# AMERICAN SUPERCONDUCTOR CORP /DE/ (AMSC) FY 2025 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AMERICAN SUPERCONDUCTOR CORP /DE/'s 10-K for fiscal year 2025.

SEC filing source: https://www.sec.gov/Archives/edgar/data/880807/000143774925017986/amsc20250331_10k.htm
Accession: 0001437749-25-017986
Filing date: 2025-05-21
Report date: 2025-03-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/AMSC/
All MD&A years: /company/AMSC/mda/
Previous year: /company/AMSC/mda/fy2024/ (FY 2024)
Next year: /company/AMSC/mda/fy2026/ (FY 2026)

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

We are a leading system provider of megawatt-scale power resiliency solutions that orchestrate the rhythm and harmony of power on the grid™, and protect and expand the capability of our Navy's fleet. Our solutions enhance the performance of the power grid, protect our Navy’s fleet, and lower the cost of wind power.  In the power grid market, we enable electric utilities, industrial facilities, and renewable energy project developers to connect, transmit and distribute smarter, cleaner and better power through our transmission planning services and power electronics and superconductor-based systems. In the wind power market, we enable manufacturers to field highly competitive wind turbines through our advanced power electronics and control system products, engineering, and support services. Our power grid and wind products and services provide exceptional reliability, security, efficiency and affordability to our customers.

Our power system solutions help to improve energy efficiency, alleviate power grid capacity constraints, improve system resiliency, and increase the adoption of renewable energy generation. Demand for our solutions is driven by the growing needs for modernized smart grids that improve power reliability, security and quality, the U.S. Navy's effort to upgrade onboard power systems to support fleet electrification, and the needs 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 robust intellectual property portfolio consisting of patents and patent applications worldwide and rights through exclusive and non-exclusive licenses.

We operate our business under two market-facing business segments: Grid and Wind. We believe this market-centric structure enables us to more effectively anticipate and meet the needs of power generation project developers, the Navy's ship protection systems, electric utilities and wind turbine manufacturers.

[[GREPCENT_TABLE]]
[["","\u2022","Grid. Through our Gridtec\u2122 Solutions, our Grid business segment enables electric utilities, industrial facilities, 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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Wind. Through our Windtec\u2122 Solutions, our Wind business segment enables manufacturers to field wind turbines with exceptional power output, reliability and affordability. We supply advanced power electronics and control systems, license our highly engineered wind turbine designs, and provide extensive customer support services to wind turbine manufacturers. Our design portfolio includes a broad range of drivetrains and power ratings of 2 megawatts (\"MWs\") 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."]]
[[/GREPCENT_TABLE]]

Our fiscal year begins on April 1 and ends on March 31. When we refer to a particular fiscal year, we are referring to the fiscal year that began on April 1 of that same year. For example, fiscal 2024 refers to the fiscal year that began on April 1, 2024. Other fiscal years follow similarly.

Changes in macroeconomic conditions arising from various reasons, such as the ongoing wars between Russia and Ukraine, and Israel and Hamas, tariffs, trade restrictions and resulting trade conflicts, labor force availability, sourcing, material delays and global supply chain disruptions could have a material adverse effect on our business, financial condition and results of operation.

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On August 1, 2024, we entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with the selling stockholders named therein. Pursuant to the terms of the Stock Purchase Agreement and concurrently with entering into such agreement, we acquired all of the issued and outstanding shares of Megatran, Industries, Inc. ("Megatran"), for aggregate consideration in an amount equal to $61.4 million, as may be adjusted pursuant to the Stock Purchase Agreement (the “Purchase Price”), including a cash payment after closing of $5.0 million, as adjusted pursuant to Sections 5.6(c), (d), and (f) of the Stock Purchase Agreement (the “Additional Cash Purchase Price”). At closing, we paid to Megatran's selling stockholders $25.0 million in cash on hand, and 1,297,600 restricted shares of our common stock. On September 23, 2024, we paid the Additional Cash Purchase Price to the selling stockholders, which was calculated based on the agreed upon formula set forth in the Stock Purchase Agreement, in the amount of $8.3 million which includes the Additional Cash Purchase Price and the make whole payment. Megatran's wholly-owned subsidiary, NWL, Inc. ("NWL"), is a U.S.-based global provider of engineered power conversion solutions for demanding industrial and military applications.  As a result of this transaction, Megatran became a wholly-owned subsidiary and is operated by our Grid business segment. We refer to this transaction as the "acquisition of NWL". 

