. In addition, utility rate reductions can make our products less competitive which would have a material adverse effect on our operations. The cost of electric power generation bears a close relationship to natural gas and other fuels. However, changes to electric utility tariffs often require lengthy regulatory approval and include a mix of fuel types as well as customer categories. Potential customers may perceive the resulting swings in natural gas and electric pricing as an increased risk of investing in on‑site generation.
We depend upon the development of new products and enhancements of existing products.
Our operating results depend on our ability to develop and introduce new products, enhance existing products and reduce the costs to produce our products. The success of our products is dependent on several factors, including proper product definition, product cost, timely completion and introduction of the products, differentiation of products from those of our competitors, meeting changing customer requirements, emerging industry standards and market acceptance of these products. The development of new, technologically advanced products and enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. There can be no assurance that we will successfully identify new product opportunities, develop and bring new or enhanced products to market in a timely manner, successfully lower costs and achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or noncompetitive.
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Operational restructuring may result in asset impairment or other unanticipated charges.
As a result of our corporate strategy, we have identified opportunities to outsource to third‑party suppliers certain functions which we currently perform. We believe outsourcing can reduce product costs, improve product quality and increase operating efficiency. These actions may not yield the expected results, and outsourcing may result in production delays or lower quality products. Transitioning to outsourcing may cause certain of our affected employees to leave before the outsourcing is complete. This could result in a lack of the experienced in‑house talent necessary to successfully implement the outsourcing. Further, depending on the nature of operations outsourced and the structure of agreements we reach with suppliers to perform these functions, we may experience impairment in the value of manufacturing assets related to the outsourced functions or other unanticipated charges, which could have a material adverse effect on our operating results.
We may not achieve production cost reductions necessary to competitively price our products, which would adversely affect our sales.
We believe that we will need to reduce the unit production cost of our products over time to maintain our ability to offer competitively priced products. Our ability to achieve cost reductions will depend on our ability to develop low cost design enhancements, to obtain necessary tooling and favorable supplier contracts and to increase sales volumes so we can achieve economies of scale. We cannot provide assurance that we will be able to achieve any such production cost reductions. Our failure to achieve such cost reductions could have a material adverse effect on our business and results of operations.
Commodity market factors impactWe have realized reductions in our operating costs and, availability of materials.
Our products containas a number of commodity materials from metals, which include steel, special high temperature alloys, copper, nickel and molybdenum, to computer components. The availability of these commodities could impactresult, our ability to acquire the materials necessary to meetcut costs further and sustain our production requirements. The cost of metals has historically fluctuated. The pricing could impact the costs to manufacture our products. If we are not able to acquire commodity materials at prices and on terms satisfactory to us or at all, our operating resultsbusiness initiatives may be materially adversely affected.limited.
Our products involve a lengthy sales cycle and we may not anticipate sales levels appropriately, which could impair our results of operations.
The sale of our products in many cases involves a significant commitment of capital by customers, with the attendant delays frequently associated with large capital expenditures. For these and other reasons, the sales cycle associated with our products has been lengthy and subject to a number of significant risks over whichSince April 2015, we have little or no control. We expectimplemented various initiatives to planreduce operating costs across all functions of the Company and focus our production and inventory levels basedbusiness efforts on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. If sales in any period fall significantly below anticipated levels, our financial condition, results of operations and cash flow would suffer. If demand in any period increases well above anticipated levels, we may have difficulties in responding, incur greater costs to respond, or be unable to fulfill the demand in sufficient time to retain the order, which would negatively impact our operations. In addition, our operating expenses are based on anticipated sales levels, and a high percentage of our expenses are generally fixed in the short term.most promising near-term product opportunities. As a result of these factors,cost-cutting initiatives, which we have already undertaken over an extended period of time, we may have a small fluctuation in timing of sales can cause operating resultsmore limited ability to varyfurther reduce costs to increase our liquidity should such measures become necessary. In March 2022, we implemented an expense reduction plan, which included furloughs, employment terminations and pay cuts. See “—Our recently implemented expenses reduction plan and organizational changes undertaken to align to our focus on our EaaS business and achieving profitability may not be successful.”Any further reductions may have a materially from period to period.
Potential intellectual property, labor, product liability, stockholder or other litigation may adverselynegative impact on our business.
From time to time, we may face litigation relating to intellectual property, labor, product liability, stockholder and other matters. An adverse judgment could negatively impact our financial position and results of operations, the trading price of our common stock and our ability to obtain future financing on favorable terms or at all. Whether or not resolved in a manner adverse to us, any litigation could be costly, divert management attention or result in increased
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costs of doing business. Further, our insurance coverage is limited for these and other claims against us, and we may not have adequate insurance or financial resources to pay for our liabilities or losses from any such claims.
Our business could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights.
We view our intellectual property rights as important assets. We seek to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing and confidentiality agreements. These protections may not be adequate to prevent third parties from using our intellectual property without our authorization, breaching any confidentiality agreements with us, copying or reverse engineering our products, or developing and marketing products that are substantially equivalent to or superior to our own. The unauthorized use of our intellectual property by others could reduce our competitive advantage and harm our business. If it became necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly and we may not prevail. We cannot guarantee that any patents, issued or pending, will provide us with any competitive advantage or will not be challenged by third parties. Moreover, the expiration of our patents may lead to increased competition with respect to certain products. In addition, we cannot be certain that we do not or will not infringe third parties’ intellectual property rights. Any such claim, even if it is without merit, may be expensive and time‑consuming to defend, subject us to damages, cause us to cease making, using or selling certain products that incorporate the disputed intellectual property, require us to redesign our products, divert management time and attention and/or require us to enter into costly royalty or licensing arrangements.
Our results of operations could be materially and adversely affected by risks related to cyber security threats.
As a manufacturer of high technology commercial products, we face cyber security threats, as well as the potential for business disruptions associated with information technology failures or cyber security attacks. We routinely experience cyber security threats, threats to our information technology infrastructure and attempts to gain access to our sensitive information. Because of the evolving nature of these security threats, the impact of any future incident cannot be predicted. The occurrence of any of these events could adversely affect our results of operations, the services we provide to customers, the competitive advantages derived from our R&D efforts, the usefulness of our products and services, our reputation or our stock price.
We may incur costs and liabilities as a result of product liability claims.
We face a risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other damage. Although we currently maintain product liability insurance coverage, we may not be able to obtain such insurance on acceptable terms in the future, if at all, or obtain insurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. A significant unsuccessful product liability defense could have a material adverse effect on our financial condition and results of operations. In addition, we believe our business depends on the strong brand reputation we have developed. If our reputation is damaged, we may face difficulty in maintaining our market share and pricing with respect to some of our products, which could reduce our sales and profitability.
Operational restructuring may result in asset impairment or other unanticipated charges.
As a result of our corporate strategy, we have identified opportunities to outsource to third-party suppliers certain functions which we currently perform. We believe outsourcing can reduce product costs, improve product quality and increase operating efficiency. These actions may not yield the expected results, and outsourcing may result in production delays or lower quality products. Transitioning to outsourcing may cause certain of our affected employees to leave before the outsourcing is complete. This could result in a lack of the experienced in-house talent necessary to successfully implement the outsourcing. Further, depending on the nature of operations outsourced and the structure of agreements we reach with suppliers to perform these functions, we may experience impairment in the value of manufacturing assets related to the outsourced functions or other unanticipated charges, which could have a material adverse effect on our operating results.
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We may not be able to manage our growth effectively, expand our production capabilities or improve our operational, financial and management information systems, which would impair our results of operations.
If we are successful in executing our business plan, we will experience growth in our business that could place a significant strain on our business operations, management and other resources. Our ability to manage our growth will require us to expand our production capabilities, continue to improve our operational, financial and management information systems, and to motivate and effectively manage our employees. We cannot provide assurance that our systems, procedures and controls or financial resources will be adequate, or that our management will keep pace with this growth. We cannot provide assurance that our management will be able to manage this growth effectively.
Our success depends in significant part upon the continuing service of management and key employees.
Our success depends in significant part upon the continuing service of our executive officers, senior management and sales and technical personnel. The failure of our personnel to execute our strategy or our failure to retain management and personnel could have a material adverse effect on our business. In March 2022, we implemented an expense reduction plan, which included furloughs, employment terminations and pay cuts. See “—Our recently implemented expenses reduction plan and organizational changes undertaken to align to our focus on our EaaS business and achieving profitability may not be successful.”
Our success, growth prospects, and ability to capitalize on market opportunities also depend to a significant extent on our ability to identify, hire, motivate and retain qualified managerial personnel, including senior members of management. There can be no assurances that we can do so. Our growth may be constrained by resource limitations as competitors and customers compete for increasingly scarce human capital resources. The demand for skilled workers is currently high. We face an increasingly competitive labor market due to sustained labor shortages in part from the COVID-19 pandemic and are subject to inflationary pressures on employee wages and salaries which may increase labor costs. In addition, we have already experienced involuntary turnover due to increased commuting costs for our employees. If gas prices remain high for a sustained period, we may experience further involuntary turnover as employees seek to shorten their commutes. Our competitors may be able to offer a work environment with higher compensation or more opportunities than we can. If we are unable to attract and retain a sufficient number of skilled personnel, our ability to successfully implement our business plan, grow our Company and maintain or expand our product offerings may be adversely affected, and the costs of doing so may increase, which may adversely impact our business, financial condition and results of operations.
In addition, our internal control systems rely on employees trained in the execution of the controls, particularly within our financial and accounting function. Loss of these employees or our inability to replace them with similarly skilled and trained individuals or new processes in a timely manner could adversely impact our internal control mechanisms.
Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control.
Our operations are vulnerable to interruption by fire, earthquake, and other events beyond our control. Our executive offices, manufacturing facility, and auxiliary inventory storage facility are located in Southern California. Because the Southern California area is located in an earthquake-sensitive area and because we have no redundancy facility located within or outside of Southern California, we are particularly susceptible to the risk of damage to, or total destruction of, our facilities in Southern California and the surrounding transportation infrastructure, which could affect our ability to make and transport our products. While we take steps to mitigate the impact of severe weather, environmental and natural disasters, the frequency and severity of which may be impacted by climate change and other natural and manmade events, such events could result in severe disruption to our business operations at these facilities. If an earthquake, fire, or other man-made or natural disaster occurs at or near our facilities, our business, financial condition, operating results and cash flow could be materially adversely affected.
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Activities necessary to integrate any future acquisitions may result in costs in excess of current expectations or be less successful than anticipated.
We may acquire other businesses in the future and the success of these transactions will depend on, among other things, our ability to develop productive relationships with the corresponding distributors and to integrate assets and personnel, if any, acquired in these transactions and to apply our internal controls processes to these acquired businesses. Future acquisitions may require us to raise financing including by issuing common stock that would dilute our current stockholders’ percentage ownership, assume or otherwise be subject to liabilities of an acquired company, record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, incur large acquisition and integration costs, immediate write-offs, and restructuring and other related expenses, and become subject to litigation. The benefits of an acquisition may also take considerable time to develop, and we cannot be certain that any particular acquisition will produce the intended benefits in a timely manner or to the extent anticipated or at all. We may experience difficulties integrating the operations, technologies, products, and personnel of an acquired company or be subjected to liability for the target’s pre-acquisition activities or operations as a successor in interest. Such integration may divert management’s attention from normal daily operations of our business. Future acquisitions may also expose us to potential risks, including risks associated with entering markets in which we have no or limited prior experience, especially when competitors in such markets have stronger market positions, the possibility of insufficient revenues to offset the expenses we incur in connection with an acquisition and potential loss of, or harm to, our relationships with employees, customers, consumers and suppliers as a result of integration of new businesses. If we are unable to fully benefit from anticipated synergies, our business, financial condition, results of operations, and cash flows could be materially adversely affected.
We may be adversely impacted by the effects of climate change and may incur increased costs and experience other impacts due to new or more stringent greenhouse gas regulations designed to address climate change.
The scientific consensus indicates that emissions of greenhouse gases (GHG) continue to alter the composition of Earth’s atmosphere in ways that are affecting, and are expected to continue to affect, the global climate. The potential impacts of climate change on our customers, product offerings, operations, facilities and suppliers are accelerating and uncertain, as they will be particular to local and customer-specific circumstances. These potential impacts may include, among other items, physical long-term changes in freshwater availability and the frequency and severity of weather events as well as customer product changes either through preference or regulation.
Concerns regarding climate change may lead to additional international, national, regional and local legislative and regulatory responses. Various stakeholders, including legislators and regulators, shareholders and non-governmental organizations, are continuing to look for ways to reduce GHG emissions. Increased input costs, such as fuel, utility, transportation and compliance-related costs could increase our operating costs.
While we aim to position ourselves as a solution for climate change related issues to our customers, there are other solutions in the market that may be cheaper or better suited to our customers’ needs, and we may not be able to capitalize on the move towards renewable energy.
As the impact of any future GHG legislative or regulatory requirements on our global businesses and products is dependent on the timing, scope and design of the mandates or standards, we are currently unable to predict its potential impact which could have a material adverse effect on our results of operations, financial condition and cash flows.
Risks Related to Our Product Offerings
We depend upon the development of new products and enhancements of existing products
Our operating results depend on our ability to develop and introduce new products, enhance existing products and reduce the costs to produce our products. The success of our products is dependent on several factors, including proper product definition, product cost, timely completion and introduction of the products, differentiation of products from those of our competitors, meeting changing customer requirements, emerging industry standards and market acceptance of these products. The development of new, technologically advanced products and enhancements is a complex and uncertain
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process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. There can be no assurance that we will successfully identify new product opportunities, develop and bring new or enhanced products to market in a timely manner, successfully lower costs and achieve market acceptance of our products, or that products and technologies developed by others will not render our products or technologies obsolete or uncompetitive. We continued to expand and develop our new hydrogen products during Fiscal 2022, which are commercially available running on a 30% hydrogen – 70% natural gas mix. Continued development towards a 100% hydrogen product will require a long time horizon and a significant amount of financial resources. We do not currently have and there can be no assurance that we will develop the resources or financial ability to develop a 100% hydrogen product.
Our operating results are dependent, in large part, upon the successful commercialization of our products. Failure to produce our products as scheduled and budgeted would materially and adversely affect our business and financial condition.
We cannot be certain that we will deliver ordered products in a timely manner. We have limited production slots for our products. Any delays in production will increase our costs, reduce future production slots and could significantly impact our business, financial condition and operating results.
We may not be able to produce our products on a timely basis if we fail to correctly anticipate product supply requirements or if we suffer delays in production resulting from issues with our suppliers. Our suppliers may not supply us with a sufficient amount of components or components of adequate quality, or they may provide components at significantly increased prices.
Some of our components are currently available only from a single source or limited sources. We may experience delays in production if we fail to identify alternative suppliers, or if any parts supply is interrupted, each of which could materially adversely affect our business and operations. In addition, the COVID-19 pandemic continues to cause labor shortages and disrupt global supply chains, which has contributed to prolonged disruptions. The COVID-19 pandemic is also contributing to growing inflationary pressures, particularly in the U.S., where inflation continues to show signs of acceleration. In order to reduce manufacturing lead times and ensure adequate component supply, we enter into agreements with certain suppliers that allow them to procure inventories based upon criteria defined by us. If we fail to anticipate customer demand properly, an oversupply of parts could result in excess or obsolete inventories, which could adversely affect our business. Additionally, if we fail to correctly anticipate our internal supply requirements, an undersupply of parts could limit our production capacity. Our inability to meet volume commitments with suppliers could affect the availability or pricing of our parts and components. A reduction or interruption in supply, a significant increase in price of one or more components or a decrease in demand of products could materially adversely affect our business and operations and could materially damage our customer relationships. Financial problems of suppliers on whom we rely could limit our supply of components or increase our costs. Also, we cannot guarantee that any of the parts or components that we purchase will be of adequate quality or that the prices we pay for the parts or components will not increase. Inadequate quality of products from suppliers could interrupt our ability to supply quality products to our customers in a timely manner. Additionally, defects in materials or products supplied by our suppliers that are not identified before our products are placed in service by our customers could result in higher warranty costs and damage to our reputation. We also outsource certain of our components internationally. As a result of outsourcing internationally, we may be subject to delays in delivery because of regulations associated with the import/export process, delays in transportation or regional instability.
Commodity market factors impact our costs and availability of materials.
Our products contain a number of commodity materials from metals, which include steel, special high temperature alloys, copper, nickel and molybdenum, to computer components. The availability of these commodities could impact our ability to acquire the materials necessary to meet our production requirements. The cost of metals has historically fluctuated. The pricing could impact the costs to manufacture our products. During Fiscal 2022, as a result of COVID-19 and other ongoing macroeconomic events, we saw significant price increases in the cost of our commodity materials. If we are not able to acquire commodity materials at prices and on terms satisfactory to us or at all, our operating results may be materially adversely affected.
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We operate in a highly competitive market among competitors that have significantly greater resources than we have and we may not be able to compete effectively.
We compete with several technologies, including reciprocating engines, fuel cells and solar power. Competing technologies may receive certain benefits, like governmental subsidies or promotion, or be able to offer consumer rebates or other incentives that we cannot receive or offer to the same extent. This could enhance our competitors’ abilities to fund research, penetrate markets or increase sales. We also compete with other manufacturers of microturbines.
Our competitors include several well-known companies with histories of providing power solutions. They have substantially greater resources than we do and have established worldwide presence. Because of greater resources, some of our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, to devote greater resources to the promotion and sale of their products than we can or lobby for governmental regulations and policies to create competitive advantages vis-à-vis our products. We believe that developing and maintaining a competitive advantage will require continued investment by us in product development and quality, as well as attention to product performance, our product prices, our conformance to industry standards, manufacturing capability and sales and marketing. In addition, current and potential competitors have established or may in the future establish collaborative relationships among themselves or with third parties, including third parties with whom we have business relationships. Accordingly, new competitors or alliances may emerge and rapidly acquire significant market share.
Overall, the market for our products is highly competitive and is changing rapidly. We believe that the primary competitive factors affecting the market for our products, including some that are outside of our control, include:
| ● | name recognition, historical performance and market power of our competitors; |
| ● | product quality and performance; |
| ● | operating efficiency; |
| ● | product price; |
| ● | availability, price and compatibility of fuel; |
| ● | development of new products and features; and |
| ● | emissions levels. |
There is no assurance that we will be able to successfully compete against either current or potential competitors or that competition will not have a material adverse effect on our business, operating results, financial condition and cash flow.
Our business and financial performance depends in part on the oil and natural gas industry, where a continued movement towards clean energy and away from fossil fuels, as well as a decline in prices for oil and natural gas may have an adverse effect on our revenue, cash flows, profitability and growth.
Revenue in the oil and natural gas industry has been in decline for several years from our historical highs, due to volatility in oil prices, as well as a movement towards clean energy and away from fossil fuels, which has impacted capital expenditures in the oil and natural gas industry. We continue to be impacted by the volatility of the global oil and gas industry. If prices were to decline and remain low for a sustained period, we would expect to see additional declines in our customers' spending which would have an adverse effect on our revenue. In addition, a worsening of these conditions may result in a material adverse impact on certain of our customers' liquidity and financial position resulting in further spending reductions, delays in the collection of amounts owing to us and other similar adverse effects. Despite a recent increase in oil prices, we have not yet seen a corresponding increase in sales activity, primarily due to the customers in our natural resources market vertical not yet increasing their spend on capital expenditures that would include our microturbine product.
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Our sales and results of operations could be materially and adversely impacted by risks inherent in international markets.
As we expand in international markets, customers may have difficulty or be unable to integrate our products into their existing systems or may have difficulty complying with foreign regulatory and commercial requirements. As a result, our products may require redesign. Any redesign of the product may delay sales or cause quality issues. In addition, we may be subject to a variety of other risks associated with international business, including import/export restrictions, fluctuations in currency exchange rates and economic or political instability. Our business in particular is also subject to risks relating to uncertainties and effects of the implementation of the United Kingdom’s referendum to withdraw membership from the EU (referred to as “Brexit”), including financial, legal, tax and trade implications. In addition, doing business internationally subjects us to risks relating to political or social unrest, as well as corruption and government regulation, including laws such as the Foreign Corrupt Practices Act and the U.K. Bribery Act, that impose stringent requirements on how we conduct our foreign operations.
We may not be able to develop sufficiently trained applications engineering, installation and service support to serve our targeted markets.
Our ability to identify and develop business relationships with companies that can provide quality, cost-effective application engineering, installation and service can significantly affect our success. The application engineering and proper installation of our microturbines, as well as proper maintenance and service, are critical to the performance of the units. Additionally, we need to reduce the total installed cost of our microturbines to enhance market opportunities. Our inability to improve the quality of applications, installation and service while reducing associated costs could affect the marketability of our products.
Changes in our product components may require us to replace parts held at distributors.
We have entered into agreements with some of our distributors requiring that if we render parts obsolete in inventories they own and hold in support of their obligations to serve fielded microturbines, we are required to replace the affected stock at no cost to the distributors. As a result, it is possible that future changes in our product technology could involve costs that have a material adverse effect on our results of operations, cash flow or financial position.
Utility companies or governmental entities could place barriers to our entry into the marketplace, and we may not be able to effectively sell our products.
Utility companies or governmental entities could place barriers on the installation of our products or the interconnection of the products with the electric grid. Further, they may charge additional fees to customers who install on-site generation or have the capacity to use power from the grid for back-up or standby purposes. These types of restrictions, fees or charges could hamper the ability to install or effectively use our products or increase the cost to our potential customers for using our systems. This could make our systems less desirable, thereby adversely affecting our revenue and other operating results. In addition, utility rate reductions can make our products less competitive which would have a material adverse effect on our operations. The cost of electric power generation bears a close relationship to natural gas and other fuels. However, changes to electric utility tariffs often require lengthy regulatory approval and include a mix of fuel types as well as customer categories. Potential customers may perceive the resulting swings in natural gas and electric pricing as an increased risk of investing in on-site generation.
Risks Related to Pending Litigation and Government Regulation
We operate in a highly regulated business environment, and changes in regulation could impose significant costs on us or make our products less economical, thereby affecting demand for our microturbines.
Our products are subject to federal, state, local and foreign laws and regulations, governing, among other things, emissions and occupational health and safety. Regulatory agencies may impose special requirements for the implementation and operation of our products or that may significantly affect or even eliminate some of our target markets. We may incur material costs or liabilities in complying with government regulations. In addition, potentially significant expenditures could be required in order to comply with evolving environmental and health and safety laws, regulations,
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requirements and approvals that may be adopted or imposed in the future. We can provide no assurances that we will be able to obtain any such approvals in a timely manner, or at all. Non-compliance with applicable regulations could have a material adverse effect on our operating results. Furthermore, our potential utility customers must comply with numerous laws and regulations. The deregulation of the utility industry may also create challenges for our marketing efforts. For example, as part of electric utility deregulation, federal, state and local governmental authorities may impose transitional charges or exit fees, which would make it less economical for some potential customers to switch to our products.
The market for electricity and generation products is heavily influenced by federal and state government regulations and policies. The deregulation and restructuring of the electric industry in the United States and elsewhere may cause rule changes that may reduce or eliminate some of the advantages of such deregulation and restructuring. We cannot determine how any deregulation or restructuring of the electric utility industry may ultimately affect the market for our microturbines. Changes in regulatory standards or policies could reduce the level of investment in the research and development of alternative power sources, including microturbines. Any reduction or termination of such programs could increase the cost to our potential customers, making our systems less desirable, and thereby adversely affect our revenue and other operating results.
We have significant tax assets, usage of which may be subject to limitations in the future.
At March 31, 2016,2022, we had federal and state net operating loss carryforwards of approximately $652$566.5 million and $181$177.1 million, respectively, which may be utilized to reduce future taxable income, subject to limitations under Section 382 of the Internal Revenue Code of 1986. These deferred tax assets have been fully offset by a valuation allowance. Any subsequent accumulations of common stock ownership leading to a change of control under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, including through sales of stock by large stockholders, all of which are outside of our control, could limit and defer our ability to utilize our net operating loss carryforwards to offset future federal income tax liabilities.
We may be subject to lawsuits.
We may be named as defendants in future lawsuits. These current and future matters may result in significant liabilities and diversion of our management’s time, attention and resources. Given the uncertain nature of litigation generally, we are not able in all cases to estimate the amount or range of loss that could result from an unfavorable outcome in these matters. In view of these uncertainties, the outcome of these matters may result in charges in excess of any established reserves and, to the extent available, liability insurance. Protracted litigation, including any adverse outcomes, may have an adverse impact on our business, financial condition or results of operations. In addition, any significant judgment or settlement amount may require us to incur additional indebtedness, adversely affect our liquidity and ability to service our indebtedness, or require us to restructure or amend the terms of our indebtedness. See Item 3—Legal Proceedings of this Form 10-K for more information regarding currently pending legal proceedings.
In addition, from time to time, we may face litigation relating to intellectual property, labor, product liability, stockholder and other matters. An adverse judgment could negatively impact our financial position and results of operations, the trading price of our common stock and our ability to obtain future financing on favorable terms or at all. Whether or not resolved in a manner adverse to us, any litigation could be costly, divert management attention or result in increased costs of doing business. Further, our insurance coverage is limited for these and other claims against us, and we may not have adequate insurance or financial resources to pay for our liabilities or losses from any such claims.
Risks Related to Data, Security, and Intellectual Property
Our business could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights.
We view our intellectual property rights as important assets. We seek to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing and confidentiality agreements. These protections may not be adequate to prevent third parties from using our intellectual property without our authorization, breaching any confidentiality agreements with us, copying or reverse engineering our products, or
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developing and marketing products that are substantially equivalent to or superior to our own. The unauthorized use of our intellectual property by others could reduce our competitive advantage and harm our business. If it became necessary for us to litigate to protect these rights, any proceedings could be burdensome and costly and we may not prevail. We cannot guarantee that any patents, issued or pending, will provide us with any competitive advantage or will not be challenged by third parties. Moreover, the expiration of our patents may lead to increased competition with respect to certain products. In addition, we cannot be certain that we do not or will not infringe third parties’ intellectual property rights. Any such claim, even if it is without merit, may be expensive and time-consuming to defend, subject us to damages, cause us to cease making, using or selling certain products that incorporate the disputed intellectual property, require us to redesign our products, divert management time and attention and/or require us to enter into costly royalty or licensing arrangements.
We face security and cybersecurity risks related to our electronic processing of sensitive and confidential business and product data. If we are unable to protect our data or the data of our customers, a security breach could damage our reputation and have a material adverse effect on our business.
As a manufacturer of high technology commercial products, we face security and cyber security threats, as well as the potential for business disruptions associated with information technology failures or cyber security attacks. Given the nature of our business, we collect, process and retain sensitive and confidential customer and associated data, in addition to proprietary business information. Our business, including our turbines and related energy assets may be vulnerable to a data compromise, computer viruses, physical and electronic break-ins and manipulations and similar disruptions, which may not be prevented by our efforts to secure our computer systems and assets, which include vulnerability scans and patching, network firewalls, identity and access management, data encryption, intrusion detection and prevention devices. Our cybersecurity efforts may not be able to prevent rapidly evolving types of cyber-attacks and a successful breach of our computer systems could result in misappropriation of personal, payment or sensitive business information. In addition, we rely on associates, contractors and other third parties that may attempt to circumvent our security measures in order to obtain such information and may purposefully or inadvertently cause a breach involving such information. A security breach involving confidential and proprietary data or the fleet of turbines we have deployed across the globe for our customers could damage our reputation and our ability to retain existing customers or gain new customers and impact the competitive advantages derived from our R&D efforts, the usefulness of our products and services, and ultimately our stock price. In addition, we may incur material liabilities and remediation costs as a result of a security breach, and our insurance may not be sufficient to cover the impact to the business. Moreover, evolving privacy laws in the United States, Europe and elsewhere, including the adoption by the European Union of the General Data Protection Regulation (“GDPR”), which became effective May 2018, establishes new individual privacy rights and imposes increased obligations on companies handling personal data. Consequently, we may incur significant costs related to prevention and compliance with laws regarding the protection and unauthorized disclosure of personal information. Further, a greater number of our employees are working remotely, which could expose us to greater risks related to cybersecurity and our information technologies systems.
Risks Related to Ownership of Our Common Stock
We cannot be certain of the future effectiveness of our internal controls over financial reporting. If we are unable to maintain effective internal controls over our financial reporting, investors may lose confidence in our ability to provide reliable, and timely financial reports and the value of our common stock may decline.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our annual reports on Form 10-K our assessment of the effectiveness of our internal controls over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal controls over financial reporting. Our management concluded that our internal controls over financial reporting were effective as of March 31, 2022. We may in the future identify material weaknesses in our internal controls over financial reporting that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we cannot adequately maintain the effectiveness of our internal controls over financial reporting, we may not be able to produce timely and accurate financial statements. If that were to
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Our success dependsTable of Contents
happen, our investors could lose confidence in significant part uponour reported financial information, the continuing service of management and key employees.
Our success depends in significant part upon the continuing servicemarket price of our executive officers, senior managementcommon stock could decline and we might be subject to sanctions or investigation by regulatory authorities, such as the SEC.
Future issuances or sales and technical personnel. The failure of our personnel to executecommon stock or exercises by holders of our strategyoutstanding warrants could lower our stock price and dilute the interests of existing stockholders.
We may issue additional shares of our common stock in the future. The issuance of a substantial amount of common stock could have the effect of substantially diluting the interests of our current stockholders. In addition, the sale of a substantial amount of common stock in the public market, either in the initial issuance or our failure to retain management and personnelin a subsequent resale by investors that acquired such common stock, could have a material adverse effect on the market price of our business. Our success will be dependent on our continued abilitycommon stock. Pursuant to attract, retain and motivate highly skilled employees. There can be no assurance that we can do so.
Our internal control systems rely on people trained in the execution of the controls. Loss of these people or our inability to replace them with similarly skilled and trained individuals or new processes in a timely manner could adversely impact our internal control mechanisms.
Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control.
Our operations are vulnerable to interruption by fire, earthquake and other events beyond our control. Our executive offices and manufacturing facilities are located in southern California. Because the southern California area is located in an earthquake‑sensitive area,A&R NPA Second Amendment, we are particularly susceptiblerequired to the risk of damageuse our commercially reasonable efforts to or total destruction of, our facilities in southern California and the surrounding transportation infrastructure, which could affect our ability to make and transport our products. If an earthquake, fire or other natural disaster occursraise at or near our facilities, our business, financial condition, operating results and cash flow could be materially adversely affected.
If we fail to meet all applicable Nasdaq Capital Market requirements and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidityleast $10 million through a sale of our common stock impair the valueby September 14, 2022. We may also sell up to $50 million of your investment and adversely affect our ability to raise needed funds.
Our common stock is listed on the Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other requirements. On December 19, 2014, when our common stock was listed on the Nasdaq Global Market, we received a notice from the Nasdaq Listing Qualifications Department stating that, for 30 consecutive business days preceding the notice date, the closing bid price for our common stock had been below the minimum $1.00 per share requirement for continued listing on the Nasdaq Global Market as set forth in Nasdaq Listing Rule 5450(a)(1). On June 22, 2015, we transferred the listingshares of our common stock from the Nasdaq Global Marketin “at-the-market’ offerings pursuant to the Nasdaq Capital Marketsales agreement entered into with H.C. Wainwright & Co., LLC on June 7, 2018 and were afforded an additional 180-day grace periodas amended on July 15, 2020 and March 29, 2021. The sale of a substantial number of shares of our common stock, pursuant to regain compliance with the minimum bidcapital raise contemplated by the A&R NPA Second Amendment, the at-the-market offering sales agreement or otherwise, or anticipation of any such sales, could cause the trading price requirement. We subsequently regained compliance with the minimum bid price requirement by effecting a 1-for-20 reverseof our common stock split. However, there can be no assurance that we will be able to comply with the continued listing standards in the future.
If we continuedecline or make it more difficult for us to fail to meet all applicable Nasdaq Capital Market requirementssell equity or equity-related securities in the future at a time and Nasdaq determines to delistat a price that we might otherwise desire. In addition, issuances of any shares of our common stock sold pursuant to the delisting could adversely affectsales agreement will have a dilutive effect on our existing stockholders.
We cannot predict the effect, if any, that future public sales of our common stock or the availability of additional shares of our common stock for sale will have on the market liquidityand trading price of our common stock. In addition, we currently have warrants outstanding for the purchase of up to an aggregate of 0.8 million shares of our common stock and adversely affect our ability to obtain financing for the continuationcertain of our operations. This delistingwarrant holders also have the right to require us to register under the Securities Act the shares issuable upon exercise of their warrants. In addition, some of our outstanding warrants contain anti-dilution provisions that may, under certain circumstances, increase the number of shares issuable thereunder. To the extent the warrants outstanding are fully exercised, a significant number of shares of common stock will be issued, which will result in dilution to the holders of our shares of common stock and an increase in the number of shares eligible for resale in the public market. If any of our stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could also impairoccur, this could have an adverse impact on the valuemarket and trading price of your investment.our securities, even if there is no relationship between such sales and the performance of our business.
The market price of our common stock has been, and may continue to be, highly volatile and you could lose all or part of your investment in our securities.
An investment in our securities is risky, and stockholders could lose their investment in our securities or suffer significant losses and wide fluctuations in the market value of their investment. The market price of our common stock is highly volatile and is likely to continue to be highly volatile. Given the continued uncertainty surrounding many variables that may affect our business and the industry in which we operate, our ability to foresee results for future periods is limited. This variability could affect our operating results and thereby adversely affect our stock price. Many factors that contribute to this volatility are beyond our control and may cause the market price of our common stock to change, regardless of our operating performance. Factors that could cause fluctuation in our stock price may include, among other things:
| actual or anticipated variations in quarterly operating results; |
| market sentiment toward alternative energy stocks in general or toward |
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| changes in financial estimates or recommendations by securities analysts; |
| conditions or trends in our industry or the overall economy; |
| loss of one or more of our significant customers; |
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| errors, omissions or failures by third parties in meeting commitments to us; |
| changes in the market valuations or earnings of our competitors or other technology companies; |
| the trading of options on our common stock; |
| announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; |
| announcements of significant market events, such as power outages, regulatory changes or technology changes; |
| changes in the estimation of the future size and growth rate of our market; |
| future equity financings; |
| the failure to produce our products on a timely basis in accordance with customer expectations; |
| the inability to obtain necessary components on time and at a reasonable cost; |
| litigation or disputes with customers or business partners; |
| capital commitments; |
| additions or departures of key personnel; |
| sales or purchases of our common stock; |
| the trading volume of our common stock; |
| developments relating to litigation or governmental investigations; and |
| further decreases in or continued low levels of oil, natural gas and electricity prices. |
In addition,Market conditions may result in volatility in the stock marketlevel of, and fluctuations in, general, and the Nasdaq Capital Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. The market prices of securities of technology companiesstocks generally and, companies servicing the technology industries have been particularly volatile. These broad marketin turn, our common stock. For example, between April 1, 2019 and industry factors may cause a material decline inMarch 31, 2022, the market price of our common stock regardlessranged from $8.90 to $4.12. Global financial markets have been experiencing extreme disruption in recent months, including, among other things, extreme volatility in securities prices. We are unable to predict the likely duration and severity of our operating performance. the current disruptions in financial markets and adverse economic conditions throughout the world.
