AMERICAN SUPERCONDUCTOR CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). For this purpose, any statements contained herein that
relate to future events or conditions, including without limitation, the
statements in Part II, "Item 1A. Risk Factors" and in Part I under "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and located elsewhere herein regarding industry prospects, the
timing of our REG system project with Commonwealth Edison Company , our
prospective results of operations or financial position and adoption of
accounting changes may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
and similar expressions are intended to identify forward-looking statements.
Such forward-looking statements represent management's current expectations and
are inherently uncertain. There are a number of important factors that could
materially impact the value of our common stock or cause actual results to
differ materially from those indicated by such forward-looking statements. These
important factors include, but are not limited to: A significant portion of our
revenues are derived from a single customer, Inox, and we cannot predict if and
how successful Inox will be in executing on Solar Energy Corporation
of India ("SECI") orders under the new central and state auction regime, and any
related failure by Inox to succeed under this regime, or any delay in Inox's
ability to deliver its wind turbines, could result in fewer electric control
systems shipments to Inox; We have a history of operating losses and negative
operating cash flows, which may continue in the future and require us to secure
additional financing in the future; Our operating results may fluctuate
significantly from quarter to quarter and may fall below expectations in any
particular fiscal quarter; We may be required to issue performance bonds or
provide letters of credit, which restricts our ability to access any cash used
as collateral for the bonds or letters of credit; Changes in exchange rates
could adversely affect our results of operations; If we fail to maintain proper
and effective internal control over financial reporting, our ability to produce
accurate and timely financial statements could be impaired and may lead
investors and other users to lose confidence in our financial data; Our
financial condition may have an adverse effect on our customer and supplier
relationships; Our contracts with the U.S. government are subject to audit,
modification or termination by the U.S. government and include certain other
provisions in favor of the government, and additional funding of such contracts
may not be approved by U.S. Congress ; Our success in addressing the wind energy
market is dependent on the manufacturers that license our designs; Our success
is dependent upon attracting and retaining qualified personnel and our inability
to do so could significantly damage our business and prospects; We may
experience difficulties re-establishing our HTS wire production capability in
our Ayer, Massachusetts facility; We may not realize all of the sales expected
from our backlog of orders and contracts; Our business and operations would be
adversely impacted in the event of a failure or security breach of our
information technology infrastructure; Failure to comply with evolving data
privacy and data protection laws and regulations or to otherwise protect
personal data, may adversely impact our business and financial results; We rely
upon third-party suppliers for the components and subassemblies of many of our
Wind and Grid products, making us vulnerable to supply shortages and price
fluctuations, which could harm our business; Many of our revenue opportunities
are dependent upon subcontractors and other business collaborators; If we fail
to implement our business strategy successfully, our financial performance could
be harmed; Problems with product quality or product performance may cause us to
incur warranty expenses and may damage our market reputation and prevent us from
achieving increased sales and market share; Many of our customers outside of the
United States may be either directly or indirectly related to governmental
entities, and we could be adversely affected by violations of the United States
Foreign Corrupt Practices Act and similar worldwide anti-bribery laws
outside the United States ; We have had limited success marketing and selling our
superconductor products and system-level solutions, and our failure to more
broadly market and sell our products and solutions could lower our revenue and
cash flow; We may acquire additional complementary businesses or technologies,
which may require us to incur substantial costs for which we may never realize
the anticipated benefits; Our success depends upon the commercial adoption of
the Resilient Electric Grid ("REG") system, which is currently limited, and a
widespread commercial market for our products may not develop; Growth of the
wind energy market depends largely on the availability and size of government
subsidies, economic incentives and legislative programs designed to support the
growth of wind energy; We have operations in, and depend on sales in, emerging
markets, including India , and global conditions could negatively affect our
operating results or limit our ability to expand our operations outside of these
markets; Changes in India's political, social, regulatory and economic
environment may affect our financial performance; Our products face intense
competition, which could limit our ability to acquire or retain customers; Our
international operations are subject to risks that we do not face in the United
States , which could have an adverse effect on our operating results; Lower
prices for other fuel sources may reduce the demand for wind energy development,
which could have a material adverse effect on our ability to grow our Wind
business; Adverse changes in domestic and global economic conditions could
adversely affect our operating results; We face risks related to our
intellectual property; We face risks related to our technologies; We face risks
related to our legal proceedings; We face risks related to our common stock; and
the important factors discussed under the caption "Risk Factors" in Part 1. Item
1A of our Form 10-K for the fiscal year ended March 31, 2019 and our other
reports filed with the SEC . These important factors, among others, could cause
actual results to differ materially from those indicated by forward-looking
statements made herein and presented elsewhere by management from time to time.