Results of Operations

Fiscal Years Ended March 31, 2025 and March 31, 2024

Revenues

Total revenues increased by 53% to $222.8 million in fiscal 2024 from $145.6 million in fiscal 2023. Our revenues are summarized as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ended March 31,"],["","","2025","","","2024"],["Revenues:"],["Grid","","$","187,170","","","$","122,065"],["Wind","","","35,648","","","","23,574"],["Total","","$","222,818","","","$","145,639"]]
[[/GREPCENT_TABLE]]

Revenues in our Grid business segment are derived from our D-VAR product sales, Northeast Power Systems, Inc. ("NEPSI") product sales, Neeltran, Inc. ("Neeltran") product sales, NWL product sales, HTS wire sales, ship protection systems ("SPS"), government-sponsored electric utility projects and other prototype development contracts. We also engineer, install and commission our products on a turnkey-basis for some customers. The Grid business segment accounted for 84% of total revenues in both fiscal 2024 and 2023. Grid revenues increased 53% to $187.2 million in fiscal 2024 from $122.1 million in fiscal 2023. The increase in revenues was driven by higher D-VAR and NEPSI revenues than in the prior year period along with the NWL revenues earned after the acquisition of NWL.

Revenues in our Wind business segment are derived from wind turbine electrical control systems and core components, wind turbine license and development contracts, service contracts and consulting arrangements. Our Wind business segment accounted for 16% of total revenues in both fiscal 2024 and 2023. Revenues in the Wind business segment increased 51% to $35.6 million in fiscal 2024 from $23.6 million in fiscal 2023. The increase over the prior year period was driven by additional shipments of electrical control systems ("ECS") at increased prices. 

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Cost of Revenues and Gross Margin

Cost of revenues increased by 46% to $161.0 million in fiscal 2024, compared to $110.4 million in fiscal 2023. Gross margin increased to 28% in fiscal 2024 from 24% in fiscal 2023. The increase in gross margin in fiscal 2024 was due to additional revenues, a favorable product mix, and a sharp improvement in Neeltran project margins.

Operating Expenses

Research and development

Research and development (“R&D”) expenses increased by 43% to $11.4 million, or 5% of revenue in fiscal 2024, compared to $8.0 million, or 5% of revenue, in fiscal 2023. The increase in R&D expenses is primarily a result of additional total compensation and stock compensation expense due in part to additional employees as a result of the acquisition of NWL.

Selling, general, and administrative

Selling, general and administrative (“SG&A”) expenses increased by 36% to $43.1 million, or 19% of revenue in fiscal 2024 from $31.6 million, or 22% of revenue, in fiscal 2023. The increase in SG&A expenses is primarily a result of higher total compensation expense, additional stock compensation expense and acquisition costs related to the acquisition of NWL.

Amortization of acquisition related intangibles

We recorded $1.7 million in fiscal 2024 and $2.2 million in fiscal 2023 in amortization expense related to our core technology and know-how, customer relationships, and other intangible assets. The decrease in amortization expense is primarily a result of using the economic consumption method as the basis to amortize the acquired customer relationship intangible assets related to NEPSI and Neeltran, partially offset by the increase related to amortization of NWL related intangibles.

Change in fair value of contingent consideration

The change in fair value of our contingent consideration for the earnout payment on the acquisition of NEPSI resulted in a loss of $3.4 million resulting from an increase in fair value in fiscal 2024, and $4.9 million during fiscal 2023. During fiscal 2024, we issued 300,000 shares of our common stock to the selling stockholders following certification of the achievement of specified earnout revenue objectives. We also recorded a $3.3 million payment relating to the acquisition of NWL, as a payment to settle the remaining obligations after the acquisition. The value of this contingent consideration was de minimis at the Acquisition Date and the resulting change in fair value was recorded in September 2024 when the payment was calculated and paid.