In the past, following periods of volatility in the market price of a company’s securities, securities class–class action litigation has often been instituted against thatthe company. This type of litigation, regardless of whether we prevail on the underlying claim, could result in substantial costs and a diversion of management’s attention and resources, which could materially harm our financial condition, results of operations and cash flow.
Our business could be negatively affected as a result of a proxy contest.
In March 2016, the Company received a letter from VCM Group LLC, an owner of 200 shares of the Company’s common stock giving notice of such stockholder’s intention to nominate nine director candidates for election to the Company’s board of directors at the Company’s 2016 annual meeting of stockholders. Although the Company believes that the stockholder’s notice letter was deficient because it didIf securities or industry analysts do not meet the requirements prescribed under our bylaws, and although the Company sent to the stockholder a response letter to that effect, it is possible that a proxy contest involving the stockholderpublish research or litigation regarding the stockholder’s eligibility to nominate director candidates at
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the 2016 annual meeting of stockholders will ensue,publish inaccurate or that we could become engaged in a proxy contest with another activist stockholder in the future.
A proxy contest and any related litigation would require us to incur significant legal and advisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by management, our board of directors and employees, and would divert the attention of our board of directors and senior management from the pursuit ofunfavorable independent research about our business, strategy, whichour stock price and trading volume could adversely affect our results of operations and financial condition. Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy, or changes to the composition of our board of directors or senior management team arising from a proxy contest could lead to the perception of a change in the direction of our business, instability or lack of continuity which may be exploited by our competitors and may result in the loss of potential business opportunities and may make it more difficult to pursue our strategic initiatives or attract and retain qualified personnel and business partners, any of which could adversely affect our business and operating results. We may choose to initiate, or may become subject to, litigation as a result of the proxy contest or matters arising from the proxy contest, which would serve as a further distraction to our board of directors, management and employees and would require us to incur significant additional costs. In addition, thedecline.
The trading market price offor our common stock could be subject to significant fluctuationwill depend in part on the research and reports that securities or otherwise be adversely affected by the uncertainties described aboveindustry analysts publish about us or the outcome of a proxy contestour business. We do not have any control over these analysts. If one or any related litigation.
It also is possible that the director candidatesmore of the stockholderanalysts that submitted the March 2016 notice letter, if nominated by such stockholder for election to the Company’s board of directors at the 2016 annual meeting of stockholders, could constitute a majority ofcovers us downgrades our board of directors following the 2016 annual meeting of stockholders. Similarly, a future proxy contest with any other activist investor could result in the turnover of a majority ofstock or publishes inaccurate or unfavorable research about our board of directors.business, our stock price would likely decline. If such a change in the composition of our board of directors were to occur, it could trigger the change of control provisions of certain agreements and arrangements to which the Company is a party, including the Credit Agreements, the Company’s Amended and Restated Change of Control Severance Plan and the Amended and Restated Change in Control Severance Agreement, as amended, between the Company and Darren Jamison, our President and Chief Executive Officer.
Under the Credit Agreements, a change of control constitutes an event of default that would entitle Wells Fargo to, among other remedies, declare all of our outstanding borrowings under the Credit Agreements immediately due and payable. Under the Amended and Restated Change of Control Severance Plan and the Amended and Restated Change in Control Severance Agreement, as amended, following a change of control, upon the occurrence of a qualifying termination of Mr. Jamisonone or certain of the Company’s other executive officers and employees, the Company will be obligated to make specified severance payments to the terminated employee.
If such a change in our board composition were to occur, and if our board of directors were unable to take certain mitigating action to avoid triggering, or if the Company were unable to obtain a waivermore of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and other similar changetrading volume to decline.
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Provisions in our certificate of incorporation, bylaws and our stockholderNOL rights plan, as well as Delaware law, may discourage, delay or prevent a merger or acquisition at a premium price.
Provisions of our second amended and restated certificate of incorporation, amended and restated bylaws and our stockholder rights plan, as well as provisions of the General Corporation Law of the State of Delaware, could discourage, delay or prevent unsolicited proposals to merge with or acquire us, even though such proposals may be at a premium price or otherwise beneficial to you. These provisions include our board’sBoard’s authorization to issue shares of preferred stock, on terms the boardBoard determines in its discretion, without stockholder approval, and the following provisions of Delaware law that restrict many business combinations.
We are subject to the provisions of Section 203 of the General Corporation Law of the State of Delaware, which could prevent us from engaging in a business combination with a 15% or greater stockholder for a period of three years from the date such stockholder acquired such status unless appropriate board or stockholder approvals are obtained.
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On May 6, 2016, the Company2019, we and Broadridge Financial Solutions, Inc. successor-in-interest to Computershare Inc., as Rights Agent, entered into athe NOL Rights Agreement, (the “NOL Rights Agreement”)which is designed to diminish the risk that the Company’sour ability to use itsour net operating losses and certain other tax assets to reduce potential future federal income tax obligations would become subject to limitations by reason of the Companyus experiencing an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended. The NOL Rights Agreement replaces the Company’s Rights Agreement, dated May 6, 2016, by and between the Company and Broadridge Financial Solutions, Inc., as successor-in-interest to Computershare Inc., as rights agent (the “Original Rights Agreement”). On April 7, 2022, our Board approved an extension of the NOL Rights Agreement from May 6, 2022 to May 6, 2025, subject to obtaining shareholder approval ratifying such extension. While this NOL Rights Agreement is intended to preserve our net operating losses, it effectively deters current and future purchasers from becoming 4.99% stockholders. The NOL Rights Agreement could also make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders.
We do not intend to pay cash dividends. We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future. Consequently, any gains from an investment in our securities will likely depend on whether the price of our common stock increases.
We have not paid dividends on any of our capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our securities if the price of our common stock increases.
General Risk Factors
Adverse economic conditions may have an impact on our business and financial condition, including some effects we may not be able to predict.
Adverse economic conditions, such as recent supply chain disruptions, labor shortages and persistent inflation, may prevent our customers from purchasing our products or delay their purchases, which would adversely affect our business, financial condition 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 adverse economic conditions. Our revenue continues to be negatively impacted by the volatility of the global oil and gas markets, a strong U.S. dollar (making our products more expensive overseas) and ongoing global geopolitical tensions. Adverse economic developments affect businesses such as ours and those of third parties on which we rely in a number of ways that could result in unfavorable consequences to us. Current economic conditions or a deepening economic downturn in the United States and elsewhere may reduce our ability to access capital, which could negatively impact our short-term and long-term liquidity.
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Our business may be impacted by international instability, war, terrorism, and geopolitical events.
International political and economic instability or volatility, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, public corruption, expropriation and other economic or political uncertainties could interrupt and negatively affect the performance of our services, sale of our products or other business operations. See “—Changes to trade regulation, quotas, duties or tariffs, and sanctions caused by the changing U.S. and geopolitical environments or otherwise, may increase our costs or limit the amount of raw materials and products that we can import or may otherwise adversely impact our business” for a discussion of the impact of Russia’s military invasion of Ukraine on our business and results of operations. A slowdown in economic growth in some emerging markets could result in long sales cycles, greater risk of uncollectible accounts and longer collection cycles. Fluctuations or devaluations in currency values, especially in emerging markets, could have an adverse effect on us, our suppliers, logistics providers and manufacturing vendors. All of these factors could result in increased costs or decreased revenues, and could materially and adversely affect our product sales, financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
None.
Our principal corporate offices, administrative, sales and marketing, R&D and support facilities consist of approximately 98,00079,000 square feet of leased office space, warehouse space and assembly, and test space and manufacturing facility for our recuperator cores located at 21211 Nordhoff16640 Stagg Street in Chatsworth,Van Nuys, California. This lease expireswill expire in September 2019,February 2023, and we have one five‑yearfive-year option to extend the term of this lease. Additionally, we lease approximately 9,216 square feet of warehouse space at 16701 Stagg Street in Van Nuys, California. This lease will expire in June 2024, and we have one five-year option to extend the term of this lease. We also lease an approximately 79,000 square foot facility at 16640 Stagg Street in Van Nuys, California as an engineering testoffice and manufacturing facility for our recuperator cores. This leasefacilities located at Unit 800 & 810 Fareham Reach, Fareham Road, Gosport, Hampshire, United Kingdom. These leases will expire in December 2017.May 2037. Management believes ourthese facilities are adequate for our current needs.
Federal Securities Class Action
Two putative securities class action complaints were filed against the CompanyRefer to Note 12 – Commitments and certain of its current and former officers Contingencies – Legal mattersin the United States District CourtNotes to Consolidated Financial Statements for the Central District of California under the following captions: David Kinney, etc. v. Capstone Turbine, et al., No. 2:15-CV-08914 on November 16, 2015 (the “Kinney Complaint”)information regarding legal proceedings in which we are involved. From time-to-time, we are involved in other pending and Kevin M. Grooms, etc. v. Capstone Turbine, et al., No. 2:15-CV-09155 on December 18, 2015 (the “Grooms Complaint”).
The putative classthreatened litigation in the Kinney Complaint is comprisednormal course of all purchasersbusiness in which claims for monetary damages are asserted. In the opinion of management, the Company’s securities between November 7, 2013 and November 5, 2015. The Kinney Complaint alleges material misrepresentations and omissions in public statements regarding BPC and the likelihood that BPC would not be able to fulfill many legal and financial obligations to the Company. The Kinney Complaint also alleges that the Company’s financial statements were not appropriately adjusted in light of this situation and were not maintained in accordance with GAAP, and that the Company lacked adequate internal controls over accounting. The Kinney Complaint alleges that these public statements and accounting irregularities constituted violations by all named defendants of Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, as well as violations of Section 20(a) of the Exchange Act by the individual defendants. The Grooms Complaint makes allegations and claims that are substantially identical to those in the Kinney Complaint, and both complaints seek compensatory damages of an undisclosed amount. On January 16, 2016, several shareholders filed motions to consolidate the Kinney and Grooms actions and for appointment as lead plaintiff. On February 29, 2016, the Court granted the motions to consolidate, and appointed a lead plaintiff. On May 6, 2016, a Consolidated Amended Complaint with allegations and claims substantially identical to those of the Kinney Complaint was filed in the consolidated action. The putative class period in the Consolidated Amended Complaint is June 12, 2014 to November 5, 2015. Defendants’ motion to dismiss the Consolidated Amended Complaint is due June 17, 2016. The Company has not recordedultimate liability, if any, liability as of March 31, 2016 since any potential lossarising from such pending or threatened litigation is not probableexpected to have a material effect on our results of operations, liquidity, or reasonably estimable given the preliminary nature of the proceedings.
State Derivative Lawsuit — California
On February 18, 2016, a purported shareholder derivative action was filed in Los Angeles Superior Court in the State of California against the Company and certain of its current and former officers and directors under the following caption: Stesiak v. Jamison, et al., No. BC610782. The lawsuit alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company,
31
but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition. The complaint also alleges that the defendants failed to timely adjust the Company’s account receivables and backlog to reflect BPC’s inability to pay the Company. The complaint asserts causes of action for breach of fiduciary duty and unjust enrichment. It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties and unjust enrichment, that the Company institute corporate governance reforms, and disgorgement from the individual defendants. On May 5, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time as the defendants’ motion(s) to dismiss the federal securities class action are decided. On May 10, 2016, the Court entered that proposed order, and scheduled a status conference for August 24, 2016.position.
On May 25, 2016, we received a pre-filing copy of a purported shareholder derivative action entitled Velma Kilpatrick v. Simon, et al., purportedly to be filed in Los Angeles Superior Court in the State of California against the Company and certain of its current and former officers and directors. The complaint alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition. The complaint also alleges that the defendants failed to timely adjust the Company’s account receivables and backlog to reflect BPC’s inability to pay the Company. The complaint asserts causes of action for breach of fiduciary duty. It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties, and that the Company institute corporate governance reforms.
Federal Derivative Lawsuit
On March 7, 2016, a purported shareholder derivative action was filed in the United States District Court for the Central District of California against the Company and certain of its current and former officers and directors under the following caption: Haber v. Jamison, et al., No. CV16-01569-DMG (RAOx). The lawsuit alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition. The complaint asserts a cause of action for breach of fiduciary duty. It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties, and equitable relief, including that the Company institute appropriate corporate governance reforms. On May 11, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time as the defendants’ motion(s) to dismiss the federal securities class action are decided. On May 13, 2016, the Court entered that proposed order.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Price Range of Common StockMarket Information
Our common stock is publicly traded on the Nasdaq Capital Market under the symbol “CPST”“CGRN”. The following table sets forth the high and low sales prices for each period indicated.
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Year Ended March 31, 2016: |
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First Quarter |
| $ | 13.60 |
| $ | 7.40 |
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Second Quarter |
| $ | 8.80 |
| $ | 6.00 |
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Third Quarter |
| $ | 6.40 |
| $ | 1.16 |
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Fourth Quarter |
| $ | 1.69 |
| $ | 1.00 |
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Year Ended March 31, 2015: |
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First Quarter |
| $ | 46.40 |
| $ | 25.60 |
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Second Quarter |
| $ | 30.60 |
| $ | 20.60 |
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Third Quarter |
| $ | 21.60 |
| $ | 11.20 |
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Fourth Quarter |
| $ | 15.40 |
| $ | 11.80 |
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Stockholders
As of June 3, 2016, the last reported sale price of our common stock on the Nasdaq Capital Market was $1.44 per share.
Stockholders
As of June 3, 2016,July 11, 2022, there were 223275 stockholders of record of our common stock. This does not include the number of persons whose stock is held in nominee or “street name” accounts through brokers.
Dividend Policy38
Dividends
We currently intend to retain any earnings for use in our business and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. We have never declared or paid any cash dividends on our capital stock. InWe currently intend to retain all available funds and any future earnings, if any, to fund the future, the decision to paydevelopment and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will depend uponbe made at the discretion of our resultsboard of operations, financial condition, cash flow and capital expenditure plans, as well as such other factors as our Board of Directors, in its sole discretion, may consider relevant. Additionally, the consent of Wells Fargo would be necessary in order for the Company to declare and pay a dividend in accordance withdirectors. In addition, the terms of our outstanding indebtedness restrict our ability to pay cash dividends, and any future indebtedness that we may incur could preclude us from paying cash dividends.
Securities Authorized for Issuance Under Equity Compensation Plan.
Information about our equity compensation plans in Item 11 of Part III of this Annual Report on Form 10-K is incorporated herein by reference.
Issuer Purchases of Equity Securities
There were no repurchases of shares of common stock made during Fiscal 2022, except for shares of common stock automatically withheld to cover the Credit Agreements.tax liability resulting from the vesting of restricted stock units. During Fiscal 2022, the Company automatically withheld 27,679 shares of common stock to cover the tax liability resulting from the vesting of stock units. These withheld shares of common stock are recorded as treasury stock on the Company’s Consolidated Balance Sheets.
Item 6. Selected Financial Data.[Reserved]
The selected financial data shown below have been derived from the audited financial statements of Capstone. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data should be read in conjunction with “Risk Factors,” “Management’s Discussion and Analysis of Financial
3339
Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this Annual Report.
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(In thousands, except per share data) |
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Statement of Operations: |
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Revenue |
| $ | 85,211 |
| $ | 115,461 |
| $ | 133,105 |
| $ | 127,557 |
| $ | 109,371 |
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Cost of goods sold |
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| 72,444 |
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| 97,174 |
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| 111,409 |
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| 113,172 |
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| 103,944 |
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Gross margin |
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| 12,767 |
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| 18,287 |
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| 21,696 |
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| 14,385 |
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| 5,427 |
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Operating costs and expenses: |
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Research and development |
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| 10,152 |
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| 9,679 |
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| 9,029 |
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| 8,979 |
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| 8,237 |
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Selling, general and administrative(1) |
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| 27,106 |
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| 39,517 |
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| 27,981 |
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| 27,364 |
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| 28,927 |
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Loss from operations |
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Net loss |
| $ | (25,191) |
| $ | (31,533) |
| $ | (16,256) |
| $ | (22,563) |
| $ | (18,764) |
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Net loss per share of common stock—basic and diluted (2) |
| $ | (1.39) |
| $ | (1.92) |
| $ | (1.06) |
| $ | (1.49) |
| $ | (1.41) |
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Balance Sheet Data: |
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Cash and cash equivalents |
| $ | 11,704 |
| $ | 32,221 |
| $ | 27,859 |
| $ | 38,817 |
| $ | 49,952 |
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Working capital |
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| 18,149 |
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| 27,528 |
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| 26,443 |
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| 32,782 |
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| 49,532 |
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Total assets |
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| 55,892 |
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| 78,927 |
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| 84,118 |
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| 87,338 |
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| 99,792 |
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Revolving credit facility |
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| 9,459 |
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| 12,953 |
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| 13,228 |
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| 13,476 |
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| 10,431 |
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Capital lease/note payable obligations |
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| 435 |
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| 496 |
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| 645 |
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| 594 |
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| 433 |
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Long‑term liabilities |
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| 184 |
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| 161 |
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| 70 |
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| 142 |
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| 254 |
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Stockholders’ equity |
| $ | 24,740 |
| $ | 34,704 |
| $ | 34,093 |
| $ | 41,886 |
| $ | 58,617 |
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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‑lookingforward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward‑lookingforward-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 Annual Report.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 Annual Report.Form 10-K.
Overview
Capstone isWe are the market leader in microturbines based on the number of microturbines sold. Generally, power purchased from the electric utility grid is less costly than power produced by distributed generation technologies. Utilities may also charge fees to interconnect to their power grids. However, we can provide economic benefits to end users in instances where the waste heat from our microturbine has value (combined heat(CHP and power (“CHP”) and combined cooling, heat and power (“CCHP”))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 Capstoneour 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, since September 2020, we have offered 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 (although there was no revenue from sales of additional energy conversion products in the form of Baker Hughes industrial gas turbines for the year ended March 31, 2022 or 2021). We are currently exploring energy conversion options for the smaller end of the power spectrum. We intend to begin to manufacture modular hybrid energy stations and lithium-ion battery energy storage systems (“BESS”) to be sold either individually or combined as part of a custom microturbine-battery storage solution. We consider our microturbines, Baker Hughes turbines, and hybrid energy stations to be a part of our Energy conversion products business line. We also added a new Energy Storage Products business line in Fiscal 2022, and there has not yet been any revenue from this business line.
Our goals for Fiscal 2022 were to broaden our diverse energy products and service offerings; focus on growing top line revenue through our new Direct Solutions Sales (DSS) team, growing the DSS subscription program, and expanding the rental fleet to 21.1 MW (a key component of growing our EaaS business); increase aftermarket margins and escalate parts availability; and focus on managing working capital and inventory turns. During Fiscal 20162022 our net loss decreased by 20% to $25.2was $20.2 million and our basic and diluted net loss per share decreased by 28%was $1.37, compared to $1.39 compared to$18.4 million and $1.63, respectively, in the same period lastof the previous fiscal year. The decrease$1.8 million increase in the net loss during Fiscal 2016 reflected a decrease2022 was primarily attributable to increases in bad debtselling, general and administrative expense relatingprimarily driven by lower expense in Fiscal 2021 from the enactment of our Business Continuity Plan in response to two customers recordedthe Covid-19 pandemic, as well as additional expense related to the growth of the DSS team during Fiscal 2015.2022. This increase was partially offset by lower revenue during Fiscal 2016 compared to the same period last year. Our gross margin was 15% for Fiscal 2016, which represents a decreaseloss on extinguishment of approximately 100 basis pointsdebt accounting resulting from our gross margin of 16% for Fiscal 2015 despite 26% lower revenue during Fiscal 2016 compared to Fiscal 2015. Capstone made improvements diversifying its revenueentering into the energy efficiencyA&R Note Purchase Agreement with Goldman Sachs during the third quarter of Fiscal 2021 and renewal energy vertical markets even with the softnessgain on extinguishment of debt resulting from the forgiveness of the oilPPP Loan during the first quarter of Fiscal 2022. On October 1, 2020, the Company entered into an Amended & Restated Note Purchase Agreement (the “A&R Note Purchase Agreement”), and gas markets during Fiscal 2016 comparedissued $20.0 million in additional Notes. See Note 11—Term Note Payable, in the Notes to the same period last year. During Fiscal 2016, we continuedConsolidated Financial Statements for discussion with respect to see increasing revenue from our aftermarket service primarily as a result of further acceptance of our comprehensive Factory Protection Plan (“FPP”). Fiscal 2016 was characterized by lower revenue and megawatts shipped compared to Fiscal 2015 because of the continuing softness of the global oil and gas markets, a substantially stronger U.S. dollar (making our products more expensive overseas) and ongoing geopolitical tensions in Russia, North Africa and the Middle East. Please see Results of Operations on page 41 for further discussion of the lower revenue.this A&R Note Purchase Agreement.
Capstone productsWe continue to gain interest infocus on developing all six of theour major vertical markets (energy efficiency, renewable energy, natural resources, critical power supply, transportation and marine)microgrids). 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 cow, pig and chickenlivestock manure. Our product sales in the oil and gas and other natural resources market isare driven by our microturbinesmicroturbines’ reliability,
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emissions profile and ease of installation. We haveGiven the volatility of the oil and gas market, our business strategy is to ensure diversification by also seen increased interest in critical power supply applications as customers want solutions that can handle both primarytargeting projects within the energy efficiency and backup power.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‑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 Capstone’sour success are revenue growth, higher average selling prices, lower direct material costs, positive new order flow and reduced cash usage.
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To support our opportunities to grow in our targeted markets, we continue to enhance the reliability and performance of our products by developing new processes and enhancing training to assist those who apply, install and use our products.
An overview of our direction, targets and key initiatives are as follows:
1) |
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During Fiscal 2016,Focus on Vertical Markets Within the distributed generation markets that we booked orders for 54.7 megawattsserve, we focus on vertical markets that we identify as having the greatest near-term potential. In our primary products and shipped 60.0 megawattsapplications (energy efficiency, renewable energy, natural resources, critical power supply, microgrid and transportation products), we identify specific targeted vertical market segments. Within each of products, which combined withthese segments, we identify what we believe to be the critical factors to success and base our backlogplans on those factors. Given the volatility of 182.8 megawatts at March 31, 2015, resulted in 113.7 megawatts in backlog as of March 31, 2016. Ending backlog as of March 31, 2016, includes the removal of approximately 63.8 megawatts, from BPC. Our product shipments in Fiscal 2016 were: 53% for use inoil and gas market, we have refocused our business strategy to target projects within the energy efficiency applications, 37% for use in natural resources applications and 10% for use in renewable energy applications.markets.
The following table summarizes our percentage of product revenues by vertical markets for which we had product revenues for the periods presented:
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Energy efficiency |
| 67% | | 61% | |
Natural resources | | 13% | | 25% | |
Renewable energy | | 18% | | 13% | |
Microgrid | | 2% | | 1% | |
Energy Efficiency—CHP/CCHP
Energy efficiency maximizesrefers to the useproper 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 produced by the microturbines, reduces emissions compared with traditional power generation and enhances theto provide a significant economic advantage to customers. Energy efficiency applications use bothcustomers while reducing their onsite emissions. CHP and CCHP can improve site economics by capturing the waste heat and electric energy produced in the power generation process. Using the heat and electricity created from a single combustion process increasesto increase the efficiency of the total system, from approximately 30%30 percent to 80%80 percent or more. The increased operatingCompared with more traditional, independent generation sources, the increase in operational efficiency also reduces overall greenhouse gas emissions compared with traditional independent sources such as power generation and local thermal generation and, through the displacement of other separate systems, which can also reduce variable productionoperating costs.
Renewable EnergyNatural 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 other extraction and production processes create fuel byproducts, which are traditionally burned or
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released into the atmosphere. Our microturbines can useturn 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 gasesand other biogases from landfills, wastewater treatment facilities and renewable natural gas. They also run efficiently on other small biogas from sources such asapplications like food processing plants, livestock farms and agricultural green waste and cow, pig and chicken manure. Capstone’s microturbinesoperations. Microturbines can burn these renewable waste gasesfuels with minimal emissions, thereby, 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 area. Capstone’sareas. Our microturbines have demonstrated effectiveness in these smaller applications and may outperform conventional combustion engines in a number ofsome situations, including when the gas contains a high amount of sulfur.sulfur, as the sulfur can contaminate combustion engines lube oil leading to equipment breakdowns and higher lifecycle costs.
Natural Resources—Oil, Natural Gas, Shale Gas & Mining
On a worldwide basis, there are thousands of locations where the drilling, production, compression and transportation of natural resources and other extraction and production processes create fuel byproducts, which traditionally have been released or burned into the atmosphere. Our microturbines are installed in the natural resource market to be used in oil and gas exploration, production, compression and transmission sites both onshore and offshore as a highly reliable critical source of power generation. In addition, our microturbines can use flare gas as a fuel to provide prime power. In many cases these oil and gas or mining operations have no access to an electric utility grid and rely solely on Capstone’s microturbines for a reliable low emission power supply.
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Critical Power Supply
Because of the potentially catastrophic consequences of even momentary system failure, momentary or otherwise, certain high demand power users, such asincluding high technology, health care and information systems companies,facilities require particularly highhigher levels of reliability in their power generation service. Management believes that Capstone’s critical power supply offerings are the world’s only microturbine poweredTo meet these customer requirements, traditional solutions utilize Uninterruptible Power Source solutionsSupplies (“UPS”) to protect critical loads from power disturbances along with back-up diesel generators for extended outages. We offer an alternative solution that can offer clean, IT‑grade power produced from microturbines,both meet customer reliability requirements and reduce operating costs. We have seen continued development in the utility orcritical market segment as it relates to heath care facilities.
Microgrid
Microgrid is a combinationgroup of both.
Transportation
Our technology is also used in hybrid electric vehicle (“HEV”) applications. Our customers have applied our products in hybrid electric mobile applications, including transit busesinterconnected loads and trucks. In these applications the microturbinedistributed energy resources that acts as an onboarda 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 chargerstorage. Microgrids can be connected to rechargelarger electricity grids; however, in the battery system as needed.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.
Backlog
Net product orders were approximately $31.8 million and $25.9 million for Fiscal 2022 and Fiscal 2021, respectively. Ending backlog was approximately $25.3 million at March 31, 2022 compared to $29.4 million at March 31, 2021. Book-to-bill ratio was 1.1:1 for both Fiscal 2022 and 2021. 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 benefitstiming of microturbine hybrids include extended range, fuel economy gains, quieter operation, reduced emissionsthe 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 higher reliability compared with traditional internal combustion engines.
Marine
Our technology is also usedcustomer delivery schedule changes), most of which are not in marine applications. Our customers have appliedour 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 commercial vessel and luxury yacht markets. The most immediate market for our marine products is for use as ship auxiliaries. In this application, the microturbines provide power to the vessel’s electrical loads and, in some cases, the vessel is able to utilize the exhaust energy to increase the overall efficiencygiven period.
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2) | Sales and Distribution |
Our DSS program provides 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, 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.
3) | Service |
Our FPP backlog at the end of Fiscal 2022 and Fiscal 2021 was approximately $79.1 million and $75.1 million, respectively, which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2042. Additionally, we offer new and remanufactured parts through our global distribution network. Service revenue in Fiscal 2022 was approximately 33% of total revenue.
4) | Product Robustness and Life Cycle Maintenance Costs We continue to invest in enhancements that relate to high performance and high reliability. An important element of our continued innovation and product strategy is to focus on the engineering of our product hardware and electronics to make them work together more effectively and deliver improved microturbine performance, reliability and low maintenance cost to our customers. |
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5) | New Product Development Our new product development is targeted specifically to meet the needs of our selected vertical markets. We expect that our existing product platforms, the |
We are also developing a more efficient microturbine CHP system with the support of the DOE. We successfully completed the first phase of the development program 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. The DOE 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. The contract was completed on September 30, 2015.
During Fiscal 2016,2022, we unveiled the Capstone C1000 Signature (“C1000S’) microturbine as part ofcontinued to expand and develop our new Signature Series microturbine energy systemshydrogen products. In March 2022, we released a commercially available hydrogen-based combined heat and power (CHP) product, which also includescan safely run on a 800kW (“C800S”) or 600kW (“C600S”) microturbine. The Signature Series microturbine incorporates over 70 components,30% hydrogen-70% natural gas mix. In continuing these efforts, we are testing a 100% hydrogen gas combustion system through our research and design upgrades intended to improve the overall product quality and enhance the microturbine ownership experience in all applications but specifically for CHP and CCHP applications. A few of the key upgrades include integrated heat recovery for CHP and CCHP applications, two-stage air filtration system, improved enclosure, relocated engine exhaust stack and redesigned discharge for enclosure cooling air. The C1000S is one of the world’s most integrated and compact 1MW CHP solutions. The 8-foot wide by 30-foot long 1MW power plant reaches approximately 82% total system efficiency and is significantly quieter than the original C1000 for installation in low noise urban environmentsdevelopment partnership with Argonne National Laboratory.
6) | Cost and Core Competencies We believe that the core competencies of |
Management believes43
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.
We believe that effective execution in each of these key areas will be necessary to leverage Capstone’sour promising technology and early market leadership into achieving positive cash flow with growing market presence and improving financial performance. Based on our recent progress
We currently occupy warehouse and assuming achievement of targeted cost reductions, our financial model indicates that we will achieve positive cash flow when we generate $25 millionoffice space in quarterly revenue with a 25% gross margin. Management believes our manufacturing facilities located in Chatsworth and Van Nuys, California havewith a combined production capacity of approximately 2,000 units per year, depending on product mix. Excluding working capital requirements, management believes we can expand our combined production capacity to approximately 4,000 units per year, depending on product mix, with approximately $10 to $15 million of capital expenditures. We have not committed to this expansion nor identified a source for its funding.
38
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‑goingon-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.stock-based compensation. 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.
Management believesWe believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
| Our revenue consists of sales of products, parts, accessories and service, which includes FPPs, net of discounts. Our distributors purchase products, parts and FPPs for sale to end users and are also required to provide a variety of additional services, including application engineering, installation, commissioning and post-commissioning service. Our standard terms of sales to distributors and direct end users include transfer of title, care, custody and control at the point of shipment, payment terms ranging from full payment in advance of shipment to payment in 90 days, no right of return or exchange, and no post-shipment performance obligations by us except for warranties provided on the products and parts sold. We |
| Our inventories are valued at the lower of cost (determined on a first in first out (“FIFO”) |
44
| changes in our product. Future product enhancement and development may render certain inventories obsolete, resulting in additional |
| We provide for the estimated cost of warranties at the time revenue from sales is recognized. We also accrue the estimated costs to address reliability repairs on products no longer under warranty when, in our judgment, and in accordance with a specific plan developed by us, it is prudent to provide such repairs. We estimate warranty expenses based upon historical and projected product failure rates, estimated costs of parts, labor and shipping to repair or replace a unit and the number of units covered under the warranty period. While we engage in extensive quality programs and processes, our warranty obligation is affected by failure rates and service costs in correcting failures. As we have more units commissioned and longer periods of actual performance, additional data becomes available to assess future warranty costs. When we have sufficient evidence that product changes are altering the historical failure occurrence rates, the impact |
39
of such changes is then taken into account in estimating future warranty liabilities. Changes in estimates are recorded in the period that new information, such as design changes, cost of repair and product enhancements, becomes available. Should actual failure rates or service costs differ from our estimates, revisions to the warranty liability would be required and could be material to our financial condition, results of operations and cash flow. During Fiscal 2021, we recorded a specific $4.9 million warranty 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. |
|
|
| Trade accounts receivable are recorded at the invoiced amount and typically |
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|
| We recognize |
The use of Black‑ScholesBlack-Scholes model requires us to make estimates of the following assumptions:
| Expected volatility—The estimated stock price volatility was derived based upon |
| Expected option life—The expected life, or term, of options granted was derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding. |
40
|
|
The amount of stock‑basedstock-based compensation recognized duringcost is recorded on a period is based on the value of the portion of the awards that are ultimately expected to vest. We estimate forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered option. We review historical forfeiture data and determine the appropriate forfeiture rate based on that data. We re‑evaluate this analysis periodically and adjust the forfeiture rate as necessary. Generally, we recognize the actual expensestraight-line basis over the vesting period only for the shares that vest.period.
45
Results of Operations
Year Ended March 31, 20162022 Compared to Year Ended March 31, 20152021
RevenueThe following table summarizes our revenue by geographic markets (amounts in millions):
| | | | | | | |
| | Year Ended March 31, | | ||||
| | 2022 | | 2021 | | ||
United States and Canada | | $ | 34.7 | | $ | 32.8 | |
Europe and Russia | | | 14.8 | | | 17.2 | |
Latin America | | | 9.2 | | | 7.2 | |
Asia and Australia | | | 8.0 | | | 9.3 | |
Middle East and Africa | | | 2.9 | | | 1.1 | |
Total | | $ | 69.6 | | $ | 67.6 | |
Revenue for Fiscal 2016 decreased $30.32022 increased $2.0 million, or 26%3%, to $85.2$69.6 million from $115.5$67.6 million for Fiscal 2015.2021. The change in revenue for Fiscal 20162022 compared to Fiscal 20152021 included increases in revenue of $2.0 million from the Latin American markets, $1.9 million from the United States and Canadian markets, and $1.8 million from the Middle East and African markets. These overall increases in revenue were offset by decreases in revenue of $12.4$2.4 million from the European and Russian markets $12.2 million from the United States and Canada markets, $2.5 million from the Latin America markets, $1.9$1.3 million from the Asian and Australian markets and $1.3 million from the African market. The decreases in the European and Russian, Asian and Australian and African markets were primarily the result of ongoing geopolitical tensions in Russia and Ukraine and a substantially stronger U.S. dollar (making our products more expensive overseas) compared to Fiscal 2015.markets. The decrease in the Europe and Russia markets was primarily due to business impacts from the ongoing conflict between Russia and Ukraine, which has not only impacted Russia but also the European economy. The slight increase in revenue in the Latin American, United States and CanadaCanadian and Middle East and African geographic markets were because ofwas primarily due to increases in product shipments into the effects of reductionsenergy efficiency and renewable energy vertical markets, as well as an increase in microturbines shipped, resulting from continued softnessparts shipments.