Any such forward-looking statements represent management's estimates as of the
date of this Quarterly Report on Form 10-Q. While we may elect to update such
forward-looking statements at some point in the future, we disclaim any
obligation to do so, even if subsequent events cause our views to change. These
forward-looking statements should not be relied upon as representing our views
as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
American Superconductor®, Amperium®, AMSC®, D-VAR®, PowerModule™, D-VAR VVO®,
PQ-IVR®, SeaTitan®, Gridtec Solutions™, Windtec Solutions™ and Smarter,
Cleaner...Better Energy™ are trademarks or registered trademarks of American
Superconductor Corporation or our subsidiaries. We reserve all of our rights
with respect to our trademarks or registered trademarks regardless of whether
they are so designated in this Quarterly Report on Form 10-Q by an ® or ™
symbol. All other brand names, product names, trademarks or service marks
appearing in this Quarterly Report on Form 10-Q are the property of their
respective holders.
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Executive Overview We are a leading provider of megawatt-scale solutions that enhance the performance of the power grid, protect ourNavy's fleet, and lower the cost of wind power. In the power grid market, we enable electric utilities, industrial facilities, and renewable energy project developers to connect, transmit and distribute power through our transmission planning services and power electronics and superconductor-based systems. In the wind power market, we enable manufacturers to field highly competitive wind turbines through our advanced power electronics and control system products, engineering, and support services. Our power grid and wind products and services provide exceptional reliability, security, efficiency and affordability to our customers. Our power system solutions help to improve energy efficiency, alleviate power grid capacity constraints, improve system resiliency, and increase the adoption of renewable energy generation. Demand for our solutions is driven by the growing needs for modernized smart grids that improve power reliability, security and quality, theU.S. Navy's effort to upgrade in-board power systems to support fleet electrification, and the need for increased renewable sources of electricity, such as wind and solar energy. Concerns about these factors have led to increased spending by corporations and the military, as well as supportive government regulations and initiatives on local, state, and national levels, including renewable portfolio standards, tax incentives and international treaties. We manufacture products using two proprietary core technologies: PowerModule™ programmable power electronic converters and our Amperium® high temperature superconductor ("HTS") wires. These technologies and our system-level solutions are protected by a broad and deep intellectual property portfolio consisting of hundreds of patents and licenses worldwide. We operate our business under two market-facing business units: Grid and Wind. We believe this market-centric structure enables us to more effectively anticipate and meet the needs of electric utilities, power generation project developers and wind turbine manufacturers.
• Grid. Through our Gridtec Solutions™, our Grid business segment enables
electric utilities and renewable energy project developers to connect,
transmit and distribute power with exceptional efficiency, reliability,
security and affordability. We provide transmission planning services that
allow us to identify power grid congestion, poor power quality, and other
risks, which help us determine how our solutions can improve network
performance. These services often lead to sales of our grid interconnection
solutions for wind farms and solar power plants, power quality systems and
transmission and distribution cable systems. We also sell ship protection
products to the U.S. Navy through our Grid business segment.
• Wind. Through our Windtec Solutions™, our Wind business segment enables
manufacturers to field wind turbines with exceptional power output,
reliability and affordability. We supply advanced power electronics and
control systems, license our highly engineered wind turbine designs, andprovide extensive customer support services to wind turbine manufacturers.
Our design portfolio includes a broad range of drive trains and power
ratings of 2 megawatts ("MW") and higher. We provide a broad range of power
electronics and software-based control systems that are highly integrated
and designed for optimized performance, efficiency, and grid compatibility.