Operating income (loss)

Our operating income (loss) is summarized as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","Fiscal Years Ended March 31,"],["","","2025","","","2024"],["Operating income (loss):"],["Grid","","$","1,812","","","$","(6,909",")"],["Wind","","","3,792","","","","449"],["Unallocated corporate expenses","","","(6,681",")","","","(4,908",")"],["Total","","$","(1,077",")","","$","(11,368",")"]]
[[/GREPCENT_TABLE]]

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Our Grid business segment generated operating income of $1.8 million in fiscal 2024 and operating loss of $6.9 million in fiscal 2023. The improvement in the Grid business segment was due to higher revenues and gross margins in fiscal 2024, compared to fiscal 2023.

The Wind segment generated operating income of $3.8 million in fiscal 2024 and $0.4 million in fiscal 2023. The increase in the Wind business segment operating income was due to higher revenue and gross margins in fiscal 2024, compared to fiscal 2023.

Unallocated corporate expenses consisted of a loss on contingent consideration of $6.7 million in fiscal 2024, and a loss on contingent consideration of $4.9 million in fiscal 2023.

Interest income, net

Interest income, net was $3.7 million in fiscal 2024 compared to $1.3 million for fiscal 2023. The increase in interest income, net, was primarily due to higher cash balances in fiscal 2024.

Other expense, net

Other expense, net was $0.3 million in fiscal 2024, compared to $0.7 million in fiscal 2023. The decrease in other expense was driven by the impacts of more favorable fluctuations in foreign currencies in fiscal 2024, compared to fiscal 2023.

Income Taxes

We recorded an income tax benefit of $3.7 million in fiscal 2024, compared to income tax expense of $0.3 million in fiscal 2023. The net improvement in income tax is a result of the release of the valuation allowance due to the recording of the deferred tax liability from the acquisition of NWL.

Net income (loss)

Net income was $6.0 million in fiscal 2024, compared to net loss of $11.1 million in fiscal 2023. The improvement in net income was driven primarily by higher revenues and gross margins in fiscal 2024 and other factors described above.

Please refer to the “Risk Factors” section in Part I, Item 1A, for a discussion of certain factors that may affect our future results of operations and financial condition.

Non-GAAP Financial Measure - Non-GAAP Net Income

Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). The non-GAAP measures included in this Form 10-K, however, should be considered in addition to, and not as a substitute for or superior to the comparable measure prepared in accordance with GAAP.

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We define non-GAAP net income as net income (loss) before stock-based compensation, amortization of acquisition-related intangibles, change in fair value of contingent consideration, acquisition costs, and other non-cash or unusual charges. We believe non-GAAP net income assists management and investors in comparing our performance across reporting periods on a consistent basis by excluding these non-cash charges and other items that we do not believe are indicative of our core operating performance. In addition, we use non-GAAP net income as a factor to evaluate the effectiveness of our business strategies. A reconciliation of GAAP net income (loss) to non-GAAP net income is set forth in the table below (in thousands, except per share data):

[[GREPCENT_TABLE]]
[["","","Year ended March 31,"],["","","2025","","","2024"],["Net income (loss)","","$","6,033","","","$","(11,111",")"],["Stock-based compensation","","","7,794","","","","4,652"],["Amortization of acquisition-related intangibles","","","2,433","","","","2,158"],["Change in fair value of contingent consideration","","","6,682","","","","4,922"],["Acquisition costs","","","1,095","","","","\u2014"],["Non-GAAP net income","","","24,037","","","","621"],["Non-GAAP net income per share - basic","","$","0.65","","","$","0.02"],["Non-GAAP net income per share - diluted","","$","0.64","","","$","0.02"],["Weighted average shares outstanding - basic","","","36,990","","","","29,825"],["Weighted average shares outstanding - diluted","","","37,718","","","","30,909"]]
[[/GREPCENT_TABLE]]

Non-GAAP net income was $24.0 million, or $0.65 per share, for fiscal 2024, compared to $0.6 million, or $0.02 per share, for fiscal 2023. The improvement in non-GAAP net income in fiscal 2024 compared to fiscal 2023 was due to improved operating income driven by higher revenues and gross margins. 