The following table summarizes our revenue (revenue amounts in the oil and gas market and a shift in customers’ project timelines.millions):
| | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| ||||||||||||
| | 2022 | | 2021 |
| ||||||||||
|
| Revenue |
| Megawatts |
| Units |
| Revenue |
| Megawatts |
| Units |
| ||
Microturbine Product | | $ | 35.9 |
| 32.6 |
| 188 | | $ | 34.1 |
| 33.5 |
| 234 | |
Accessories | |
| 1.3 |
| | | | |
| 2.4 |
| | | | |
Total Product and Accessories | |
| 37.2 |
| | | | |
| 36.5 |
| | | | |
| | | | | | | | | | | | | | | |
Parts and Service | | | 32.4 |
| | | | | | 31.1 |
| | | | |
Total | | $ | 69.6 |
| | | | | $ | 67.6 |
| | | | |
For Fiscal 2016,2022, revenue from microturbine products decreased $31.0and accessories increased $0.7 million, or 35%2%, to $58.4$37.2 million from $89.4$36.5 million for Fiscal 2015. Megawatts shipped2021. The increase in revenue was primarily due to the mix of products sold during Fiscal 2016 decreased 31.4 megawatts, or 34%, to 60.0 megawatts from 91.4 megawatts during Fiscal 2015. The decrease in revenue and megawatts was because of volume reductions in microturbines shipped, resulting from a 90% reduction in microturbine product shipments to Russia, continued softness in the oil and gas market and shift in customers’ project timelines during Fiscal 20162022 compared to the same period last year. Megawatts shipped during Fiscal 2022 decreased 0.9 megawatts, or 3%, to 32.6 megawatts from 33.5 megawatts during Fiscal 2021. Average revenue per megawatt shipped was approximately $1.1 million and $1.0 million during each ofin Fiscal 20162022 and Fiscal 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended March 31, |
| ||||||||
|
| 2016 |
| 2015 |
| ||||||
|
| Revenue |
| Megawatts |
| Revenue |
| Megawatts |
| ||
United States and Canada |
| $ | 23.7 |
| 23.6 |
| $ | 38.4 |
| 35.0 |
|
Latin America |
|
| 12.5 |
| 13.7 |
|
| 14.1 |
| 15.2 |
|
Asia and Australia |
|
| 10.9 |
| 10.8 |
|
| 14.1 |
| 13.2 |
|
Europe and Russia |
|
| 10.8 |
| 11.3 |
|
| 22.5 |
| 27.7 |
|
Africa |
|
| 0.5 |
| 0.6 |
|
| 0.3 |
| 0.3 |
|
Total from Microturbine Products |
| $ | 58.4 |
| 60.0 |
| $ | 89.4 |
| 91.4 |
|
2021, respectively. The timing of shipments is subject to change based on several variables (including customer deposits, payments, availability of credit and delivery schedule changes), most of which are not within our control and can affect the timing of our revenue. Therefore, we evaluate historicalAccessories revenue decreased $1.1 million, or 46%, to $1.3 million from $2.4 million for Fiscal 2021, primarily due to the types of projects that required accessories in conjunction with backlogFiscal 2022 compared to anticipate the growth trend of our revenue.Fiscal 2021.
41
The following table summarizes ourParts and service revenue (revenue amounts in millions):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended March 31, |
| ||||||||||||
|
| 2016 |
| 2015 |
| ||||||||||
|
| Revenue |
| Megawatts |
| Units |
| Revenue |
| Megawatts |
| Units |
| ||
C30 |
| $ | 1.8 |
| 1.2 |
| 40 |
| $ | 4.8 |
| 2.9 |
| 97 |
|
C65 |
|
| 12.2 |
| 11.2 |
| 172 |
|
| 30.1 |
| 27.8 |
| 427 |
|
TA100 |
|
| — |
| — |
| — |
|
| 0.3 |
| 0.2 |
| 2 |
|
C200 |
|
| 3.9 |
| 3.6 |
| 18 |
|
| 7.1 |
| 6.6 |
| 33 |
|
C600 |
|
| 6.2 |
| 6.0 |
| 10 |
|
| 5.9 |
| 6.0 |
| 10 |
|
C800 |
|
| 8.1 |
| 8.8 |
| 11 |
|
| 8.3 |
| 8.8 |
| 11 |
|
C1000 |
|
| 25.9 |
| 29.0 |
| 29 |
|
| 32.7 |
| 39.0 |
| 39 |
|
Waste heat recovery generator |
|
| — |
| — |
| — |
|
| 0.2 |
| 0.1 |
| 1 |
|
Unit upgrades |
|
| 0.3 |
| 0.2 |
| 1 |
|
| — |
| — |
| — |
|
Total from Microturbine Products |
| $ | 58.4 |
| 60.0 |
| 281 |
| $ | 89.4 |
| 91.4 |
| 620 |
|
Accessories and Parts |
|
| 14.7 |
| — |
| — |
|
| 15.3 |
| — |
| — |
|
Total Product, Accessories and Parts |
| $ | 73.1 |
| 60.0 |
| 281 |
| $ | 104.7 |
| 91.4 |
| 620 |
|
Service |
|
| 12.1 |
| — |
| — |
|
| 10.8 |
| — |
| — |
|
Total |
| $ | 85.2 |
| 60.0 |
| 281 |
| $ | 115.5 |
| 91.4 |
| 620 |
|
Forfor Fiscal 2016, revenue from our accessories and parts decreased $0.62022 increased $1.3 million, or 4%, to $14.7$32.4 million from $15.3$31.1 million for Fiscal 2015. The decrease in revenue from accessories and parts was primarily from lower accessories revenue as a result of volume reductions in microturbines shipped.
Service revenue for Fiscal 2016 increased $1.3 million, or 12%, to $12.1 million from $10.8 million for Fiscal 2015.2021. The increase in revenue was primarily driven by an increase in rentals, FPP revenue, and spare parts, partially offset by lower engineering service revenue resulted primarily from higher FPP contract enrollment.revenue.
Sales to Horizon Power Systems (“Horizon”), one of the Company’s domestic distributors,E-Finity accounted for 15%, 17% and 12%18% of our revenue for the years ended March 31, 2016, 2015 and 2014, respectively. Sales to E-Finity Distributed Generation, LLC (“E-Finity), one of the Company’s domestic distributors, accounted for 11% and 19% of our revenue for the years ended March 31, 2016 and 2014. Sales to Dtc Soluciones Inmobiliarias S.A. de C.V. (“DTC”), one of the Company’s Mexican distributors, accounted for 10% of revenue for the year ended March 31, 2016.2022. Sales to Optimal Group Australia Pty Ltd (“Optimal”), one of the Company’s Australian distributors,CAL and E-Finity accounted for 15% and 12%, respectively, of our revenue for the fiscal year ended March 31, 2021. Sales to CAL were below 10% of revenueour revenues for the year ended March 31, 2016. Sales to BPC accounted for 2%, 11% and 17%2022.
46
Gross Margin Cost of goods sold includes direct material costs, production and service center labor and overhead, inventory charges and provision for estimated product warranty expenses. The grossGross margin was $12.8approximately $8.5 million, or 15%12% of revenue, for Fiscal 20162022, compared to a gross margin of $18.3$6.9 million, or 16%10% of revenue, for Fiscal 2015. Of the $5.5 million decrease2021. The increase in the gross margin of $1.6 million during Fiscal 20162022 compared to Fiscal 2015, $12.7 million2021 was primarily the resultbecause of a lower volumean incremental decrease of microturbines shipped and a shift$5.3 million in product mix. This reduction in gross margin waswarranty expense, partially offset by decreasesan increase in warranty expense of $3.4 million, variable production and service center manufacturing expenseslabor and overhead expense of $2.4$2.9 million and higher inventory charges of $1.0 million and royalty expense of $0.4$0.8 million. Management continues to implement initiatives to improve gross margin by further reducing manufacturing overhead and fixed and direct material costs as we work to achieve profitability and improving product performance.
Warranty expense is a combination of a standard warranty provision recorded at the time revenue is recognized and changes, if any, in estimates for reliability repair programs. Reliability repair programs are based upon estimates that are recorded in the period that new information becomes available, including design changes, cost of repair and product enhancements, which can include both in-warranty and out-of-warranty systems. The decrease in warranty expense of $3.4$5.3 million reflects a decrease in the standard warranty provision primarily because of a decrease in the number of units covered under warranty as a result of the lower volume of microturbines shipped during Fiscal 2016 compared to the prior year. In addition, the cost of fulfilling warranty obligations during Fiscal 2016 was lower2022 compared to Fiscal 2015
42
asa reserve in Fiscal 2021 related to reliability programs to account for the product reliability continuedreplacement of remaining high risk failure parts in some of our fielded units due to improve. Management expects warranty expense to increase as a result of higher shipments of microturbine products forsupplier defect, with no such reserve in Fiscal 2017.2022.
Production and service center labor and overhead expense decreased $2.4increased $2.9 million during Fiscal 20162022 compared to Fiscal 2015 as a result2021 primarily because of decreasesincreases of approximately $1.6 million in freightfacilities costs, $0.8 million in supplies expense, of $1.2$0.6 million salariesin consulting expense ofand $0.6 million in labor costs, partially offset by $0.7 million supplies expense of $0.5 million, business travel expense of $0.2 million and consulting expense of $0.3 million, offset by lowerin overhead allocated to finished goods inventory of $0.4 million. In addition, a portion of our TA100 intangible asset backlog of approximately $0.1 million was written off during the three months ended March 31, 2016. This impairment aligns our TA100 intangible asset backlog with management’s decision to limit the production of TA100 systems on a case-by-case basis for key customers.inventory.
Inventory charges decreased $1.0increased $0.8 million during Fiscal 20162022 compared to Fiscal 20152021 primarily as the result of a decreasean increase in the provision for excess and obsolete inventory. During Fiscal 2016, we made an allowance of approximately $0.8 million for slow-moving inventory in relation to our TA100 product line.
Royalty expense decreased $0.4 million during Fiscal 2016 compared to Fiscal 2015 primarily as a result of lower sales of our C1000 Series systems.
The following table summarizes our gross margin (in millions except percentages):
|
|
|
|
|
|
|
|
| Year Ended March 31, | ||||
|
| 2016 |
| 2015 | ||
Gross Margin |
|
|
|
|
|
|
Microturbine Products |
| $ | 5.7 |
| $ | 10.4 |
As a percentage of revenue |
|
| 10% |
|
| 12% |
|
|
|
|
|
|
|
Accessories and Parts |
| $ | 5.6 |
| $ | 5.8 |
As a percentage of revenue |
|
| 38% |
|
| 38% |
|
|
|
|
|
|
|
Service |
| $ | 1.5 |
| $ | 2.1 |
As a percentage of revenue |
|
| 12% |
|
| 19% |
|
|
|
|
|
|
|
Total Gross Margin |
| $ | 12.8 |
| $ | 18.3 |
As a percentage of revenue |
|
| 15% |
|
| 16% |
| | | | | | | |
| | Year Ended March 31, | | ||||
|
| 2022 |
| 2021 | | ||
Gross Margin | | | | | | | |
Product and accessories | | $ | (3.3) | | $ | (5.5) | |
As a percentage of product and accessories revenue | |
| (9) | % |
| (15) | % |
| |
| | |
| | |
Parts and service | | $ | 11.8 | | $ | 12.4 | |
As a percentage of parts and service revenue | |
| 36 | % |
| 40 | % |
| |
| | |
| | |
Total Gross Margin | | $ | 8.5 |
| $ | 6.9 | |
As a percentage of total revenue | | | 12 | % | | 10 | % |
Microturbine productsProduct and accessories gross margin improved by $2.2 million during Fiscal 2022 compared to Fiscal 2021 primarily due to 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 in Fiscal 2021, a decrease in volume of product shipments from weakness in the oil and gas market due to a decline in oil price in Fiscal 2021, partially offset by higher overhead costs in Fiscal 2022, primarily due to the cost savings from the COVID-19 Business Continuity Plan in Fiscal 2021. Parts and service gross margin decreased approximately 200 basis points to 10%$0.6 million during Fiscal 20162022 compared to Fiscal 20152021 primarily due to higher FPP costs in Fiscal 2022 driven by higher scheduled and unscheduled maintenance.
Product and accessories gross margin as a percentage of product and accessories revenue improved to (9)% during Fiscal 2022 from (15)% during Fiscal 2021, primarily driven by the warranty reserve for high-risk parts, partially offset by lower overhead costs in Fiscal 2021 due to the enactment of the Business Continuity Plan. Parts and service gross margin as a percentage of parts and service revenue decreased to 36% for Fiscal 2022 compared to 40% for Fiscal 2021 primarily driven by lower overhead costs in Fiscal 2021 due to the enactment of the Business Continuity Plan, as well as lower FPP costs in Fiscal 2021.
Research and Development Expenses (“R&D”) R&D expenses for Fiscal 2022 increased $1.0 million, or 42%, to $3.4 million from $2.4 million for Fiscal 2021, as a result of a lower volume of microturbines shipped and a shift in product mix. Service gross margin decreased 700 basis points to 12%costs from our COVID-19 Business Continuity Plan during Fiscal 2016 compared to Fiscal 2015 primarily because of timing of FPP services performed.2021.
Research and Development Expenses(“R&D”) R&D expenses include compensation, engineering department expenses, overhead allocations for administration and facilities and materials costs associated with development. R&D expenses for Fiscal 2016 increased $0.5 million, or 5%, to $10.2 million from $9.7 million for Fiscal 2015. R&D expenses are reported net of benefits from cost-sharing programs, such as DOE grants. The overall increase in R&D expenses of approximately $0.5 million resulted from increases in supplies expense of approximately $0.7 million, consulting expense of $0.2 million and a decrease in cost-sharing benefits of $0.3 million. These overall increases were offset by a $0.7 million decrease in salaries expense. Management expects R&D expenses in Fiscal 2017 to be lower than in Fiscal 2016 as a result of the successful launch of the C1000 Signature Series microturbine and our postponement in development of the C250 microturbine.
Selling, General and Administrative (“SG&A”) Expenses SG&A expenses for Fiscal 2016 decreased $12.42022 increased $4.6 million, or 31%25%, to $27.1$23.0 million from $39.5$18.4 million for Fiscal 2015.2021. The net decreaseincrease in SG&A expenses was comprisedprimarily as a result of decreasesincreases of $11.6approximately $1.3 million inof net bad debt expense, $0.7$1.2 million in labor costs, $0.6 million in marketing related costs, $0.6 million in consulting expense, $0.5 million in business travel expense, and $0.1$0.2 million in marketing expense. The decrease
47
facilities costs, and $0.2 million in shareholder costs. These increases in Fiscal 2022 compared to Fiscal 2021, except for the higher net bad debt expense wasof $1.3 million, were primarily a result of the actions taken in our Business Continuity Plan in Fiscal 2021.
Interest Expense Interest expense for Fiscal 2022 and 2021 were $5.0 million and $5.2 million, respectively. See Liquidity and Capital Resources below for additional discussion on our interest expense.
Gain and Loss on Extinguishment of Debt We recognized a gain on extinguishment of debt of approximately $1.9 million during Fiscal 2022, as the result of the forgiveness of the PPP Loan. See Note 11 – Term Note Payable. We recognized a loss on extinguishment of debt of approximately $9.7$4.3 million
43
recorded for two customers during Fiscal 2015. We recorded net bad2021. The loss on extinguishment of debt recoverycomprised 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 year ended March 31, 2016. Excluding bad debt recovery, management expects SG&A expensesprincipal 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.
Other Income for Fiscal 20172022 includes the payment to be lower than in Fiscal 2016 primarily as a resultthe Company of our initiatives to reduce operating expenses and achieve profitability.
Interest Expense Interest expense increased $0.1 million, or 20%, to $0.6 million during Fiscal 2016 from $0.5 million during Fiscal 2015. Interest expense is primarily fromof PPP Loan proceeds previously repaid in accordance with the average balances outstanding underFourth Amendment to the credit facility. As of March 31, 2016, we had total debt of $9.5 million outstanding underNote Purchase Agreement between the credit facility.Company and Goldman Sachs Specialty Lending Group, L.P. See Note 11 – Term Note Payable.
Income Tax Provision Income tax expense decreased $0.1 million, or 83%, to $20,000 duringwas $19,000 for Fiscal 2016 from $118,000 during2022 and Fiscal 2015.2021. Income tax expense incurred was related to state and foreign taxes. The effective income tax rate of −0.1%-0.1% differs from the federal and state blended statutory rate of approximately 35%23.59% primarily as a result of recording taxable losses.maintaining a full valuation allowance against net deferred tax assets. At March 31, 2016,2022, we had federal and state net operating loss carryforwards of approximately $652$566.5 million and $181$177.1 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 $252.3$153.4 million at March 31, 20162022 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, 2015,2021, the net deferred tax asset was fully reserved.
Year Ended March 31, 2015 Compared to Year Ended March 31, 2014
Revenue Revenue for Fiscal 2015 decreased $17.6 million, or 13%, to $115.5 million from $133.1 million for Fiscal 2014. The change in revenue for Fiscal 2015 compared to Fiscal 2014 included decreases in revenue of $12.3 million from the European market, $4.3 million from the African market, $3.9 million from the North American market and $1.5 million from the Asian market. The decrease in the European market was primarily the result of the continuing geopolitical instability in Russia and Ukraine and the effects of a stronger U.S. dollar making our product more expensive overseas compared to Fiscal 2014. The revenue decline during Fiscal 2015 in the North American market was primarily the result of a drop in the oil and gas market which has affected the timing of customer demand for our products compared to the same period last year. Revenue from the Asian and African markets decreased during Fiscal 2015 because of the impact of a decline in the oil and gas market and stronger U.S. dollar. These overall decreases in revenue were offset by increases in revenue of $3.6 million from the Australian market and $0.8 million from the South American market. The increase in the Australian and South American markets was primarily the result of our continued efforts to improve distribution channels.
Megawatts shipped, microturbine units shipped and average revenue per unit decreased primarily as a result of lower sales volume and shift in product mix for our microturbines during Fiscal 2015 compared to the same period last year. Revenue from microturbine products during Fiscal 2015 decreased $19.4 million, or 18%, to $89.4 million from $108.8 million for Fiscal 2014. Microturbine megawatts shipped during Fiscal 2015 decreased 18.5 megawatts to 91.4 megawatts from 109.9 megawatts for Fiscal 2014. Microturbine units shipped during Fiscal 2015 decreased 51 units to 620 units from 671 units shipped during Fiscal 2014. Average revenue per unit shipped decreased for Fiscal 2015 to approximately $144,000 compared to approximately $162,000 per unit for Fiscal 2014. The decrease in average revenue per unit was primarily the result of a decrease in shipments of our C1000 Series systems partially offset by an increase in shipments of our C65 microturbines during Fiscal 2015 compared to the same period last year.
For Fiscal 2015, revenue from our accessories, parts and service increased $1.8 million, or 7%, to $26.1 million from $24.3 million for Fiscal 2014. The increase in revenue resulted primarily from higher FPP contract enrollment and sales of microturbine parts, partially offset by lower sales of microturbine service work.
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. Therefore, we evaluate historical revenue in conjunction with backlog to anticipate the growth trend of our revenue.
44
The following table summarizes our revenue (revenue amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended March 31, |
| ||||||||||||
|
| 2015 |
| 2014 |
| ||||||||||
|
| Revenue |
| Megawatts |
| Units |
| Revenue |
| Megawatts |
| Units |
| ||
C30 |
| $ | 4.8 |
| 2.9 |
| 97 |
| $ | 5.6 |
| 3.7 |
| 124 |
|
C65 |
|
| 30.1 |
| 27.8 |
| 427 |
|
| 29.1 |
| 26.1 |
| 402 |
|
TA100 |
|
| 0.3 |
| 0.2 |
| 2 |
|
| 0.5 |
| 0.4 |
| 4 |
|
C200 |
|
| 7.1 |
| 6.6 |
| 33 |
|
| 14.8 |
| 12.6 |
| 63 |
|
C600 |
|
| 5.9 |
| 6.0 |
| 10 |
|
| 10.4 |
| 10.8 |
| 18 |
|
C800 |
|
| 8.3 |
| 8.8 |
| 11 |
|
| 10.1 |
| 11.2 |
| 14 |
|
C1000 |
|
| 32.7 |
| 39 |
| 39 |
|
| 38.1 |
| 45 |
| 45 |
|
Waste heat recovery generator |
|
| 0.2 |
| 0.1 |
| 1 |
|
| 0.2 |
| 0.1 |
| 1 |
|
Unit upgrades |
|
| — |
| — |
| — |
|
| — |
| — |
| — |
|
Total from Microturbine Products |
| $ | 89.4 |
| 91.4 |
| 620 |
| $ | 108.8 |
| 109.9 |
| 671 |
|
Accessories and Parts |
|
| 15.3 |
| — |
| — |
|
| 14.8 |
| — |
| — |
|
Total Product, Accessories and Parts |
| $ | 104.7 |
| 91.4 |
| 620 |
| $ | 123.6 |
| 109.9 |
| 671 |
|
Service |
|
| 10.8 |
| — |
| — |
|
| 9.5 |
| — |
| — |
|
Total |
| $ | 115.5 |
| 91.4 |
| 620 |
| $ | 133.1 |
| 109.9 |
| 671 |
|
Sales to Horizon, one of the Company’s domestic distributors, accounted for 17%, 12% and 27% of our revenue for the years ended March 31, 2015, 2014 and 2013, respectively. Sales to BPC, accounted for 11%, 17% and 11% of our revenue for the years ended March 31, 2015, 2014 and 2013, respectively. Sales to E-Finity, one of the Company’s domestic distributors, accounted for 19% of our revenue for the year ended March 31, 2014.
Gross Margin Cost of goods sold includes direct material costs, production and service center labor and overhead, inventory charges and provision for estimated product warranty expenses. The gross margin was $18.3 million, or 16% of revenue, for Fiscal 2015 compared to a gross margin of $21.7 million, or 16% of revenue, for Fiscal 2014. The change in the gross margin during Fiscal 2015 compared to Fiscal 2014 was driven by multiple factors including lower royalty expense of $1.2 million, lower production and service center labor and overhead expense of $1.0 million and lower warranty expense of $0.4 million. The positive impact of these factors was offset by the adverse impact of lower volume, lower average selling prices and a change in product mix for our microturbines of $5.0 million and higher inventory charges of $1.0 million.
Royalty expense decreased $1.2 million during Fiscal 2015 compared to Fiscal 2014 as a result of a reduction in the predetermined fixed rate royalty. We pay a predetermined fixed rate royalty for each microturbine system covered by our Development and License Agreement with Carrier. The fixed rate royalty was reduced by 50% during the three months ended September 30, 2013 as a result of the contractual reduction.
Production and service center labor and overhead expense decreased approximately $1.0 million during Fiscal 2015 compared to Fiscal 2014 primarily as the result of decreases in service center travel expense of approximately $0.3 million, facilities expense of $0.3 million, salaries expense of $0.2 million and supplies expense of $0.2 million.
Warranty expense is a combination of a standard warranty provision recorded at the time revenue is recognized and changes, if any, in estimates for reliability repair programs. Reliability repair programs are based upon estimates that are recorded in the period that new information becomes available, including design changes, cost of repair and product enhancements, which can include both in-warranty and out-of-warranty systems. The decrease in warranty expense of $0.4 million reflects a decrease in the standard warranty provision as a result of sales volume and a decrease in reliability repair programs during Fiscal 2015 compared to the prior year.
Inventory charges increased approximately $1.0 million during Fiscal 2015 compared to Fiscal 2014 primarily as a result of an allowance for slow-moving inventory related to our waste heat recovery generators.
During the three months ended March 31, 2015, we shipped approximately $0.7 million of product to BPC. Given the uncertainty as to the collectability of the sale, revenue recognition on this shipment was deferred. However,
45
as we do not have title to the product or rights to receive the product back in the event we are not paid, such amounts were expensed through cost of goods sold for Fiscal 2015.
The following table summarizes our gross margin (in millions except percentages):
|
|
|
|
|
|
|
|
| Year Ended March 31, | ||||
|
| 2015 |
| 2014 | ||
Gross Margin |
|
|
|
|
|
|
Microturbine Products |
| $ | 10.4 |
| $ | 15.8 |
As a percentage of revenue |
|
| 12% |
|
| 15% |
|
|
|
|
|
|
|
Accessories and Parts |
| $ | 5.8 |
| $ | 4.3 |
As a percentage of revenue |
|
| 38% |
|
| 29% |
|
|
|
|
|
|
|
Service |
| $ | 2.1 |
| $ | 1.6 |
As a percentage of revenue |
|
| 19% |
|
| 16% |
|
|
|
|
|
|
|
Total Gross Margin |
| $ | 18.3 |
| $ | 21.7 |
As a percentage of revenue |
|
| 16% |
|
| 16% |
Microturbine products gross margin decreased approximately 300 basis points to 12% during Fiscal 2015 compared to Fiscal 2014 primarily as a result of lower volume, lower average selling prices and a change in product mix. Accessories and parts gross margin increased 900 basis points to 38% during Fiscal 2015 compared to Fiscal 2014 because of shipments of high margin microturbine products accessories. Service gross margin increased 300 basis points to 19% during Fiscal 2015 compared to Fiscal 2014 primarily because of timing of FPP services performed.
Research and Development Expenses R&D expenses include compensation, engineering department expenses, overhead allocations for administration and facilities and materials costs associated with development. R&D expenses for Fiscal 2015 increased $0.7 million, or 8%, to $9.7 million from $9.0 million for Fiscal 2014. R&D expenses are reported net of benefits from cost-sharing programs, such as DOE grants. During Fiscal 2015 cost sharing benefits decreased approximately $0.9 million offset by a decrease of approximately $0.2 million in professional services expense. There were approximately $0.5 million of cost-sharing benefits for Fiscal 2015 and $1.4 million of such benefits for Fiscal 2014. Cost-sharing programs vary from period to period depending on the phase of the programs.
Selling, General and Administrative Expenses SG&A expenses for Fiscal 2015 increased $11.5 million, or 41%, to $39.5 million from $28.0 million for Fiscal 2014. The net increase in SG&A expenses was comprised of increases of $9.9 million in bad debt expense, $0.9 million in salaries expense, $0.6 million in professional services expense, which includes legal expense, $0.4 million in marketing expense and $0.1 million in business travel expense, offset by a decreases of $0.2 million in facilities expense and $0.2 million in supplies expense. The increase in the bad debt expense was primarily the result of accounts receivable allowances recorded for BPC and EMI, one of the Company’s distributors in the Middle East and Africa, during Fiscal 2015. During the three months ended March 31, 2015, we recorded approximately $7.1 million with respect to the accounts receivable allowance from BPC. We determined that the collectability of this accounts receivable balance was not reasonably assured based on BPC’s recent payment history and because the impact of the steep decline of the Russian ruble could continue to negatively impact its ability to pay its outstanding accounts receivable balance. Also during three months ended September 30, 2014, we recorded approximately $2.6 million with respect to EMI. We determined that the collectability of this accounts receivable balance was not reasonably assured based on EMI’s payment history.
Interest Expense Interest expense decreased $0.2 million, or 29%, to $0.5 million during Fiscal 2015 from $0.7 million during Fiscal 2014. Interest expense is primarily from the average balances outstanding under the credit facility. As of March 31, 2015, we had total debt of $13.0 million outstanding under the credit facility.
46
Change in Fair Value of Warrant Liability Effective September 23, 2013, warrants issued in connection with the September 23, 2008 registered direct placement to purchase 4.0 million shares expired, and the liability associated with the warrants was reversed. The reversal of the warrant liability resulted in a benefit of approximately $10,000 for Fiscal 2014. This reversal of the warrant liability had no impact on our cash balances.
Income Tax Provision Income tax expense decreased $0.1 million, or 50%, to $0.1 million during Fiscal 2015 from $0.2 million during Fiscal 2014. Income tax expense incurred was related to state and foreign taxes. The effective income tax rate of -0.4% differs from the federal and state blended statutory rate of approximately 37% primarily as a result of recording taxable losses. At March 31, 2015, we had federal and state net operating loss carryforwards of approximately $626 million and $202 million, respectively, which may be utilized to reduce future taxable income, subject to 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 $246.8 million at March 31, 2015 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, 2014, 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended March 31, 2016 |
| Year Ended March 31, 2015 |
| ||||||||||||||||||||
|
| Fourth |
| Third |
| Second |
| First |
| Fourth |
| Third |
| Second |
| First |
| ||||||||
(Unaudited) |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| Quarter |
| ||||||||
Revenue |
| $ | 18,867 |
| $ | 21,459 |
| $ | 17,905 |
| $ | 26,980 |
| $ | 29,869 |
| $ | 30,084 |
| $ | 32,248 |
| $ | 23,260 |
|
Cost of goods sold |
|
| 16,764 |
|
| 17,408 |
|
| 15,977 |
|
| 22,295 |
|
| 26,347 |
|
| 23,978 |
|
| 27,005 |
|
| 19,844 |
|
Gross margin |
|
| 2,103 |
|
| 4,051 |
|
| 1,928 |
|
| 4,685 |
|
| 3,522 |
|
| 6,106 |
|
| 5,243 |
|
| 3,416 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D |
|
| 1,959 |
|
| 2,905 |
|
| 2,872 |
|
| 2,416 |
|
| 2,942 |
|
| 2,355 |
|
| 2,055 |
|
| 2,327 |
|
SG&A |
|
| 5,310 |
|
| 7,002 |
|
| 6,705 |
|
| 8,089 |
|
| 14,702 |
|
| 7,508 |
|
| 9,543 |
|
| 7,764 |
|
Loss from operations |
|
| (5,166) |
|
| (5,856) |
|
| (7,649) |
|
| (5,820) |
|
| (14,122) |
|
| (3,757) |
|
| (6,355) |
|
| (6,675) |
|
Net loss |
| $ | (5,319) |
| $ | (6,015) |
| $ | (7,882) |
| $ | (5,975) |
| $ | (14,298) |
| $ | (3,935) |
| $ | (6,529) |
| $ | (6,771) |
|
Net loss per common share—basic and diluted (1) |
| $ | (0.25) |
| $ | (0.34) |
| $ | (0.48) |
| $ | (0.36) |
| $ | (0.87) |
| $ | (0.24) |
| $ | (0.40) |
| $ | (0.42) |
|
|
|
During the three months ended March 31, 2016, we recorded approximately $1.4 million in bad debt recovery with respect to the collection of cash for receivables from EMI previously reserved during Fiscal 2015. This transaction was recorded in SG&A for the three months ended March 31, 2016. During three months ended March 31, 2016 we made an allowance of approximately $0.7 million for slow-moving inventory in relation to our TA100 product line. This transaction was recorded in cost of goods sold for the three months ended March 31, 2016.
During the three months ended March 31, 2015, we recorded an allowance of approximately $1.2 million for slow‑moving inventory related to our waste heat recovery generators. In addition, we shipped approximately $0.7 million of product to BPC during the three months ended March 31, 2015. Given the uncertainty as to the
47
collectability of the sale, the revenue for this shipment was not recognized. Both transactions were included in cost of goods sold for the three months ended March 31, 2015.
During the three months ended March 31, 2015, we recorded approximately $7.1 million with respect to the accounts receivable allowance from BPC. We determined that the collectability of this accounts receivable balance was not reasonably assured based on BPC’s recent payment history and because the impact of the recent steep decline of the Russian ruble could continue to negatively impact its ability to pay its outstanding accounts receivable balance. During the three months ended September 30, 2014, we recorded approximately $2.6 million with respect to the accounts receivable balance from EMI. We determined that the collectability of this accounts receivable balance was not reasonably assured based on EMI’s payment history. Both transactions were included in SG&A for the three months ended March 31, 2015 and September 30, 2014, respectively.
Liquidity and Capital Resources
Our cash requirements depend on many factors, including the execution of our business strategy and plan. We expect to continue to devote substantial capital resources to running our business and implementing the strategic changes summarized herein. Our planned capital expenditures for the year ending March 31, 2017 include approximately $1.0 million for plant and equipment costs related to manufacturing and operations. We have invested our cash in institutional funds that invest in high quality short‑term money market instruments to provide liquidity for operations and for capital preservation.
Our cash and cash equivalentequivalents balances decreased $20.5$27.0 million during the year ended March 31, 2016,Fiscal 2022, compared to an increase of $4.4$34.4 million during the year ended March 31, 2015.Fiscal 2021. The overall decrease in cash and cash equivalents during the year ended March 31, 2016Fiscal 2022 compared to the year ended March 31, 2015increase in cash and cash equivalents during Fiscal 2021 was due to an increase in cash used in operating activities, as well as an increase in inventory to continue to produce product despite supply chain challenges and the intentional slowdown of incoming material in Fiscal 2021 due to the COVID-19 pandemic and delays in accounts receivable collections primarily related to the COVID-19 pandemic in the current period. Cash used in investing activities was primarily to continue the resultexpansion of a reduction inthe rental fleet, which was partially offset by cash provided by financing activities.activities from the issuance of Common Stock through our June 2021 Common Stock offering and our at-the-market offering program.
Operating Activities—During the year ended March 31, 2016, weFiscal 2022, net cash used $22.5 million in cash in ourby operating activities which consistedwas $27.5 million, consisting of a net loss for the period of $25.2$20.2 million, andoffset by cash used for working capital of $2.4$11.8 million offset by non‑cashand non-cash adjustments (primarily warranty provision, accounts receivable allowances, warranty provision, depreciation and amortization, stock‑stock based compensation and inventory provision) of $5.1$4.5 million. During the year ended March 31, 2015,Fiscal 2021, net cash provided by operating cash usageactivities was $23.0$1.7 million, which consistedconsisting of a net loss for the period of $31.5$18.4 million, andoffset by cash used forprovided from working capital of $11.9$6.4 million offset by non‑cashand non-cash adjustments (primarily warranty provision, accounts receivable allowances, depreciation and amortization, stock based compensation and inventory provision) of $20.4$13.7 million.
48
The following is a summary of the significant sources (uses) of cash from operating activities (amounts in thousands):
| | | | | | | |
| | Year Ended March 31, |
| ||||
|
| 2022 |
| 2021 |
| ||
Net loss |
| $ | (20,211) |
| $ | (18,387) | |
Non-cash operating activities(1) | |
| 4,468 | |
| 13,678 | |
Changes in operating assets and liabilities: | | | | | | | |
Accounts receivable | |
| (6,413) | |
| (4,125) | |
Inventories | |
| (7,262) | |
| 8,702 | |
Accounts payable and accrued expenses | |
| 4,485 | |
| 4,652 | |
Prepaid expenses, other current assets and other assets | | | 164 | | | 653 | |
Other changes in operating assets and liabilities | |
| (2,729) | |
| (3,472) | |
Net cash provided by (used) in operating activities | | $ | (27,498) | | $ | 1,701 | |
|
|
|
|
|
|
|
|
|
| Year Ended March 31, |
| ||||
|
| 2016 |
| 2015 |
| ||
Net loss |
| $ | (25,191) |
| $ | (31,533) |
|
Non‑cash operating activities(1) |
|
| 5,090 |
|
| 20,444 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
| 1,021 |
|
| 4,761 |
|
Inventories |
|
| 5,161 |
|
| (7,125) |
|
Accounts payable and accrued expenses |
|
| (8,317) |
|
| (5,960) |
|
Other changes in operating assets and liabilities |
|
| (234) |
|
| (3,605) |
|
Net cash used in operating activities |
| $ | (22,470) |
| $ | (23,018) |
|
| (1) |
| Represents |
The change in non-cash operating activities during Fiscal 2022 compared to Fiscal 2021 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 and the gain on extinguishment of debt resulting from the forgiveness of the PPP Loan during the first quarter of Fiscal 2022. Also 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 was primarily the result of slower collections in Fiscal 2022 due to continued delays from the COVID-19 pandemic, as well as from impacts from the ongoing conflict between Russia and Ukraine, compared to Fiscal 2021. The change in inventory was primarily to continue to produce product despite supply chain challenges and the resultintentional slowdown of lower purchases during the year ended March 31, 2016. The changeincoming material in accounts receivable was the result of lower than expected revenue and slower collection of accounts receivable comparedFiscal 2021 due to the year ended March 31, 2015.COVID-19 pandemic. The change in accounts payable and accrued expenses was primarily the result of the timing and level of inventory receipts and timing of payments made by us during Fiscal 2022 compared to vendor paymentsFiscal 2021. The change in other operating assets and liabilities during the year ended March 31, 2015.Fiscal 2022 compared to Fiscal 2021, was primarily the result of additional expenditures for the reliability repair program.
