Table
of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Quarterly Period Ended April 4,
2009
Commission File Number 1-11512
SATCON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
|
04-2857552
(IRS Employer Identification No.)
|
|
|
27
Drydock Avenue
Boston, Massachusetts
(Address of principal executive offices)
|
02210
(Zip Code)
|
(617) 897-2400
(Registrants telephone number, including area code)
Indicate by check
mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
¨
No
¨
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
o
|
Accelerated filer
x
|
|
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting
company
o
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date.
Common Stock, $0.01 Par Value,
51,586,893
shares outstanding as of May 1, 2009.
Table
of Contents
PART I. FINANCIAL
INFORMATION
Item 1. Financial Statements
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
April 4,
2009
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
6,746,429
|
|
$
|
9,957,716
|
|
Restricted cash
and cash equivalents
|
|
84,000
|
|
84,000
|
|
Accounts
receivable, net of allowance of $173,024 and $168,219 at April 4, 2009
and December 31, 2008, respectively
|
|
9,348,449
|
|
11,471,671
|
|
Unbilled
contract costs and fees
|
|
291,501
|
|
398,707
|
|
Inventory
|
|
7,436,812
|
|
11,457,532
|
|
Prepaid expenses
and other current assets
|
|
765,448
|
|
1,040,441
|
|
Total current
assets
|
|
$
|
24,672,639
|
|
$
|
34,410,067
|
|
Property and
equipment, net
|
|
2,350,296
|
|
1,964,968
|
|
Goodwill, net
|
|
123,714
|
|
123,714
|
|
Intangibles, net
|
|
299,954
|
|
398,526
|
|
Total assets
|
|
$
|
27,446,603
|
|
$
|
36,897,275
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Line of credit
|
|
$
|
4,450,191
|
|
$
|
3,000,000
|
|
Accounts payable
|
|
6,943,997
|
|
8,588,313
|
|
Accrued payroll
and payroll related expenses
|
|
1,461,124
|
|
2,042,786
|
|
Other accrued
expenses
|
|
2,898,099
|
|
2,825,255
|
|
Accrued contract
loss
|
|
|
|
1,131,370
|
|
Accrued
restructuring costs
|
|
456,188
|
|
602,782
|
|
Deferred revenue
|
|
978,360
|
|
4,214,389
|
|
Total current
liabilities
|
|
$
|
17,187,959
|
|
$
|
22,404,895
|
|
|
|
|
|
|
|
Warrant
liabilities
|
|
$
|
29,819,450
|
|
$
|
2,407,438
|
|
Deferred
revenue, net of current portion
|
|
2,690,860
|
|
2,512,794
|
|
Redeemable
convertible Series B preferred stock (290 shares issued and outstanding
at April 4, 2009 and December 31, 2008, respectively; face value
$5,000 per share; liquidation preference $1,450,000, respectively)
|
|
1,450,000
|
|
1,450,000
|
|
Other long-term
liabilities
|
|
50,770
|
|
58,282
|
|
Total Liabilities
|
|
$
|
51,199,039
|
|
$
|
28,833,409
|
|
Commitments and
contingencies (Note H)
|
|
|
|
|
|
Redeemable
convertible Series C preferred stock (25,000 shares issued and
outstanding at April 4, 2009 and December 31, 2008, face value
$1,000 per share, liquidation preference $26,671,038 and $26,350,000 at
April 4, 2009 and December 31, 2008, respectively)
|
|
$
|
18,391,125
|
|
$
|
17,248,593
|
|
|
|
|
|
|
|
Stockholders
deficit:
|
|
|
|
|
|
Common stock;
$0.01 par value, 200,000,000 shares authorized; 51,549,472 and 51,479,822
shares issued and outstanding at April 4, 2009 and December 31,
2008, respectively
|
|
$
|
515,495
|
|
$
|
514,798
|
|
Additional
paid-in capital
|
|
171,651,186
|
|
182,222,762
|
|
Accumulated
deficit
|
|
(212,539,809
|
)
|
(189,962,435
|
)
|
Accumulated
other comprehensive loss
|
|
(1,770,433
|
)
|
(1,959,852
|
)
|
Total
stockholders deficit
|
|
$
|
(42,143,561
|
)
|
$
|
(9,184,727
|
)
|
Total
liabilities and stockholders deficit
|
|
$
|
27,446,603
|
|
$
|
36,897,275
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3
Table of Contents
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Revenue:
|
|
|
|
|
|
Product revenue
|
|
$
|
13,379,849
|
|
$
|
10,175,918
|
|
Funded research
and development and other revenue
|
|
1,481,667
|
|
1,183,678
|
|
Total revenue
|
|
$
|
14,861,516
|
|
$
|
11,359,596
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
Cost of product
revenue
|
|
$
|
12,285,038
|
|
$
|
9,710,379
|
|
Cost of funded
research and development and other revenue
|
|
1,116,833
|
|
1,015,873
|
|
Total cost of
revenue
|
|
$
|
13,401,871
|
|
$
|
10,726,252
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
1,459,645
|
|
$
|
633,344
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Research and
development
|
|
$
|
1,871,262
|
|
$
|
868,092
|
|