Our fiscal year begins onApril 1 and ends onMarch 31 . When we refer to a particular fiscal year, we are referring to the fiscal year beginning onApril 1 of that same year. For example, fiscal 2019 refers to the fiscal year beginning onApril 1, 2019 . Other fiscal years follow similarly. OnJuly 3, 2018 , we and our wholly-owned subsidiariesSuzhou AMSC Superconductor Co. Ltd. ("AMSC China") andAMSC Austria GmbH ("AMSC Austria") entered into a settlement agreement (the "Settlement Agreement") with Sinovel Wind Group Co., Ltd. ("Sinovel"). The Settlement Agreement settles the litigation and arbitration proceedings between us and Sinovel listed on Schedule 2 of the Settlement Agreement (the "Proceedings"), and any other civil claims, counterclaims, causes of action, rights and obligations directly or indirectly relating to the subject matters of the Proceedings and the contracts between us and Sinovel listed on Schedules 1 and 4 of the Settlement Agreement, subject to the exception described in Section 1.1 of the Settlement Agreement. The Settlement Agreement was filed as Exhibit 10.1 to the Company's Form 8-K filed with theSecurities and Exchange Commission onJuly 9, 2018 . Under the terms of the Settlement Agreement, Sinovel agreed to pay AMSC China an aggregate cash amount in Renminbi ("RMB") equivalent to$57.5 million , consisting of two installments. Sinovel paid the first installment of the RMB equivalent of$32.5 million onJuly 4, 2018 and paid the second installment of the RMB equivalent of$25.0 million onDecember 27, 2018 . In addition, pursuant to the terms of the Settlement Agreement, we and AMSCAustria have granted Sinovel a non-exclusive license for certain of our intellectual property to be used solely in Sinovel's doubly fed wind turbines (the "License"). We have agreed not to sue Sinovel, Sinovel's power converter suppliers or Sinovel's customers for use of the technology covered by the License. OnOctober 31, 2018 , we entered into a Subcontract Agreement with Commonwealth Edison Company ("ComEd") (the "Subcontract Agreement") for the manufacture and installation of the Company's REG system within ComEd's electric grid inChicago, Illinois (the "Project"). As provided in the Subcontract Agreement, the Subcontract Agreement became effective upon the signing of an amendment by us and theU.S. Department of Homeland Security ("DHS") to the existing contract (the "Prime Contract") between us andDHS onJune 20, 2019 . Unless terminated earlier by us, ComEd orDHS according to the terms of the Subcontract Agreement, the term of the Subcontract Agreement will continue until we complete our warranty obligations under the Subcontract Agreement. Under the terms of the Subcontract Agreement, we have agreed, among other things, to provide the REG system and to supervise ComEd's installation of the REG system inChicago . As part of our separate cost sharing arrangement withDHS under the Prime Contract, we expect funding provided byDHS in connection with the Subcontract Agreement to be between$9.0 to$11.0 million , which represents the total amount of revenue we are expected to recognize over the term of the Subcontract Agreement and includes up to$1.0 million that we have agreed to reimburse ComEd for costs incurred by ComEd while undertaking its tasks under the Subcontract Agreement (the "Reimbursement Amount"). In addition, we are required to deliver an irrevocable letter of credit in the amount of$5.0 million to secure certain Company obligations under the Subcontract Agreement. ComEd has agreed to provide the site and provide all civil engineering work required to support the installation, operation and integration of the REG system into ComEd's electric grid. Other than the Reimbursement Amount, ComEd is responsible for its own costs and expenses.DHS's approval to commence with construction was obtained onJune 20, 2019 . Substation work on the project began in late 2019. The REG system is expected to be operational in 2021. 24 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of the unaudited condensed consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ under different assumptions or conditions. EffectiveApril 1, 2019 , we adopted ASU 2016-02, which provides for new requirements in regards to leases. See Note 14, "Leases" for further details. Aside from the adoption of ASU 2016-02, there were no significant changes in the critical accounting policies that were disclosed in our Form 10-K for fiscal 2018, which ended onMarch 31, 2019 . Results of Operations
Three and nine months ended
Revenues
Total revenues increased 27% and 10% to
Three Months Ended December 31, Nine Months Ended December 31,
2019 2018 2019 2018
Revenues:
Grid $ 15,232 $ 6,826 $ 36,577 $ 23,325
Wind 2,683 7,308 9,120 18,293
Total $ 17,915 $ 14,134 $ 45,697 $ 41,618
Our Grid business unit accounted for 85% and 80% of total revenues for the three
and nine months ended December 31, 2019 , respectively, compared to 48% and 56%
for the three and nine months ended December 31, 2018 , respectively. Our Grid
business unit revenues increased 123% and 57% to $15.2 million and $36.6 million
in the three and nine months ended December 31, 2019 , respectively, from $6.8
million and $23.3 million in the three and nine months ended December 31, 2018 ,
respectively. Grid business unit revenue in both the three and nine months ended
December 31, 2019 increased primarily driven by growth in D-VAR, SPS and REG
revenue.