48
Investing Activities Net cash used in investing activities of $1.5$9.9 million and $1.6$3.2 million during the years ended March 31, 2016Fiscal 2022 and 2015 relates2021, respectively, related primarily to the acquisitionadditions to our rental fleet of fixed assets.approximately $8.7 million and $2.4 million, respectively. The remaining amounts were primarily for sustaining our production and facilities.
Financing Activities During the year ended March 31, 2016,Fiscal 2022, we generated approximately $3.5$10.4 million in cash from financing activities compared to cash generated during the year ended March 31, 2015Fiscal 2021 of approximately $29.0$36.0 million. The funds generated from financing activities during the fiscal year ended March 31, 20162022 were primarily the result of net proceeds from our June 2021 Common Stock offering and proceeds from the at-the-market offering program described below, offset by cash equivalents restricted by Wells Fargo, net repayments underbelow. The funds generated from financing activities during the credit facility and the repayments of notes payable and capital lease obligations. As a condition of the amended Credit Agreements with Wells Fargo, $5.0 million of cash equivalents was restricted as additional security for the credit facility. During thefiscal year ended March 31, 2015, the funds generated in financing activities2021 were primarily the result of $19.0 million in net proceeds from our A&R Note Purchase Agreement with Goldman Sachs, as amended, net borrowings under the PPP Loan, as well as $15.9 million in proceeds from the proceeds related to our underwritten publicat-the-market offering program described below.
Effective August 28, 2015, the CompanyAt-the-market offerings
On June 7, 2018, we entered into a sales agreementSales 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 the Companywe may offer and sell, from time to time at itsour sole discretion, shares of its common stock,our Common Stock, having an aggregate offering price of up to $30.0$25.0 million. The CompanyWe 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. In connectionOn July 15, 2020, we entered into an 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
49
modified the Sales Agreement to, among other things, reflect our filing of a new Registration Statement on Form S-3 with the April 2016 underwritten public offering,SEC on March 22, 2021 and set the Company ismaximum amount of shares of our Common Stock that we may offer and sell through or to H.C. Wainwright at $50 million from the date of the amendment to the Sales Agreement, subject to a lock up with respect tocertain limitations set forth in the at-the-market offering program that expires in September 2016. As of March 31, 2016, 6.9amendment. During Fiscal 2022, we issued approximately 0.1 million shares of our Common Stock under the Company’s common stock had been soldATM program and the net proceeds to the Companyus from the sale of our Common Stock were approximately $0.7 million after deducting commissions paid of approximately $26,000. As of March 31, 2022, approximately $49.3 million remained available for issuance under this ATM Program.
Common Stock Offering
On June 17, 2021, we entered into an amended and restated underwriting agreement (the “Underwriting Agreement”) with H.C. Wainwright & Co., LLC (the “Underwriter”) whereby we agreed to sell to the Underwriter, and the Underwriter agreed to purchase, in a firm commitment underwritten public offering 1,904,763 shares (the “Shares”) of our common stock, $0.001 par value per share (the “Offering”). The offering price to the public in the Offering was $5.25 per share of Common Stock, and the Underwriter agreed to purchase the Shares from the Company pursuant to the Underwriting Agreement at a price of $4.91 per share, representing an underwriting discount of 6.5%. Pursuant to the Underwriting Agreement, we also granted the Underwriter an option to purchase, for a period of 30 days from the date of the Underwriting Agreement, up to an additional 285,714 shares of Common Stock (the “Option Shares”). On June 21, 2021, the Underwriter exercised the option in full. The Offering closed on June 22, 2021, and we received net proceeds of $10.5 million after deducting $1.0 million underwriting discounts, commissions and offering expenses paid by the Company.
Warrants
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 our 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, 2022, the Holder may purchase shares of our Common Stock in an aggregate amount of up to 463,067 shares at an exercise price of $2.61 per share.
Goldman “2020 Warrant”
On October 1, 2020, we 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, 2022, the holder may purchase shares of our Common Stock in an aggregate amount of up to 291,295 shares at an exercise price of $4.76 per share.
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, were approximately $12.7 million.expenses.
Effective May 6, 2014, the Company completed an underwritten public offering in which it sold 0.9 million shares of the Company’s common stock atIn a price of $34.00 per share less underwriting discounts and commissions. The shares were allocatedconcurrent private placement, we agreed to a single institutional investor. The net proceedsissue to the Company from the sale of the common stock, after deducting fees and other offering expenses, were approximately $29.8 million.
On October 31, 2013, an unsolicited exercise ofpurchasers warrants to purchase 4.7 million765,000 shares resultedof Common Stock, which represent 75% of the number of shares of Common Stock and shares underlying the Pre-Funded Warrants purchased in proceedsthe Registered Direct Offering, pursuant to the Securities Purchase Agreement. The Common
50
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 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, 2013, all then2022, there were 75,000 Series D warrants outstanding warrants expired.at an exercise price of $6.12 per share.
There were no stock options exercised during the year ended March 31, 2016. During the years ended March 31, 2015Fiscal 2022 and 2014, the amount of cash received from the exercise of stock options was approximately $0.3 million and $0.5 million, respectively. Employee stock purchases, net of repurchases2021. Repurchases of shares of our common stock for employee taxes due onupon vesting of restricted stock units, net of employee stock purchases, resulted in approximately $0.1 million of net cash used during the year ended March 31, 2016, compared with $0.2 millionFiscal 2022 and 2021.
Three-year Term Note On February 4, 2019, we entered into a Note Purchase Agreement, by and among us, certain subsidiaries of net cash used during the year ended March 31, 2015.
Credit Facility We maintain the Credit Agreements, with Wells Fargo, which provide the Company with a line of credit of up to $20.0 million in the aggregate. As previously disclosed, the twelfth amendment to the Credit Agreements provided the Company the right, under certain circumstances, to increase the borrowing capacity available under the Company’s revolving lines of credit to an aggregate maximum of $20.0 million from an aggregate maximum of $15.0 million (the “Accordion Feature”). In addition, Wells Fargo has provided the Company with a non-revolving capital expenditure line of credit up to $0.5 million to acquire additional eligible equipment for use in the Company’s business. Effectiveus as of June 30, 2015, the Company exercised the Accordion Feature, thereby increasing the maximum borrowing capacity available to a maximum of $20.0 million. The amount actually available to the Company may be lessguarantors, Goldman Sachs Specialty Lending Holdings, Inc., as collateral agent and may varyany other Purchasers party thereto from time to time, dependingin 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 among other factors,the Notes was on March 31, 2019. On October 1, 2020, pursuant to A&R Note Purchase Agreement, we increased the amount of its eligible inventoryborrowing under the Notes by $20.0 million to $50.0 million, and accounts receivable. As security forall outstanding Notes bear interest at the payment and performance ofAdjusted (London Interbank Offer) LIBO Rate (as defined in the credit facility, the Company granted a security interest in favor of Wells Fargo in substantially all of the assets of the Company. One of the Credit Agreements will terminate in accordance with its terms on September 1, 2017A&R Note Purchase Agreement) plus 8.75% per annum. The Notes do not amortize and the other one will terminateentire principal balance is due in a single payment on September 30, 2017.the maturity date. As of March 31, 2016 and March 31, 2015, $9.5 million and $13.02022, $51.0 million in borrowings were outstanding respectively, under the credit facility.
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 for the period from the Amendment Date to March 31, 2022, and $9.0 million thereafter. The Credit Agreements include affirmativefinancial covenants as well as negative covenants that prohibit a variety of actions without Wells Fargo’s consent, including covenants that limit our ability to (a) incur or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all of the assets or
49
stock of another entity, (d) pay dividends on, or purchase, acquire, redeem or retire shares of, our capital stock, (e) sell, assign, transfer or otherwise dispose of all or substantially all of our assets, (f) change our accounting method or (g) enter into a different line of business. Furthermore,A&R Note Purchase Agreement require the Credit Agreements contain financial covenants, including (i) a requirementCompany not to exceed specified levels of Adjusted EBITDA losses (ii) a requirementrelative to maintain a substantial minimum monthly cash balance to outstanding lineits financial model, beginning with the fiscal quarter ending September 30, 2021. As of credit advances based upon the Company’s financial performance, and (iii) limitations on our annual capital expenditures.
Several times since entering into the Credit AgreementsMarch 31, 2022, we were not in compliance with certain covenants under the credit facility. In connection with each event of noncompliance, Wells Fargo waivedAdjusted EBITDA covenant contained in the event of defaultA&R Note Purchase Agreement and on several occasions,did not cure such non-compliance by prepaying the Company amended the Credit Agreements in response to the default and waiver. The following summarizes the recent events, amendments and waivers:
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IfNotes. As a result, we had not obtained the waivers and amended the Credit Agreements as described above, we would not be able to draw additional funds under the credit facility. In addition, the Company has pledged its accounts receivables, inventories, equipment, patents and other assets as collateral for its Credit Agreements, which would be subject to seizure by Wells Fargo if the Company were in default underbreach of the Credit AgreementsAdjusted EBITDA covenant as of May 27, 2022. On July 13, 2022 we entered into the A&R NPA Second Amendment with the Purchaser and unablethe Collateral Agent, pursuant to repaywhich (i) the indebtedness. Wells Fargo alsoPurchaser and the Collateral Agent waived our breach of the Adjusted EBITDA covenant and (ii) the A&R Note Purchase Agreement has been amended to, among other things, add certain new covenants, including requirements that we use our commercially reasonable best efforts to raise at least $10 million through a sale of our common stock by September 14, 2022 and refinance the option to terminateNotes by October 1, 2022. See Item 9B “Other Information” for a summary of the Credit Agreements or accelerate the indebtedness during a periodA&R NPA Second Amendment. As of noncompliance. Based on our current forecasts, management believesMarch 31, 2022, we will maintainare in compliance with the other covenants contained in the amended Credit AgreementsA&R Note Purchase Agreement.
Paycheck Protection Program Loan On April 15, 2020, we applied for at leastan unsecured PPP Loan in the next twelve months. Ifprincipal 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 covenant violation werepromissory 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 used the proceeds from the PPP Loan to occur, management would attemptsupport 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 negotiate a waiver of compliance from Wells Fargo.
Working Capital Althoughthe Note Purchase Agreement between the Company realizedand Goldman Sachs Specialty Lending Group, L.P.
The advance under the PPP Loan bore interest at a rate per annum of 1%.
In February 2021, the Company applied for forgiveness in full of the original balance of the PPP loan and the loan was forgiven in full on June 30, 2021. The Company received a refund of $660,200 and recorded these amounts within other income on the Company’s Condensed Consolidated Statements of Operations. Management will accounted for forgiveness on the PPP Loan in accordance with ASC 470 and recorded a gain on extinguishment of debt on its condensed consolidated financial statements and related footnote disclosures, provided forgiveness be approved by the SBA.
Working Capital Cash used for working capital improvementswas $11.8 million during Fiscal 2022, an increase of $18.2 million from the cash provided from working capital of $6.4 million during Fiscal 2021. These increases in cash used for
51
working capital and other operating assets and liabilities were primarily due to increases in inventory and accounts receivable, partially offset by decreases in accounts payable and accrued expenses.
Evaluation of Ability to Maintain Current Level of Operations In connection with preparing the consolidated financial statements for the fiscal year ended March 31, 2016 because of a reduction2022, management evaluated whether there were conditions and events, considered in finished goods inventory, the Company’s working capital requirementsaggregate, that raised substantial doubt about our ability to meet our obligations as they became due for the year ended March 31, 2016next twelve months from the date of issuance of our Fiscal 2022 consolidated financial statements. Management assessed that there were higher than planned; primarily assuch conditions and events, including a resulthistory of recurring operating losses, negative cash equivalents restricted by Wells Fargo, lower than expected revenue, slower collection of accounts receivable and lower than anticipated inventory turns. We continue to be negatively impactedflows from operating activities, the continued negative impact by the softnessvolatility of the global oil and gas markets, a substantially strongerstrong U.S. dollar (makingin certain markets making our products more expensive overseas)in such markets, the COVID-19 pandemic, the Russian invasion of Ukraine, and ongoing global geopolitical tensionstensions. We incurred a net loss of $20.2 million and used cash from operating activities of $27.5 million during the Fiscal 2022. Our working capital requirements during Fiscal 2022 were primarily for increases in inventory to continue to produce product despite supply chain challenges, as well as the delayed timing of accounts receivable collections due to the COVID-19 pandemic and impacts from the ongoing conflict between Russia North Africa and Middle East.Ukraine. Our net loss increased during Fiscal 2022 primarily due to lower overhead and operating expenses in Fiscal 2021 from our COVID-19 Business Continuity Plan. As of March 31, 2022, we had cash and cash equivalents as of March 31, 2016$22.6 million, and March 31, 2015 were $11.7outstanding debt of $51.0 million ($16.7 million when combined with restricted cash relatedat fair value (see Note 11–Term Note Payable in the Notes to the credit facility) and $32.2 million, respectively. Cash and cash equivalents and restricted cash, less the amount outstanding under the credit facility, was $7.2 million and $19.3 million as of March 31, 2016 and March 31, 2015, respectively. Additionally, the Company has an at-the-market offering program in place pursuant to which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, subject to the lock up period discussed above.
On April 19, 2016, we entered into an underwriting agreement with Oppenheimer & Co. Inc. as the sole book-running manager, and Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC, as the co-manager, related to public offering of 2.7 million shares of our common stock and pre-funded Series B warrants to purchase up to 5.5 million
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shares of common stock, which were offered in lieu of common stock to those purchasers whose purchase of common stock in the offering otherwise would result in the purchaser beneficially owning more than 4.99%Consolidated Financial Statements for further discussion of the Company’s outstanding common stock following the completion of the offering. Also includeddebt).
Management evaluated these conditions in the offering were Series A warrantsrelation to purchase 4.1 million shares of common stock. Every two shares of common stock were sold with one Series A Warrantour ability to purchase one share of common stock at a collective negotiated price of $3.50. Every two Series B Warrants were sold with one Series A Warrantmeet our obligations as they become due. Our ability to purchase one share of common stock at a collective negotiated price of $3.48. The net proceedscontinue current operations and to the Company from the sale of the common stock, after deducting fees and other offering expenses, were approximately $13.1 million. The offering closed on April 22, 2016. In connection with this underwritten public offering, the Company is subject to a lock up with respect to the at-the-market offering program that expires in September 2016.
Basedexecute on management’s projections, free cash of approximately $7.2 million (cash and cash equivalents and restricted cash less amounts outstanding under the credit facility) and net proceeds of approximately $13.1 million from the April 22, 2016 underwritten public offering are sufficient to meet the Company’s anticipated cash needs for working capital and capital expenditures for at least the next twelve months. If revenueplan is less than management’s projections, management has thedependent on our ability to reduce expenses to extend its liquidity to provide adequate resources for a similar period of time. In addition, management has the ability to manage certain operating assets and liabilities, specifically the procurement of inventory and timing of payments of accounts payable, capital expenditures and certain operating expenses depending on the results of its operations to preserve its cash and cash equivalents.
If revenue declines at a greater rate than contemplated above or if management cannot reduce expenses to offset the lower revenue and extend its liquidity, the Company would need additional financing. Until such time as the Company can generate positive cash flows from operations, the Company likelyoperations. Management believes that we will continue to make progress on our path to profitability through a cost reduction plan implemented in March 2022, expanding the Energy as a Service (“EaaS”) revenue streams, as well as price increases on our Factory Protection Plan and certain product offerings. In March 2022, we implemented an expense reduction plan and announced our efforts to reduce operating costs and modify our operating model to better match our expanding EaaS business. In order to implement the expense reduction plan, we undertook a holistic review of our operations, taking the growing EaaS business into account. Beginning on February 28, 2022, we furloughed 17 employees for a period of 120 days, eliminated the position of Chief Revenue Officer, held by Jim Crouse, effective April 15, 2022, instituted 15% temporary pay cuts for approximately 36 employees and 25% temporary pay cuts for members of our senior leadership team, among other actions.
We believe that the implementation of the expense reduction plan will help better align our current cost structure to support our higher margin EaaS revenues.
In February 2022, we announced that we reached our goal of having 21.1 MW of rental units in our fleet and under contract. The EaaS rental unit timeline includes a delay between the time of manufacture and the time revenue from that unit is realized. The microturbine rental unit is built, allocated by a signed rental contract, and then commissioned at the customer site, at which point it begins to generate revenue. We expect to have a need for additional capital. The Companyall rental units contracted, commissioned, and generating revenue by our second quarter of Fiscal 2023. We expect rental revenue to more than double in Fiscal 2023 from the $2.8 million of rental revenue in Fiscal 2022. Additionally in March 2022, we announced that we increased the Distributor Support System, or DSS, program fee to 5% of prior calendar year revenue, from 3%, to support the expanding EaaS business.
To help offset inflation and the rising cost of components, as well as improve our profitability, we implemented price increases on our Factory Protection Plan contracts effective April 1, 2022, and implemented price increases on certain of our product offerings including the C65 and C1000 products, effective May 1, 2022.
We may seek to raise funds by selling additional securities after the expiration of the applicable lock up period (through the at-the-market offering discussed above or some other offering)otherwise) to the public or to selected investors or by obtaining additional debt financing. There is no assurance that the Companywe will be able to obtain additional funds on commercially favorable terms or at all. If the Company raiseswe raise 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 Companywe would issue may have rights, preferences or privileges senior to those of the holders of itsour common stock. Should
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Based on our current operating plan, management anticipates that, given current working capital levels and current financial projections, including the Companycost reduction plan, expanding EaaS business, and price increases, we will be unableable to execute its plans (including raising funds throughmeet our financial obligations as they become due over the at-the-market offering program after the lock up period and maintaining availability under its credit facility) or obtain additional financing that may be needed, the Company may need to significantly reduce its operations. The condensed consolidated financial statements do not include any adjustments that might resultnext twelve months from the outcomedate of these uncertainties.issuance of our Fiscal 2022 financial statements.
Depending on the timing of our future sales and collection of related receivables, managing inventory costs and the timing of inventory purchases and deliveries required to fulfill the backlog, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will require us to achieve significantly increased sales volume, which is dependent on many factors, including:
| the continuing impact of the COVID-19 pandemic on the global economy; |
● | the continuing impact from the ongoing conflict between Russia and Ukraine; |
| ● | 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 relationships with customers, distributors, dealers and project resellers; and |
| our customers’ ability to afford and/or finance our products. |
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Our accounts receivable balance, net of allowances, was $13.6$24.7 million and $13.1$20.6 million as of March 31, 20162022 and March 31, 2015,2021, respectively. Days sales outstanding in accounts receivable, (“DSO”), increased by 26 days to 66150 days as of March 31, 20162022, compared to 40111 days as of March 31, 2015. The change2021 due to continued delayed collections in DSO was largely the result of lower than expected revenue and slower collection of accounts receivable for the year ended March 31, 2016 comparedall markets due to the year ended March 31, 2015.COVID-19 pandemic and impacts from the ongoing conflict between Russia and Ukraine. In the Energy Efficiency market vertical we sell to end users that have been significantly, economically impacted by the pandemic, such as in the Hospitality and Health Care industries. Additionally, the COVID-19 Pandemic heavily impacted our natural resources market vertical, where we primarily sell to Oil & Gas end users. While oil prices have rebounded above $100 per barrel, we have not seen a corresponding rebound in capital expenditures or spending activity. Additionally, the ongoing conflict between Russia and Ukraine has caused a widespread economic slowdown in the region, which has also impacts our collections. We recorded net bad debt expense of approximately $1.1 million for Fiscal 2022 and a net bad debt recovery of approximately $1.5 million for the year ended March 31, 2016. We recorded bad debt expense of $10.1 million and $0.2 million for the years endedFiscal 2021. Our allowance for doubtful accounts, was $0.8 million as of March 31, 20152022 and 2014, respectively. During Fiscal 2015, we recorded approximately $7.1$0.3 million and $2.6 million with respect to the accounts receivable allowances from BPC and EMI, respectively.as of March 31, 2021.
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 currentpreviously referenced economic environment.and geopolitical considerations.
Contractual ObligationsIn March 2022, we implemented an expense reduction plan, which included furloughs, employment terminations and Commercial Commitments
At March 31, 2016,pay cuts. See “—Initiative to Shift Towards Energy as a Service and Reduce Operating Costs”“Risk Factors--Our recently implemented expenses reduction plan and organizational changes undertaken to align to our commitments under notes payable, capital leases and non‑cancelable operating leases were as follows (in thousands):
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| Payment Due by Period |
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| 1 Year |
| 1 - 3 |
| 3 - 5 |
| More than |
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| 5 Years |
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Contractual Obligations: |
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Notes payable and capital lease obligations |
| $ | 435 |
| $ | 362 |
| $ | 72 |
| $ | 1 |
| $ | — |
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Operating lease obligations |
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| 6,025 |
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| 1,927 |
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| 3,513 |
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| 585 |
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| — |
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Revolving credit facility |
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| 9,459 |
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| 9,459 |
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| — |
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| — |
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| — |
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Total |
| $ | 15,919 |
| $ | 11,748 |
| $ | 3,585 |
| $ | 586 |
| $ | — |
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As of March 31, 2016, we had firm commitments to purchase inventories of approximately $23.8 million through Fiscal 2019. Certain inventory delivery dates and related payments are not firmly scheduled; therefore, amounts under these firm purchase commitments will be payable concurrent with the receipt of the related inventories.
Agreements we have with some of our distributors require that if we render parts obsolete in inventories they own and hold in support of their obligations to serve fielded microturbines, then we are required to replace the affected stock at no cost to the distributors. While we have never incurred costs or obligations for these types of replacements, it is possible that future changes in product technology could result and yield costs if significant amounts of inventory are held at distributors. As of March 31, 2016, no significant inventories were held at distributors.
Pursuant to the terms of our Credit Agreements with Wells Fargo, the minimum interest payable under the credit facility is $66,000 each calendar quarter. One of the Credit Agreements will terminate in accordance with its terms on September 1, 2017 and the other one will terminate on September 30, 2017.
Off‑Balance Sheet Arrangements
We do not have any material off‑balance sheet arrangements.
Inflation
Inflation did not have a material impactfocus on our results of operations or financial condition for the fiscal years ended March 31, 2016, 2015EaaS business and 2014. In an effort to offset the adverse impact of inflation on earnings, we have historically raised selling prices on all products, parts, accessories and services. However, any future adverse impact of inflation on our raw materials and energy costsachieving profitability may not be similarly recoverable through our selling price increases.successful.”
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Impact of Recently Issued Accounting Standards
In March 2016, the FinancialRefer to Note 2 – Summary of Significant Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the potential impact the new standard will have on our financial position and results of operations.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 requires inventory that is recorded using the first-in, first-out method to be measured at the lower of cost or net realizable value. ASU 2015-11 is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. We are currently evaluating the potential impact the new standard will have on our financial position and results of operations.
In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30). The ASU was issued as part of FASB’s current plan to simplify overly complex standards. This ASU requires that debt issuance costs related to a recognized debt liability be presentedpolicies in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidanceNotes to Consolidated Financial Statements for debt issuance costs are not affected by this ASU. The update requires retrospective application to all prior period amounts presented. This update is effective for annual and interim periods beginning on or after December 15, 2015, with early application permitted for financial statements that have not been issued. The adoption of this standard would result in the reclassification of debt issuance costs from prepaid expenses and other current assets to the amount outstanding under the credit facility. The net amount of such costs at March 31, 2016 was approximately $0.1 million.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. ASU 2014-15 applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. We are currently evaluating the potential impacts theinformation regarding new standard will have on our reporting process.
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. We are evaluating the potential impacts of the new standard on our existing stock-based compensation plans.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We are evaluating our existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be affected by the new requirements. We will be required to adopt the revenue recognition standard in annual reporting periods beginning after December 15, 2017 (fiscal year ending March 31, 2019), and interim periods within those annual periods.
accounting standards.
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Item 7A. Quantitative and Qualitative Disclosure Aboutabout Market Risk.
Foreign Currency
We currently develop products inare a smaller reporting company as defined by Rule 12b-2 of the U.S.Exchange Act and market and sell our products predominantly in North America, Europe and Asia. As a result, factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets could affect our financial results. As all of our sales and purchases are currently made in U.S. dollars, we do not utilize foreign exchange contractsrequired to reduce our exposure to foreign currency fluctuations. Inprovide the future, as our customers, employees and vendor bases expand, we may enter into transactions that are denominated in foreign currencies.information required under this Item.
Interest
Our exposure to changes in the interest rates results primarily from our credit facility borrowings. As of March 31, 2016 we had $9.5 million of outstanding indebtedness subject to interest rate fluctuations. Based on these borrowings as of March 31, 2016, a hypothetical 100 basis point increase in the then current LIBOR rate would increase our interest expense by $0.1 million on an annual basis. The level of outstanding indebtedness fluctuates from period to period and therefore could result in additional interest.
Item 8. Financial Statements and Supplementary Data.
Our Consolidated Financial Statements and Financial Statement Schedule included in this Form 10‑K10-K beginning at page F‑1F-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 the Company’sour 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‑K10-K for the fiscal year ended March 31, 2016,2022, 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)13a-15(e) under the Exchange Act). Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures arewere effective as of March 31, 20162022 to ensureprovide 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. Additionally,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)13a-15(f) or 15d‑15(f)15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’sour CEO and CFO and effected by the Company’sour board of
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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:
| Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of |
| Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures |
| Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of |
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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 the Companywe maintained effective internal control over financial reporting as of March 31, 2016.2022.
KPMG LLP, the Company’s independent registered public accounting firm, has issued a report on the Company’s internal control over financial reporting. The report of KPMG LLP follows. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’sour internal control over financial reporting (as defined in Rules 13a‑15(f)13a-15(f) and 15d‑15(f)15d-15(f) under the Exchange Act) during the Company’s most recently completedour fiscal quarteryear ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’sour internal control over financial reporting.
Inherent Limitations of the Effectiveness of Internal Control
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Capstone Turbine Corporation:
We have audited Capstone Turbine Corporation’sthe internal control over financial reporting as of March 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizationssystem are met. Because of the Treadway Commission (COSO). Capstone Turbine Corporation’s management is responsible for maintaining effectiveinherent limitations of any internal control over financial reporting and for its assessmentsystem, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
Item 9B. Other Information.
On April 7, 2022, our Board approved an extension of the effectivenessNOL Rights Agreement from May 6, 2022 to May 6, 2025, subject to obtaining stockholder approval of internal control over financial reporting, included insuch extension. We intend to seek that approval at our 2022 annual meeting of stockholders.
On May 20, 2022, we entered into a National Account Agreement with Capstone Engineered Solutions (“CES”), a company directly owned by Jim Crouse, our former Chief Revenue Officer. Under the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibilityterms of the National Account Agreement, CES is authorized to express an opinionmarket, actively promote, and sell Capstone microturbines, related parts, and service. The dollar value of this contract will depend on the Company’s internal control over financial reporting basedamount of sales generated by CES. On May 20. 2022, the Company also entered into a Consulting Agreement with CES, whereby CES will provide certain engineering services to the Company on our audit.
We conducted our audit in accordancean as needed basis, at a rate of $150 per hour. Additionally on May 10, 2022, the Company entered into an agreement with the standardsCES, whereby CES will provide general contract and installation services for one of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk thatCompany’s Energy as a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basisService projects for our opinion.approximately $0.2 million.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositionsThe foregoing descriptions of the assets of the company; (2) provide reasonable assurance that transactionsNational Account Agreement, Engineering Consulting Agreement, and Installation Services Agreement are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,not complete and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to, and qualified in their entirety by reference to, the risktext of the National Account Agreement, Engineering Consulting Agreement, and Installation Services Agreement, copies of which are included as Exhibit 10.29, 10.28, and 10.30 respectively, attached hereto.
On July 13, 2022, we entered into the Second Amendment to the A&R Note Purchase Agreement with the guarantors party thereto, the Purchaser and the Collateral Agent. The A&R NPA Second Amendment provides for (i) the waiver by the Purchaser and the Collateral Agent of our breach of the Adjusted EBITDA covenant contained in the A&R Note Purchase Agreement for the 12 months ended June 30, 2022 and (i) the amendment to certain provisions of the A&R Note Purchase Agreement, including to add a number of new covenants. Those include requirements that controls may become inadequate becausewe (i) deliver a revised financial plan to the Collateral Agent by no later than 42 days after the effective date of changes in conditions,the A&R NPA Second Amendment, (ii) deliver 13-week cash flow forecasts to the Collateral Agent every week commencing on July 15, 2022 through October 1, 2022, (iii) enter into an engagement letter with an investment bank satisfactory to the Collateral Agent by August 10, 2022, (iv) use commercially reasonable best efforts to raise a minimum of $10 million through a sale of common stock by September 14, 2022, and (v) use commercially reasonable best efforts to refinance the Notes by October 1, 2022, (iv) take all actions necessary to maintain our engagement of Riveron Consulting, LLC or another financial advisor acceptable to the Collateral Agent and (v) retain an interim chief financial officer on terms acceptable to the Collateral Agent (it being understood that Scott Robinson and the degreeterms offered to him are acceptable to the Collateral Agent). The A&R NPA Second Amendment also provides that, for purposes of determining our compliance with the policies or proceduresAdjusted EBITDA covenant with respect to our fiscal quarter ended June 30, 2022, we may deteriorate.
Inincrease our opinion, Capstone Turbine Corporation maintained, in all material respects, effective internal control over financial reporting asAdjusted EBITDA for the period by prepaying the Notes up to the amount that the required level for consolidated Adjusted EBITDA for the
55
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Capstone Turbine Corporation and subsidiaries as of March 31, 2016 and 2015, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three‑year periodfiscal quarter ended March 31, 2016,2022 exceeded our consolidated Adjusted EBITDA for that fiscal quarter (i.e., approximately $1.4 million) (the “Cure Cap”); provided that any reversal made with respect to allowances or reserves for bad debt for that fiscal quarter will reduce the Cure Cap on a dollar for dollar basis. We have not, however, yet determined if we will need to make any such prepayment to comply with the Adjusted EBITDA covenant for the fiscal quarter ended June 30, 2022, as we have not yet closed our books for that fiscal quarter. The A&R NPA Second Amendment eliminates the Adjusted EBITDA covenant cure right for any future period.
The foregoing description of the A&R NPA Second Amendment does not purport to be complete and our report dated June 9, 2016 expressed an unqualified opinionis subject to, and qualified in its entirety by, the full text of those consolidated financial statements.the A&R NPA Second Amendment, which is filed herewith as Exhibit 4.16 and is incorporated by reference herein.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
(signed) KPMG LLPNot applicable.
Los Angeles, California
June 9, 2016
56
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Directors
Information contained under the caption “Proposal 1: Election of Directors to the Board of Directors”The information required by this Item will be included in our proxy statement relatingthe Company’s 2022 Proxy Statement to our 2016 annual meetingbe filed with the SEC in connection with the solicitation of stockholdersproxies for the Company’s 2022 Annual Meeting of Shareholders (“2022 Proxy Statement”) and is incorporated herein by reference. Such Proxy Statement will be filed with the SEC within 120 days after the end Fiscal 2022.
Executive OfficersDelinquent Section 16(a) Reports
Information contained under the caption “Executive Officers of the Company” included inThe information required regarding our proxy statement relating to our 2016 annual meeting of stockholders is incorporated herein by reference.
Compliancedirectors’ and executive officers’ compliance with Section 16(a) of the Exchange Act
Information contained will be included in the Company’s 2022 Proxy Statement under the caption “Other Information—heading “Delinquent Section 16(a) Beneficial Ownership Reporting Compliance” included in our proxy statement relating to our 2016 annual meeting of stockholdersReports” and is incorporated herein by reference.
Code of EthicsItem 11. Executive Compensation.
Information contained under the caption “Other Information—Code of Business Conduct and Code of Ethics”The information required by this Item will be included in our proxy statement relating to our 2016 annual meeting of stockholdersthe Company’s 2022 Proxy Statement and is incorporated herein by reference.
Stockholder Nominees
Information contained under the caption “Governance of the Company and Practices of the Board of Directors—Director Recommendation and Nomination Process” included in our proxy statement relating to our 2016 annual meeting of stockholders is incorporated herein by reference.
Audit and Compliance Committee
Information contained under the caption “Governance of the Company and Practices of the Board of Directors—Board Committees—Audit Committee” included in our proxy statement relating to our 2016 annual meeting of stockholders is incorporated herein by reference.
Item 11. Executive Compensation.
Information contained under the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation of Directors,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” included in our proxy statement relating to our 2016 annual meeting of stockholders is incorporated herein by reference.
57
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
Information contained under the caption “Securities Authorized for Issuance under Equity Compensation Plans”The information required by this Item will be included in our proxy statement relating to our 2016 annual meeting of stockholdersthe Company’s 2022 Proxy Statement and is incorporated herein by reference.reference.
Security Ownership of Certain Beneficial Owners and Management
Information contained under the caption “Security Ownership of Certain Beneficial Owners and Management” included in our proxy statement relating to our 2016 annual meeting of stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information contained under the captions “Other Information—Related Person Transactions Policies and Procedures” and “Governance of the Company and Practices of the Board of Directors—Board of Directors; Leadership Structure”The information required by this Item will be included in our proxy statement relating to our 2016 annual meeting of stockholdersthe Company’s 2022 Proxy Statement and is incorporated herein by reference.reference.
Item 14. Principal Accounting Firm Fees and Services.
Information contained under the caption “Fees and Services of the Independent Registered Public Accounting Firm”The information required by this Item will be included in our proxy statement relating to our 2016 annual meeting of stockholdersthe Company’s 2022 Proxy Statement and is incorporated herein by reference.reference.
5856
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) 1. and 2. Financial statements and financial statement schedule
The financial statements notes and financial statement schedulenotes are listed in the Index to Consolidated Financial Statements on page F‑1F-1 of this Report.
(a) 3. Index to Exhibits.
Exhibit Index
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*Management contract or compensatory plan or arrangement
(a)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on February 5, 2010 (File No. 001-15957).
62
(b)Incorporated by reference to Capstone Turbine Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (File No. 001-15957).
(c)Incorporated by reference to Capstone Turbine Corporation’s Registration Statement on Form S-1/A, dated May 8, 2000 (File No. 333-33024).
(d)Incorporated by reference to Appendix B to Capstone Turbine Corporation’s Definitive Proxy Statement, filed on July 17, 2012 (File No. 001-15957).
(e)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on November 6, 2015 (File No. 001-15957).
(f)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2005 (File No. 001-15957).
(g)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on July 8, 2005 (File No. 001-15957).
(h)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009 (File No. 001-15957).
(i)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on September 6, 2012 (File No. 001-15957).
(j)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on May 6, 2016 (File No. 001-15957).
(k)Incorporated by reference to Capstone Turbine Corporation’s Registration Statement on Form S-1/A, dated June 21, 2000 (File No. 333-33024).
(l)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on July 10, 2008 (File No. 001-15957).
(m)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on July 2, 2014 (File No. 001-15957).
(n)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on August 5, 2014 (File No. 001-15957).
(o)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on April 21, 2016 (File No. 001-15957).
63
(p)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on October 16, 2000 (File No. 001-15957).
(q)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on September 2, 2009 (File No. 001-15957).
(r)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on October 6, 2014 (File No. 001-15957).