Selling, general
and administrative
|
|
4,676,224
|
|
2,459,109
|
|
Amortization of
intangibles
|
|
78,573
|
|
78,572
|
|
Total operating
expenses from continuing operations
|
|
$
|
6,626,059
|
|
$
|
3,405,773
|
|
|
|
|
|
|
|
Operating loss
from continuing operations
|
|
$
|
(5,166,414
|
)
|
$
|
(2,772,429
|
)
|
|
|
|
|
|
|
Change in fair
value of warrant liabilities
|
|
$
|
(5,370,471
|
)
|
$
|
(467,481
|
)
|
Other (loss)
income, net
|
|
(138,941
|
)
|
258,923
|
|
Interest income
|
|
3,731
|
|
69,385
|
|
Interest expense
|
|
(82,361
|
)
|
(46,191
|
)
|
Net loss from
continuing operations
|
|
$
|
(10,754,456
|
)
|
$
|
(2,957,793
|
)
|
|
|
|
|
|
|
Loss from
discontinued operations, net
|
|
|
|
$
|
(443,407
|
)
|
Net loss
|
|
$
|
(10,754,456
|
)
|
$
|
(3,401,200
|
)
|
|
|
|
|
|
|
Deemed dividend
and accretion on Series C preferred stock
|
|
$
|
(821,494
|
)
|
$
|
(637,991
|
)
|
Dividend on
Series C preferred stock
|
|
(321,038
|
)
|
(303,962
|
)
|
Net loss
attributable to common stockholders
|
|
$
|
(11,896,988
|
)
|
$
|
(4,343,153
|
)
|
|
|
|
|
|
|
Net loss per
weighted average share, basic and diluted:
|
|
|
|
|
|
From loss on
continuing operations attributable to common stockholders
|
|
$
|
(0.23
|
)
|
$
|
(0.08
|
)
|
From loss on
discontinued operations
|
|
|
|
$
|
(0.01
|
)
|
Net loss
attributable to common stockholders per weighted average share, basic and
diluted
|
|
$
|
(0.23
|
)
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
Weighted average
number of common shares, basic and diluted
|
|
51,537,864
|
|
49,934,919
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
4
Table
of Contents
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
For the three months ended April 4,
2009
(Unaudited)
|
|
Common
Shares
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Stockholders Equity
|
|
Comprehensive
Loss
|
|
Balance,
December 31, 2008
|
|
51,479,822
|
|
$
|
514,798
|
|
$
|
182,222,762
|
|
$
|
(189,962,435
|
)
|
$
|
(1,959,852
|
)
|
$
|
(9,184,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect
of a change in accounting principle January 1, 2009 reclassification
of warrants to warrant liabilities
|
|
|
|
|
|
(10,218,623
|
)
|
(11,822,918
|
)
|
|
|
(22,041,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
(10,754,456
|
)
|
|
|
(10,754,456
|
)
|
$
|
(10,754,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock to 401(k) Plan
|
|
69,650
|
|
697
|
|
107,262
|
|
|
|
|
|
107,959
|
|
|
|
Accretion of
Series C Preferred Stock to its redemption value
|
|
|
|
|
|
(821,494
|
)
|
|
|
|
|
(821,494
|
)
|
|
|
Dividend on
Series C Preferred Stock
|
|
|
|
|
|
(321,038
|
)
|
|
|
|
|
(321,038
|
)
|
|
|
Employee
stock-based compensation
|
|
|
|
|
|
682,317
|
|
|
|
|
|
682,317
|
|
|
|
Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
189,419
|
|
189,419
|
|
189,419
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,565,037
|
)
|
Balance,
April 4, 2009
|
|
51,549,472
|
|
$
|
515,495
|
|
$
|
171,651,186
|
|
$
|
(212,539,809
|
)
|
$
|
(1,770,433
|
)
|
$
|
(42,143,561
|
)
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements
5
Table of Contents
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three Months Ended
|
|
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(10,754,456
|
)
|
$
|
(3,401,200
|
)
|
Net loss from
discontinued operations
|
|
|
|
443,407
|
|
Adjustments
to reconcile net loss from continuing operations to net cash used in
operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
365,448
|
|
274,800
|
|
Provision for
uncollectible accounts
|
|
4,806
|
|
59,898
|
|
Non-cash
compensation expense related to issuance of stock options and warrants to
employees and non-employees and issuance of common stock to 401(k) Plan,
including stock based compensation costs of $682,317 and $129,267 for the
three months ended April 4, 2009 and March 29, 2008, respectively
|
|
704,567
|
|
256,741
|
|
Change in fair
value of warrant liabilities
|
|
5,370,471
|
|
467,481
|
|
Non-cash
interest expense
|
|
29,001
|
|
33,999
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
2,013,159
|
|
496,356
|
|
Unbilled
contract costs and fees
|
|
107,206
|
|
(84,157
|
)
|
Prepaid expenses
and other assets
|
|
271,110
|
|
493
|
|
Inventory
|
|
3,915,177
|
|
(3,741,518
|
)
|
Accounts payable
|
|
(1,586,851
|
)
|
(2,048,428
|
)
|
Accrued expenses
and payroll
|
|
(438,363
|
)
|
377,520
|
|
Accrued
restructuring
|
|
(146,594
|
)
|
|
|
Accrued contract
losses