Liquidity and Capital Resources

The Company’s primary sources of liquidity are internally generated cash provided by operating activities, our cash and cash equivalents on hand, along with access to capital markets. The Company believes that these sources of liquidity provide adequate liquidity to meet both its short-term and reasonably foreseeable long-term requirements and obligations. At March 31, 2025, we had cash, cash equivalents and restricted cash of $85.4 million, compared to $92.3 million at March 31, 2024, a decrease of $6.9 million. As of March 31, 2025, we had approximately $4.7 million in cash, cash equivalents and restricted cash in foreign bank accounts. Our cash, cash equivalents and restricted cash are summarized as follows (in thousands):

[[GREPCENT_TABLE]]
[["","","March 31, 2025","","","March 31, 2024"],["Cash and cash equivalents","","$","79,494","","","$","90,522"],["Restricted cash","","","5,887","","","","1,758"],["Total cash, cash equivalents and restricted cash","","$","85,381","","","$","92,280"]]
[[/GREPCENT_TABLE]]

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Net cash provided by operating activities was $28.3 million compared to net cash used in operating activities of $2.1 million in fiscal 2024 and 2023, respectively. The increase in net cash provided by operations in fiscal 2024 compared to fiscal 2023 was driven primarily by higher gross margins, favorable changes in accounts payable and accrued expenses, relief of deferred revenue, increased non-cash expenses like stock-based compensation, depreciation and amortization, and change in fair value of contingent consideration, offset by decreased cash collections, increased prepaid balances, and change in deferred income taxes. 

Net cash used in investing activities was $35.2 million and $1.0 million in fiscal 2024 and 2023, respectively. The increase in net cash used in investing activities in fiscal 2024 compared to fiscal 2023 was due primarily to cash paid for the acquisition of NWL.

Net cash provided by financing activities was less than $0.1 million compared to $65.4 million in fiscal 2024 and 2023, respectively. The decrease in cash provided by financing activities was primarily related to net proceeds received from an equity offering in fiscal 2023, while the Company had no equity offerings in fiscal 2024.

At March 31, 2025, we had $4.3 million of restricted cash included in long-term assets and $1.6 million of restricted cash in current assets. At March 31, 2024, we had $1.3 million of restricted cash included in long-term assets and $0.5 million of restricted cash in current assets. These amounts included in restricted cash primarily represent collateral deposits to secure surety bonds and letters of credit for various customer contracts. These deposits are held in interest bearing accounts.

In January 2024, we filed a shelf registration statement on Form S-3 that will expire three years from the date on which it was declared effective, March 15, 2027 (the “Form S-3”). The Form S-3 allows us to offer and sell from time-to-time up to $250 million of common stock, debt securities, warrants or units comprised of any combination of these securities. The Form S-3 is intended to provide us flexibility to conduct registered sales of our securities, subject to market conditions, in order to fund our future capital needs. The terms of any future offering under the Form S-3 will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering.

On August 1, 2024, we entered into the Stock Purchase Agreement with the selling stockholders named therein. Pursuant to the terms of the Stock Purchase Agreement and concurrently with entering into such agreement, we acquired all of the issued and outstanding shares of Megatran, for the Purchase Price of $61.4 million, which consideration amount was subject to various adjustments set forth in the Stock Purchase Agreement (including those described below) and consisted of: (a) (i) $25.0 million, minus (ii) the Indebtedness (as defined in the Stock Purchase Agreement) outstanding as of immediately prior to the closing, minus (iii) Company Expenses (as defined in the Stock Purchase Agreement); (b) a number of restricted shares (rounded up or down to the nearest whole share, as applicable) of our common stock equal to the quotient obtained by dividing (x) $31.4 million by (y) the closing price per share of our common stock on the Nasdaq Global Select Market on the last trading day immediately preceding the Acquisition Date; and (c) an additional cash payment equal to $5.0 million, as adjusted pursuant to Sections 5.6(c), (d), and (f) of the Stock Purchase Agreement. Megatran is now a wholly-owned subsidiary of the Company and, together with its wholly-owned subsidiaries and affiliates, is operated and reported as a component of its Grid business segment. On September 23, 2024, the Company paid $3.3 million to the selling stockholders, which was calculated based on the agreed upon formula set forth in the Stock Purchase Agreement. As of September 30, 2024, there are no remaining obligations to the selling stockholders of Megatran.