(s)Incorporated by reference to Capstone Turbine Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013 (File No. 001-15957).
(t)Incorporated by reference to Appendix A to Capstone Turbine Corporation’s Definitive Proxy Statement, filed on July 17, 2012 (File No. 001-15957).
(u)Incorporated by reference to Appendix B to Capstone Turbine Corporation’s Definitive Proxy Statement, filed on July 15, 2015 (File No. 001-15957).
(v)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 (File No. 001-15957).
(w)Incorporated by reference to Capstone Turbine Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010 (File No. 001-15957).
(x)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004 (File No. 001-15957).
(y)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 (File No. 001-15957).
(z)Incorporated by reference to Capstone Turbine Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2009 (File No. 001-15957).
(aa)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 (File No. 001-15957).
(bb)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on July 1, 2010 (File No. 001-15957).
(cc)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on November 12, 2010 (File No. 001-15957).
64
(dd)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on March 25, 2011 (File No. 001-15957).
(ee)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on October 3, 2011 (File No. 001-15957).
(ff)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 (File No. 001-15957).
(gg)Incorporated by reference to Capstone Turbine Corporation’s Annual Report on Form 10-K for the fiscal year ended on March 31, 2012 (File No. 001-15957).
(hh)Incorporated by reference to Capstone Turbine Corporation’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014 (File No. 001-15957).
(ii)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on June 10, 2014 (File No. 001-15957).
(jj)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on September 19, 2014 (File No. 001-15957).
(kk)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014 (File No. 001-15957).
(ll)Incorporated by reference to Capstone Turbine Corporation’s Annual Report on Form 10-K for the fiscal year ended on March 31, 2015 (File No. 001-15957).
(mm)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 (File No. 001-15957).
(nn)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 (File No. 001-15957).
(oo)Incorporated by reference to Appendix B to Capstone Turbine Corporation’s Definitive Proxy Statement, filed on July 16, 2014 (File No. 001-15957).
(pp)Incorporated by reference to Capstone Turbine Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2006 (File No. 001-15957).
(qq)Incorporated by reference to Capstone Turbine Corporation’s Annual Report on Form 10-K for the fiscal year ended on March 31, 2007 (File No. 001-15957).
65
(rr)Incorporated by reference to Capstone Turbine Corporation’s Registration Statement on Form S-8, dated June 17, 2009 (File No. 333-160049).
(ss)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on May 1, 2014 (File No. 001-15957).
(tt)Incorporated by reference to Capstone Turbine Corporation’s Current Report on Form 8-K, filed on August 28, 2015 (File No. 001-15957).
66
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Financial statement schedules not included in this Annual Report on Form 10‑K10-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.
F-157
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
Report of Independent Registered Public Accounting Firm (PCAOB 00688); Marcum LLP, Los Angeles, CA | | F-2 |
Consolidated Financial Statements: | | |
| F-4 | |
For the years ended March 31, 2022 and 2021: | | |
| F-5 | |
| F-6 | |
| F-7 | |
| 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.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and Board of Directors and Stockholdersof
Capstone Turbine Corporation:Green Energy Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Capstone TurbineGreen Energy Corporation and subsidiaries(the “Company”) as of March 31, 20162022 and 2015, and2021, the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the three‑year period ended March 31, 2016.2022, and the related notes (collectively referred to as the “financial statements”). In connection with our auditsopinion, the financial statements present fairly, in all material respects, the financial position of the consolidatedCompany as of March 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidatedthe Company's financial statements and financial statement schedule 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 Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit includesof 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 supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In
Critical Audit Matters
Critical audit matters 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. We determined that there are no 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capstone Turbine Corporation and subsidiaries as of March 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, presents fairly, in all material respects,and we are not, by communicating the information set forth therein.critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
We also have audited, in accordance with the standards
F-2
Accounts Receivable Allowances
Description of Matter
The Company’s accounts receivable totaled approximately $24.7 million, net of an allowance of approximately $845,000, as of March 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations2022. As a result of the Treadway Commission (COSO),ongoing COVID-19 pandemic, along with current geopolitical tensions, the Company saw an increase in its overall days sales outstanding during the year ended March 31, 2022 resulting in delays in the collections of its accounts receivable. 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.
The principal considerations for our report dated June 9, 2016 expressed an unqualifieddetermination that performing procedures relating to the accounts receivable allowances is a critical audit matter are (i) the significant judgement required 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 effectivenessconsolidated financial statements. These procedures included:
| ● | Obtaining an understanding of the Company’s processes in place in order to estimate the allowance for doubtful accounts; |
| ● | Testing management’s calculation and significant assumptions made in determining its allowance for doubtful accounts; |
| ● | Testing the Company’s subsequent cash collections through the date the consolidated financial statements were issued; |
| ● | Evaluating the credit worthiness of customers whose balances were past due as of March 31, 2022 by testing the historical collection trends over the past 5 years; and |
| ● | Evaluating the Company’s historical accounts receivable write-offs as compared to their past estimates allowance for doubtful accounts. |
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s internal control over financial reporting.auditor since 2017.
(signed) KPMG LLP
Los Angeles, CaliforniaCA
June 9, 2016July 13, 2022
F-2F-3
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
(In thousands, except share amounts)
| | | | | | |
| March 31, |
| March 31, |
| ||
| 2022 |
| 2021 |
| ||
Assets | | | | | | |
Current Assets: | | | | | | |
Cash and cash equivalents | $ | 22,559 | | $ | 49,533 | |
Accounts receivable, net of allowances of $845 at March 31, 2022 and $314 at March 31, 2021 |
| 24,665 | |
| 20,593 | |
Inventories, net |
| 18,465 | |
| 11,829 | |
Prepaid expenses and other current assets |
| 5,519 | |
| 4,953 | |
Total current assets |
| 71,208 | |
| 86,908 | |
Property, plant, equipment and rental assets, net |
| 18,038 | |
| 9,630 | |
Non-current portion of accounts receivable | | 1,212 | |
| — | |
Non-current portion of inventories |
| 1,680 | |
| 1,845 | |
Other assets |
| 8,635 | |
| 7,639 | |
Total assets | $ | 100,773 | | $ | 106,022 | |
Liabilities and Stockholders’ Equity | | | | | | |
Current Liabilities: | | | | | | |
Accounts payable and accrued expenses | $ | 25,130 | | $ | 19,767 | |
Accrued salaries and wages |
| 1,147 | |
| 1,889 | |
Accrued warranty reserve |
| 1,483 | |
| 5,850 | |
Deferred revenue |
| 9,185 | |
| 6,374 | |
Current portion of notes payable and lease obligations |
| 675 | |
| 576 | |
Total current liabilities |
| 37,620 | |
| 34,456 | |
Deferred revenue - non-current | | 981 | | | 765 | |
Term note payable, net | | 50,949 | | | 52,865 | |
Long-term portion of notes payable and lease obligations |
| 5,809 | |
| 4,762 | |
Total liabilities |
| 95,359 | |
| 92,848 | |
Commitments and contingencies (Note 12) | | | | | | |
Stockholders’ Equity: | | | | | | |
Preferred stock, $.001 par value; 1,000,000 shares authorized; NaN issued | | — | | | — | |
Common stock, $.001 par value; 51,500,000 shares authorized, 15,398,368 shares issued and 15,296,735 shares outstanding at March 31, 2022; 12,898,144 shares issued and 12,824,190 shares outstanding at March 31, 2021 |
| 15 | |
| 13 | |
Additional paid-in capital |
| 946,969 | |
| 934,381 | |
Accumulated deficit |
| (939,482) | |
| (919,271) | |
Treasury stock, at cost; 101,633 shares at March 31, 2022 and 73,954 shares at March 31, 2021 |
| (2,088) | |
| (1,949) | |
Total stockholders’ equity |
| 5,414 | |
| 13,174 | |
Total liabilities and stockholders' equity | $ | 100,773 | | $ | 106,022 | |
|
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|
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| March 31, |
| March 31, |
| ||
|
| 2016 |
| 2015 |
| ||
Assets |
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 11,704 |
| $ | 32,221 |
|
Restricted cash |
|
| 5,002 |
|
| — |
|
Accounts receivable, net of allowances of $8,909 at March 31, 2016 and $11,041 at March 31, 2015 |
|
| 13,575 |
|
| 13,120 |
|
Inventories |
|
| 16,126 |
|
| 23,097 |
|
Prepaid expenses and other current assets |
|
| 2,636 |
|
| 3,063 |
|
Total current assets |
|
| 49,043 |
|
| 71,501 |
|
Property, plant and equipment, net |
|
| 3,537 |
|
| 3,523 |
|
Non-current portion of inventories |
|
| 2,143 |
|
| 2,258 |
|
Intangible assets, net |
|
| 941 |
|
| 1,337 |
|
Other assets |
|
| 228 |
|
| 308 |
|
Total |
| $ | 55,892 |
| $ | 78,927 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
| $ | 13,187 |
| $ | 22,266 |
|
Accrued salaries and wages |
|
| 1,880 |
|
| 2,113 |
|
Accrued warranty reserve |
|
| 1,639 |
|
| 3,183 |
|
Deferred revenue |
|
| 4,368 |
|
| 3,051 |
|
Revolving credit facility |
|
| 9,459 |
|
| 12,953 |
|
Current portion of notes payable and capital lease obligations |
|
| 361 |
|
| 407 |
|
Total current liabilities |
|
| 30,894 |
|
| 43,973 |
|
Long-term portion of notes payable and capital lease obligations |
|
| 74 |
|
| 89 |
|
Other long-term liabilities |
|
| 184 |
|
| 161 |
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
Common stock, $.001 par value; 515,000,000 shares authorized, 23,857,516 shares issued and 23,753,873 shares outstanding at March 31, 2016; 16,590,058 shares issued and 16,527,264 shares outstanding at March 31, 2015 |
|
| 24 |
|
| 17 |
|
Additional paid-in capital |
|
| 853,288 |
|
| 837,965 |
|
Accumulated deficit |
|
| (826,955) |
|
| (801,764) |
|
Treasury stock, at cost; 103,643 shares at March 31, 2016 and 62,794 shares at March 31, 2015 |
|
| (1,617) |
|
| (1,514) |
|
Total stockholders’ equity |
|
| 24,740 |
|
| 34,704 |
|
Total |
| $ | 55,892 |
| $ | 78,927 |
|
See accompanying notes to consolidated financial statements.
F-3F-4
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended March 31, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
Revenue: |
|
|
|
|
|
|
|
|
|
|
Product, accessories and parts |
| $ | 73,116 |
| $ | 104,710 |
| $ | 123,553 |
|
Service |
|
| 12,095 |
|
| 10,751 |
|
| 9,552 |
|
Total revenue |
|
| 85,211 |
|
| 115,461 |
|
| 133,105 |
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
|
|
Product, accessories and parts |
|
| 61,866 |
|
| 88,531 |
|
| 103,434 |
|
Service |
|
| 10,578 |
|
| 8,643 |
|
| 7,975 |
|
Total cost of goods sold |
|
| 72,444 |
|
| 97,174 |
|
| 111,409 |
|
Gross margin |
|
| 12,767 |
|
| 18,287 |
|
| 21,696 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Research and development |
|
| 10,152 |
|
| 9,679 |
|
| 9,029 |
|
Selling, general and administrative |
|
| 27,106 |
|
| 39,517 |
|
| 27,981 |
|
Total operating expenses |
|
| 37,258 |
|
| 49,196 |
|
| 37,010 |
|
Loss from operations |
|
| (24,491) |
|
| (30,909) |
|
| (15,314) |
|
Other (expense) income |
|
| (40) |
|
| 41 |
|
| (20) |
|
Interest expense |
|
| (640) |
|
| (548) |
|
| (712) |
|
Change in fair value of warrant liability |
|
| — |
|
| — |
|
| 10 |
|
Loss before income taxes |
|
| (25,171) |
|
| (31,416) |
|
| (16,036) |
|
Provision for income taxes |
|
| 20 |
|
| 117 |
|
| 220 |
|
Net loss |
| $ | (25,191) |
| $ | (31,533) |
| $ | (16,256) |
|
Net loss per common share—basic and diluted |
| $ | (1.39) |
| $ | (1.92) |
| $ | (1.06) |
|
Weighted average shares used to calculate basic and diluted net loss per common share |
|
| 18,162 |
|
| 16,401 |
|
| 15,353 |
|
| | | | | | | |
| | Year Ended | | ||||
| | March 31, |
| ||||
|
| 2022 |
| 2021 |
| ||
Revenue: | | | | | | | |
Product and accessories | | $ | 37,181 |
| $ | 36,517 | |
Parts and service | | | 32,464 | | | 31,119 | |
Total revenue | | | 69,645 | | | 67,636 | |
Cost of goods sold: | | | | | | | |
Product and accessories | | | 40,483 | | | 42,025 | |
Parts and service | | | 20,624 | | | 18,756 | |
Total cost of goods sold | |
| 61,107 | |
| 60,781 | |
Gross margin | |
| 8,538 | |
| 6,855 | |
Operating expenses: | | | | | | | |
Research and development | |
| 3,359 | |
| 2,417 | |
Selling, general and administrative | |
| 22,980 | |
| 18,391 | |
Total operating expenses | |
| 26,339 | |
| 20,808 | |
Loss from operations | |
| (17,801) | |
| (13,953) | |
Other income | |
| 642 | |
| 4,993 | |
Interest income | |
| 21 | |
| 30 | |
Interest expense | |
| (5,004) | |
| (5,156) | |
Gain (loss) on debt extinguishment | | | 1,950 | | | (4,282) | |
Loss before provision for income taxes | |
| (20,192) | |
| (18,368) | |
Provision for income taxes | |
| 19 | |
| 19 | |
Net loss | | | (20,211) | | | (18,387) | |
Less: Deemed dividend on purchase warrant for common shares | | | — | | | 15 | |
Net loss attributable to common stockholders | | $ | (20,211) | | $ | (18,402) | |
| | | | | | | |
Net loss per common share attributable to common stockholders—basic and diluted | | $ | (1.37) | | $ | (1.63) | |
Weighted average shares used to calculate basic and diluted net loss per common share attributable to common stockholders | |
| 14,727 | |
| 11,280 | |
See accompanying notes to consolidated financial statements.
F-4F-5
CAPSTONE TURBINEGREEN 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 |
| |||||
Balance, March 31, 2013 |
| 15,291,309 |
| $ | 15 |
| $ | 797,058 |
| $ | (753,975) |
| 51,935 |
| $ | (1,212) |
| $ | 41,886 |
|
Purchase of treasury stock |
| — |
|
| — |
|
| — |
|
| — |
| 5,229 |
|
| (118) |
|
| (118) |
|
Vested restricted stock awards |
| 20,400 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
Stock-based compensation |
| — |
|
| — |
|
| 2,031 |
|
| — |
| — |
|
| — |
|
| 2,031 |
|
Exercise of stock options and employee stock purchases |
| 17,881 |
|
| — |
|
| 479 |
|
| — |
| — |
|
| — |
|
| 479 |
|
Stock awards to Board of Directors |
| 18,444 |
|
| — |
|
| 116 |
|
| — |
| — |
|
| — |
|
| 116 |
|
Issuance of common stock upon exercise of put option |
| 236,250 |
|
| 1 |
|
| 5,953 |
|
| — |
| — |
|
| — |
|
| 5,954 |
|
Net loss |
| — |
|
| — |
|
| — |
|
| (16,256) |
| — |
|
| — |
|
| (16,256) |
|
Balance, March 31, 2014 |
| 15,584,284 |
| $ | 16 |
| $ | 805,637 |
| $ | (770,231) |
| 57,164 |
| $ | (1,330) |
| $ | 34,092 |
|
Purchase of treasury stock |
| — |
|
| — |
|
| — |
|
| — |
| 5,630 |
|
| (184) |
|
| (184) |
|
Vested restricted stock awards |
| 29,137 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
Stock-based compensation |
| — |
|
| — |
|
| 2,119 |
|
| — |
| — |
|
| — |
|
| 2,119 |
|
Exercise of stock options and employee stock purchases |
| 17,143 |
|
| — |
|
| 320 |
|
| — |
| — |
|
| — |
|
| 320 |
|
Stock awards to Board of Directors |
| 18,244 |
|
| — |
|
| 117 |
|
| — |
| — |
|
| — |
|
| 117 |
|
Warrants exercised |
| 941,250 |
|
| 1 |
|
| 29,772 |
|
| — |
| — |
|
| — |
|
| 29,773 |
|
Net loss |
| — |
|
| — |
|
| — |
|
| (31,533) |
| — |
|
| — |
|
| (31,533) |
|
Balance, March 31, 2015 |
| 16,590,058 |
| $ | 17 |
| $ | 837,965 |
| $ | (801,764) |
| 62,794 |
| $ | (1,514) |
| $ | 34,704 |
|
Purchase of treasury stock |
| — |
|
| — |
|
| — |
|
| — |
| 40,849 |
|
| (103) |
|
| (103) |
|
Vested restricted stock awards |
| 250,735 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
Stock-based compensation |
| — |
|
| — |
|
| 2,406 |
|
| — |
| — |
|
| — |
|
| 2,406 |
|
Exercise of stock options and employee stock purchases |
| 5,658 |
|
| — |
|
| 13 |
|
| — |
| — |
|
| — |
|
| 13 |
|
Stock awards to Board of Directors |
| 92,520 |
|
| — |
|
| 164 |
|
| — |
| — |
|
| — |
|
| 164 |
|
Issuance of common stock, net of issuance costs |
| 6,918,545 |
|
| 7 |
|
| 12,740 |
|
| — |
| — |
|
| — |
|
| 12,747 |
|
Net loss |
| — |
|
| — |
|
| — |
|
| (25,191) |
| — |
|
| — |
|
| (25,191) |
|
Balance, March 31, 2016 |
| 23,857,516 |
| $ | 24 |
| $ | 853,288 |
| $ | (826,955) |
| 103,643 |
| $ | (1,617) |
| $ | 24,740 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | | | | | | Total | ||
| | Common Stock | | Paid-in | | Accumulated | | Treasury Stock | | Stockholders’ | |||||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Shares |
| Amount |
| Equity | |||||
Balance, March 31, 2020 | | 10,286,366 | | $ | 10 | | $ | 915,755 | | $ | (900,869) |
| 57,577 | | $ | (1,875) | | $ | 13,021 |
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) |
Issuance of common stock, net of issuance costs | | 2,130,634 | | | 3 | | | 16,778 | | | — | | — | | | — | | | 16,781 |
Warrants issued | | — | | | — | | | 761 | | | — | | — | | | — | | | 761 |
Warrants exercised | | 352,279 | | | — | | | — | | | — | | — | | | — | | | — |
Change in warrants valuation | | — | | | — | | | 99 | | | — | | — | | | — | | | 99 |
Deemed dividend on purchase warrant for common shares | | — | | | — | | | 15 | | | (15) | | — | | | — | | | — |
Net loss | | — | | | — | |
| — | |
| (18,387) |
| — | |
| — | |
| (18,387) |
Balance, March 31, 2021 | | 12,898,144 | | | 13 | | | 934,381 | | | (919,271) |
| 73,954 | | | (1,949) | | | 13,174 |
Purchase of treasury stock | | — | |
| — | |
| — | |
| — |
| 27,679 | |
| (139) | |
| (139) |
Vested restricted stock awards | | 124,184 | |
| — | |
| 100 | |
| — |
| — | |
| — | |
| 100 |
Stock-based compensation | | — | |
| — | |
| 1,245 | |
| — |
| — | |
| — | |
| 1,245 |
Stock awards to Board of Directors | | 70,260 | |
| — | |
| — | |
| — |
| — | |
| — | |
| — |
Issuance of common stock, net of issuance costs | | 2,305,780 | | | 2 | | | 11,243 | | | — | | — | | | — | | | 11,245 |
Net loss | | — | |
| — | |
| — | |
| (20,211) |
| — | |
| — | |
| (20,211) |
Balance, March 31, 2022 | | 15,398,368 | | $ | 15 | | $ | 946,969 | | $ | (939,482) |
| 101,633 | | $ | (2,088) | | $ | 5,414 |
See accompanying notes to consolidated financial statements.
F-5F-6
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended March 31, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (25,191) |
| $ | (31,533) |
| $ | (16,256) |
|
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,746 |
|
| 1,697 |
|
| 2,323 |
|
Amortization of deferred financing costs |
|
| 172 |
|
| 196 |
|
| 223 |
|
Interest on restricted cash |
|
| (2) |
|
| — |
|
| — |
|
Accounts receivable allowances |
|
| (1,459) |
|
| 10,138 |
|
| 242 |
|
Inventory provision |
|
| 1,925 |
|
| 2,810 |
|
| 1,509 |
|
Provision for warranty expenses |
|
| 111 |
|
| 3,463 |
|
| 3,903 |
|
Net (gain) loss on disposal of equipment |
|
| 27 |
|
| (96) |
|
| 225 |
|
Stock-based compensation |
|
| 2,570 |
|
| 2,236 |
|
| 2,147 |
|
Change in fair value of warrant liability |
|
| — |
|
| — |
|
| (10) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 1,021 |
|
| 4,761 |
|
| (10,320) |
|
Inventories |
|
| 5,161 |
|
| (7,125) |
|
| (784) |
|
Prepaid expenses and other current assets |
|
| 314 |
|
| (1,075) |
|
| 470 |
|
Accounts payable and accrued expenses |
|
| (8,317) |
|
| (5,960) |
|
| 4,475 |
|
Accrued salaries and wages and long term liabilities |
|
| (210) |
|
| 321 |
|
| 90 |
|
Accrued warranty reserve |
|
| (1,655) |
|
| (3,245) |
|
| (3,237) |
|
Deferred revenue |
|
| 1,317 |
|
| 394 |
|
| (432) |
|
Net cash used in operating activities |
|
| (22,470) |
|
| (23,018) |
|
| (15,432) |
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
Expenditures for property and equipment |
|
| (1,513) |
|
| (1,606) |
|
| (1,179) |
|
Net cash used in investing activities |
|
| (1,513) |
|
| (1,606) |
|
| (1,179) |
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
Net (repayments of) proceeds from revolving credit facility |
|
| (3,494) |
|
| (275) |
|
| (248) |
|
Changes in restricted cash |
|
| (5,000) |
|
| — |
|
| — |
|
Repayment of notes payable and capital lease obligations |
|
| (697) |
|
| (647) |
|
| (415) |
|
Net proceeds from (cash used in) employee stock-based transactions |
|
| (91) |
|
| 136 |
|
| 362 |
|
Net proceeds from equity issuances |
|
| 12,748 |
|
| 29,772 |
|
| 5,954 |
|
Net cash provided by financing activities |
|
| 3,466 |
|
| 28,986 |
|
| 5,653 |
|
Net increase (decrease) in Cash and Cash Equivalents |
|
| (20,517) |
|
| 4,362 |
|
| (10,958) |
|
Cash and Cash Equivalents, Beginning of Year |
|
| 32,221 |
|
| 27,859 |
|
| 38,817 |
|
Cash and Cash Equivalents, End of Year |
| $ | 11,704 |
| $ | 32,221 |
| $ | 27,859 |
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 473 |
| $ | 354 |
| $ | 506 |
|
Income taxes |
| $ | 24 |
| $ | 129 |
| $ | 246 |
|
Supplemental Disclosures of Non-Cash Information: |
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment through accounts payable |
| $ | 28 |
| $ | 154 |
| $ | 7 |
|
Renewal of insurance contracts which was financed by notes payable |
| $ | 477 |
| $ | 447 |
| $ | 491 |
|
Acquisition of property and equipment in consideration for the issuance of a note payable |
| $ | 101 |
| $ | 418 |
| $ | 158 |
|
| | | | | | | | |
| | | | | | | | |
| | | Year Ended March 31, |
| ||||
|
|
| 2022 |
| 2021 |
| ||
Cash Flows from Operating Activities: | | | | | | | | |
Net loss | | | $ | (20,211) | | $ | (18,387) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | |
| 1,915 | | | 1,452 | |
Amortization of financing costs and discounts | | |
| 35 | | | 623 | |
Amortization of right-of-use assets | | | | 657 | | | 378 | |
Loss (gain) on debt extinguishment | | | | (1,950) | | | 4,282 | |
Bad debt expense (recovery) | | |
| 1,129 | | | (228) | |
Inventory provision | | |
| 791 | | | 305 | |
Provision for warranty expenses | | |
| 646 | | | 5,930 | |
Gain on disposal of equipment | | |
| — | | | (1) | |
Stock-based compensation | | |
| 1,245 | | | 937 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | |
| (6,413) | | | (4,125) | |
Inventories | | |
| (7,262) | | | 8,702 | |
Prepaid expenses, other current assets and other assets | | |
| 164 | | | 653 | |
Accounts payable and accrued expenses | | |
| 4,485 | | | 4,652 | |
Accrued salaries and wages and long term liabilities | | |
| (743) | | | 245 | |
Accrued warranty reserve | | |
| (5,013) | | | (2,014) | |
Deferred revenue | | |
| 3,027 | | | (1,703) | |
Net cash used in operating activities | | |
| (27,498) | |
| 1,701 | |
Cash Flows from Investing Activities: | | | | | | | | |
Expenditures for property, plant, equipment and rental assets | | |
| (9,924) | | | (3,209) | |
Net cash used in investing activities | | |
| (9,924) | |
| (3,209) | |
Cash Flows from Financing Activities: | | | | | | | | |
Net proceeds from term note payable | | | | — | | | 20,833 | |
Repayment of notes payable and lease obligations | | |
| (685) | | | (691) | |
Cash used in employee stock-based transactions | | |
| (138) | | | (74) | |
Net proceeds from issuance of common stock and warrants | | |
| 11,271 | | | 15,905 | |
Net cash provided by financing activities | | |
| 10,448 | |
| 35,973 | |
Net (decrease) increase in Cash and Cash Equivalents | | |
| (26,974) | |
| 34,465 | |
Cash and Cash Equivalents, Beginning of Period | | |
| 49,533 | |
| 15,068 | |
Cash and Cash Equivalents, End of Period | | | $ | 22,559 | | $ | 49,533 | |
Supplemental Disclosures of Cash Flow Information: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | | $ | 5,095 | | $ | 4,287 | |
Income taxes | | | $ | 20 | | $ | 14 | |
Supplemental Disclosures of Non-Cash Information: | | | | | | | | |
Acquisition of property and equipment through accounts payable | | | $ | 264 | | $ | 36 | |
Renewal of insurance contracts financed by notes payable | | | $ | 567 | | $ | 593 | |
Issuance of common stock for services to be received | | | $ | 75 | | $ | — | |
Deemed dividend | | | $ | — | | $ | 15 | |
See accompanying notes to consolidated financial statements.
F-6F-7
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of the Company and Basis of Presentation
Capstone TurbineGreen Energy Corporation (the(“Capstone”, “We” or the “Company”) develops, manufactures, marketsis a provider of customized microgrid solutions, on-site resilient green Energy as a Service (EaaS) solutions, and services microturbineon-site energy technology systems focused on helping customers around the globe meet their environmental, energy savings, and resiliency goals. These solutions for use ininclude 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 addition,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 microturbines can be usedindustry-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 charging generators for hybrid electric vehicle applications.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.
The Company has incurred significant operating losses since its inception. Management anticipates incurring additional losses untilOn April 22, 2021, the Company can produce sufficient revenue to cover its operating costs. To date, the Company has funded its activities primarily through private and public equity offerings. This Annual Report on Form 10‑K (this “Form 10‑K”) refers to the Company’s fiscal years ending March 31 as its “Fiscal” years.
The consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company continues to be negatively impacted by the softness of the global oil and gas markets, a substantially stronger U.S. dollar (making our products more expensive overseas) and ongoing geopolitical tensions in Russia, North Africa and Middle East. The Company’s net loss from operations for the Fiscal years ended 2016, 2015 and 2014 was $24.5 million, $30.9 million and $15.3 million, respectively. Management believes that the Company will make progress on its path to profitability by improving its net loss from operations through lowering its operating costs and the continued development of other geographical and vertical markets. The Company’s cash and cash equivalents as of March 31, 2016 and 2015 were $11.7 million ($16.7 million when combined with restricted cash related to the line of credit (the “Credit Facility”)) with Wells Fargo Bank, National Association (“Wells Fargo”) and $32.2 million, respectively. See Note 11—Revolving Credit Facility for discussion of the Credit Facility. Cash and cash equivalents and restricted cash, less the amount outstanding under the Credit Facility, was $7.2 million and $19.3 million as of March 31, 2016 and March 31, 2015, respectively. Although the Company realized working capital improvements during Fiscal 2016 because of a reduction in finished goods inventory, the Company’s working capital requirements for Fiscal 2016 were higher than planned, primarily as a result of lower than expected revenue, slower collection of accounts receivable and lower than anticipated inventory turns. Additionally, the Company has an at-the-market offering program in place pursuant to which the Company may offer and sell, from time to time after the lock up period at its sole discretion, shares of its common stock. See Note 9— Underwritten and Registered Direct Placement of Common Stock for disclosure with respect to the at-the-market offering program. The Company completed an underwritten public offering on April 22, 2016 in which it sold shares of common stock. See Note 15— Subsequent Events for discussion with respect to this public offering. In connection with this underwritten public offering, the Company is subject to a lock up with respect to the at-the-market offering program that expires in September 2016.
Based on management’s projections, free cash of approximately $7.2 million (cash, cash equivalents and restricted cash less amounts outstanding under the Credit Facility) and net proceeds of approximately $13.1 million from the April 22, 2016 underwritten public offering are sufficient to meet the Company’s anticipated cash needs for working capital and capital expenditures for at least the next twelve months. If revenue is less than management’s projections, management has the ability to reduce expenses to extend its liquidity to provide adequate resources for a similar period of time. In addition, management has the ability to manage certain operating assets and liabilities, specifically the procurement of inventory and timing of payments of accounts payable, capital expenditures and certain operating expenses depending on the results of its operations to preserve its cash and cash equivalents.
If revenue declines at a greater rate than contemplated above or if management cannot reduce expenses to offset the lower revenue and extend its liquidity, the Company would need additional financing. Until such time as the Company can generate positive cash flows from operations, the Company likely will continue to have a need for additional capital. The Company may seek to raise funds by selling additional securities after the lock up period (through the at-the-market offering discussed above or some other offering) to the public or to selected investors or by obtaining
F-7
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 have rights, preferences or privileges senior to those of the holders of its common stock. Should the Company be unable to execute its plans (including raising funds through the at-the-market offering program after the lock up period and maintaining availability under its Credit Facility) or obtain additional financing that may be needed, the Company may need to significantly reduce its operations. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
On November 6, 2015, the Company filed a Certificate of Amendment to its Second Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a 1-for-20 reverse stock splitCertificate of Amendment of the issuedSecond Amended and outstanding sharesRestated Certificate of Incorporation of the Company for the sole purpose of changing the Company’s common stock, par value $0.001 per share,name to Capstone Green Energy Corporation effective as of 4:30 p.m.12:01 a.m. Eastern Standard Time on April 22, 2021 (the “Corporate Name Change”). In addition, the filing date. For purposesCompany amended and restated its Fourth Amended and Restated Bylaws, effective as of presentation, all share and per share information and instruments outstanding under stock plans contained in this reportApril 22, 2021, solely to reflect the Corporate Name Change.
This Annual Report on Form 10-K has been retroactively adjusted(this “Form 10-K”) refers to reflect the reverse stock split.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.
2. Summary of Significant Accounting Policies
Reclassifications For the year ended March 31, 2016, the Company has separately reported revenue and cost of goods sold for product, accessories and parts from service revenue. Such amounts have been reported for the years ended March 31, 2015 and 2014.
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‑termshort-term nature. See Note 10—Fair Value Measurements, for disclosure regarding the fair value of other financial instruments.
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CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and are typically non‑interestnon-interest bearing. The Company maintains allowances for estimated losses resulting from the inability of customers to make required payments and other accounts receivable allowances. We evaluate all accounts aged over 60 days past payment terms. If the financial condition of our customers deteriorates or if other conditions arise that result in an impairment of their ability or intention to make payments, additional allowances may be required. Accounts receivable that is expected to be received past 12 months are recorded as non-current accounts receivable. Changes in the accounts receivable allowances are as follows (in thousands):
| | | | |
Balance, March 31, 2020 | | $ | 703 | |
Reductions charged to costs and expenses | |
| (228) | |
Bad debt write-off | |
| (161) | |
Balance, March 31, 2021 | | $ | 314 | |
Additions charged to costs and expenses | |
| 1,129 | |
Bad debt write-off | |
| (598) | |
Balance, March 31, 2022 | | $ | 845 | |
Inventories The Company values inventories at the lower of cost (determined on a first in first out (“FIFO”) basis and lower of costbasis) or market.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. During Fiscal 2016, we recorded an allowance of approximately $0.8 million for slow-moving inventory in relation to our TA100 product line. Inventory charges increased approximately $1.0 million during Fiscal 2015 compared to Fiscal 2014 primarily as a result of an allowance for slow-moving inventory related to the waste heat recovery generators.
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
F-8
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 with the exception of the backlog of 100 kW microturbines (“TA100”) acquired from Calnetix Power Solutions, Inc. (“CPS”). Purchased backlog is amortized based on unit sales and presented as a component of cost of goods sold.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,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, 20162022 and as a result, approximately $0.1 million of purchased TA100 backlogdetermined that 0 impairment was written off to align with management’s decision to limit the production of TA100 systems on a case-by-case basis for key customers. Intangible assets include a manufacturing license, trade name, technology, backlog and customer relationships.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.
Revenue The Company’s revenue consists ofCompany derives its revenues primarily from system sales, of products, parts, accessoriesservice contracts and service, which includes a comprehensive Factory Protection Plan (“FPP”), net of discounts. Capstone’s distributors purchase products, parts and FPPs for sale to end users andprofessional services. Revenues are also required to provide a variety of additional services, including application engineering, installation, commissioning and post‑commissioning repair and maintenance service. The Company’s standard terms of sales to distributors and direct end‑users include transfer of title, care, custody andrecognized when control at the point of shipment, payment terms ranging from full payment in advance of shipment to payment in 90 days, no right of return or exchange, and no post‑shipment performance obligations by Capstone except for warranties provided on the products and parts sold.
Revenue from the sale of products, parts and accessories is generally recognized and earned when all of the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) pricesystems and services is fixed or determinable; (c) collectability is reasonably assured; and (d) delivery has occurred. Delivery generally occurs when the title and the risks and rewards of ownership have substantially 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 |
| ● | Allocation of the transaction price to the performance obligations in the contract |
F-9
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| ● | Recognition of revenue when, or as, the Company satisfies a performance obligation |
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. Assuming allRevenue 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. The Company extends payment terms past one year only on a limited basis, and thus any financing component is not considered material.
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, have been met, if it is determined that collection is not reasonably assured,the deferred revenue will not be recognized until collectability is reasonably assured, which is generally upon receipt of payment. Management’s estimates regarding the collectability of a particular sale may impact the timing of actual revenue recognized each period.
Service performed by the Company has consisted primarily of time and materials based contracts. The time and materials contracts are usually related to out‑of‑warranty units. Service revenue derived from time and materials contracts is recognized asin the service is performed.Consolidated Statement of Operations. The Company also provides maintenance service contractsdeferred revenue relating to customers of its existing installed base. The maintenance service contracts are agreements to perform certain services to maintain a product for a specified period of time. Service revenue derived fromthe annual maintenance service contracts is recognized in the Consolidated Statement of Operations on a straight‑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 period.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 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-
F-10
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2022, the FPP backlog was approximately $79.1 million, which represents the value of the contractual agreement for FPP services that has not been earned and extends through Fiscal 2042.