|
|
(1,112,412
|
)
|
100,459
|
|
Deferred
revenue, current and long portion
|
|
(2,987,732
|
)
|
4,486,859
|
|
Other current
liabilities
|
|
(7,512
|
)
|
(4,810
|
)
|
Total
adjustments
|
|
$
|
6,501,481
|
|
$
|
675,693
|
|
Net
cash used in operating activities in continuing operations
|
|
$
|
(4,252,975
|
)
|
$
|
(2,282,100
|
)
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
Purchases of
property and equipment
|
|
$
|
(660,100
|
)
|
$
|
(101,363
|
)
|
Net cash used in
investing activities in continuing operations
|
|
$
|
(660,100
|
)
|
$
|
(101,363
|
)
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
Net borrowings
under line of credit
|
|
$
|
1,450,191
|
|
$
|
3,000,000
|
|
Payments related
to warrant holder redemption rights
|
|
|
|
(572,250
|
)
|
Net proceeds
from exercise of options to purchase common stock
|
|
|
|
99,385
|
|
Net cash
provided by financing activities in continuing operations
|
|
$
|
1,450,191
|
|
$
|
2,527,135
|
|
|
|
|
|
|
|
Cash
flows from discontinued operations:
|
|
|
|
|
|
Net cash used in
operating activities of discontinued operations
|
|
$
|
|
|
$
|
(879,916
|
)
|
Net cash used in
investing activities of discontinued operations
|
|
$
|
|
|
$
|
(76,411
|
)
|
Net decrease in
cash and cash equivalents from discontinued operations
|
|
$
|
|
|
$
|
(956,327
|
)
|
Effects of
foreign currency exchange rates on cash and cash equivalents
|
|
$
|
251,597
|
|
$
|
(102,380
|
)
|
Net decrease in
cash and cash equivalents
|
|
$
|
(3,211,287
|
)
|
$
|
(915,035
|
)
|
Cash and cash
equivalents at beginning of period
|
|
$
|
9,957,716
|
|
$
|
12,615,566
|
|
Cash and cash
equivalents at end of period
|
|
$
|
6,746,429
|
|
$
|
11,700,531
|
|
The accompanying
notes are an integral part of these unaudited consolidated financial
statements.
6
Table of Contents
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
Three Months Ended
|
|
Non-cash Investing and Financing Activities:
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Employee
stock-based compensation (1)
|
|
$
|
682,317
|
|
$
|
146,016
|
|
Common stock
issued related to 401(k) contributions
|
|
$
|
107,959
|
|
$
|
144,511
|
|
Accretion of
redeemable convertible preferred stock discount and dividends
|
|
$
|
1,142,532
|
|
$
|
637,991
|
|
Interest
and Income Taxes Paid:
|
|
|
|
|
|
Interest
|
|
$
|
53,361
|
|
$
|
12,191
|
|
Income Taxes
|
|
$
|
|
|
$
|
|
|
(1) Includes $0 and $16,749, related to discontinued operations,
for the three month periods ended April 4, 2009 and March 29, 2008,
respectively.
7
Table of
Contents
SATCON TECHNOLOGY CORPORATION
NOTES TO
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
APRIL4, 2009 (2009) AND MARCH 29,
2008 (2008)
(Unaudited)
Note A.
Basis of Presentation
The accompanying
unaudited consolidated financial statements include the accounts of Satcon
Technology Corporation and its wholly-owned subsidiaries (collectively, the Company)
as of April 4, 2009 and for the three months ended April 4, 2009 and March 29,
2008 and have been prepared by the Company in accordance with accounting
principles generally accepted in the United States of America for interim
financial reporting and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. All intercompany
accounts and transactions have been eliminated. These unaudited consolidated financial
statements, which, in the opinion of management, reflect all adjustments
(including normal recurring adjustments) necessary for a fair presentation,
should be read in conjunction with the financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31,
2008. Operating results for the three months ended April 4, 2009 are not
necessarily indicative of the results that may be expected for any future
interim period or for the entire fiscal year.
Note B.
Realization of Assets and Liquidity
The Company anticipates
that its current cash, along with the availability under its credit facility
with Silicon Valley Bank, will be sufficient to fund its operations through at
least December 31, 2009. The Company has developed a business plan that
envisions a significant increase in revenue and significant reductions in the
cost structure and the cash burn rate from the results experienced in the
recent past and allow the Company to remain in compliance with the covenants of
the credit facility. Although the
Company believes it has developed a realistic business plan, there is no
assurance that it can achieve these objectives.