In August 2024, the Company filed an automatically-effective shelf registration statement on Form S-3 that will expire no later than August 12, 2027 (the “Second Form S-3”). The Second Form S-3 allows the Company to offer and sell from time-to-time unspecified amounts of common stock, debt securities, warrants or units comprised of any combination of these securities and allows certain selling stockholders to offer and sell from time-to-time common stock. The Second Form S-3 assisted the Megatran selling stockholders in the resale of their common stock and is intended to provide the Company flexibility to conduct registered sales of its securities, subject to market conditions, in order to fund its future capital needs. The terms of any future offering under the Second Form S-3 will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering.

We are a party to many contractual obligations involving commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the consolidated balance sheet as of March 31, 2025, while others are considered future commitments. We have various contractual arrangements, under which we have committed to purchase certain minimum quantities of goods or services on an annual basis. For information regarding our other contractual obligations, refer to Note 13, "Contingent Consideration," Note 16, "Leases", and Note 18, "Commitments and Contingencies" to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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We believe we have sufficient available liquidity to fund our operations and capital expenditures for the next twelve months. 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. There can be no assurance that we will be able to raise additional capital on favorable terms or at all or execute on any other means of improving our liquidity as described above. Additionally. the impact of global sources of instability, including tariffs, trade restrictions and resulting trade conflicts, the ongoing wars between Russia and Ukraine and Israel and Hamas, instability of financial institutions and political instability in the United States, on the global financial markets may reduce our ability to raise additional capital, if necessary, which could negatively impact our liquidity.

Legal Proceedings

From time to time, we are involved in legal and administrative proceedings and claims of various types. We record a liability in our consolidated financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. We review these estimates each accounting period as additional information is known and adjust the loss provision when appropriate. If a matter is both probable to result in liability and the amounts of loss can be reasonably estimated, we estimate and disclose the possible loss or range of loss to the extent necessary to make the consolidated financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in our consolidated financial statements.

Recent Accounting Pronouncements

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in ASU 2023-07 improve the disclosures about a public entity’s reportable segments and address requests from investors for additional, more detailed information about a reportable segment’s expenses. Following the release of ASU 2023-07 in November 2023, the effective date will be annual reporting periods beginning after December 15, 2024. As of March 31, 2025, we have adopted ASU 2023-07 and made the required disclosures, and noted no other material impact on our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in ASU 2023-09 address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. Following the release of ASU 2023-09 in December 2023, the effective date will be annual reporting periods beginning after December 15, 2024. We are evaluating the impact on our consolidated financial statements.

In March 2024, the FASB issued ASU 2024-02, Codification Improvements—Amendments to Remove References to the Concepts Statements. The amendments in ASU 2024-02 contain amendments to the Codification that remove references to various FASB Concepts Statements. Following the release of ASU 2024-02 in March 2024, the effective date will be annual reporting periods beginning after December 15, 2024. We are evaluating the impact on our consolidated financial statements.

In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures. The amendments in ASU 2024-03 address investor requests for more disclosure of disaggregated financial reporting information about expenses presented in the income statement. Following the release of ASU 2024-03 in November 2024, the effective date will be annual reporting periods beginning after December 15, 2026. We are evaluating the impact on our consolidated financial statements.

We do not believe that, outside of those disclosed here, there are any other recently issued accounting pronouncements that will have a material impact on our consolidated financial statements.

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Critical Accounting Policies and Estimates

       The preparation of the 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. Our accounting policies that involve the most significant judgments and estimates are as follows:

Revenue recognition

For certain arrangements, such as contracts to perform research and development, prototype development contracts and certain customized product sales, we record revenues using the over-time method, measured by the relationship of costs incurred to total estimated contract costs. Over-time revenue recognition accounting is predominantly used on certain turnkey power systems installations for electric utilities and long-term prototype development contracts with the U.S. government.

Significant judgement is required to estimate the total expected costs for projects that typically have a timeline of 12-24 months. Any increase or decrease in estimated costs to complete a performance obligation without a corresponding change to the contract price could impact the calculation of cumulative revenue to date and gross profit on the project. Factors that may result in a change to our estimate include delays in manufacturing, unforeseen engineering problems, the performance of subcontractors and material suppliers, among others.

We have a long history of working with multiple types of projects and preparing cost estimates, and we rely on the expertise of key personnel to prepare what we believe are reasonable best estimates given available facts and circumstances. Due to the nature of the work involved, however, judgment is involved to estimate the total costs to complete, and the amounts estimated could have a material impact on the revenue we recognize in each accounting period. We cannot estimate unforeseen events and circumstances which may result in actual results being materially different from previous estimates.