Our Wind business unit accounted for 15% and 20% of total revenues for the three
and nine months ended December 31, 2019 , respectively, compared to 52% and 44%
for the three and nine months ended December 31, 2018 , respectively. Revenues in
the Wind business unit decreased 63% and 50% to $2.7 million and $9.1 million in
the three and nine months ended December 31, 2019 , respectively, from $7.3
million and $18.3 million in the three and nine months ended December 31, 2018 ,
respectively. The decreases over the prior year period were driven primarily by
decreased shipments of ECS to Inox offset slightly by increased development
revenue for the 3MW wind turbine platform with Inox and the 5.5MW with Doosan.
As further described in Note 1 "Nature of the Business and Operations and
Liquidity," Inox is currently delinquent on its obligations to post letters of
credit for sets of electrical control systems that Inox has agreed to purchase
under the terms of the supply contract. We cannot predict if and when Inox will
resume posting letters of credit for payment of contracted-for shipments of
electrical control systems. Any continued failure by Inox to post letters of
credit and take delivery of contracted-for shipments of electrical control
shipments would impact the Company's revenues and liquidity. Inox has been
active in the new central and state government auction regime in India and has
over 900 MW of orders from the first four SECI central government auctions, and
50 MW from the Maharashtra state government auction. However, we cannot predict
if and how successful Inox will be in executing on these orders or in obtaining
new orders under the new central and state auction regime. Any failure by Inox
to succeed under this regime, or any delay in Inox's ability to deliver its wind
turbines, could result in fewer ECS shipments to Inox.
Cost of Revenues and Gross Margin
Cost of revenues increased by 57% and 28% to$16.3 million and$38.8 million for the three and nine months endedDecember 31, 2019 , respectively, compared to$10.4 million and$30.4 million for the three and nine months endedDecember 31, 2018 , respectively. Gross margin was 9% and 15% for the three and nine months endedDecember 31, 2019 , respectively, compared to 26% and 27% for the three and nine months endedDecember 31, 2018 , respectively. The decrease in gross margin in the three and nine months endedDecember 31, 2019 was primarily due to increased revenue from cost share projects withDHS and a less favorable product mix in the current year periods. 25 --------------------------------------------------------------------------------
Operating Expenses Research and development R&D expenses decreased 17% in the three months endedDecember 31, 2019 to$2.0 million from$2.5 million in the three months endedDecember 31, 2018 . R&D expenses decreased 9% in the nine months endedDecember 31, 2019 to$6.9 million from$7.6 million in the nine months endedDecember 31, 2018 . The decreases in R&D expense in both the three and nine month periods were primarily due to better labor absorption to cost of revenues to support revenue generating projects.
Selling, general, and administrative
SG&A expenses increased 14% in the three months endedDecember 31, 2019 to$6.1 million from$5.3 million in the three months endedDecember 31, 2018 . SG&A expenses increased 3% in the nine months endedDecember 31, 2019 to$16.7 million from$16.3 million in the nine months endedDecember 31, 2018 . The increases in SG&A expense in the both the three and nine month periods was due primarily to higher overall compensation expense than the prior fiscal year. Gain on Sinovel settlement We recorded a gain of$25.0 million and$53.7 million , net of legal and other direct costs, in the three and nine months endedDecember 31, 2018 , respectively, as a result of the receipt of the payments from Sinovel required by the Settlement Agreement.