Accordingly, if the Company is unable to realize its business plan or
does not remain in compliance with the covenants of the credit facility, the
Company would need to raise additional funds in the near future in order to
sustain operations by selling equity or taking other actions to conserve its
cash position, which could include selling of certain assets and incurring
additional indebtedness, subject to the restrictions in the 2007 preferred
stock financing. Such actions would
likely require the consent of the investors in that financing (the Investors),
and there can be no assurance that such consent would be given. Furthermore, there can be no assurance that
the Company will be able to raise such funds if they are required.
Note C.
Significant Accounting Policies and Basis of Consolidation
There have been no
material changes from the Significant
Accounting Policies and Basis of Presentation
previously disclosed in Part II, Item 8, contained
within Notes to Consolidated Financial Statements of the Companys Annual
Report on Form 10-K for the fiscal year ending December 31, 2008
except for the adoption of EITF No. 07-05
Determining Whether an Instrument (or Embedded Feature) Is Indexed to
an Entitys Own Stock as disclosed below.
Basis
of Consolidation
The consolidated
financial statements include the accounts of Satcon and its wholly owned
subsidiaries (Satcon Applied Technology, Inc. and Satcon Power Systems
Canada, Ltd., and its discontinued operating divisions Satcon Electronics, Inc.
and Satcon Power Systems, Inc.). All intercompany accounts and
transactions have been eliminated in consolidation.
Revenue
Recognition
The Company recognizes
revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition
. Product
revenue is recognized when there is persuasive evidence of an arrangement, the
fee is fixed or determinable, delivery of the product to the customer has
occurred and the Company has determined that collection of the fee is probable.
Title to the product passes upon shipment of the product, as the products are
typically shipped FOB shipping point, except for certain foreign shipments. If
the product requires installation to be performed by the Company, all revenue
related to the product is deferred and recognized upon the completion of the
installation. If the product requires specific customer acceptance, revenue is
deferred until customer acceptance occurs or the acceptance provisions lapse,
unless the Company can objectively and reliably demonstrate that the criteria
specified in the acceptance provisions are satisfied. When appropriate the
Company provides for a warranty reserve at the time the product revenue is
recognized. If a contract involves the
provisions of multiple elements and the elements qualify for separation under
EITF 00-21,
Revenue Arrangements with Multiple Deliverables
,
total estimated contact revenue is allocated to each element based on the
relative fair value of each element provided.
The amount of revenue allocated to each element is limited to the amount
that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as
described above.
8
Table of Contents
The Company performs funded research and development and product
development for commercial companies and government agencies under both cost
reimbursement and fixed price contracts. Product development revenue is
included in product revenue. Cost reimbursement contracts provide for the
reimbursement of allowable costs and, in some situations, the payment of a fee.
These contracts may contain incentive clauses providing for increases or
decreases in the fees depending on how costs compare with a budget. On fixed
price contracts, revenue is generally recognized on the percentage of
completion method based upon the proportion of costs incurred to the total
estimated costs for the contract. Revenue from reimbursement contracts is
recognized as the services are performed. In each type of contract, the Company
receives periodic progress payments or payments upon reaching interim
milestones. All payments to the Company for work performed on contracts with
agencies of the U.S. government are subject to audit and adjustment by the Defense
Contract Audit Agency. Adjustments are recognized in the period made. When the
current estimates of total contract revenue for commercial product development
contracts indicate a loss, a provision for the entire loss on the contract is
recorded. As of April 4, 2009 and December 31, 2008, the Company has
accrued approximately $0 and $1.1 million, respectively, for anticipated
contract losses on commercial contracts.
Cost of product revenue includes materials, labor and overhead. Costs
incurred in connection with funded research and development and other revenue
arrangements are included in cost of research and development and other
revenue.
Deferred revenue consists of payments received from customers in
advance of services performed, product shipped or installation completed. Deferred revenue also consists of cash
received for extended product warranties.
Unbilled Contract Costs and Fees and Funded Research and Development
Costs in Excess of Billings
Unbilled contract costs and fees represent revenue recognized in excess
of amounts billed due to contractual provisions or deferred costs that have not
been recognized as revenue or billed to the customer.
Cash
and Cash Equivalents
Cash and cash equivalents include demand deposits, overnight repurchase
agreements with Silicon Valley Bank (the Bank) and highly liquid investments
with maturities of three months or less when acquired. Cash equivalents are
stated at cost, which approximates market value. At April 4, 2009, the
Company had approximately $1.0 million invested in a money market account with
a national bank. At April 4, 2009 and December 31, 2008, the Company
had restricted cash as indicated in the table below.