See Note 4, “Revenue Recognition,” for additional information.

Business Acquisitions

We account for acquisitions using the purchase method of accounting in accordance with Accounting Standards Codification ("ASC") 805, Business Combinations. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess purchase price over the estimated fair value of the net assets acquired and liabilities assumed is recorded as goodwill. Intangible assets, if identified, are also recorded.

Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions as well as the use of specialists as needed. The Company utilizes management estimates and an independent third-party valuation firm to assist in determining the fair values of assets acquired, including intangible assets and liabilities assumed. The primary intangible assets acquired include customer relationship and trade names. Intangible assets are initially valued using a methodology commensurate with the intended use of the asset. The fair value of customer relationships is measured using the multi-period excess earnings method (“MPEEM”). The fair value of the trade names is measured using a relief-from-royalty (“RFR”) approach. The basis for future sales projections for both the MPEEM and RFR are based on internal revenue forecasts which the Company believes represents reasonable market participant assumptions. The future cash flows are discounted using an applicable discount rate. The key uncertainties in the calculations, as applicable, are the selection of an appropriate royalty rate, assumptions used in developing estimates of future cash flows, including revenue growth and expense forecasts, assumed customer attrition rates, as well as perceived risks associated with those forecasts in determining the discount rate. There is inherent uncertainty in forecasted cash flows and therefore, actual results may differ and could result in a subsequent impairment charge of acquired intangibles and/or goodwill.

The consideration for our acquisitions may include future payments that are contingent upon the occurrence of a particular event. We record a contingent consideration obligation for such contingent consideration payments at fair value on the acquisition date. We estimate the fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and the likelihood of making related payments. Significant judgment is employed in determining these assumptions as of the acquisition date and for each subsequent period. Accordingly, future business and economic conditions, as well as changes in any of the assumptions described above, can materially impact the fair value of contingent consideration recorded at each reporting period.

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Goodwill

Goodwill represents the excess of cost over net assets of acquired businesses that are consolidated. We perform our annual assessment of goodwill on February 28th of each fiscal year and whenever events or changes in circumstances or a triggering event indicate that the carrying amount may not be recoverable. An entity is permitted to first assess qualitatively whether it is necessary to perform a goodwill impairment test. Significant judgment is required to determine if an indication of impairment has taken place. Factors to be considered include the following: adverse change in operating results, decline in strategic business plans, significantly lower future cash flows, and sustainable declines in market data such as market capitalization. The quantitative impairment test is required only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. We determine the fair value of a reporting unit, using a methodology which combines an income approach, using a discounted cash flow method, with a market approach. The income approach includes estimates and assumptions about revenue growth rates, operating margins and terminal growth rates, discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. These estimates are based on historical experiences, our projects of future operating activity and our weighted-average cost of capital. A significant change in events, circumstances or any of these assumptions could adversely affect these estimates, which could result in an impairment. 

We performed our annual assessment of goodwill on February 28, 2025 including a quantitative assessment of our goodwill balance acquired from our acquisition of Neeltran, and a qualitative assessment of all other reporting units goodwill, and determined that there was no impairment to goodwill. See Note 5, “Goodwill,” for further information regarding our goodwill valuation assumptions. 

Income taxes

Our provision for income taxes is comprised of a current and a deferred portion. The current income tax provision is calculated as the estimated taxes payable or refundable on tax returns for the current fiscal year. The deferred income tax provision is calculated for the estimated future tax effects attributable to temporary differences and carryforwards using expected tax rates in effect in the years during which the differences are expected to reverse. All deferred tax assets and liabilities are presented as non-current in the consolidated balance sheets.

We regularly assess our ability to realize our deferred tax assets. Assessments of the realization of deferred tax assets require that management consider all available evidence, both positive and negative, and make significant judgments about many factors, including the amount and likelihood of future taxable income. Based on all the available evidence, we have recorded valuation allowances to reduce our deferred tax assets to the amount that is more likely than not to be realizable due to the taxable losses that have been incurred since our inception and uncertainty around our future profitability.

Accounting for income taxes requires a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any changes in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision. See Note 14, “Income Taxes,” of our consolidated financial statements for further information regarding our income tax assumptions and expenses.