Amortization of acquisition related intangibles
We recorded amortization expense related to our core technology and know-how, trade names and trademark, and intangible assets of$0.1 million and$0.3 million in the three and nine month periods endedDecember 31, 2019 , respectively, and$0.1 million and$0.3 million in the three and nine months endedDecember 31, 2018 respectively. Restructuring We recorded$0.1 million and$0.4 million for facility exit costs in the three and nine months endedDecember 31, 2018 , respectively, as a result of the relocation of the corporate office that was announced as part of ourApril 4, 2017 approved restructuring plan. There was no restructuring activity in the three and nine months endedDecember 31, 2019 . Operating (loss) income
Our operating (loss) income is summarized as follows (in thousands):
Three Months Ended December 31, Nine Months Ended December 31,
2019 2018 2019 2018
Operating (loss) income:
Grid $ (3,732 ) $ (2,665 ) $ (9,723 ) $ (8,202 )
Wind (2,297 ) 24,269 (6,015 ) 51,419
Unallocated corporate expenses (590 ) (839 ) (1,236 ) (2,851 )
Total $ (6,619 ) $ 20,765 $ (16,974 ) $ 40,366
Our Grid segment generated an operating loss of $3.7 million and $9.7 million in
the three and nine months ended December 31, 2019 , respectively, compared to
$2.7 million and $8.2 million in the three and nine months ended December 31,
2018 , respectively. The increase in the Grid business unit operating loss in the
three and nine months ended December 31, 2019 was primarily due to a less
favorable product mix than in the prior year period.
Our Wind segment generated an operating loss of $2.3 million and $6.0 million in
the three and nine months ended December 31, 2019 , respectively, compared to
income of $24.3 million and $51.4 million in the three and nine months ended
December 31, 2018 , respectively. The decreases in the Wind business unit
operating income in both periods were due primarily to receipt of the payments
from Sinovel required by the Settlement Agreement in the second and third
quarters of fiscal 2018 and no such payment in fiscal 2019.
Unallocated corporate expenses primarily consist of stock-based compensation
expense of $0.6 million and $0.8 million in the three months ended December 31,
2019 and 2018, respectively, and restructuring charges of $0.1 million in the
three months ended December 31, 2018 . Unallocated corporate expenses primarily
consist of stock-based compensation expense of $1.2 million and $2.4 million in
the nine months ended December 31, 2019 and 2018, respectively, and
restructuring charges of $0.4 million in the nine months ended December 31,
2018 .
Change in fair value of warrants
The change in fair value of warrants resulted in gains of$0.6 million and$4.6 million in the three and nine months endedDecember 31, 2019 , respectively, compared to losses of$2.5 million and$2.7 million in the three and nine months endedDecember 31, 2018 , respectively. The change in the fair value was primarily driven by changes in stock price, which is a key valuation metric, as well as the exercise of the Hercules warrant inJune 2019 and Hudson warrants inNovember 2019 . 26
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Minority Interest The gain on sale of minority interest was$0.1 million in each of the three and nine months endedDecember 31, 2018 . There was no minority interest activity in the three and nine months endedDecember 31, 2019 .
Interest income, net
Interest income, net, was$0.3 million and$1.1 million in the three and nine months endedDecember 31, 2019 , compared to$0.3 million and$0.8 million in the three and nine months endedDecember 31, 2018 . The increase in interest income in the nine months endedDecember 31, 2019 was primarily related to higher cash balances earning higher interest rates than in prior periods as well as the non-cash interest income recognized from receipt of the final payment on theDevens facility note receivable. Other (expense) income, net Other expense, net, was$0.9 million and other income, net was less than$0.1 million in the three and nine months endedDecember 31, 2019 , compared to other income, net of$0.1 million and$1.1 million in the three and nine months endedDecember 31, 2018 . The increase in other expense, net, in the three month period was primarily driven by higher foreign losses. The decrease in other income, net, in the nine month period was primarily driven by foreign exchange gains and higher interest income. Income Taxes Income tax expense was$0.1 million and less than$0.1 million in the three and nine months endedDecember 31, 2019 , compared to$1.6 million and$4.5 million in the three and nine months endedDecember 31, 2018 . The decrease in income tax expense is due primarily to the prior year repayment of previously reserved intercompany trade balances due to AMSC Austria from AMSC China, and a dividend paid by AMSC Austria to us in the nine months endedDecember 31, 2018 following the Sinovel settlement. Net (loss) income Net loss was$6.8 million and$11.2 million in the three and nine months endedDecember 31, 2019 , respectively, compared to net income of$17.3 million and$35.1 million in the three and nine months endedDecember 31, 2018 , respectively. The increase in net loss in both periods was primarily driven by the receipt of the payments from Sinovel required by the Settlement Agreement in the second and third quarters of fiscal 2018 and no such payments in fiscal 2019.