Restricted Cash
|
|
April 4, 2009
|
|
December 31, 2008
|
|
Security
deposits
|
|
$
|
34,000
|
|
$
|
34,000
|
|
Certificates of
deposit
|
|
50,000
|
|
50,000
|
|
Total restricted
cash
|
|
$
|
84,000
|
|
$
|
84,000
|
|
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may
become uncollectible in the future. The estimated allowance for uncollectible
amounts is based primarily on a specific analysis of accounts in the receivable
portfolio and historical write-off experience. While management believes the
allowance to be adequate, if the financial condition of our customers were to
deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required.
Inventory
Inventory is stated at the lower of cost or market and costs are
determined based on the first-in, first-out method of accounting and include
material, labor and manufacturing overhead costs. The Company periodically reviews quantities
of inventory on hand and compares these amounts to expected usage of each
particular product or product line. The Company records, as a charge to cost of
sales, any amounts required to reduce the carrying value to net realizable
value.
9
Table of Contents
Foreign
Currency Translation
The functional currency of the Companys foreign subsidiary is its
local currency. Assets and liabilities of foreign subsidiaries are translated
at the rates in effect at the balance sheet date, while stockholders equity
(deficit) including the long-term portion of intercompany advances is
translated at historical rates. Statements of operations and cash flow amounts
are translated at the average rate for the period. Translation adjustments are
included as a component of accumulated other comprehensive income (loss).
Foreign currency gains and losses were a charge of approximately $0.1 million
for the three months ended April 4, 2009 and income of approximately $0.2
million for the three months ended March 29, 2008. All foreign currency transaction gains and
losses are recorded as a component of other income (expense) and all periods
presented have been adjusted to reflect this classification.
Use of
Estimates
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and
expenses during the period reported. Management believes the most significant
estimates include the net realizable value of accounts receivable and
inventory, warranty provisions, the recoverability of long-lived assets and
intangible assets, the accrued contract losses on fixed-price contracts, the
recoverability of deferred tax assets and the fair value of equity and
financial instruments. Actual results
could differ from these estimates.
Income
Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
,
which is the asset and liability method for accounting and reporting for income
taxes. Under SFAS No. 109, deferred tax assets and deferred tax
liabilities are recognized based on temporary differences between the financial
reporting and income tax basis of assets and liabilities using statutory rates.
In addition, SFAS No. 109 requires a valuation allowance against net
deferred tax assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized.
In
June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109
(FIN 48).
FIN 48 requires companies to recognize the tax benefits of uncertain tax
positions only where the position is more likely than not to be sustained
assuming examination by tax authorities.
The amount recognized is the amount that represents the largest amount
of tax benefit that is greater than 50% likely of being ultimately
realized. A liability is recognized for
any benefit claimed, or expected to be claimed, in a tax return in excess of
the benefit recorded in the financial statements, along with any interest and
penalties (if applicable) on that excess.
FIN 48 requires a tabular reconciliation of the change in the aggregate
unrecognized tax benefits claimed, or expected to be claimed, in tax returns
and disclosure relating to the accrued interest and penalties for unrecognized
tax benefits. Discussion is also
required for those uncertain tax positions where it is reasonably possible that
the estimate of the tax benefit will change significantly in the next twelve
months.
The
Company adopted the provisions of FIN 48 on January 1, 2007. The Company did not recognize any change in
the liability for unrecognized tax benefits as a result of the adoption.
As of December 31, 2008, the Company had federal and state net
operating losses (NOL) carry forwards and federal and state R&D credit
carry forwards, which may be available to offset future federal and state
income tax liabilities which expire at various dates through 2029. Utilization
of the NOL and R&D credit carry forwards may be subject to a substantial
annual limitation due to ownership change limitations that have occurred
previously or that could occur in the future provided by Section 382 of
the Internal Revenue Code of 1986, as well as similar state and foreign
provisions. These ownership changes may limit the amount of NOL and R&D
credit carry forwards that can be utilized annually to offset future taxable
income and tax, respectively. In general, an ownership change, as defined by Section 382,
results from transactions increasing the ownership of certain shareholders or
public groups in the stock of a corporation by more than 50 percentage points
over a rolling three-year period. Since the Companys formation, the Company
has raised capital through the issuance of capital stock on several occasions
(both pre and post initial public offering) which, combined with the purchasing
shareholders subsequent disposition of those shares, may have resulted in a
change of control, as defined by Section 382, or could result in a change
of control in the future upon subsequent disposition. The Company has not
currently completed a study to assess whether a change of control has occurred
or whether there have been multiple changes of control since the Companys
formation due to the significant complexity and cost associated with such study
and that there could be additional changes in control in the future. If the
Company has experienced a change of control at any time since Company
formation, utilization of its NOL or R&D credit carry forwards would be
subject to an annual limitation under Section 382 which is determined by
first multiplying the value of our stock at the time of the ownership change by
the applicable long-term tax-exempt rate, and then could be subject to
additional adjustments, as required. Any limitation may result in expiration of
a portion of the NOL or R&D credit
10
Table of Contents
carry forwards before
utilization. Further, until a study is completed and any limitation known, no
amounts are being presented as an uncertain tax position under FIN 48. The Company does not expect to have any
taxable income for the foreseeable future.