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
F-9
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 toadjusts 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.
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. TotalThere were 0 offsets to R&D expenses amounted to $0.2 million, $0.5 millionduring Fiscal 2022 and $1.4 million for the years ended March 31, 2016, 2015 and 2014, respectively.2021.
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
F-11
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
reporting period in which that threshold is met. Previously recognized tax positions 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, 2016,2022, 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 $16.5$22.0 million as of March 31, 2016.2022. 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 Horizon Power Systems (“Horizon”), oneE-Finity accounted for 18% of the Company’s domestic distributors,revenue for Fiscal 2022. Sales to CAL and E-Finity accounted for 15%, 17% and 12% of our revenue for the years ended March 31, 2016, 2015 and 2014, respectively. Sales to E‑Finity Distributed Generation, LLC (“E‑Finity), onerespectively, of the Company’s domestic distributors,revenue for Fiscal 2021. Additionally, E-Finity accounted for 11%28% and 19% of our revenue for the years ended March 31, 2016 and 2014. Sales to Dtc Soluciones Inmobiliarias S.A. de C.V. (“DTC”), one of the Company’s Mexican distributors, accounted for 10% of revenue for the year ended March 31, 2016. Sales to Optimal Group Australia Pty Ltd (“Optimal”), one of the Company’s Australian distributors, accounted for 10% of revenue for the year ended March 31, 2016. Sales to BPC Engineering (“BPC”), one of the Company’s Russian distributors, accounted for 2%, 11% and 17% of our revenue for the years ended March 31, 2016, 2015 and 2014, respectively. Additionally, DTC, Optimal, Reliable Secure Power Systems, one of the Company’s domestic distributors (“RSP”), and Regale Energy Zrt, the Company’s Hungarian distributor (“Regale”), accounted for 28%, 11%, 10% and 10%, respectively,13% of net accounts receivable as of March 31, 2016. Optimal accounted for 17% of net accounts receivable as of2022 and March 31, 2015.
During the three months ended March 31, 2015, the Company recorded approximately $7.1 million with respect to the accounts receivable allowance from BPC. The Company determined that the collectability of this accounts receivable balance was not reasonably assured based on BPC’s payment history and because the impact of the recent steep decline of the Russian ruble could continue to negatively impact its ability to pay its outstanding accounts receivable balance. During the three months ended September 30, 2014, the Company recorded approximately $2.6 million with respect to the accounts receivable balance from Electro Mecanique Industries (“EMI”), one of the Company’s distributors in the Middle East and Africa. The Company determined that the collectability of this accounts receivable balance was not reasonably assured based on EMI’s payment history. The Company recorded bad debt
F-10
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
recovery of approximately $1.5 million for the year ended March 31, 2016. The Company recorded bad debt expense of approximately $10.1 million and $0.2 million for the years ended March 31, 2015 and 2014,2021, 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‑basedstock-based compensation, inventory write‑downs,write-downs, valuation of long‑livedlong-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‑averageweighted-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 at March 31, 2016, 2015 and 2014 were 0.5 million, 0.7 million and 0.7 million, respectively. Outstanding restricted stock units at March 31, 2016, 20152022 and 20142021 were 0.3 million, 0.10.6 million and 0.10.5 million, respectively. All per-share amountsAs of March 31, 2022 and 2021, the Company’s shares outstanding for all periods have been retroactively adjusted to reflect the Company’s 1-for-20 reverse stock split, whichnumber of warrants excluded from diluted net loss per common share computations was effective November 6, 2015.approximately 0.8 million and 1.1 million, respectively.
Stock‑BasedStock-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‑linestraight-line basis over the requisite service period for the entire award.
Leases 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.
F-12
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 twelve 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.
Evaluation of Ability to Maintain Current Level of Operations In connection with preparing the consolidated financial statements for the fiscal year ended March 31, 2022, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about our ability to meet our obligations as they became due for the next twelve months from the date of issuance of our Fiscal 2022 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, the Russian invasion of Ukraine, and ongoing global geopolitical tensions. We incurred a net loss of $20.2 million and used cash from operating activities of $27.5 million during the Fiscal 2022. Our working capital requirements during Fiscal 2022 were primarily for increases in inventory to continue to produce product despite supply chain challenges, as well as the delayed timing of accounts receivable collections due to the COVID-19 pandemic and impacts from the ongoing conflict between Russia and Ukraine. Our net loss increased during Fiscal 2022 primarily due to lower overhead and operating expenses in Fiscal 2021 from our COVID-19 Business Continuity Plan. As of March 31, 2022, we had cash and cash equivalents of $22.6 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).
Management evaluated these conditions in relation to our ability to meet our obligations as they become due. Our ability to continue current operations and to execute on management’s plan is dependent on our ability to generate cash flows from operations. Management believes that we will continue to make progress on our path to profitability through a cost reduction plan implemented in March 2022, expanding the Energy as a Service (“EaaS”) revenue streams, as well as price increases on our Factory Protection Plan and certain product offerings. In March 2022, we implemented an expense reduction plan and announced our efforts to reduce operating costs and modify our operating model to better match our expanding EaaS business. In order to implement the expense reduction plan, we undertook a holistic review of our operations, taking the growing EaaS business into account. Beginning on February 28, 2022, we furloughed 17 employees for a period of 120 days, eliminated the position of Chief Revenue Officer, held by Jim Crouse, effective April 15, 2022, instituted 15% temporary pay cuts for approximately 36 employees and 25% temporary pay cuts for members of our senior leadership team, among other actions. We believe that the implementation of the expense reduction plan will help better align our current cost structure to support our higher margin EaaS revenues.
In February 2022, we announced that we reached our goal of having 21.1 MW of rental units in our fleet and under contract. The EaaS rental unit timeline includes a delay between the time of manufacture and the time revenue from that unit is realized. The microturbine rental unit is built, allocated by a signed rental contract, and then commissioned at the customer site, at which point it begins to generate revenue. We expect to have all rental units contracted, commissioned, and generating revenue by our second quarter of Fiscal 2023. We expect rental revenue to more than double in Fiscal 2023 from the $2.8 million of rental revenue in Fiscal 2022. Additionally in March 2022, we announced that we increased the Distributor Support System, or DSS, program fee to 5% of prior calendar year revenue, from 3%, to support the expanding EaaS business.
To help offset inflation and the rising cost of components, as well as improve our profitability, we implemented price increases on our Factory Protection Plan contracts effective April 1, 2022, and implemented price increases on certain of our product offerings including the C65 and C1000 products, effective May 1, 2022.
We 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 we will be able to obtain additional funds on commercially favorable terms or at all. If we raise additional funds by issuing additional equity or convertible debt securities, the fully diluted ownership percentages of existing stockholders will be reduced. In addition,
F-13
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
any equity or debt securities that we would issue may have rights, preferences or privileges senior to those of the holders of our common stock.
Based on our current operating plan, management anticipates that, given current working capital levels and current financial projections, including the cost reduction plan, expanding EaaS business, and price increases, we will be able to meet our financial obligations as they become due over the next twelve months from the date of issuance of our Fiscal 2022 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 Senior 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 as of the date hereof.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (the “CARES Act”), which, among other things, outlines the provisions of the Paycheck Protection Program (the “PPP”). The Company determined that it met the criteria to be eligible to obtain a loan under the PPP because, among other reasons, in light of the COVID-19 outbreak and the uncertainty of economic conditions related thereto, the loan was necessary to support the Company’s ongoing operations. Under the PPP, the Company could obtain a U.S. Small Business Administration loan in an amount equal to the average of the Company’s monthly payroll costs (as defined under the PPP) for calendar 2019 multiplied by 2.5 (approximately 10 weeks of payroll costs). Section 1106 of the CARES Act contains provisions for the forgiveness of all or a portion of a PPP loan, subject to the satisfaction of certain requirements. The amount eligible for forgiveness is, subject to certain limitations, the sum of the Company’s payroll costs, rent and utilities paid by the Company during the eight-week period beginning on the funding date of the PPP loan.
On April 24, 2020, the Company closed on a PPP loan in the amount of $2,610,200, which was transferred by the Company into an account dedicated to allowable uses of the PPP loan proceeds. On May 13, 2020, the Company repaid $660,200 of the loan in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs Specialty Lending Group, L.P. In February 2021, the Company applied for forgiveness in full of the original balance of the PPP loan and the loan was forgiven in full on June 30, 2021. The Company received a refund of $660,200 and recorded these amounts within other income on the Company’s Condensed Consolidated Statements of Operations.
F-14
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
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, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
United States |
| $ | 36,667 |
| $ | 48,890 |
| $ | 58,432 |
|
Mexico |
|
| 11,598 |
|
| 14,468 |
|
| 8,956 |
|
All other North America |
|
| 318 |
|
| 331 |
|
| 196 |
|
Total North America |
|
| 48,583 |
|
| 63,689 |
|
| 67,584 |
|
Russia |
|
| 1,828 |
|
| 12,978 |
|
| 23,216 |
|
All other Europe |
|
| 14,513 |
|
| 15,707 |
|
| 17,820 |
|
Total Europe |
|
| 16,341 |
|
| 28,685 |
|
| 41,036 |
|
Asia |
|
| 7,643 |
|
| 9,257 |
|
| 10,728 |
|
Australia |
|
| 8,557 |
|
| 8,832 |
|
| 5,275 |
|
All other |
|
| 4,087 |
|
| 4,998 |
|
| 8,482 |
|
Total Revenue |
| $ | 85,211 |
| $ | 115,461 |
| $ | 133,105 |
|
F-11
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | |
| | Year Ended March 31, |
| ||||
|
| 2022 |
| 2021 |
| ||
United States | | $ | 34,116 | | $ | 32,502 | |
Mexico | |
| 3,862 | |
| 3,931 | |
All other North America | |
| 620 | |
| 321 | |
Total North America | |
| 38,598 | |
| 36,754 | |
Russia | |
| 3,335 | |
| 3,577 | |
All other Europe | | | 11,494 | | | 13,659 | |
Total Europe | | | 14,829 | | | 17,236 | |
Asia | |
| 3,774 | |
| 6,087 | |
Australia | |
| 4,197 | |
| 3,165 | |
All other | |
| 8,247 | |
| 4,394 | |
Total Revenue | | $ | 69,645 | | $ | 67,636 | |
The following table summarizes the Company’s revenue by product (in thousands):
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Year Ended March 31, |
| ||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| ||||||||||
| | | | | | | | ||||||||||
| | Year Ended March 31, |
| ||||||||||||||
|
| 2022 |
| 2021 |
| ||||||||||||
C30 |
| $ | 1,815 |
| $ | 4,804 |
| $ | 5,623 |
| | $ | 503 | | $ | 1,607 | |
C65 |
|
| 12,291 |
|
| 30,118 |
|
| 29,107 |
| |
| 10,387 | |
| 10,756 | |
TA100 |
|
| — |
|
| 318 |
|
| 460 |
| |||||||
C200 |
|
| 3,884 |
|
| 7,120 |
|
| 14,754 |
| |
| 2,906 | |
| 3,603 | |
C600 |
|
| 6,194 |
|
| 5,848 |
|
| 10,374 |
| |
| 7,120 | |
| 7,913 | |
C800 |
|
| 8,058 |
|
| 8,319 |
|
| 10,127 |
| |
| 5,843 | |
| 3,069 | |
C1000 |
|
| 25,877 |
|
| 32,685 |
|
| 38,141 |
| |
| 9,120 | |
| 7,173 | |
Waste heat recovery generator |
|
| — |
|
| 155 |
|
| 180 |
| |||||||
Unit upgrades |
|
| 281 |
|
| — |
|
| — |
| |||||||
Total from Microturbine Products |
|
| 58,400 |
|
| 89,367 |
|
| 108,766 |
| |||||||
Accessories and Parts |
|
| 14,716 |
|
| 15,343 |
|
| 14,787 |
| |||||||
Total Product, Accessories and Parts |
|
| 73,116 |
|
| 104,710 |
|
| 123,553 |
| |||||||
Service |
|
| 12,095 |
|
| 10,751 |
|
| 9,552 |
| |||||||
Microturbine Products | | $ | 35,879 | | $ | 34,121 | | ||||||||||
Accessories | | | 1,302 | | | 2,396 | | ||||||||||
Total Product and Accessories | | | 37,181 | | | 36,517 | | ||||||||||
Parts and Service | |
| 32,464 | |
| 31,119 | | ||||||||||
Total Revenue |
| $ | 85,211 |
| $ | 115,461 |
| $ | 133,105 |
| | $ | 69,645 | | $ | 67,636 | |
Substantially all of the Company’s operating assets are in the United States.
RecentImpact of Recently Issued Accounting PronouncementsStandards
Adopted
In March 2016,December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The new guidance removes certain exceptions to the general principles of Accounting Standards Codification (“ASU”ASC”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The standard is intended740 in order to simplify several areasthe 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 periods within those fiscal years, beginning after December 15, 2020. The Company adopted ASU 2019-12 on April 1, 2021 and it did not have a material impact on the Company’s consolidated financial statements and related disclosures.
F-15
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Not yet adopted
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this ASU reduce the number of accounting models for share-based compensation arrangements, includingconvertible debt instruments and convertible preferred stock in order to simplify the income tax impact, classification onaccounting for convertible instruments. In addition, it amends the statement of cash flows and forfeitures.guidance for the scope exception surrounding derivatives for contracts in an entity’s own equity. In each case, the related guidance surrounding EPS has also been amended. The amendments in this ASU 2016-09 isare effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, and early adoption is permitted.2023. The Company is currently evaluating the potential impact the new standard will haveof ASU 2020-06 on its consolidated financial positionstatements and results of operations.related disclosures.
In July 2015,June 2016, the FASB issued ASU 2015-11, Simplifying theNo. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Inventory.Credit Losses on Financial Instruments. The amendments in this ASU 2015-11 requires inventory thatprovide guidance for estimating credit losses on certain types of financial instruments, including trade receivables, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable forecasts. With certain exceptions, transition to the new guidance will be through a cumulative effect adjustment to opening accumulated deficit as of the beginning of the first reporting period in which the guidance is recorded usingadopted. In November 2019, the first-in, first-out method to be measured atFASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which defers the loweradoption of cost or net realizable value. ASU 2015-11 is effective2016-13 for annual and interim periodsSmaller Reporting Companies (“SRCs”) as defined by the SEC for fiscal years beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an2022, including interim or annual reporting period.periods within those fiscal years. The Company is currently evaluating the potential impact the new standard will haveof ASU 2016-13 on its consolidated financial statements and related disclosures.
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 andand/or results of operations.
In April 2015,3. Inventories
Inventories are valued at the FASB issued ASU 2015-03, Interest – Imputationlower of Interest (Subtopic 835-30). The ASU was issued as part of FASB’s current plan to simplify overly complex standards. This ASU requires that debt issuance costs related tocost (determined on a recognized debt liability be presentedfirst in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognitionfirst out (“FIFO”) basis) or net realizable value and measurement guidance for debt issuance costs are not affected by this ASU. The update requires retrospective application to all prior period amounts presented. This update is effective for annual and interim periods beginning on or after December 15, 2015, with early application permitted for financial statements that have not been issued. The adoption of this standard would result in the reclassification of debt issuance costs from prepaid expenses and other current assets to the amount outstanding under the Credit Facility. The net amount of such costs at March 31, 2016 was approximately $0.1 million.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one yearconsisted of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to following (in thousands):
| | | | | | | |
| | March 31, | | March 31, | | ||
|
| 2022 |
| 2021 |
| ||
Raw materials | | $ | 20,071 | | $ | 15,755 | |
Work in process | | | — | |
| (30) | |
Finished goods | | | 1,935 | | | — | |
Total | | | 22,006 | | | 15,725 | |
Less: inventory reserve | | | (1,861) | | | (2,051) | |
Less: non-current portion | | | (1,680) | | | (1,845) | |
Total inventory, net-current portion | | $ | 18,465 | | $ | 11,829 | |
F-12F-16
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
continue as a going concern. ASU 2014-15 applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The Company is evaluating the potential impacts the new standard will have on its reporting process.
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the potential impacts of the new standard on its existing stock-based compensation plans.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company is evaluating its existing revenue recognition policies to determine whether any contracts in the scope of the guidance will be affected by the new requirements. The Company will be required to adopt the revenue recognition standard in annual reporting periods beginning after December 15, 2017 (fiscal year ending March 31, 2019) and interim periods within those annual periods.
3. Inventories
Inventories are valued on a FIFO basis and lower of cost or market and consisted of the following as of March 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| ||
Raw materials |
| $ | 16,539 |
| $ | 19,955 |
|
Work in process |
|
| 554 |
|
| — |
|
Finished goods |
|
| 1,176 |
|
| 5,400 |
|
Total |
|
| 18,269 |
|
| 25,355 |
|
Less non-current portion |
|
| (2,143) |
|
| (2,258) |
|
Current portion |
| $ | 16,126 |
| $ | 23,097 |
|
|
|
|
|
|
|
|
|
The non‑currentnon-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‑currentnon-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‑currentnon-current portion of inventories on hand as of March 31, 20162022 is 1.71.2 years. The Company
F-13
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
expects to use the non‑currentnon-current portion of the inventories on hand as of March 31, 20162022 over the periods presented in the following table (in thousands):
| ||||
| ||||
|
| |||
|
| |||
| ||||
| ||||
|
|
| | | | |
| | | Non-current Inventory | |
|
| | Balance Expected | |
Expected Period of Use |
| | to be Used |
|
13 to 24 months | | $ | 784 | |
25 to 36 months | |
| 896 | |
Total | | $ | 1,680 | |
4. Property, Plant and Equipment
Property, plant, equipment and equipment as of March 31, 2016 and 2015 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| Estimated Useful Life | ||
Machinery, rental equipment, equipment, automobiles and furniture |
| $ | 19,016 |
| $ | 20,873 |
| 2 - 10 years |
Leasehold improvements |
|
| 9,855 |
|
| 9,760 |
| 10 years |
Molds and tooling |
|
| 2,824 |
|
| 3,722 |
| 2 - 5 years |
|
|
| 31,695 |
|
| 34,355 |
|
|
Less, accumulated depreciation |
|
| (28,158) |
|
| (30,832) |
|
|
Total property, plant and equipment, net |
| $ | 3,537 |
| $ | 3,523 |
|
|
Depreciation expense for property, plant and equipment was $1.3 million, $1.2 million and $1.8 million for the years ended March 31, 2016, 2015 and 2014, respectively.
5. Intangible Assets
Intangiblerental assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2016 |
| |||||||||
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
| Average |
| Intangible |
|
|
|
|
|
|
| |
|
| Amortization |
| Assets, |
| Accumulated |
| Intangible |
| |||
|
| Period |
| Gross |
| Amortization |
| Assets, Net |
| |||
Manufacturing license |
| 17 years |
| $ | 3,700 |
| $ | 3,635 |
| $ | 65 |
|
Technology |
| 10 years |
|
| 2,240 |
|
| 1,381 |
|
| 859 |
|
Backlog |
| Various |
|
| 490 |
|
| 473 |
|
| 17 |
|
Trade name & Parts, service and TA100 customer relationships |
| 1.2 to 5 years |
|
| 1,766 |
|
| 1,766 |
|
| — |
|
Total |
|
|
| $ | 8,196 |
| $ | 7,255 |
| $ | 941 |
|
| | | | | | | |
| | March 31, | | March 31, | | ||
|
| 2022 |
| 2021 |
| ||
Machinery, equipment, automobiles and furniture | | $ | 15,945 | | $ | 15,523 |
|
Leasehold improvements | |
| 8,848 | |
| 8,069 |
|
Molds and tooling | | | 3,469 | | | 3,192 | |
Rental assets | |
| 17,079 | |
| 8,378 |
|
| |
| 45,341 | |
| 35,162 | |
Less: accumulated depreciation | |
| (27,303) | |
| (25,532) | |
Total property, plant, equipment and rental assets, net | | $ | 18,038 | | $ | 9,630 | |
F-14
TableDuring Fiscal 2022, the Company deployed an additional 11.1 megawatts (“MWs”) of Contentsmicroturbine systems with a book value of approximately $8.7 million under its long-term rental program, bringing the total rental fleet to 21.1 MWs.
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2015 |
| |||||||||
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
| Average |
| Intangible |
|
|
|
|
|
|
| |
|
| Amortization |
| Assets, |
| Accumulated |
| Intangible |
| |||
|
| Period |
| Gross |
| Amortization |
| Assets, Net |
| |||
Manufacturing license |
| 17 years |
| $ | 3,700 |
| $ | 3,585 |
| $ | 115 |
|
Technology |
| 10 years |
|
| 2,240 |
|
| 1,157 |
|
| 1,083 |
|
Backlog |
| Various |
|
| 490 |
|
| 351 |
|
| 139 |
|
Trade name & Parts, service and TA100 customer relationships |
| 1.2 to 5 years |
|
| 1,766 |
|
| 1,766 |
|
| — |
|
Total |
|
|
| $ | 8,196 |
| $ | 6,859 |
| $ | 1,337 |
|
AmortizationThe Company regularly assesses the useful lives of property and equipment and retires assets no longer in service. Depreciation expense for the intangibleproperty, plant, equipment and rental assets was $0.4 million, $0.5$1.8 million and $0.5$1.3 million for eachFiscal 2022 and 2021, respectively.
5. Intangible Assets
Intangible assets, net of the years ended March 31, 2016, 2015 and 2014. Included in amortization expense for the three months ended March 31, 2016, is approximately $0.1 million of purchased TA100 backlog that was written off to align with management’s decision to limit the production of TA100 systems on a case-by-case basis for key customers.
Expected future amortization expense of intangible assetsinclude intellectual property such as of March 31, 2016 is as follows (in thousands):
|
|
|
|
|
|
| Amortization |
| |
Year Ending March 31, |
| Expense |
| |
2017 |
| $ | 288 |
|
2018 |
|
| 242 |
|
2019 |
|
| 224 |
|
2020 |
|
| 187 |
|
2021 |
|
| — |
|
Thereafter |
|
| — |
|
Total expected future amortization |
| $ | 941 |
|
The manufacturing license provideslicenses providing the Company with the ability to manufacture recuperator cores previously purchased from Solar Turbines Incorporated (“Solar”). and were fully amortized as of March 31, 2022 and March 31, 2021. The Company is required to pay a per‑unitper-unit royalty fee over a seventeen-year period for cores manufactured and sold by the Company using the technology. Royalties of approximately $35,000, $71,100,$22,600 and $83,000$27,400 were earned by Solar for the years ended March 31, 2016, 2015Fiscal 2022 and 2014,2021, respectively. Earned royalties of approximately $35,000$76,400 and $19,300$53,800 were unpaid as of March 31, 20162022 and 2015,2021, respectively, and are included in accrued expenses in the accompanying consolidated balance sheets.
Amortization expense for the intangible assets was $0.1 million for Fiscal 2022 and 2021.
F-17
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Accrued Warranty Reserve
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 microturbine product sold and the 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 adjusts 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. Changes in the accrued warranty reserve during the years ended March 31, 2022 and 2021 are as follows as(in thousands):
| | | | | | | |
Balance, beginning of the period | | $ | 5,850 | | $ | 1,934 | |
Standard warranty provision | |
| 646 | |
| 985 | |
Accrual related to reliability repair programs | |
| — | |
| 4,945 | |
Deductions for warranty claims | |
| (5,013) | |
| (2,014) | |
Balance, end of the period | | $ | 1,483 | | $ | 5,850 | |
During the fourth quarter of Fiscal 2021, the Company recorded a specific $4.9 million accrual related to a reliability repair program to account for the replacement of remaining high risk failure parts in some of the Company’s fielded units due to a supplier defect. As of March 31, 2016, 20152022, the accrual related to this reliability repair program was 0 as the Company has determined it replaced a sufficient quantity of high risk failure parts in its fielded units under this reliability repair program and 2014that it should be terminated.
7. Revenue Recognition
The following table presents disaggregated revenue by business group (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| 2014 |
| |||
Balance, beginning of the period |
| $ | 3,183 |
| $ | 2,965 |
| $ | 2,299 |
|
Standard warranty provision |
|
| 127 |
|
| 3,516 |
|
| 2,857 |
|
Changes for accrual related to reliability repair programs |
|
| (16) |
|
| (53) |
|
| 1,046 |
|
Deductions for warranty claims |
|
| (1,655) |
|
| (3,245) |
|
| (3,237) |
|
Balance, end of the period |
| $ | 1,639 |
| $ | 3,183 |
| $ | 2,965 |
|
| | | | | | |
| | Year Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Microturbine Products | | $ | 35,879 | | $ | 34,121 |
Accessories | | | 1,302 | | | 2,396 |
Total Product and Accessories | | | 37,181 | | | 36,517 |
Parts and Service | |
| 32,464 | |
| 31,119 |
Total Revenue | | $ | 69,645 | | $ | 67,636 |
F-15F-18
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Deferred RevenueFollowing is the geographic revenue information based on the primary operating location of the Company’s customers (in thousands):
| | | | | | |
| | Year Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
United States | | $ | 34,116 | | $ | 32,502 |
Mexico | |
| 3,862 | |
| 3,931 |
All other North America | |
| 620 | |
| 321 |
Total North America | |
| 38,598 | |
| 36,754 |
Russia | |
| 3,335 | |
| 3,577 |
All other Europe | | | 11,494 | | | 13,659 |
Total Europe | | | 14,829 | | | 17,236 |
Asia | |
| 3,774 | |
| 6,087 |
Australia | |
| 4,197 | |
| 3,165 |
All other | |
| 8,247 | |
| 4,394 |
Total Revenue | | $ | 69,645 | | $ | 67,636 |
Contract Balances
The Company’s contract liabilities consist of advance payments for systems as well as deferred revenue on service obligations and extended warranties. The current portion of deferred revenue is included in current liabilities under deferred revenue and the non-current portion of deferred revenue is included in other non-current liabilities in the consolidated balance sheets.
As of March 31, 2022, the balance of deferred revenue was approximately $10.2 million compared to $7.1 million as of March 31, 2021. This overall increase in the balance of deferred revenue of $3.1 million during Fiscal 2022 was comprised of increases in deferred revenue attributable to deposits of $2.0 million and Distributor Support System (“DSS program”) of $1.3 million, offset by a decrease in FPP contracts of $0.2 million. Changes in deferred revenue during the year ended March 31, 2022 and 2021 are as follows as of March 31, 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| 2014 |
| |||
FPP Balance, beginning of the period |
| $ | 2,491 |
| $ | 2,061 |
| $ | 1,412 |
|
FPP Billings |
|
| 11,419 |
|
| 9,773 |
|
| 7,689 |
|
FPP Revenue recognized |
|
| (10,981) |
|
| (9,343) |
|
| (7,040) |
|
Balance attributed to FPP contracts |
|
| 2,929 |
|
| 2,491 |
|
| 2,061 |
|
Deposits |
|
| 1,439 |
|
| 560 |
|
| 596 |
|
Deferred revenue balance, end of the period |
| $ | 4,368 |
| $ | 3,051 |
| $ | 2,657 |
|
| | | | | | | |
FPP Balance, beginning of the period | | $ | 4,765 | | $ | 5,342 | |
FPP Billings | |
| 17,562 | |
| 16,700 | |
FPP Revenue recognized | |
| (17,783) | |
| (17,277) | |
Balance attributed to FPP contracts | |
| 4,544 | |
| 4,765 | |
DSS Program | | | 2,696 | | | 1,417 | |
Deposits | |
| 2,926 | |
| 957 | |
Deferred revenue balance, end of the period | | $ | 10,166 | | $ | 7,139 | |
Deferred revenue attributed to FPP contracts represents the unearned portion of ourthe Company’s agreements. FPP agreements are generally paid quarterly in advance with revenue recognized on a straight line basis over the contract period. The DSS program provides additional support for distributor business development activities, customer lead generation, brand awareness and tailored marketing services for each of the Company’s major geography and market vertical. This program is funded by the Company’s distributors and was developed to provide improved worldwide distributor training, sales efficiency, website development, company branding and provide funding for increased strategic marketing activities. DSS program revenue is generally paid quarterly with revenue recognized on a straight line basis over a calendar year period. Deposits are primarily non-refundable cash payments from distributors for future orders.
F-19
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of March 31, 2022, approximately $4.5 million of revenue is expected to be recognized from remaining performance obligations for FPP service contracts. The Company expects to recognize revenue on approximately $3.5 million of these remaining performance obligations over the next 12 months and the balance of $1.0 million will be recognized thereafter.
8. Income Taxes
Loss before provision for income taxes consisted of the following for the years ended March 31, 2022 and 2021 (in thousands):
| | | | | | | |
| | Year Ended March 31, |
| ||||
|
| 2022 |
| 2021 |
| ||
United States | | $ | (20,232) | | $ | (18,388) | |
Foreign |
|
| 40 |
|
| 20 | |
Loss before provision for income taxes | | $ | (20,192) | | $ | (18,368) | |
Current income tax provision is the amount of income taxes reported or expected to be reported on our income tax return. The provision for current income taxes was $19,000 for the yearyears ended March 31, 2016 was $20,000, which was2022 and March 31, 2021. The current income taxes were related to state income and foreign taxes. The Company did not have current federal income taxes for the fiscal year ended March 31, 2016.2022.
Actual income tax expense differed from the amount computed by applying statutory corporate income tax rates to loss from operations before income taxes. A reconciliation of income tax (benefit) expense to the federal statutory rate follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended March 31, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
Federal income tax at the statutory rate |
| $ | (8,558) |
| $ | (10,681) |
| $ | (5,452) |
|
State taxes, net of federal effect |
|
| (250) |
|
| (671) |
|
| (93) |
|
Foreign taxes |
|
| 109 |
|
| 33 |
|
| 134 |
|
R&D tax credit |
|
| (451) |
|
| (392) |
|
| 37 |
|
Impact of state rate change |
|
| 478 |
|
| (2,627) |
|
| 492 |
|
Warrant liability |
|
| — |
|
| — |
|
| (3) |
|
Expiring NOL |
|
| 3,058 |
|
| 3,865 |
|
| 1,543 |
|
Valuation allowance |
|
| 5,596 |
|
| 10,583 |
|
| 3,614 |
|
Excess tax benefit—stock compensation |
|
| — |
|
| — |
|
| — |
|
Other |
|
| 38 |
|
| 7 |
|
| (52) |
|
Income tax expense (benefit) |
| $ | 20 |
| $ | 117 |
| $ | 220 |
|
| | | | | | | |
| | Year Ended March 31, |
| ||||
|
| 2022 |
| 2021 |
| ||
Federal income tax benefit at the statutory rate | | $ | (4,240) | | $ | (3,857) | |
State taxes, net of federal effect |
|
| (601) |
|
| (311) | |
Foreign taxes | |
| 5 | |
| 9 | |
Expiring NOLs and tax credits | | | 11,028 | | | 14,086 | |
Impact of state rate change | |
| (263) | |
| 160 | |
Valuation allowance | |
| (5,997) | |
| (10,154) | |
Shortfall in tax benefit—stock compensation | |
| 75 | |
| 87 | |
True-up | | | (4) | | | (2) | |
Other | |
| 16 | |
| 1 | |
Income tax expense | | $ | 19 | | $ | 19 | |
F-16F-20
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s deferred tax assets and liabilities consisted of the following at March 31, 20162022 and 20152021 (in thousands):
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
Inventories |
| $ | 2,903 |
| $ | 3,323 |
|
Warranty reserve |
|
| 616 |
|
| 1,217 |
|
Bad debt reserve |
|
| 3,350 |
|
| 4,223 |
|
Deferred revenue |
|
| 1,101 |
|
| 953 |
|
Net operating loss (“NOL”) carryforwards |
|
| 226,007 |
|
| 218,826 |
|
Tax credit carryforwards |
|
| 19,411 |
|
| 18,860 |
|
Depreciation, amortization and impairment loss |
|
| 3,045 |
|
| 3,231 |
|
Other |
|
| 4,212 |
|
| 5,154 |
|
Deferred tax assets |
|
| 260,645 |
|
| 255,787 |
|
Valuation allowance for deferred tax assets |
|
| (252,349) |
|
| (246,753) |
|
Deferred tax assets, net of valuation allowance |
|
| 8,296 |
|
| 9,034 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
Federal benefit of state taxes |
|
| (8,296) |
|
| (9,034) |
|
Net deferred tax assets |
| $ | — |
| $ | — |
|
| | | | | | |
|
| Year Ended March 31, | ||||
| | 2022 |
| 2021 | ||
Deferred tax assets: | | | | | | |
Inventories | | $ | 1,438 | | $ | 889 |
Warranty reserve | |
| 350 | |
| 1,357 |
Bad debt reserve | | | 199 | | | 58 |
Deferred revenue | |
| 1,708 | |
| 1,434 |
Net operating loss (“NOL”) carryforwards | |
| 131,395 | |
| 135,895 |
Tax credit carryforwards | |
| 13,370 | |
| 13,988 |
Depreciation, amortization and impairment loss | |
| — | |
| 1,237 |
Lease liability | |
| 1,464 | |
| 1,146 |
Interest limitation | |
| 4,655 | |
| 3,735 |
Other | |
| 1,094 | |
| 1,032 |
Deferred tax assets | |
| 155,673 | |
| 160,771 |
Valuation allowance for deferred tax assets | |
| (153,673) | |
| (159,671) |
Deferred tax assets, net of valuation allowance | |
| 2,000 | |
| 1,100 |
Deferred tax liabilities: | | | | | | |
Depreciation, amortization and impairment loss | |
| (594) | |
| — |
Right of use assets | |
| (1,406) | |
| (1,100) |
Net deferred tax assets | | $ | — | | $ | — |
Because of the uncertainty surrounding the timing of realizing the benefits of favorable tax attributes in future income tax returns, the Company has placed a valuation allowance against its net deferred income tax assets. The change in valuation allowance for Fiscal 2016, 2015fiscal years ended March 31, 2022 and 20142021 was $5.6 million, $10.6$6.0 million and $3.6$10.2 million, respectively.
The Company’s NOL and tax credit carryforwards for federal and state income tax purposes at March 31, 20162022 were as follows (in thousands):
| ||||||
|
| |||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
| | | | | | |
| | | | | Expiration | |
|
| Amount |
| Period |
| |
Federal NOL generated before April 1, 2018 | | $ | 494,213 |
| 2022 - 2038 | |
Federal NOL generated after March 31, 2018 | | $ | 72,330 |
| Indefinite | |
State NOL | | $ | 177,187 |
| 2025 - 2039 | |
Federal tax credit carryforwards | | $ | 5,713 |
| 2022 - 2038 | |
State tax credit carryforwards | | $ | 9,692 |
| Indefinite | |
The NOLs and federal and state tax credits can be carried forward to offset future taxable income, if any. Utilization of the NOLs and tax credits are subject to an annual limitation of approximately $57.3 million due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The federal tax credit carryforward is a research and development credit, which may be carried forward. The state tax credits consist of a research and development credit can be carried forward indefinitely.