Non-GAAP Financial Measure - Non-GAAP Net Loss
Generally, a non-GAAP financial measure is a numerical measure of a company's
performance, financial position or cash flow that either excludes or includes
amounts that are not normally excluded or included in the most directly
comparable measure calculated and presented in accordance with GAAP. The
non-GAAP measures included in this Form 10-Q, however, should be considered in
addition to, and not as a substitute for or superior to the comparable measures
prepared in accordance with GAAP.
We define non-GAAP net loss as net loss before sale of minority investments,
stock-based compensation, gain on Sinovel settlement, net, amortization of
acquisition-related intangibles, changes in fair value of warrants, and other
non-cash or unusual charges, and the tax effect of those adjustments calculated
at the relevant rate for our non-GAAP metric, indicated in the table below. We
believe non-GAAP net loss assists management and investors in comparing our
performance across reporting periods on a consistent basis by excluding these
non-cash or non-recurring charges that we do not believe are indicative of our
core operating performance. A reconciliation of GAAP to non-GAAP net loss is set
forth in the table below (in thousands, except per share data):
Three Months Ended December 31, Nine Months Ended December 31,
2019 2018 2019 2018
Net (loss) income $ (6,845 ) $ 17,293 $ (11,209 ) $ 35,114
Sale of minority investments 0 (127 ) 0 (127 )
Stock-based compensation 590 792 1,236 2,402
(Gain) on Sinovel settlement, net - (24,978 ) - (53,698 )
Amortization of acquisition-related
intangibles 85 85 255 255
Changes in fair value of warrants (556 ) 2,475 (4,648 ) 2,658
Tax effect of adjustments for (gain) on
Sinovel settlement, net - 2,163 - 4,991
Non-GAAP net loss $ (6,726 ) $ (2,297 ) $ (14,366 ) $ (8,405 )
Non-GAAP net loss per share - basic $ (0.32 ) $ (0.11 ) $ (0.69 ) $ (0.41 )
Weighted average shares outstanding -
basic 21,185 20,419 20,786 20,300
We incurred non-GAAP net losses of $6.7 million and $14.4 million or $0.32 and
$0.69 per share, for the three and nine months ended December 31, 2019 ,
respectively, compared to non-GAAP net losses of $2.3 million and $8.4 million ,
or $0.11 and $0.41 per share for the three and nine months ended December 31,
2018 respectively. The increases in non-GAAP net loss were primarily due to the
more favorable product mix in the prior year period.
For a description and reconciliation of our other non-GAAP financial measure,
non-GAAP operating cash flow, see the below under "Non-GAAP Financial Measure -
Non-GAAP Operating Cash Flow."