The Company has a full valuation allowance against the net operating
losses and credits.
The
tax years 2005 through 2007 remain open to examination by major taxing
jurisdictions to which the Company is subject, which are primarily in the
United States, as carry forward attributes generated in years past may still be
adjusted upon examination by the Internal Revenue Service or state tax
authorities if they are or will be used in a future period. The Company is currently not under
examination by the Internal Revenue Service or any other jurisdiction for any tax
years. The Company did not recognize any
interest and penalties associated with unrecognized tax benefits in the
accompanying financial statements.
The Company would record any such
interest and penalties as a component of interest expense. The
Company does not expect any material changes to the unrecognized benefits
within 12 months of the reporting date.
Accounting
for Stock-based Compensation
The Company has several stock-based employee
compensation plans, as well as stock options issued outside of such plans as an
inducement to engage new executives. On October 1,
2005, the Company adopted Statement of Financial Accounting Standards No. 123R
(SFAS 123R)
Accounting for Stock-based
Compensation
, using the modified prospective method, which results
in the provisions of SFAS 123R only being applied to the consolidated financial
statements on a going-forward basis (that is, the prior period results have not
been restated). At the time of adoption
the Company had no unvested outstanding options. Under the fair value recognition provisions
of SFAS 123R, stock-based compensation cost is measured at the grant date based
on the value of the award and is recognized as expense over the service
period. Previously, the Company had
followed Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
,
and related interpretations, which resulted in the accounting for employee
share options at their intrinsic value in the consolidated financial
statements.
On March 29, 2005, the SEC issued SAB 107 which expresses the view
of the SEC regarding the interaction between SFAS 123R and certain SEC rules and
regulations concerning the valuation of share-based payment arrangements for
public companies. In particular, SAB 107 provides guidance related to
share-based payment transactions with non-employees, the transition from
nonpublic to public entity status, valuation methods (including assumptions
such as expected volatility and expected term), the accounting for certain
redeemable financial instrument issues under shares-based payment arrangements,
the classification of compensation expense, non-GAAP financial measures,
first-time adoption of SFAS 123R in an interim period, capitalization of
compensation costs related to share-based payment arrangements, the accounting
for income tax effects of share-based payment arrangements, the accounting for
income tax effects of share-based payment arrangements upon adoption of SFAS
123R, the modification of employee share options prior to adoption of SFAS
123R, and disclosures in Managements Discussion and Analysis of Financial
Condition and Results of Operations subsequent to adoption of SFAS 123R. The
Company has accounted for its stock option grants in compliance with SAB 107
and Staff Accounting Bulletin No. 110,
Year-End
Help for Expensing Employee Stock Option
(SAB No. 110).
On November 10,
2005, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position SFAS 123R-3
Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards.
The Company has elected to adopt the
alternative transition method provided the FASB Staff Position for calculating
the tax effects (if any) of stock-based compensation expense pursuant to SFAS
123R. The alternative transition method
includes simplified methods to establish the beginning balance of the
additional paid-in capital pool related to the tax effects of employee
stock-based compensation, and to determine the subsequent impact to the
additional paid-in capital pool and the consolidated statements of operations
and cash flows of the tax effects of employee stock-based compensation awards
that are outstanding upon adoption of SFAS 123R.
The Company uses
historical volatility as it believes it is more reflective of market conditions
and a better indicator of volatility. The Company uses the simplified
calculation of expected life described in SAB No. 107 and SAB No. 110.
If the Company determines that another method used to estimate expected
volatility is more reasonable than the Companys current methods, or if another
method for calculating these input assumptions is prescribed by authoritative
guidance, the fair value calculated for share-based awards could change
significantly. Higher volatility and longer expected lives result in an
increase to share-based compensation determined at the date of grant.
11
Table of
Contents
The Company recognized the full impact of its share-based compensation
plans in the consolidated financial statements for the three months ended April 4,
2009 and March 29, 2008 under SFAS 123R and did not capitalize any such
costs on the consolidated balance sheets, as such costs that qualified for
capitalization were not material. The
following table presents share-based compensation expense included in the
Companys consolidated statement of operations:
|
|
Three Months Ended
|
|
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Cost of product
revenue
|
|
$
|
48,628
|
|
$
|
20,714
|
|
Funded research
and development and other revenue expense
|
|
21,058
|
|
26,795
|
|
Un-funded
research and development and other revenue expenses
|
|
84,474
|
|
11,110
|
|
Selling, general
and administrative expenses
|
|
528,157
|
|
70,648
|
|
|
|
|
|
|
|
Share based
compensation expense from continuing operations before tax
|
|
$
|
682,317
|
|
$
|
129,267
|
|
|
|
|
|
|
|
Share based
compensation expense from discontinued operations
|
|
$
|
|
|
$
|
16,749
|
|
|
|
|
|
|
|
Total share
based compensation expense before tax
|
|
$
|
682,317
|
|
$
|
146,016
|
|
|
|
|
|
|
|
Income tax
benefit
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Net share-based
compensation expense
|
|
$
|
682,317
|
|
$
|
146,016
|
|
Compensation expense associated with the
granting of stock options to employees is being recognized on a straight-line
basis over the service period of the option.