Tax benefits arising from the disposition of certain shares issued upon exercise of stock options within two years of the date of grant or within one year of the date of exercise by the option holder (“Disqualifying Dispositions”) provide the Company with a tax deduction equal to the difference between the exercise price and the fair market value of the stock on the date of exercise. Approximately $27.7 million of the Company’s federal and state NOL carryforwards as of March 31, 2016 were generated by Disqualifying Dispositions of stock options and exercises of nonqualified stock options. In accordance with the reporting requirements under ASC 718, we did not include approximately $9.7 million of excess windfall tax benefits resulting from stock option exercises as components of our gross deferred tax assets and corresponding valuation allowance disclosures, as tax attributes related to those windfall tax benefits should not be recognized until they result in a reduction of taxes payable. The tax effected amount of gross unrealized net operating loss carry forwards excluded under ASC 718 was approximately $9.7 million at March 31, 2016. When realized, those excess windfall tax benefits are credited to additional paid-in capital.
F-17
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting Standards Codification (“ASC”) 740, Income Taxes clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Based on management’s evaluation, the total amount of unrecognized tax benefits related to research and development credits as of March 31, 20162022 and 20152021 was $2.7$1.9 million and $2.6$1.9 million, respectively. There were no0 interest or penalties related to unrecognized tax benefits as of March 31, 20162022 or March 31, 2015.2021. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate
F-21
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
as of March 31, 20162022 and March 31, 20152021 was $2.7$1.9 million and $2.6$1.9 million, respectively. However, this impact would be offset by an equal increase in the deferred tax valuation allowance as the Company has recorded a full valuation allowance against its deferred tax assets because of uncertainty as to future realization. The fully reserved recognized federal and state deferred tax assets related to research and development credits balance as of March 31, 20162022 and 20152021 was $9.9 million and $9.5$5.7 million and $9.7 million, and $9.2$6.3 million and $9.7 million, respectively.
A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows (in thousands):
|
| |||
| ||||
| ||||
| ||||
|
| |||
|
| |||
| ||||
| ||||
|
| |||
|
| |||
| ||||
| ||||
|
| |||
|
|
| | | | |
Balance at March 31, 2020 | | $ | 2,272 | |
Gross increase related to prior year tax positions | |
| — | |
Gross increase related to current year tax positions | |
| — | |
Lapse of statute of limitations | |
| (326) | |
Balance at March 31, 2021 | | $ | 1,946 | |
Gross increase related to prior year tax positions | |
| — | |
Gross increase related to current year tax positions | |
| — | |
Lapse of statute of limitations | |
| (48) | |
Balance at March 31, 2022 | | $ | 1,898 | |
The Company does not expect a material change to its unrecognized tax benefits over the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for the years before 2011.2016. However, net operating loss carryforwards remain subject to examination to the extent they are carried forward and impact a year that is open to examination by tax authorities. The Company’sCompany's evaluation was performed for the tax years which remain subject to examination by major tax jurisdictions as of March 31, 2016.2022. When applicable, the Company accounts for interest and penalties generated by tax contingencies as interest and other expense, net in the statements of operations.
9. Stockholders’ Equity
The Company effected a 1-for-20 reverse stock split of its outstanding common stock effective November 6, 2015. The reverse stock split did not change the authorized number of shares or par value of the Company’s common stock or preferred stock, but did effect a proportionate adjustment to the per share exercise price and the number of shares of common stock issuable upon the exercise of outstanding stock options, the number of shares of common stock issuable upon the vesting of restricted stock and performance restricted stock units, and the number of shares of common stock eligible for issuance. All per-share amounts and the Company’s shares outstanding for all periods have been retroactively adjusted to reflect the reverse split.
F-18
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes, by statementconsolidated statements of operations line item, stock-based compensation expense for the years ended March 31, 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Fiscal Year |
| ||||||||||||||
|
| Ended March 31, |
| ||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| ||||||||||
| | | | | | | | ||||||||||
| | Year Ended | | ||||||||||||||
| | March 31, | | ||||||||||||||
|
| 2022 |
| 2021 |
| ||||||||||||
Cost of goods sold |
| $ | 325 |
| $ | 113 |
| $ | 43 |
| | $ | 109 |
| $ | 83 | |
Research and development |
|
| 74 |
|
| 328 |
|
| 562 |
| |
| 79 | |
| 41 | |
Selling, general and administrative |
|
| 2,171 |
|
| 1,795 |
|
| 1,542 |
| |
| 1,057 | |
| 813 | |
Stock-based compensation expense |
| $ | 2,570 |
| $ | 2,236 |
| $ | 2,147 |
| | $ | 1,245 | | $ | 937 | |
2000 and 2017 Equity Incentive PlanPlans
In June 2000,2017, the CompanyCompany’s Board adopted the 2000Capstone Green Energy Corporation 2017 Equity Incentive Plan (“2000(the “2017 Plan”), which was approved by the stockholders at the Company’s 2017 annual meeting of stockholders on August 31, 2017 (the “2017 Annual Meeting”). The 20002017 Plan providesinitially provided for a total maximum aggregate numberawards of up to 300,000 shares which may be issued of 1,849,000 shares.Common Stock. The 20002017 Plan is administered by the Compensation and Human Capital Committee designated by the Board of Directors.(the “Compensation Committee”). The Compensation Committee’s authority includes determining the number of incentive awards and vesting provisions. In August 2015,On June 5, 2018, the Company’s Board of Directors adopted and the shareholders approved an amendment of the 2017 Plan to increase the 2000 Plan.aggregate number of shares of Common Stock authorized for issuance under the 2017 Plan
F-22
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
by 300,000 shares of Common Stock. The amendment includesof the 2017 Plan was approved by the Company’s stockholders at the 2018 annual meeting of stockholders on August 30, 2018. Since this time, the Company’s stockholders have approved amendments to increase the aggregate number of shares authorized for issuance under the 2017 Plan by an increase of 450,000additional 1,600,000 shares of common stock availableCommon Stock, including, most recently, on June 2, 2021, the Company’s Board of Directors adopted Amendment No. 4 (the “Plan Amendment”) of the 2017 Plan to increase the aggregate number of shares of Common Stock authorized for issuance under the 2000 Plan. 2017 Plan by 500,000 shares of Common Stock. The Plan amendment was approved by the Company’s stockholders at the 2021 annual meeting of stockholders on August 27, 2021.
As of March 31, 2016,2022, there were 257,473814,708 shares available for future grants under the 20002017 Plan.
Stock Options
The Company issues stock options under the 2000 Plan to employees, non-employee directors and consultants that vest and become exercisable over a four-year period and expire 10 years after the grant date. The Company uses a Black-Scholes valuation model to estimate the fair value of the options at the grant date, and compensation cost is recorded on a straight-line basis over the vesting period. Stock based compensation expense is based on awards that are ultimately expected to vest and accordingly, stock - based compensation recognized is reduced by estimated forfeitures. Management’s estimate of forfeitures is based on historical forfeitures. All options are subject to the following vesting provisions: one-fourth vest one year after the issuance date and 1/48th vest on the first day of each full month thereafter, so that all options will be vested on the first day of the 48th month after the grant date. Information relating to stock options for fiscal year ended March 31, 2016, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted- |
|
|
|
|
|
|
|
|
|
| Average |
|
|
| ||
|
|
|
| Weighted- |
| Remaining |
| Aggregate |
| ||
|
|
|
| Average |
| Contractual |
| Intrinsic |
| ||
|
| Shares |
| Exercise Price |
| Term |
| Value |
| ||
|
|
|
|
|
|
| (in years) |
|
|
|
|
Options outstanding at March 31, 2015 |
| 658,170 |
| $ | 25.57 |
|
|
|
|
|
|
Granted |
| 29,225 |
| $ | 12.80 |
|
|
|
|
|
|
Exercised |
| — |
| $ | — |
|
|
|
|
|
|
Forfeited, cancelled or expired |
| (219,764) |
| $ | 38.76 |
|
|
|
|
|
|
Options outstanding at March 31, 2016 |
| 467,631 |
| $ | 22.68 |
| 2.7 |
|
| — |
|
Options fully vested at March 31, 2016 |
| 467,631 |
| $ | 22.68 |
| 2.7 |
|
| — |
|
Options exercisable at March 31, 2016 |
| 459,770 |
| $ | 22.67 |
| 2.8 |
|
| — |
|
F-19
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Black-Scholes Model Valuation Assumptions
The Company calculated the estimated fair value of each stock option on the date of grant using the Black Scholes valuation method and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year Ended |
| |||||||
|
| March 31, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
Risk-free interest rates |
|
| 1.5 | % |
| 1.8 | % |
| 0.9 | % |
Expected lives (in years) |
|
| 5.7 |
|
| 5.7 |
|
| 5.7 |
|
Dividend yield |
|
| — | % |
| — | % |
| — | % |
Expected volatility |
|
| 59.0 | % |
| 77.0 | % |
| 77.3 | % |
Weighted average grant date fair value of options granted during the period |
| $ | 6.84 |
| $ | 18.80 |
| $ | 12.00 |
|
The Company’s computation of expected volatility for the fiscal years ended March 31, 2016, 2015 and 2014 was based on historical volatility. The expected life, or term, of options granted is derived from historical exercise behavior and represents the period of time that stock option awards are expected to be outstanding. Management has selected a risk-free rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the options’ expected term.
The following table provides additional information on stock options for the Company’s fiscal years ended March 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
| |||||||
|
| Ended March 31, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
Stock option compensation expense (in thousands) |
| $ | 1,248 |
| $ | 1,071 |
| $ | 1,117 |
|
Cash received for exercise price (in thousands) |
| $ | — |
| $ | 302 |
| $ | 464 |
|
Intrinsic value (in thousands) |
| $ | — |
| $ | 129 |
| $ | 225 |
|
Weighted average grant date fair value of options exercised during the period |
| $ | — |
| $ | 26.75 |
| $ | 39.96 |
|
During the fiscal year ended March 31, 2016, the Company’s executive management team voluntarily agreed to cancel and terminate a total of 65,508 unvested stock options that had been previously issued to them. There was approximately $0.7 million of total compensation cost related to the cancellation of these stock options recorded during the fiscal year ended March 31, 2016. There were no unvested stock option awards as of March 31, 2016.
Restricted Stock Units and Performance Restricted Stock Units
The Company issuesissued restricted stock units under the Company’s 2000 Equity Incentive Plan, as well as issued (and may in the future issue) restricted stock units under the 2017 Plan to employees, non-employee directors and consultants. The restricted stock units are valued based on the closing price of the Company’s common stockCommon Stock on the date of issuance, and compensation cost is recorded on a straight-line basis over the vesting period. The related compensation expense recognized is reduced by estimated forfeitures. The Company’s estimate of forfeitures is based on historical forfeitures. The restricted stock units issued to employees vest in equal installments over a period oftwo, three or four years. For restricted stock units with fourtwo year vesting, 100% vests on the second year anniversary. For restricted stock units with 3 year vesting, 1-third vest annually beginning 1 year after the issuance date. For restricted stock units with 4 year vesting, one-fourth vest annually beginning one1 year after the issuance date. The restricted stock units issued to
F-20
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
non-employee directors vest one year after the issuance date. The following table outlines thesummarizes restricted stock unit and performance restricted stock unit (“PRSU”) activity:activity during Fiscal 2022:
|
|
|
|
|
|
|
|
|
|
| Weighted |
| |
|
|
|
| Average Grant |
| |
|
|
|
| Date Fair |
| |
Restricted Stock and Performance Restricted Stock Units |
| Shares |
| Value |
| |
Nonvested restricted stock units outstanding at March 31, 2015 |
| 93,383 |
| $ | 23.76 |
|
Granted |
| 234,046 |
|
| 3.86 |
|
Vested and issued |
| (37,530) |
|
| 24.28 |
|
Forfeited |
| (33,112) |
|
| 16.15 |
|
Nonvested restricted stock units outstanding at March 31, 2016 |
| 256,787 |
|
| 6.53 |
|
Restricted stock units expected to vest beyond March 31, 2016 |
| 256,776 |
| $ | 6.52 |
|
| | | | | | |
| | | | Weighted | | |
| | | | Average Grant | | |
| | | | Date Fair | | |
Restricted Stock Units and Performance Restricted Stock Units | | Shares | | Value |
| |
Non-vested restricted stock units outstanding at March 31, 2021 |
| 497,281 |
| $ | 5.65 | |
Granted |
| 328,963 | | | 5.40 | |
Vested and issued |
| (194,444) | | | 5.18 | |
Forfeited |
| (39,995) | | | 5.78 | |
Non-vested restricted stock units outstanding at March 31, 2022 |
| 591,805 | | | 5.66 | |
Restricted stock units expected to vest beyond March 31, 2022 |
| 591,805 | | $ | 5.66 | |
The following table provides additional information on restricted stock units for the Company’s fiscal years ended March 31, 2016, 2015 and 2014:performance restricted stock units:
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| Fiscal Year Ended |
| ||||||||||||||
|
| March 31, |
| ||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| ||||||||||
| | | | | | | | ||||||||||
| | Year Ended March 31, | |||||||||||||||
|
| 2022 |
| 2021 | |||||||||||||
Restricted stock compensation expense (in thousands) |
| $ | 891 |
| $ | 1,048 |
| $ | 914 |
| |
| $ | 1,245 |
| $ | 937 |
Aggregate fair value of restricted stock units vested and issued (in thousands) |
| $ | 346 |
| $ | 1,206 |
| $ | 806 |
| |
| $ | 936 |
| $ | 352 |
Weighted average grant date fair value of restricted stock units granted during the period |
| $ | 3.34 |
| $ | 26.50 |
| $ | 21.90 |
| |
| $ | 5.40 |
| $ | 5.28 |
As of March 31, 2016,2022, there was approximately $1.0$2.1 million of total compensation cost related to unvested restricted stock units that is expected to be recognized as expense over a weighted average period of 2.82.2 years.
The Company’s PRSU activity is included in the above restricted stock units tables. In May 2014,The PRSU program has a three-year performance measurement period. The performance measurement occurs in the third year (for a three-year grant) following the grant date. The program is intended to have overlapping performance measurement periods (e.g., a new three-year cycle begins each year on April 1), subject to Compensation Committee approval. At the end of each
F-23
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
performance measurement period, the Compensation Committee will determine the achievement against the performance objectives.
During Fiscal 2022, the Company granted 35,986 PRSUs with a third-year performance measurement and the criteria measured by the Company’s cash flow from operations and aftermarket sales absorption. There were 0 PRSUs granted during Fiscal 2021. The target PRSU awards for each participant, will be paid upon achievement of the Company’s Boardtarget level of Directors approvedperformance for cash flow from operations and aftermarket sale absorption, taking into account the new Performance Restricted Stock Unit Program, whichapplicable weighing for the individual metric. Achievement of a performance goal at the threshold level will result in a payment that is applicable to certain senior employees. During Fiscal 2016,50% of the target PRSU award. Achievement of a performance goal at the maximum level will result in a payment that is 150% of the target PRSU award. The Compensation Committee granted 10,000 PRSUs towill use an interpolation table that weighs performance between levels for determining the Chief Executive Officer under the 2000 Plan. The Chief Executive Officer is the only participant for Fiscal 2016. For the first yearportion of the program, theTarget PRSU grant for the Chief Executive Officerthat is broken out into two performance measurement periods. The first performance measurement period began on April 1, 2015 and will end on March 31, 2017; the second performance measurement period has a three-year term that began on April 1, 2015 and will end on March 31, 2018. Any earned PRSU awards will vest 50% after the end of the applicable performance measurement period and 50% one year thereafter.earned.
The weighted average per share grant date fair value of PRSUs granted during the fiscal year ended March 31, 2016Fiscal 2022 was $15.50.$8.39. Based on ourthe Company’s assessment as of March 31, 2016,2022, the PRSU threshold for the first performance measurement likelyCompany will not be metmeet the threshold of the performance measurements, and as a result, no0 compensation expense was recorded or recognized during Fiscal 2016.2022. Compensation expense if any, will beis recognized over the corresponding requisite service period and will be adjusted in subsequent reporting periods if the Company’s assessment of the probable level of achievement of the performance goals changes.change. The Company will continue to periodically assess the likelihood of the PRSU threshold being met until the end of the applicable performance period.
Restricted Stock Awards
The Company issues restricted stock awards under the 2000 Plan to employees and non-employee directors. During the fiscal year ended March 31, 2016 the Company granted stock awards in lieu of cash to employees for variable
F-21
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
compensation. During the fiscal years ended March 31, 2016, 2015 and 2014 the Company granted stock awards to non-employee directors who elected to take payment of all or any part of the directors’ fees in stock in lieu of cash. The following table outlines the restricted stock awards activity for the Company’s fiscal years ended March 31, 2016, 2015 and 2014:
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|
| Fiscal Year |
| |||||||
|
| Ended March 31, |
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||
Non-employee director stock awards compensation expense (in thousands) |
| $ | 431 |
| $ | 117 |
| $ | 116 |
|
Non-employee director deferred stock awards granted |
|
| 305,725 |
|
| 5,964 |
|
| 4,580 |
|
Weighted average grant date fair value of restricted stock awards granted during the period |
| $ | 1.41 |
| $ | 19.76 |
| $ | 25.26 |
|
For each term of the Board of Directors (beginning on the date of an annual meeting of stockholders and ending on the date immediately preceding the next annual meeting of stockholders), a non-employee director may elect to receive a stock award in lieu of all or any portion of their annual retainer or committee fee cash payment. The shares of stock were valued based on the closing price of the Company’s common stock on the date of grant.
2000 Employee Stock Purchase Plan
In June 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan provides for the granting of rights to purchase common stock to regular full and part-time employees or officers of the Company and its subsidiaries. Under the Purchase Plan, shares of common stock will be issued upon exercise of the purchase rights. Under the Purchase Plan, an aggregate of 70,000 shares may be issued pursuant to the exercise of purchase rights. The Purchase Plan will continue by its terms through June 30, 2020, unless terminated sooner. The maximum amount that an employee can contribute during a purchase right period is $25,000 or 15% of the employee’s regular compensation. Under the Purchase Plan, the exercise price of a purchase right is 95% of the fair market value of such shares on the last day of the purchase right period. The fair market value of the stock is its closing price as reported on the Nasdaq Capital Market on the day in question. During the fiscal years ended March 31, 2016, 2015 and 2014, the Company issued a total of 5,658 shares, 1,031 shares and 615 shares of stock, respectively, to regular full and part-time employees or officers of the Company who elected to participate in the Purchase Plan. As of March 31, 2016, there were 14,820 shares available for future grant under the Purchase Plan.
Grants outside of the 2000 Plan
As of March 31, 2016, the Company had outstanding 148,229 non-qualified common stock options and 2,343 restricted stock units issued outside of the 2000 Plan. The Company granted 12,500 of these stock options during Fiscal 2015, 142,500 of these stock options prior to Fiscal 2015 and 2,343 of these restricted stock units during Fiscal 2015 as inducement grants to new officers and employees of the Company, with exercise prices equal to the fair market value of the Company’s common stock on the grant date.
|
|
|
|
|
|
Outside of 2000 Plan |
| Options |
| RSUs |
|
Executive Vice President and Chief Executive Officer |
| 100,000 |
| — |
|
Executive Vice President of Sales and Marketing |
| 42,500 |
| — |
|
Vice President of Operations |
| 5,729 |
| 2,343 |
|
Outstanding stock outside of 2000 Plan |
| 148,229 |
| 2,343 |
|
Although the options and restricted stock units were not granted under the 2000 Plan, they are governed by terms and conditions identical to those under the 2000 Plan. All options are subject to the following vesting provisions: one-fourth vest one year after the issuance date and 1/48th vest on the first day of each full month thereafter, so that all
F-22
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
options will be vested on the first day of the 48th month after the grant date. All outstanding options have a contractual term of ten years. The restricted stock units vest in equal installments over a period of four years.
Stockholder Rights Plan
On May 6, 2016,2019, the Company entered into Amendment No. 5 (the “Amendment”) to the Rights Agreement, dated as of July 7, 2005, as amended by Amendment No. 1, dated as of July 3, 2008, Amendment No. 2, dated as of June 9, 2011, Amendment No. 3, dated as of July 1, 2014 and Amendment No. 4, dated as of August 5, 2014, (the “Original Rights Agreement”) between the Company and Computershare Inc.
The Amendment accelerated the expiration of the Company’s preferred share purchase rights (the “Original Rights”) from 5:00 p.m., California time, on the 30 day after the Company’s 2017 annual meeting of stockholders to 5:00 p.m., California time, on May 6, 2016, and had the effect of terminating the Original Rights Agreement on that date. At the time of the termination of the Original Rights Agreement, all of the Original Rights distributed to holders of the Company’s common stock pursuant to the Original Rights Agreement expired.
On May 6, 2016, the Company entered into a rights agreement (the “NOL Rights Agreement”) with Computershare Inc., as rights agent. In connection with the NOL Rights Agreement, the Company’s Board of Directors authorized and declared a dividend distribution of one preferred stock purchase right (a “New Right”) for each share of the Company’s common stock authorizedissued and outstanding.outstanding shares of Common Stock. The dividend was paid to the stockholders of record at the close of business on May 16, 2019 (the “Record Date”). Each New Right entitles the registered holder, subject to the terms of the NOL Rights Agreement (as defined below), to purchase from the Company a unit consisting of one one-thousandth1-thousandth of a share of the Company’s Series B Junior Participating Preferred Stock par value $0.001 per share,(the “Preferred Stock”) at a purchase price of $8.76 per unit,$5.22 (the “Exercise Price”), subject to adjustment.certain adjustments. The description and terms of the New Rights are set forth in the Rights Agreement dated as of May 6, 2019 (the “NOL Rights Agreement”) between the Company and Broadridge Financial Solutions, Inc., as Rights Agent (the “Rights Agent”).
The NOL Rights Agreement.Agreement replaced the Company’s Rights Agreement, dated May 6, 2016, by and between the Company and Broadridge Financial Solutions, Inc., as successor-in-interest to Computershare Inc., as rights agent (the “Original Rights Agreement”). The Original Rights Agreement, and the rights thereunder to purchase fractional shares of Preferred Stock, expired at 5:00 p.m., New York City time, on May 6, 2019 and the NOL Rights Agreement was entered into immediately thereafter.
The purpose of the NOL Rights Agreement is to diminish the risk that the Company’s ability to use its net operating losses and certain other tax assets (collectively, “Tax Benefits”) to reduce potential future federal income tax obligations would become subject to limitations by reason of the Company’s experiencing an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986.1986, as amended (the “Tax Code”). A company generally experiences such an ownership change if the percentage of its stock owned by its “5-percent shareholders,” as defined in Section 382 of the Internal RevenueTax Code, of 1986, increases by more than 50 percentage points over a rolling three-year period. The NOL Rights Agreement is designed to reduce the likelihood that the Company will experience an ownership change under Section 382 of the Internal RevenueTax Code of 1986 by (i) discouraging any person or group from becoming a 4.99%4.9% or greater shareholder and (ii) discouraging any existing 4.99%4.9% or greater shareholder from acquiring additional shares of the Company’s stock.
The New Rights will not be exercisable until the earlier to occur of (i) the close of business on the tenth business day after a public announcement or filing that a person has, or group of affiliated or associated persons or persons acting in concert have, become an “Acquiring Person,” which is defined as a person or group of affiliated or associated persons or persons acting in concert who, at any time after the date of the NOL Rights Agreement, have acquired, or obtained the right to acquire, beneficial ownership of 4.99%4.9% or more of the Company’s outstanding shares of common stock,Common Stock, subject to certain exceptions or (ii) the close of business on the
F-24
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
tenth business day after the commencement of, or announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person becoming an Acquiring Person (the earlier of such dates being called the “Distribution Date”). Certain synthetic interests in securities created by derivative positions, whether or not such interests are considered to be ownership of the underlying common stockCommon Stock or are reportable for purposes of Regulation 13D of the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), are treated as beneficial ownership of the number of shares of common stockCommon Stock equivalent to the economic exposure created by the derivative position, to the extent actual shares of the common stockCommon Stock are directly or indirectly held by counterparties to the derivatives contracts.
With respect to certificates representing shares of Common Stock outstanding as of the Record Date, until the Distribution Date, the New Rights will be evidenced by such certificates for shares of Common Stock registered in the names of the holders thereof, and not by separate Rights Certificates, as described further below. With respect to book entry shares of Common Stock outstanding as of the Record Date, until the Distribution Date, the New Rights will be evidenced by the balances indicated in the book entry account system of the transfer agent for the Common Stock. Until the earlier of the Distribution Date and the Expiration Date, as described below, the transfer of any shares of Common Stock outstanding on the Record Date will also constitute the transfer of the New Rights associated with such shares of Common Stock. As soon as practicable after the Distribution Date, separate certificates evidencing the New Rights (“Right Certificates”) will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date, and such Right Certificates alone will evidence the New Rights.
The New Rights, which are not exercisable until the Distribution Date, will expire prior to the earliest of (i) May 6, 20192022 or such later day as may be established by the Board of Directors prior to the expiration of the New Rights,
F-23
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
provided that the extension is submitted to the Company’s stockholders for ratification at the next annual meeting of stockholders of the Company succeeding such extension; (ii) the time at which the New Rights are redeemed pursuant to the NOL Rights Agreement; (iii) the time at which the New Rights are exchanged pursuant to the NOL Rights Agreement; (iv) the time at which the New Rights are terminated upon the occurrence of certain transactions; (v) the close of business on the first day after the Company’s 20172019 annual meeting of stockholders, if approval by the stockholders of the Company of the NOL Rights Agreement has not been obtained on or prior to the close of business on the first day after the Company’s 20172019 annual meeting of stockholders; (vi) the close of business on the effective date of the repeal of Section 382 of the Internal RevenueTax Code, of 1986, if the Board of Directors determines that the NOL Rights Agreement is no longer necessary or desirable for the preservation of Tax Benefits; and (vii) the close of business on the first day of a taxable year of the Company to which the Board of Directors determines that no Tax Benefits are available to be carried forward.forward, (the earliest of (i), (ii), (iii), (iv), (v), (vi) and (vii) is referred to as the “Expiration Date”). On April 7, 2022, our Board approved an extension of the NOL Rights Agreement from May 6, 2022 to May 6, 2025, subject to obtaining shareholder approval ratifying such extension.
Each share of Series B Junior Participating Preferred Stock will be entitled, when, as and if declared, to a preferential per share quarterly dividend payment equal to the greater of (i) $1.00 per share or (ii) an amount equal to 1,000 times the aggregate quarterly dividend declared per share of common stock.Common Stock since the immediately preceding quarterly dividend payment date for the Common Stock (or, with respect to the first quarterly dividend payment on the Common Stock, since the first issuance of the Preferred Stock). Each share of Series B Junior Participating Preferred Stock will entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Company. In the event of any merger, consolidation or other transaction in which shares of common stockCommon Stock are converted or exchanged, each share of Series B Junior Participating Preferred Stock will be entitled to receive 1,000 times the amount received per one share of common stock.Common Stock.
Offerings of Common Stock and Warrants and At-the-Market Offering Program and Underwritten
At-the-Market Offering of Common Stock
Effective August 28, 2015, the CompanyOn June 7, 2018, we entered into a sales agreementSales 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 the Companywe may offer and sell, from time to time at itsour sole discretion, shares of its common stock,our Common Stock, having an aggregate offering price of up to $30.0$25.0 million. The CompanyWe will set the parameters for sales of the shares, including the number to be sold, the time period during which sales are
F-25
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. In connectionOn July 15, 2020, we entered into an 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 our filing of a new Registration Statement on Form S-3 with the April 2016 underwritten public offering,SEC on March 22, 2021 and set the Company ismaximum amount of shares of our Common Stock that we may offer and sell through or to H.C. Wainwright at $50 million from the date of the amendment to the Sales Agreement, subject to a lock up with respect tocertain limitations set forth in the at-the-market offering program that expires in September 2016. As of March 31, 2016, 6.9amendment. During Fiscal 2022, we issued approximately 0.1 million shares of our Common Stock under the Company’s common stock were sold pursuant to the at-the-market offeringATM program and the net proceeds to the Companyus from the sale of the common stock,our Common Stock were approximately $0.7 million after deducting commissions paid of approximately $26,000. As of March 31, 2022, approximately $49.3 million remained available for issuance with respect to this ATM Program.
Warrants
Goldman Warrant
On February 4, 2019, the Company sold to Goldman Sachs & Co. LLC (the “Holder”), a Purchase Warrant for Common Shares (the “Warrant”) pursuant to which the Holder may purchase shares of the Company’s Common Stock in an aggregate amount of up to 404,634 shares (the “Warrant Shares”). The Warrant was sold to the Holder at a purchase price of $150,000, in a private placement exempt from registration under the Securities Act. The Warrant may be exercised by the Holder at any time after August 4, 2019 at an exercise price equal to $8.86 and will expire on February 4, 2024. The Warrant contains standard adjustment provisions in the event of additional stock issuances below the exercise price of the warrant, stock splits, combinations, rights offerings and similar transactions. The value of the Warrant was $2.3 million, and has been classified as an equity instrument in additional paid in capital in the Company’s condensed consolidated balance sheets. As of March 31, 2022, the Holder may purchase shares of the Company’s Common Stock in an aggregate amount of up to 463,067 shares.
On December 9, 2019, the Company entered into an Amendment No. 1 to the Purchase Warrant for Common Shares (the “Amendment No. 1”) with Special Situations Investing Group II, LLC (as successor in interest to Goldman Sachs & Co. LLC) (the “Warrant Holder”) that amends the Warrant. The Amendment No. 1 amended the Warrant to increase the number of Warrant Shares issuable under the Warrant (on a post-reverse split basis) and to decrease the exercise price from $8.86 per share (on a post-reverse split basis) to $3.80 per share (the “Per Share Warrant Exercise Price”). The Amendment No. 1 also amends the Warrant such that the Per Share Anti-Dilution Price is equal to the Per Share Warrant Exercise Price. As a result of the decrease in exercise price, the Company recorded the change in valuation of $0.3 million as additional debt discount with a corresponding entry to additional paid-in capital in the condensed consolidated balance sheets and statements of stockholders equity.
On June 16, 2020, the Company entered into an Amendment No. 2 to the Purchase Warrant for Common Shares (“Amendment No. 2”) with the Warrant Holder to increase the number of Warrant Shares (as defined therein) issuable under the Warrant and to decrease the exercise price from $3.80 per share to $2.61 per share (the “Per Share Warrant Exercise Price”). The Company would receive aggregate gross proceeds of $1,186,313 if the outstanding Warrant is exercised at the new Per Share Warrant Exercise Price.
Amendment No. 2 also amends the Warrant such that the Per Share Anti-Dilution Price (as defined therein) is equal to the Per Share Warrant Exercise Price as provided in the Amendment No. 2 to the Warrant. As a result of the decrease in exercise price, the Company recorded the change in valuation of $0.1 million as additional debt discount with a corresponding entry to additional paid in capital in the condensed consolidated balance sheets and statements of stockholders equity. All other terms and provisions in the Warrant remain in effect.
Goldman “2020 Warrant”
F-26
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On October 1, 2020, the Company entered into an Amendment No. 3 to the Purchase Warrant for Common Shares (the “Amendment No. 3”) with Special Situations Investing Group II, LLC (as successor in interest to Goldman Sachs & Co. LLC) (the “Warrant Holder”) that amends that certain Purchase Warrant for Common Shares originally issued by the Company to Goldman Sachs & Co. LLC, dated February 4, 2019, as amended (the “Original Warrant”). Amendment No. 3 amends the Original Warrant to amend Section 2.1, Section 2.2(c) and Section 18.1 of the Warrant to, among other things, make certain changes necessitated by the issuance of a second Warrant (the “2020 Warrant”) to the Warrant Holder pursuant to the Company’s entry into the Amended & Restated (“A&R”) Note Purchase Agreement (See Note 11 – Term Note Payable).
On October 1, 2020, and pursuant to the Company’s entry into the A&R Note Purchase Agreement, the Company sold to the Warrant Holder the 2020 Warrant to purchase up to 291,295 shares (the “2020 Warrant Shares”) of the Company’s Common Stock. The 2020 Warrant was sold to the Warrant Holder at a purchase price of $10,000, in a private placement exempt from registration under the Securities Act. The 2020 Warrant may be exercised by the Warrant Holder at any time after October 1, 2020 at an exercise price equal to $4.76 and will expire on February 4, 2024. The Warrant contains standard adjustment provisions in the event of additional stock issuances below the exercise price of the warrant, stock splits, combinations, rights offerings and similar transactions. The value of the Warrant was $0.8 million, and has been classified as an equity instrument in additional paid in capital in the Company’s consolidated balance sheets. The value of the Warrant was determined using the Black-Scholes Option Pricing model using the following assumptions:
| | |
Risk-free interest rate | 0.2% | |
Contractual term | 3 years | |
Expected volatility | 81.0% |
September 2019 Pre-Funded and Series D Warrants
On September 4, 2019, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain institutional and accredited investors pursuant to which the Company agreed to issue and sell in a registered direct offering (the “Registered Direct Offering”) an aggregate of 580,000 shares of 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 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,expenses. Net proceeds from the offering were approximately $12.7$4.6 million. The offering closed on September 9, 2019. On October 24, 2019, a warrant holder exercised its rights to the warrant agreement to exercise on a cash basis 440,000 pre-funded warrants at an exercise price of $0.001 per share under the warrant agreement.
Effective May 6, 2014,In a concurrent private placement, the Company completedissued to the purchasers warrants to purchase 765,000 shares of Common Stock, which represent 75% of the number of shares of Common Stock and shares underlying the Pre-Funded Warrants purchased in the Registered Direct Offering, pursuant to the Securities Purchase Agreement. The Common Warrants will be exercisable for shares of Common Stock at an underwritten public offeringinitial 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, 3 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 under the warrant agreement. In accordance with terms of the warrant agreement, after taking into account the shares withheld to satisfy the cashless exercise option, the Company issued 352,279 shares of Common Stock. As of March 31, 2022, there were 75,000 Series D warrants outstanding.
Stock to Vendors
From time to time, the Company may enter into agreements with vendors for sponsorship, marketing or investor relation services whereby it may agree to compensate the vendor in which it sold 0.9 millioncash and unregistered shares of Common Stock of the
F-27
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company. The value of the unregistered shares of Common Stock is recorded as prepaid marketing cost and included in prepaid expenses and other current assets and stockholder’s equity in the Condensed Consolidated Balance Sheets and is amortized in proportion to the terms of their respective agreements.
On February 10, 2020, the Company issued 229,886 shares of the Company’s common stock atCommon Stock, under a price of $34.00 per share less underwriting discounts and commissions.sponsorship agreement to its vendor. The shares were allocated to a single institutional investor. The net proceeds to the Company from the sale ofprepaid marketing cost amortization associated with the Common Stock after deducting feesissued were $1.1 million during Fiscal 2021 and were included in selling, general and administrative expense in the Consolidated Statements of Operations.
On February 17, 2021 and April 1, 2021, the Company issued 105,933 and 9,541 shares of the Company’s Common Stock, under a sponsorship agreement and an investor relations consulting agreement, respectively to vendors. The prepaid marketing cost amortization associated with the Common Stock issued were $1.0 million during Fiscal 2022, and were included in selling, general and administrative expense in the Consolidated Statements of Operations. As of March 31, 2022, there are no amounts remaining in prepaid marketing cost, prepaid expenses and other offering expenses, were approximately $29.8 million.current assets in the Consolidated Balance Sheets related to the value of shares issued under the sponsorship agreement and investor relations consulting agreement.