27
--------------------------------------------------------------------------------Liquidity and Capital Resources
We have experienced recurring operating losses, and as of
Our cash requirements depend on numerous factors, including whether Inox is successful in executing on SECI orders or in obtaining additional orders under the new central and state auction regime, whether and to the extent that Inox fulfills its purchase obligations under our supply contract, the successful completion of our product development activities, our ability to commercialize our REG and ship protection system solutions, the rate of customer and market adoption of our products, collecting receivables according to established terms, and the continued availability ofU.S. government funding during the product development phase of our superconductor-based products. We continue to closely monitor our expenses and, if required, expect to further reduce our operating and capital spending to enhance liquidity. As ofDecember 31, 2019 , we had cash, cash equivalents, restricted cash, and marketable securities of$66.3 million , compared to$78.2 million as ofMarch 31, 2019 , a decrease of$11.9 million . As ofDecember 31, 2019 , we had approximately$8.4 million of cash, cash equivalents, and restricted cash in foreign bank accounts. Our cash and cash equivalents, marketable securities and restricted cash are summarized as follows (in thousands): December 31, 2019 March 31, 2019 Cash and cash equivalents$ 25,481 $ 77,483 Marketable securities 35,047 0 Restricted cash 5,754 715 Total cash, cash equivalents, marketable securities and restricted cash$ 66,283 $ 78,198 For the nine months endedDecember 31, 2019 , net cash used in operating activities was$17.8 million compared to net cash provided by operating activities of$47.8 million for the nine months endedDecember 31, 2018 . The decrease in net cash provided by operations was due primarily to the receipt of the first and second payments from the Sinovel settlement in the nine months endedDecember 31, 2018 with no similar transaction in the nine months endedDecember 31, 2019 . For the nine months endedDecember 31, 2019 , net cash used in investing activities was$34.9 million , compared to$0.7 million for the nine months endedDecember 31, 2018 . The increase in net cash used in investing activities was due primarily to the purchase of marketable securities and increased purchases of property, plant and equipment related to improvements to theAyer facility and factory equipment to support theNavy and REG projects, partially offset by the receipt of the second installment payment under the Note Receivable from theDevens facility sale in the nine months endedDecember 31, 2019 . For the nine months endedDecember 31, 2019 , net cash provided by financing activities was$5.7 million compared to net cash used in financing activities of$0.4 million in the nine months endedDecember 31, 2018 . The increase in net cash provided by financing activities was due primarily to proceeds received from the exercise of theHudson warrants during the nine months endedDecember 31, 2019 . As ofDecember 31, 2019 , we had$5.8 million of restricted cash included in long-term assets. These amounts included in restricted cash primarily represent deposits to secure letters of credit for various supply contracts and long-term projects. These deposits are held in interest bearing accounts. We believe we have sufficient available liquidity to fund our operations and capital expenditures for the next twelve months. In addition, we may seek to raise additional capital, which could be in the form of loans, convertible debt or equity, to fund our operating requirements and capital expenditures. Our liquidity is highly dependent on our ability to increase revenues, including our ability to collect revenues under our agreements with Inox, control our operating costs, and our ability to raise additional capital, if necessary. There can be no assurance that we will be able to raise additional capital, on favorable terms or at all, or execute on any other means of improving our liquidity as described above.
Non-GAAP Financial Measure - Non-GAAP Operating Cash Flow
We define non-GAAP operating cash flow as operating cash flow before the Sinovel
settlement (net of legal fees and expenses); tax effect of adjustments; and
other unusual cash flows or items. We believe non-GAAP operating cash flow
assists management and investors in comparing our operating cash flow across
reporting periods on a consistent basis by excluding these non-recurring cash
items that it does not believe are indicative of our core operating cash flow. A
reconciliation of GAAP to non-GAAP operating cash flow is set forth in the table
below (in thousands).
Nine months ended
December 31, December 31,
2019 2018
Operating cash flow $ (17,779 ) $ 47,786
Sinovel settlement (net of legal fees and expenses) 1,000 (54,724 )
Tax effect of adjustments 2,724 2,377
Non-GAAP operating cash flow $ (14,055 ) $ (4,561 )
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Legal Proceedings We are involved in legal and administrative proceedings and claims of various types. See Part II, Item 1, "Legal Proceedings," for additional information. We record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. We review these estimates each accounting period as additional information is known and adjust the loss provision when appropriate. If a matter is both probable to result in liability and the amounts of loss can be reasonably estimated, we estimate and disclose the possible loss or range of loss to the extent necessary to make the consolidated financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in our consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined underSEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating transactions that are not required to be reflected on our balance sheet except as discussed below. We occasionally enter into construction contracts that include a performance bond. As these contracts progress, we continually assess the probability of a payout from the performance bond. Should we determine that such a payout is probable, we would record a liability.
In addition, we have various contractual arrangements in which minimum quantities of goods or services have been committed to be purchased on an annual basis.
Recent Accounting Pronouncements
InFebruary 2016 , the FASB issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This ASU and its amendments are effective for fiscal years beginning afterDecember 15, 2018 , including interim periods within those fiscal years.
• In
842, Leases. The amendments in ASU 2018-10 provide more clarification in
regards to the application and requirements of ASU 2016-02.
