Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies (Policies)

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Summary of Significant Accounting Policies (Policies)
 12 Months Ended
Mar. 31, 2014
Summary of Significant Accounting Policies  
Cash Equivalents
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.
Restricted Cash

Restricted Cash    As of March 31, 2011, the Company had maintained $1.3 million as additional security for its line of credit with Wells Fargo. During Fiscal 2012, Wells Fargo released $1.3 million of the restricted cash.

        See Note 11—Revolving Credit Facility, for discussion of the line of credit with Wells Fargo.
Fair Value of Financial Instruments
Fair Value of Financial Instruments    The carrying value of certain financial instruments, including cash equivalents, accounts receivable, accounts payable, revolving credit facility and notes payable approximate fair market value based on their short-term nature. See Note 10—Fair Value Measurements, for disclosure regarding the fair value of other financial instruments.
Accounts Receivable
Accounts Receivable    Trade accounts receivable are recorded at the invoiced amount and typically non-interest bearing. The Company maintains allowances for estimated losses resulting from the inability of customers to make required payments and other accounts receivable allowances.
Inventories
Inventories    The Company values inventories at first in first out ("FIFO") basis and lower of cost or market. The composition of inventory is routinely evaluated to identify slow-moving, excess, obsolete or otherwise impaired inventories. Inventories identified as impaired are evaluated to determine if write-downs are required. Included in the assessment is a review for obsolescence as a result of engineering changes in the Company's products. All inventories expected to be used in more than one year are classified as long-term.
Depreciation and Amortization
Depreciation and Amortization    Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of the related assets, ranging from two to ten years. Leasehold improvements are amortized over the lease term or the estimated useful lives of the assets, whichever is shorter. Intangible assets that have finite useful lives are amortized over their estimated useful lives using the straight-line method 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.
Long-Lived Assets
Long-Lived Assets    The Company reviews the recoverability of long-lived assets, including intangible assets with finite lives, whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the expected future cash flows from the use of such assets (undiscounted and without interest charges) are less than the carrying value, the Company may be required to record a write-down, which is determined based on the difference between the carrying value of the assets and their estimated fair value. The Company performed an analysis as of March 31, 2014 and determined that no impairment was necessary. Intangible assets include a manufacturing license, trade name, technology, backlog and customer relationships. See Note 5—Intangible Assets.
Deferred Revenue
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

Revenue    The Company's revenue consists of sales of products, parts, accessories 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 and 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 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 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) price 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 customer. 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 as the service is performed. The Company also provides maintenance service contracts 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 from maintenance service contracts is recognized on a straight-line basis over the contract period.
Warranty
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 eighteen months. Factors that affect the Company's warranty obligation include product failure rates, anticipated hours of product operations and costs of repair or replacement in correcting product failures. These factors are estimates that may change based on new information that becomes available each period. Similarly, the Company also accrues the estimated costs to address reliability repairs on products no longer in warranty when, in the Company's judgment, and in accordance with a specific plan developed by the Company, it is prudent to provide such repairs. The Company assesses the adequacy of recorded warranty liabilities quarterly and makes adjustments to the liability as necessary. When the Company has sufficient evidence that product changes are altering the historical failure occurrence rates, the impact of such changes is then taken into account in estimating future warranty liabilities.
Research and Development ("R&D")
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. Total offsets to R&D expenses amounted to $1.4 million, $1.7 million and $0.8 million for the years ended March 31, 2014, 2013 and 2012, respectively.
Income Taxes
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.
Contingencies
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

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, 2014, 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 $27.6 million as of March 31, 2014. 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 E-Finity Distributed Generation, LLC ("E-Finity), one of the Company's domestic distributors, accounted for 19% of the Company's revenue for the year ended March 31, 2014. Sales to BPC Engineering ("BPC"), one of the Company's Russian distributors, accounted for 17%, 11% and 26% of revenue for the years ended March 31, 2014, 2013 and 2012, respectively. Sales to Horizon Power Systems ("Horizon"), one of the Company's domestic distributors, accounted for 12%, 27% and 19% of revenue for the years ended March 31, 2014, 2013 and 2012, respectively. Additionally, BPC, Electro Mecanique Industries ("EMI"), one of the Company's distributors in the Middle East and Africa, and E-Finity accounted for 26%, 18% and 16%, respectively, of net accounts receivable as of March 31, 2014. BPC and Regatta Solutions, Inc., one of the Company's domestic distributors, accounted for 35% and 11%, respectively, of net accounts receivable as of March 31, 2013.

        The Company did not have receivables from the U.S. Department of Energy ("DOE") as of March 31, 2014. Accounts receivable, net of allowances as of March 31, 2013 includes approximately $0.3 million of other receivables from the U.S. Department of Energy ("DOE") under grants awarded in 2009 and 2010.

        The Company recorded bad debt expense of approximately $0.2 million, $0.3 million and $2.3 million for the years ended March 31, 2014, 2013 and 2012, 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
Estimates and Assumptions    The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include accounting for accounts receivable allowances, stock-based compensation, inventory write-downs, valuation of long-lived assets including intangible assets with finite lives, product warranties, income taxes and other contingencies. Actual results could differ from those estimates.
Net Loss Per Common Share
Net Loss Per Common Share    Basic loss per common share is computed using the weighted-average number of common shares outstanding for the period. Diluted loss per share is also computed without consideration to potentially dilutive instruments because the Company incurred losses which would make such instruments antidilutive. Outstanding stock options at March 31, 2014, 2013 and 2012 were 12.9 million, 11.8 million and 10.0 million, respectively. Outstanding restricted stock units at March 31, 2014, 2013 and 2012 were 2.1 million, 1.5 million and 1.1 million, respectively. As of March 31, 2014, the Company did not have any warrants outstanding. As of each of March 31, 2013 and 2012, the number of warrants excluded from diluted net loss per common share computations was approximately 26.5 million.
Stock-Based Compensation
Stock-Based Compensation    Options or stock awards are recorded at their estimated fair value at the measurement date. The Company recognizes compensation cost for options and stock awards that have a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Segment Reporting

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,  
 
   2014   2013   2012  

United States

   $ 58,432   $ 57,001   $ 41,796  

Mexico

     8,956     22,581     7,798  

All other North America

     196     4,370     116  
               
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Total North America

     67,584     83,952     49,710  

Russia

    
23,216		    
13,827		    
29,722		  

All other Europe

     17,820     12,036     17,452  
               
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total Europe

     41,036     25,863     47,174  

Asia

    
10,728		    
8,473		    
5,692		  

Australia

     5,275     5,461     2,749  

All other

     8,482     3,808     4,046  
               
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total Revenue

   $ 133,105   $ 127,557   $ 109,371  
               
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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
               

        The following table summarizes the Company's revenue by product (in thousands):

 
   Year Ended March 31,  
 
   2014   2013   2012  

C30

   $ 5,623   $ 6,756   $ 4,426  

C65

     29,107     22,899     28,680  

TA100

     460     1,485     681  

C200

     14,754     18,099     7,361  

C600

     10,374     12,384     7,567  

C800

     10,127     5,324     8,728  

C1000

     38,141     35,571     32,475  

Waste heat recovery generator

     180     —     —  

Unit upgrades

     —     129     —  
               
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total from Microturbine Products

     108,766     102,647     89,918  

Accessories, Parts and Service

     24,339     24,910     19,453  
               
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 133,105   $ 127,557   $ 109,371  
               
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
               

        Substantially all of the Company's operating assets are in the United States.
Recent Accounting Pronouncements
Recent Accounting Pronouncements    In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("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. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods therein.