On October 31, 2013, an unsolicited exercise of warrants to purchase 4.7 million shares resulted in proceeds of approximately $6.0 million. Effective October 31, 2013, all then outstanding warrants expired.
10. Fair Value Measurements
The FASB has established a framework for measuring fair value in generally accepted accounting principles. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described as follows:
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CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 1. Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2. Inputs to the valuation methodology include:
| Quoted prices for similar assets or liabilities in active markets |
| Quoted prices for identical or similar assets or liabilities in inactive markets |
| Inputs other than quoted prices that are observable for the asset or liability |
| Inputs that are derived principally from or corroborated by observable market data by correlation or other means |
If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3. Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
The table below presents our assets and liabilities that are measured at fair value on a recurring basis during Fiscal 2015 and are categorized using the fair value hierarchy (in thousands):
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Cash equivalents |
| $ | 3,002 |
| $ | 3,002 |
| $ | — |
| $ | — |
|
Restricted Cash |
| $ | 5,002 |
| $ | 5,002 |
| $ |
|
| $ |
|
|
Cash equivalents includes cash held in money market and U.S. Treasury Funds at March 31, 2016.
The table below presents our assets and liabilities that are measured at fair value on a recurring basis during Fiscal 2015 and are categorized using the fair value hierarchy (in thousands):
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|
|
|
|
|
|
|
|
|
|
| Fair Value Measurements at March 31, 2015 |
| ||||||||||
|
|
|
|
|
|
| Quoted Prices in |
|
|
|
| ||
|
|
|
|
| Quoted Prices in |
| Active Markets for |
| Significant |
| |||
|
|
|
|
| Active Markets for |
| for |
| Unobservable |
| |||
|
|
|
|
| Identical Assets |
| Identical Assets |
| Inputs |
| |||
|
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
Cash equivalents |
| $ | 13,737 |
| $ | 13,737 |
| $ | — |
| $ | — |
|
F-25F-28
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basis for Valuation
The carrying values reported in the condensed consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair values because of the immediate or short-term maturities of these financial instruments. As the Company’s obligations under the Credit Facility areThe term note payable has been recorded net of a discount based on adjustable market interest rates, the Company has determined that the carrying value approximates the fair value.value of the associated warrant and capitalized debt issuance costs and as of March 31, 2022 includes both the Three-Year Term Note and the SBA Paycheck Protection Program (“PPP”) Loan as discussed in Note 11–Term Note Payable. The carrying values and estimated fair values of these obligations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of |
| As of |
| ||||||||
|
| March 31, 2016 |
| March 31, 2015 |
| ||||||||
|
| Carrying |
| Estimated |
| Carrying |
| Estimated |
| ||||
|
| Value |
| Fair Value |
| Value |
| Fair Value |
| ||||
Obligations under the credit facility |
| $ | 9,459 |
| $ | 9,459 |
| $ | 12,953 |
| $ | 12,953 |
|
| | | | | | | | | | | | | |
| | As of | | As of | | ||||||||
| | March 31, 2022 | | March 31, 2021 | | ||||||||
| | Carrying | | Estimated | | Carrying | | Estimated |
| ||||
|
| Value |
| Fair Value |
| Value |
| Fair Value |
| ||||
Term note payable | | $ | 50,940 |
| $ | 51,000 | | $ | 50,915 |
| $ | 51,000 | |
PPP loan | | | — | | | — | | | 1,950 | | | 1,950 | |
Total |
| $ | 50,940 |
| $ | 51,000 |
| $ | 52,865 |
| $ | 52,950 | |
The Company calculated the estimated fair value of warrants on the date of issuance and at each subsequent reporting date using the following assumptions:
| |||
| |||
|
| ||
|
| ||
|
|
The Company has issued common stock warrants at times in the past and recently issued common stock warrants in its April 2016 underwritten public offering; however, no warrants were outstanding as of March 31, 2016. The Company does not enter into speculative derivative agreements and does not enter into derivative agreements for the purpose of hedging risks.11. Term Note Payable
Three-Year Term Note
11. Revolving Credit Facility
The Company maintains two Credit and Security Agreements, as amended (the “Credit Agreements”), with Wells Fargo Bank, National Association (“Wells Fargo”), which provideOn February 4, 2019, the Company withentered into a line of credit of up to $20.0 million inNote Purchase Agreement (as amended, the aggregate. As previously disclosed, the twelfth amendment to the Credit Agreements provided“Note Purchase Agreement”), by and among the Company, the right, under certain circumstances, to increase the borrowing capacity available under the Company’s revolving linessubsidiaries of credit to an aggregate maximum of $20.0 million from an aggregate maximum of $15.0 million (the “Accordion Feature”). In addition, Wells Fargo has provided the Company with a non‑revolving capital expenditure line of credit up to $0.5 million to acquire additional eligible equipment for use in the Company’s business. Effectiveparty thereto as of June 30, 2015, the Company exercised the Accordion Feature, thereby increasing the maximum borrowing capacity available to a maximum of $20.0 million. The amount actually available to the Company may be lessguarantors, Goldman Sachs Specialty Lending Holdings, Inc. and may varyany other purchasers party thereto from time to time depending on, among other factors,(collectively, the “Purchaser”). Under the Note Purchase Agreement, the Company sold to the Purchaser $30.0 million aggregate principal amount of its eligible inventorysenior secured notes (the “Notes”), bearing interest at a rate of 13.0% per annum and accounts receivable. As security for the paymentpayable quarterly on March 31, June 30, September 30 and performanceDecember 31 of the Credit Facility,each year until maturity.
On October 1, 2020, the Company grantedentered into an Amended & Restated Note Purchase Agreement (the “A&R Note Purchase Agreement”). The A&R Note Purchase Agreement amends and restates that certain Note Purchase Agreement, as amended, dated February 4, 2019, by and among the Company, certain of its subsidiaries as guarantors, the Collateral Agent and various purchasers party thereto. Under the A&R Note Purchase Agreement, the Company issued an additional $20 million in Notes, increasing total borrowings to $50.0 million. Following entry into the A&R Note Purchase Agreement, 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, payable on the last day of each interest period of one-, two-, three- or six-months (but, in the case of a securitysix-month interest in favor of Wells Fargo in substantially all of the assets of the Company. One of the Credit Agreements will terminate in accordance with its terms on September 1, 2017period, every three months). The Notes do not amortize and the other one will terminateentire principal balance is due in a single payment on September 30, 2017.
The Credit Agreements include affirmative covenants as well as negative covenants that prohibit a varietythe maturity date, October 1, 2023. As of actions without Wells Fargo’s consent, including covenants that limitMarch 31, 2022, $51.0 million in borrowings were outstanding under the Company’s abilityNotes, which includes the accrual for an exit fee to (a) incurbe paid at maturity or guarantee debt, (b) create liens, (c) enter into any merger, recapitalization or similar transaction or purchase all or substantially all ofupon pre-payment. Obligations under the assets or stock of another entity, (d) pay dividends on, or purchase, acquire, redeem or retire shares of, the Company’s capital stock, (e) sell, assign, transfer or otherwise dispose of all or substantiallyA&R Note Purchase Agreement are secured by all of the Company’s assets, (f) changeincluding intellectual property and general intangibles.
The A&R Note Purchase Agreement contains customary covenants, including, among others, covenants that restrict the Company’s accounting method or (g)ability to incur debt, grant liens, make certain investments and acquisitions, pay dividends, repurchase equity interests, repay certain debt, amend certain contracts, enter into a different lineaffiliate transactions and asset sales or make certain equity issuances (including equity issuances that would cause an ownership change within the meaning of business. Furthermore,Section 382 of the Credit
F-26
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Agreements containInternal Revenue Code), and covenants that require the Company to, among other things, provide annual, quarterly and monthly financial statements, together with related compliance certificates, maintain its property in good condition, maintain insurance and comply with applicable laws. The financial covenants including (i) a requirementof the A&R Note Purchase Agreement require the Company not to exceed specified levels of Adjusted EBITDA losses (ii) a requirement to maintain a substantial minimum cash balance relative to its financial model, beginning with the outstanding linefiscal quarter ending September 30, 2021. Additionally, the Company shall not permit the Company’s minimum consolidated liquidity, which consists of credit advances, which was $8.1its cash and cash equivalents, to be less than $9.0 million. Furthermore,
F-29
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the covenants require the Company to expand its Rental Fleet (as defined in the A&R Note Purchase Agreement) by (i) at least 6.25 MW by the 9-month anniversary of the Closing Date, and (ii) at least 12.50 MW by the 18-month anniversary of the Closing Date.
On May 13, 2021, the Company and the collateral agent, entered into a First Amendment, dated as of May 13, 2021 (the “Amendment”), to the A&R Note Purchase Agreement. The Amendment amends certain provisions of the A&R Note Purchase Agreement, including to (a) require the Company to expand its Rental Fleet (as defined in the A&R Note Purchase Agreement) by (i) at least 2.00 MW by the 9-month anniversary of the Closing Date (instead of 6.25 MW as provided in the A&R Note Purchase Agreement prior to the Amendment), and (ii) at least 12.50 MW by the 18-month anniversary of the Closing Date (which is unchanged from the covenant set forth in in the A&R Note Purchase Agreement prior to the Amendment), and (b) increase the Company’s minimum consolidated liquidity requirement from $9.0 million asto $12.2 million for the period from the Amendment Date to March 31, 2022, and $9.0 million thereafter.
As of March 31, 2016, and (iii) limitations on the Company’s annual capital expenditures. The Credit Agreements also define an event of default to include a material adverse effect on the Company’s business, as determined by Wells Fargo. An event of default for this or any other reason, if not waived, would have a material adverse effect on the Company.
Several times since entering into the Credit Agreements2022, the Company was not in compliance with certain covenants under the Credit Facility. In connection with each event of noncompliance, Wells Fargo waived the event of default and, on several occasions, the Company amended the Credit Agreements in response to the default and waiver. The following summarizes the recent events, amendments and waivers:
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|
|
|
|
|
If the Company had not obtained the waivers and amended the Credit Agreements as described above, the Company would not have been able to draw additional funds under the Credit Facility. In addition, the Company has pledged its accounts receivables, inventories, equipment, patents and other assets as collateral for its Credit Agreements, which would be subject to seizure by Wells Fargo if the Company were in default under the Credit Agreements and unable to repay the indebtedness. Wells Fargo also has the option to terminate the Credit Agreements or accelerate the indebtedness during a period of noncompliance. Based on the Company’s current forecasts, the Company believes it will maintain compliance with the covenants contained in the amended Credit Agreements for at least the next twelve months. If a covenant violation were to occur, the Company would attempt to negotiate a waiver of compliance from Wells Fargo.A&R Note Purchase Agreement.
The Company is required to maintainNotes have been recorded net of a Wells Fargo collection account for cash receipts on all of its accounts receivable. These amounts are immediately applied to reduce the outstanding amountdiscount based on the Credit Facility. The floating ratedebt issuance costs totaling $0.1 million. Amortization of the debt discount and debt issuance costs was $34,000 and $0.6 million for line of credit advances is the sum of daily three month London Inter-Bank Offer Rate (“LIBOR”), whichFiscal 2022 and 2021, respectively, based on an effective interest rate, shall change whenever daily three month LIBOR changes, plus applicable margin. Based on the revolving nature of the Company’s borrowings and payments, the Company classifies all outstanding amounts as current liabilities. The applicable margin varies based on net income and the minimum interest floor is set at $66,000 each calendar quarter. The Company’s borrowing rate was 4.4% and 4.0% at March 31, 2016 and March 31, 2015, respectively.
The Company is also required to pay an annual unused line fee of one‑quarter of one percent of the daily average of the maximum line amount and 1.5% interest with respect to each letter of credit issued by Wells Fargo. These amounts, if any, are alsohas been recorded as interest expense in the consolidated statements of operations.
Interest expense related to the Notes payable during Fiscal 2022 and 2021 was $5.0 million and $5.2 million and includes $34,000 and $0.6 million in amortization of debt issuance costs, respectively.
SBA Paycheck Protection Program Loan
On April 15, 2020, the Company submitted an application to its banking partner Western Alliance Bank, an Arizona corporation (“Western Alliance”) under the Small Business Administration (the “SBA”) Paycheck Protection Program (“PPP”) enabled by the Company. AsCoronavirus Aid, Relief and Economic Security Act of March 31, 20162020 (the “CARES Act”). Western Alliance entered into a note on April 24, 2020 with the Company and March 31, 2015, $9.5 millionagreed to make available to the Company a loan in the amount of $2,610,200 (the “PPP Loan”). The Company received the full amount of the PPP Loan on April 24, 2020 (the “Initial Disbursement Date) and $13.0 millionhas used the proceeds to support fixed costs such as payroll costs, rent and utilities in borrowings were outstanding, respectively,accordance with the relevant terms and conditions of the CARES Act. The advance under the Credit Facility. AsLoan bears interest at a rate per annum of March 31, 1%. The term of the PPP Loan is two years, ending April 24, 2022.
On May 13, 2020, the Company 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.
In February 2021, the Company applied for forgiveness of the PPP Loan, and the loan was forgiven in full on June 30, 2021 (See “Gain on extinguishment of debt” below).
Gain and Loss on Extinguishment of DebtIn June 2021, the Company received notification from Western Alliance that the SBA approved forgiveness of the PPP loan in its entirety. The Company accounted for forgiveness on the PPP Loan in accordance with ASC 470 and recognized a gain on debt extinguishment of $1.9 million on its Consolidated Statements of Operations and Consolidated Statements of Cash Flows during Fiscal 2022. In June 2021, the Company also received a refund of the $660,200 previously repaid in accordance with the Fourth Amendment to the Note Purchase Agreement between the Company and Goldman Sachs Specialty Lending Group, L.P. and recorded these amounts within other income on the Company’s Consolidated Statements of Operations.
The Company determined the A&R Note Purchase Agreement should be accounted for as an extinguishment of debt rather than a modification of debt in accordance with ASC 470. Accordingly, the Company recognized a loss on extinguishment of debt of approximately $4.3 million during Fiscal 2021. The loss on extinguishment of debt comprised
F-27F-30
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2016,of the write-off of approximately $9.0$1.5 million was available for additional borrowing. Interest expense relatedof unamortized debt issuance costs, a facility fee in the amount of $1.0 million paid to the Credit Facility duringlender, an accrual of $1.0 million for anticipated exit fees due upon repayment of the year ended March 31, 2016 was $0.5 million, which includes $0.2 million in amortization of deferred financing costs. Interest expense relatedprincipal balance to the Credit Facility duringlender and the year ended March 31, 2015 was $0.7 million, which includes $0.2 million in amortizationfair value of deferred financing costs. Interest expense relatedcommon stock warrants issued to the Credit Facility duringwarrant holder in connection with Amendment No. 3 to the year ended March 31, 2014 was $0.7 million, which includes $0.1 million in amortizationPurchase Warrant of deferred financing costs.$0.8 million.
12. Commitments and Contingencies
Purchase Commitments
As of March 31, 2016,2022, the Company had firm commitments to purchase inventories of approximately $23.8$40.5 million through Fiscal 2019.2023. Certain inventory delivery dates and related payments are not scheduled; therefore amounts under these firm purchase commitments will be payable upon the receipt of the related inventories.
Lease Commitments
In June 2019, the Company entered into a new lease of approximately 9,216 square feet of warehouse space at 16701 Stagg Street in Van Nuys, California. Upon the lease commencement date in July 2019, the Company recorded $0.5 million of right-of-use assets and operating lease liabilities.
In May 2021, the Company entered into new lease of office and warehouse spaces at Unit 800 & 810 Fareham Reach, Fareham Road, Gosport, Hampshire, United Kingdom. Upon commencement of the lease, the Company recorded $1.9 million of right-of-use assets and operating lease liabilities.
The Company leases offices and manufacturing facilities under various non‑cancelablenon-cancelable operating leases expiring at various times through the fiscal year ending March 31, 2020.Fiscal 2037. All of the leases require the Company to pay maintenance, insurance and property taxes. The lease agreements for primary office and manufacturing facilities provide for rent escalation over the lease term and renewal options for five‑yearfive-year periods. RentLease expense is recognized on a straight-line basis over the term of the lease.
The difference between rentcomponents of lease expense recorded and the amount paid is credited or charged to deferred rent, which is included in other long‑term liabilities in the accompanying consolidatedwere as follows (in thousands):
| | | | | | |
| | Year Ended March 31, | ||||
|
| 2022 |
| 2021 | ||
Operating lease cost | | $ | 1,157 |
| $ | 1,051 |
Supplemental balance sheets. The balance of deferred rent was approximately $0.2 million as each of March 31, 2016 and 2015. Rent expense was approximately $2.5 million, $2.4 million and $2.3 million for the years ended March 31, 2016, 2015 and 2014, respectively.
On July 31, 2014, the Company and Northpark Industrial (“Northpark”) entered into a Third Amendment to Lease (the “Third Amendment”) to amend the Standard Industrial/Commercial Single-Tenant Lease - Net, dated December 1, 1999, as amended (the “Lease”), pursuant to which the Company leases the premises located at 21211 Nordhoff Street, Chatsworth, California for use as primary office space, engineering testing and manufacturing. The Third Amendment extended the term of the Lease for a period of two months commencing on August 1, 2014 and ending on September 30, 2014 and set the monthly base rent payable by the Company under the Lease at $81,001 per month.
On September 30, 2014, the Company and Northpark entered into a Fourth Amendment to Lease (the “Fourth Amendment”) to amend the Lease by extending the term of the Lease for a period of five years commencing on October 1, 2014 and ending on September 30, 2019. The Fourth Amendment also adjusts the monthly base rent payable by the Company under the Leasesheet information related to the following: $39,500 per month from October 1, 2014 through November 30, 2014; $79,000 per month from December 1, 2014 through September 30, 2015; $81,225 per month from October 1, 2015 through September 30, 2016; $83,600 per month from October 1, 2016 through September 30, 2017; $86,000 per month from October 1, 2017 through September 30, 2018; and $88,500 per month from October 1, 2018 through September 30, 2019. The Fourth Amendment also provides the Company with an option to extend the Lease by an additional five-year term following the expiration of the term of the Leaseleases was as amended by the Fourth Amendment and provides that Northpark will perform certain capital improvements to the leased premises’ HVAC system.follows (in thousands):
On March 28, 2013, the Company and Prologis, L.P., formerly known as AMB Property, L.P., entered into a third amendment (the “Van Nuys Amendment”) to the Lease Agreement dated September 25, 2000, for leased premises used by the Company for engineering testing and manufacturing located in Van Nuys, California. The Van Nuys Amendment extends the term of the Lease Agreement from December 31, 2012 to December 31, 2017. The Van Nuys
| | | | | |
| March 31, 2022 | | March 31, 2021 | ||
Operating lease right-of-use assets | $ | 5,959 | | $ | 4,741 |
Total operating lease right-of-use assets | $ | 5,959 | | $ | 4,741 |
| | | | | |
Operating lease liability, current | $ | 586 | | $ | 485 |
Operating lease liability, non-current |
| 5,619 | |
| 4,456 |
Total operating lease liabilities | $ | 6,205 | | $ | 4,941 |
| | | | | |
Weighted average remaining lease life |
| 8.35 years | |
| 6.51 years |
| | | | | |
Weighted average discount rate | | 12.00% | | | 13.00% |
F-28F-31
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amendment also adjusts the monthly base rentThe Company records its right-of-use assets within other assets (non-current) and its operating lease liabilities within current and long-term portion of notes payable by the Company under the Lease Agreementand lease obligations.
Supplemental cash flow information related to the leases was as follows (in thousands):
| | | | | |
| Year Ended March 31, | ||||
| 2022 | | 2021 | ||
Cash paid for amounts included in the measurement of lease liabilities | |
| | ||
Operating cash flows from operating leases | $ | 1,106 | | $ | 1,116 |
Right-of-use assets obtained in exchange for lease obligations | | | | | |
Operating leases | $ | 1,877 | | $ | — |
Other supplemental operating lease information consists of the following: $60,000 per month from January 1, 2013 through June 30, 2015 and $65,000 per month from July 1, 2015 through December 31, 2017.
At March 31, 2016,2022, the Company’s minimum commitments under non-cancelable operating leases were as follows (in thousands):
|
|
|
|
|
|
| Operating |
| |
Year Ending March 31, |
| Leases |
| |
2017 |
| $ | 1,927 |
|
2018 |
|
| 1,713 |
|
2019 |
|
| 1,158 |
|
2020 |
|
| 642 |
|
2021 |
|
| 111 |
|
Thereafter |
|
| 474 |
|
Total minimum lease payments |
| $ | 6,025 |
|
| | | |
| | Operating | |
Year Ending March 31, |
| Leases | |
2023 | | $ | 1,297 |
2024 | | | 1,324 |
2025 | |
| 1,248 |
2026 | |
| 1,243 |
2027 | |
| 1,279 |
Thereafter | | | 3,358 |
Total lease payments | | $ | 9,749 |
Less: imputed interest | | | (3,544) |
Present value of operating lease liabilities | | $ | 6,205 |
Other Commitments
In September 2010, the Company was awarded a grant from the DOE for the research, development and testing of a more efficient microturbine CHP system. Part of the improved efficiency will come from an improved microturbine design, with a projected electrical efficiency of 42% and power output of 370 kW. The contract was over a five-year period and was completed in September 2015. The project was estimated to cost approximately $11.7 million. The DOE will contribute $5.0 million toward the project, of which $4.2 million was allocated to the Company, and the Company will incur approximately $6.7 million in research and development expense. The Company billed the DOE under the contract for this project a cumulative amount of $4.2 million through September 30, 2015, the date on which the contract was completed.
The Company has agreements with certain of its distributors requiring that, if the Company renders parts obsolete in inventories the distributors own and hold in support of their obligations to serve fielded microturbines, then the Company is required to replace the affected stock at no cost to the distributors. While the Company has never incurred costs or obligations for these types of replacements, it is possible that future changes in the Company’s product technology could result and yield costs to the Company if significant amounts of inventory are held at distributors. As of March 31, 2016,2022, no significant inventories were held at distributors.
Legal Matters
Federal Securities Class ActionCapstone Turbine Corporation v. Turbine International, LLC.
Two putative securities class action complaints wereOn February 3, 2020, Capstone Turbine Corporation filed suit against the Company and certain of its current and former officersdistributor, Turbine International, LLC (“Turbine Intl.”), in the United States DistrictSuperior Court of California for the Central DistrictCounty of CaliforniaLos Angeles under the following captions: David Kinney, etc. v.caption: Capstone Turbine et al.,Corporation v. Turbine International, LLC; Case No. 2:15-CV-08914 on November 16, 2015 (the “Kinney Complaint”20STCV04372 (“Capstone-Turbine Intl. Litigation”). The Company has alleged claims against Turbine Intl. for breach of contract and Kevin M. Grooms, etc. v. Capstone Turbine, et al., No. 2:15-CV-09155 on December 18, 2015 (the “Grooms Complaint”).
The putative class in the Kinney Complaint is comprised of all purchasers of the Company’s securities between November 7, 2013 and November 5, 2015. The Kinney Complaint alleges material misrepresentations and omissions in public statements regarding BPC and the likelihood that BPC would not be able to fulfill many legal and financial obligationsfor injunctive relief relating to the Company. The Kinney Complaint also alleges thatparties’ prior distributor relationship, which terminated at the Company’send of March of 2018, and Turbine Intl.’s failure to satisfy its payment obligations under certain financial statements were not appropriately adjustedagreements, namely an accounts receivable agreement and promissory note in lightfavor of this situation and were not maintained in accordance with GAAP, and thatCapstone. As remedies for these claims, the Company lacked adequate internal controls over accounting. The Kinney Complaint alleges that these public statements is seeking compensatory, consequential, along with injunctive relief and attorney’s fees, interest, and costs.
F-29F-32
CAPSTONE TURBINEGREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March 18, 2020, Turbine Intl. filed its answer and accounting irregularities constituted violations by all named defendantscross-claims in the Capstone-Turbine Intl. Litigation. In its cross-claims, Turbine Intl. asserted claims against Capstone, and individually against Mr. James Crouse, Capstone’s Chief Revenue Officer, for breach of Section 10(b)contract under the distributor agreement, accounts receivable agreement and promissory note, fraud, breach of the Exchange Act,covenant of good faith and Rule 10b-5 thereunder, as well as violations of Section 20(a)fair dealing, unjust enrichment and constructive trust, negligent misrepresentation, violation of the Exchange ActCalifornia unfair practices act, violation of racketeer influenced corrupt organizations act, and conspiracy to commit fraud. As remedies for these alleged claims, Turbine Intl. are seeking compensatory, consequential, and punitive damages along with attorney’s fees, interest, and costs. Capstone answered the cross-claims on May 7, 2020.
On June 29, 2020, Capstone filed a motion to file a First Amended Complaint that would add, among other things, a claim for enforcement of a guaranty signed by an entity related to Turbine Intl., Hispania Petroleum, S.A., and personal claims against the individual defendants. The Groomsprincipals of Turbine Intl. and Hispania. That motion was granted on August 19, 2020, and the First Amended Complaint makes allegations(“FAC”) is now on file. All of the new defendants have been served and claims that are substantially identical to thosehave filed answers. A trial date in the Kinney Complaint, and both complaints seek compensatory damages of an undisclosed amount. On January 16, 2016, several shareholders filed motions to consolidate the Kinney and Grooms actions andmatter has been set for appointment as lead plaintiff. On February 29, 2016, the Court granted the motions to consolidate, and appointed a lead plaintiff. On May 6, 2016, a Consolidated Amended Complaint with allegations and claims substantially identical to those of the Kinney Complaint was filed in the consolidated action. The putative class period in the Consolidated Amended ComplaintDecember 12, 2022. Discovery is June 12, 2014 to November 5, 2015. Defendants’ motion to dismiss the Consolidated Amended Complaint is due June 17, 2016. ongoing.The Company has not recorded any liability as of March 31, 2016 since any potential loss is not probable or reasonably estimable given the preliminary nature of the proceedings.
State Derivative Lawsuits — California
On February 18, 2016, a purported shareholder derivative action was filed in Los Angeles Superior Court in the State of California against the Company and certain of its current and former officers and directors under the following caption: Stesiak v. Jamison, et al., No. BC610782. The lawsuit alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition. The complaint also alleges that the defendants failed to timely adjust the Company’s account receivables and backlog to reflect BPC’s inability to pay the Company. The complaint asserts causes of action for breach of fiduciary duty and unjust enrichment. It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties and unjust enrichment, that the Company institute corporate governance reforms, and disgorgement from the individual defendants. On May 5, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time2022 as the defendants’ motion(s)matter is too early to dismiss the federal securities class action are decided. On May 10, 2016, the Court entered that proposed order, and scheduled a status conference for August 24, 2016.estimate.
On May 25, 2016, we received a pre-filing copy of a purported shareholder derivative action entitled Velma Kilpatrick v. Simon, et al., purportedly to be filed in Los Angeles Superior Court in the State of California against the Company and certain of its current and former officers and directors. The complaint alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition. The complaint also alleges that the defendants failed to timely adjust the Company’s account receivables and backlog to reflect BPC’s inability to pay the Company. The complaint asserts causes of action for breach of fiduciary duty. It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties, and that the Company institute corporate governance reforms.
Federal Derivative Lawsuit
On March 7, 2016, a purported shareholder derivative action was filed in the United States District Court for the Central District of California against the Company and certain of its current and former officers and directors under the following caption: Haber v. Jamison, et al., No. CV16-01569-DMG (RAOx). The lawsuit alleges that certain of the Company’s current and former officers and directors knew or should have known that BPC would be unable to fulfill its obligations to the Company, but allowed the Company to make false and misleading statements regarding BPC and the Company’s financial condition. The complaint asserts a cause of action for breach of fiduciary duty. It demands damages for the amount of damage sustained by the Company as a result of the individual defendants’ alleged breach of fiduciary duties, and equitable relief, including that the Company institute appropriate corporate governance reforms. On May 11, 2016, the parties filed a stipulation and proposed order seeking to stay this action until such time as the defendants’ motion(s) to dismiss the federal securities class action are decided. On May 13, 2016, the Court entered that proposed order.
F-30
CAPSTONE TURBINE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Employee Benefit Plans
The Company maintains a defined contribution 401(k) profit‑sharingprofit-sharing plan in which all employees are eligible to participate. Employees may contribute up to Internal Revenue Service annual limits or, if less, 90% of their eligible compensation. Employees are fully vested in their contributions to the plan. The plan also provides for both Company matching and discretionary contributions, which are determined by the Board of Directors. The Company has been matching 50 cents on the dollar up to 6% of the employee’s contributions since February 2019. Prior to that date, the Company had been matching 50 cents on the dollar up to 4% of the employee’s contributions since October 2006. Prior to that date, noThere were 0 Company contributions had been made sinceto the inception of the plan.plan prior to October 2006. The Company’s match vests 25% a year over four years starting from the employee’s hire date. The Company recorded expense of approximately $0.3$0.1 million and $0.2 million for each of the years ended March 31, 2016, 2015Fiscal 2022 and 2014.2021, respectively.
14. Other Current LiabilitiesAssets
The Company iswas a party to a Development and License Agreement with Carrier Corporation (“Carrier”) regarding the payment of royalties on the sale of each of the Company’s 200 kilowatt (“C200”) microturbines. DuringIn 2013, the three months ended September 30, 2013, weCompany reached ourits repayment threshold level and the fixed rate royalty was reduced by 50%. On July 25, 2018, the Company and Carrier earned $1.2entered into a Second Amendment to the Development and License Agreement (“Second Amendment”) whereby the Company agreed to pay Carrier approximately $3.0 million $1.6to conclude the Company’s current royalty obligation under the Development and License Agreement, dated as of September 4, 2007, as amended (“Development Agreement”) and release the Company from any future royalty payment obligations. The Second Amendment also removed non-compete provisions from the Development Agreement, allowing the Company to design market or sell its C200 System in conjunction with any energy system and compete with Carrier products in the CCHP market.
On September 19, 2018, the Company paid in full the negotiated royalty settlement of $3.0 million to Carrier, and $2.8as such, there is 0 further royalty obligation to Carrier. The prepaid royalty of $3.0 million has been recorded under the captions “Prepaid expenses and other current assets” and “Other assets” in the accompanying consolidated balance sheets and will be amortized in the accompanying consolidated statements of operations over a 15-year amortization period through September 2033 using an effective royalty rate. A 15-year amortization period is the minimum expected life cycle of the current generation of product. The effective royalty rate is calculated as the prepaid royalty settlement divided by total projected C200 System units over the 15-year amortization period. On a quarterly basis, the Company will perform a re-forecast of C200 System unit shipments, to determine if an adjustment to the effective royalty rate is necessary. Accordingly, if the Company’s future projections change, its effective royalty rates would change, which could affect the
F-33
CAPSTONE GREEN ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amount and timing of royalty expense the Company recognizes. If impairment exists, then the prepaid royalty asset could be written down to fair value. Prepaid royalties for C200are classified as current assets to the extent that such amounts will be recognized in the Company’s consolidated statements of operations within the next twelve months. The current and C1000 Series system sales duringlong-term portions of prepaid royalties, included in other current assets and other assets, respectively, consisted of (in thousands):
| | | | | | | |
| | March 31, | | March 31, | | ||
|
| 2022 |
| 2021 |
| ||
Other current assets | | $ | 124 | | $ | 124 | |
Other assets | | | 2,506 | |
| 2,613 | |
Royalty-related assets | | $ | 2,630 | | $ | 2,737 | |
15. Subsequent Events
The Company has evaluated all subsequent events through the year ended March 31, 2016, 2015 and 2014, respectively. Earned royaltiesfiling date of $0.2 million and $0.4 million were unpaidthis Form 10-K with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of March 31, 20162022 and March 31, 2015, respectively, and are included in accrued expensesevents which occurred subsequently but were not recognized in the accompanying balance sheets.financial statements. Except as described below, there were no other subsequent events which required recognition, adjustment to or disclosure in the financial statements.
15. Subsequent EventsDuring the first quarter of Fiscal 2023, the Company has entered into several rental agreements, to rent used microturbine equipment from customers where that equipment was not currently in use. The Company is then renting this equipment to end users as part of its Energy as a Service business. These agreements total approximately 11.8 MW of microturbines, have an average term of 36 months, and have a total commitment value of approximately $9.5 million.
On May 9, 2016,July 13, 2022 we entered into the Company announced that its Board of Directors adopted a Net Operating Loss (“NOL”) Shareholder RightsSecond Amendment to the A&R Note Purchase Agreement (the “NOL Rights Plan”) designedwith the Purchaser and the Collateral Agent, pursuant to preserve its substantial tax assets. At March 31, 2016, we had federalwhich (i) the Purchaser and state net operating loss carryforwards of approximately $652 million and $181 million, respectively, which may be utilized to reduce future taxable income, subject to limitations under Section 382the Collateral Agent waived our breach of the Internal Revenue Code of 1986. In connection withAdjusted EBITDA covenant and (ii) the adoption of the NOL Rights Plan, Capstone also entered into Amendment No. 5 (the “Amendment”)A&R Note Purchase Agreement has been amended to, the rights agreement, dated as of July 7, 2005, as amended (the “Original Rights Agreement”), between the Company and Computershare Inc. as successor-in-interestamong other things, add certain new covenants, including requirements that we use our commercially reasonable best efforts to Mellon Investor Services LLC. The Amendment accelerates the expiration of the Company’s preferred share purchase rights under the Original Rights Agreement from 5:00 p.m., California time, on the 30th day after the Company’s 2017 annual meeting of stockholders to 5:00 p.m., California time, on May 6, 2016, and has the effect of terminating the Original Rights Agreement. Upon the termination of the Original Rights Agreement, all of the preferred share purchase rights distributed to holders of the Company’s common stock pursuant to the Original Rights Agreement expired.
On April 19, 2016, the Company entered into an underwriting agreement with Oppenheimer & Co. Inc. as the sole book-running manager, and Rodman & Renshaw,raise at least $10 million through a unit of H.C. Wainwright & Co., LLC, as the co-manager, related to the public offering of 2.7 million sharessale of our common stock by September 14, 2022 and pre-funded Series B warrants to purchase up to 5.5 million shares of common stock, which were offered in lieu of common stock to those purchasers whose purchase of common stock inrefinance the offering otherwise would result in the purchaser beneficially owning more than 4.99% of the Company’s outstanding common stock following the completion of the offering. Also included in the offering were Series A warrants to purchase 4.1 million shares of common stock. Every two shares of common stock were sold with one Series A Warrant to purchase one share of common stock at a collective negotiated price of $3.50. Every two Series B Warrants were sold with one Series A Warrant to purchase one share of common stock at a collective negotiated price of $3.48. The net proceeds to the Company from the sale of the common stock, after deducting fees and other offering expenses, were approximately $13.1 million. The offering closed on April 22, 2016.Notes by October 1, 2022.
F-31F-34
SCHEDULE II
CAPSTONE TURBINE CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Exhibit Index
FOR THE YEARS ENDED MARCH 31, 2016, 2015 and 2014
(In thousands)
*Management contract or compensatory plan or arrangement
SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of Capstone Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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