In instances where the actual compensation expense would be greater than
that calculated using the straight-line method, the actual compensation expense
is recorded in that period.
The weighted
average grant date fair value of options granted during the three months ended April 4,
2009 and March 29, 2008 were $1.22 and $1.66, respectively, per
option. The fair value of each stock
option is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following range of assumptions:
|
|
Three Months Ended
|
|
Assumptions:
|
|
April 4, 2009
|
|
March 29, 2008
|
|
Expected life
|
|
6.25 years (1)
|
|
6.25 years (1)
|
|
Expected
volatility ranging from
|
|
82.14% - 82.81% (2)
|
|
84.71% - 89.47% (2)
|
|
Dividends
|
|
none
|
|
none
|
|
Risk-free
interest rate
|
|
2%(3)
|
|
2.70% to 3.16% (3)
|
|
Forfeiture Rate
(4)
|
|
6.25%
|
|
6.25%
|
|
(1)
|
The option life was
determined using the simplified method for estimating expected option life,
which qualify as plain-vanilla options.
|
(2)
|
The
stock volatility for each grant is measured using the weighted average of
historical daily price changes of the Companys common stock over the most
recent period equal to the expected option life of the grant, the historical
short term trend of the option and other factors, such as expected changes in
volatility arising from planned changes in the Companys business operations.
|
(3)
|
The
risk-free interest rate for each grant is equal to the U.S. Treasury yield
curve in effect at the time of grant for instruments with a similar expected
life.
|
(4)
|
The
estimated forfeiture rate for each option grant is 6.25%. At the time SFAS
123R was adopted, all outstanding stock options were vested. The Company
periodically reviews the estimated forfeiture rate, in light of actual
experience.
|
12
Table of Contents
Concentration
of Credit Risk
Financial instruments that subject the Company to concentrations of
credit risk principally consist of cash equivalents, trade accounts receivable,
unbilled contract costs and deposits in bank accounts. The Company deposits its cash and invests in
short-term investments primarily through a national commercial bank. Deposits
in excess of amounts insured by the Federal Deposit Insurance Corporation
(FDIC) are exposed to loss in the event of nonperformance by the
institution. The Company has had cash deposits in excess of the FDIC insurance
coverage.
The Companys trade accounts receivable and unbilled contract costs and
fees are primarily from sales to U.S. government agencies and commercial
customers. The Company does not require collateral and has not historically
experienced significant credit losses related to receivables, letters of credit
or unbilled contract costs and fees from individual customers or groups of
customers in any particular industry or geographic area.
Significant customers are defined as those customers that account for
10% or more of total net revenue in a fiscal year or 10% or more of accounts
receivable and unbilled contract costs and fees at the end of a fiscal period.
For the three months ended April 4, 2009, there were five customers that
were deemed significant with regards to revenue. For the three months ended April 4,
2009, these customers accounted for approximately 72%, or approximately $10.8
million, of revenue. At April 4,
2009, there are three customers that were deemed significant with regards to
accounts receivable. At April 4,
2009, these customers accounted for approximately 60%, or approximately $5.7
million, of accounts receivable.
Research and Development Costs
The Company expenses research and development costs as incurred. Cost
of research and development and other revenue includes costs incurred in
connection with both funded research and development and other revenue
arrangements and unfunded research and development activities.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes net loss and foreign currency
translation adjustments.
Fair
Value of Financial Instruments
The Companys financial instruments consist of cash equivalents,
accounts receivable, unbilled contract costs and fees, warrants to purchase
shares of common stock, accounts payable and debt instruments,. The estimated
fair values of these financial instruments approximate their carrying values at
April 4, 2009 and December 31, 2008. The estimated fair values have
been determined through information obtained from market sources and management
estimates. The Companys warrant
liability is recorded at fair value. See
Fair Value Measurement section below.
13
Table of Contents
Fair
Value Measurements
Effective January 1,
2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS
157). In February 2008, the FASB issued FASB Staff Position No. FAS
157-2, Effective Date of FASB Statement No. 157, which provides a one
year deferral of the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the Company
has adopted the provisions of SFAS 157 with respect to its financial assets and
liabilities only. SFAS 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and
enhances disclosures about fair value measurements. Fair value is defined under
SFAS 157 as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair
value under SFAS 157 must maximize the use of observable inputs and minimize
the use of unobservable inputs. The standard describes a fair value hierarchy
based on three levels of inputs, of which the first two are considered
observable and the last unobservable, that may be used to measure fair value
which are the following:
·
Level 1 - Quoted prices in active markets for
identical assets or liabilities.
·
Level 2 - Inputs other than Level 1 that are
observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
·
Level 3 - Unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of the
assets or liabilities.
The adoption of this
statement did not have a material impact on the Companys consolidated results
of operations and financial condition.