• In
improvements. The amendments in ASU 2018-11 provide for the option to adopt
the standard prospectively and recognize a cumulative-effect adjustment to the
opening balance of retained earnings as well as offer a new practical
expedient that will allow us to elect, by class of underlying asset, to not
separate non-lease and lease components in certain circumstances and instead
to account for those components as a single item.
ASU 2016-02 became effective on April 1, 2019 , and we adopted the standard using
the modified retrospective transition method, which will impact all leases
existing at, or entered into after, the period of adoption. For all leases
existing at the time of adoption we recognized a right-of-use asset and lease
liability on the balance sheet. See Note 14 "Leases" for additional
information.
In June 2016 , the FASB issued ASU 2016-13, Financial Instruments-Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments. The
amendments in ASU 2016-13 provide more decision-useful information about the
expected credit losses on financial instruments and other commitments to extend
credit held by a reporting entity at each reporting date. The ASU is effective
for annual reporting periods beginning after December 15, 2019 , including
interim periods within that year. Following the release of ASU 2019-10 in
November 2019 , the new effective date, as long as the Company remains a smaller
reporting company, would be annual reporting periods beginning after December
15, 2022 . We are currently evaluating the impact, if any, the adoption of ASU
2016-13 may have on our consolidated financial statements.
In July 2017 , the FASB issued ASU 2017-11, Earnings per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging
(Topic 815). The amendments in ASU 2017-11 provide guidance for freestanding
equity-linked financial instruments, such as warrants and conversion options in
convertible debt or preferred stock, and should no longer be accounted for as a
derivative liability at fair value as a result of the existence of a down round
feature. The ASU is effective for annual reporting periods beginning after
December 15, 2018 , including interim periods within those periods. As of April
1, 2019 we have adopted ASU 2017-11 and noted no significant impact on our
consolidated financial statements, primarily due to the put option feature which
required continued liability classification under ASC 840.
In August 2017 , the FASB issued ASU 2017-12, Derivatives and Hedging (Topic
815): Targeted Improvements to Accounting for Hedging Activities. The amendments
in ASU 2017-12 provide improved financial reporting of hedging relationships to
better portray the economic results of an entity's risk management activities in
its financial statements. In addition, the amendments in this update make
certain targeted improvements to simplify the application of the hedge
accounting guidance. The ASU is effective for annual reporting periods beginning
after December 15, 2018 , including interim periods within those periods. As of
April 1, 2019 we have adopted ASU 2017-12 and noted no significant impact on our
consolidated financial statements, primarily due to the fact that there are no
longer any hedging instruments included in our results.
In June 2018 , the FASB issued ASU 2018-08, Not-For-Profit Entities (Topic 958):
Clarifying the Scope and the Accounting Guidance for Contributions Received and
Contributions Made. The amendments in ASU 2018-08 assist entities in (1)
evaluating whether transactions should be accounted for as contributions
(nonreciprocal transactions) within the scope of Topic 958, Not-for-Profit
Entities, or as exchange (reciprocal) transactions subject to other guidance and
(2) determining whether a contribution is conditional. The ASU is effective for
annual reporting periods beginning after December 15, 2018 , including interim
periods within those periods. As of April 1, 2019 , we have adopted ASU 2018-08
and noted additional disclosures within our revenue footnote to appropriately
present the revenue related to our grant revenue.
In August 2018 , the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):
Changes to the Disclosure Requirements for Fair Value Measurement. The
amendments in ASU 2018-13 provide for increased effectiveness of the disclosures
made around fair value measurements while including consideration for costs and
benefits. The ASU is effective for annual reporting periods beginning after
December 15, 2019 , including interim periods within those periods. We are
currently evaluating the impact the adoption of ASU 2018-13 may have on our
consolidated financial statements.
In December 2019 , the FASB issued ASU 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12
provide for simplified accounting to several income tax situations and removal
of certain accounting exceptions. The ASU is effective for annual reporting
periods beginning after December 15, 2020 , including interim periods within
those periods. We do not expect the impact of the adoption of ASU 2019-12 to be
material to our consolidated financial statements.
We do not believe that, outside of those disclosed here, there are any other
recently issued accounting pronouncements that will have a material impact on
our consolidated financial statements.
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