Assets and Liabilities
Measured at Fair Value on a Recurring Basis as of April 4, 2009 are as
follows:
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
Balance as of
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
April 4,
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
Description
|
|
2009
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
(Dollars
in Thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market
funds (2)
|
|
$
|
1,048,001
|
|
$
|
1,048,001
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,048,001
|
|
$
|
1,048,001
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term
warrant liability (1)
|
|
$
|
29,819,450
|
|
$
|
|
|
$
|
29,819,450
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
29,819,450
|
|
$
|
|
|
$
|
29,819,450
|
|
$
|
|
|
(1)
|
Within
the Companys Level 2 financial assets, which consists of long term investor
warrant liabilities comprised of the Warrant As, Warrant Cs, the
Series C Preferred Warrants and the placement agent warrants. the
Warrant As and Warrant Cs are being fair valued utilizing a binomial lattice
model and the placement agent warrants and the Series C Preferred
Warrants are being fair valued using the Black-Scholes option pricing model.
(see Note J. Warrant Liabilities-
Valuation Methodology
and Significant Assumptions
and Note K -
Redeemable
Convertible Series B and Series C Preferred Stock and current
liabilities below.
).
|
(2)
|
Included
as a component of cash and cash equivalents on accompanying consolidated
balance sheets.
|
14
Table
of Contents
Warrant
Liabilities
In June 2008, the
FASB ratified the consensus reached on Emerging Issues Task Force (EITF)
Issue No. 07-05,
Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock
(EITF No. 07-05). EITF No. 07-05 clarifies the determination of
whether an instrument (or an embedded feature) is indexed to an entitys own
stock, which would qualify as a scope exception under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. EITF No. 07-05
is effective for financial statements issued for fiscal years beginning after December 15,
2008.
Upon the Companys adoption of EITF No. 07-05 on January 1,
2009, the Companys evaluation of the Series C Preferred Stock Warrants
determined that the 19,899,022 Series C Preferred Stock Warrants did not
qualify for a scope exception under SFAS No. 133 as they were determined
to not be indexed to the Companys stock as prescribed by EITF No. 07-05.
As a result on the date of adoption the Company reclassified these warrants
from additional paid in capital to warrant liabilities through a cumulative
effect of a change in accounting principle of $22,041,541. For the three month period ended April 4,
2009 the Company recorded a charge to change in fair value of warrants of
$4,703,493 for the increase in the fair value related to these warrants during
the quarter ended April 4, 2009.
The warrants do not qualify for hedge accounting, and as such, all
future changes in the fair value of these warrants will be recognized currently
in earnings until such time as the warrants are exercised or expire. These common stock purchase warrants do not
trade in an active securities market, and as such, we estimate the fair value
of these warrants using the Black-Scholes option pricing model using the
following assumptions:
Assumptions:
|
|
January 1, 2009
|
|
April 4, 2009
|
|
|
|
|
|
|
|
Expected life
|
|
5.9 6.7 years
|
|
5.6 6.5 years
|
|
Expected volatility
|
|
80% - 85%
|
|
75% - 85%
|
|
Dividends
|
|
none
|
|
none
|
|
Risk-free
interest rate
|
|
1.69% - 1.83%
|
|
2.06% - 2.35%
|
|
The Company
determined the fair values of the investor warrants and placement agent
warrants using valuation models it considers to be appropriate. The Companys
stock price has the most significant influence on the fair value of its
warrants. An increase in the Companys common stock price would cause the fair
values of the warrants to increase, because the exercise price of the warrants
is fixed at $1.815 per share and result in a charge to our statement of
operations. A decrease in the Companys stock price would likewise cause the
fair value of the warrants to decrease and result in a credit to our statement
of operations. See Note J for valuation discussion.
Redeemable
Convertible Series B Preferred Stock
The Company accounts for its Series B
Preferred Stock and associated warrants in accordance with
EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments,
allocating the proceeds received net of transaction costs based on the relative
fair value of the redeemable convertible Series B Preferred Stock and the
warrants issued to the investors, and then to any beneficial conversion rights
contained in the convertible redeemable preferred securities. The Company determined the initial value of
the Series B Preferred Stock and investor warrants using valuation models
it considers to be appropriate. The Series B
Preferred Stock is classified within the liability section of the Companys
balance sheet. To the extent that the Series B
Preferred Stock is subject to a remeasurement event under EITF Topic D-98,
Classification and
Measurement of Redeemable Securities,
or is otherwise
modified, the Series B Preferred Stock will be reclassified to temporary
equity.
Redeemable
Convertible Preferred Stock
The Company accounted for its issuance of Convertible Series C
Preferred Stock (the Series C Preferred Stock), and associated warrants
in accordance with
in
accordance with EITF 00-27,
Application of
Issue No. 98-5 to Certain Convertible Instruments,
allocating
the proceeds received net of transaction costs based on the relative fair value
of the redeemable convertible Series C Preferred Stock and the warrants
issued to the Investors, and then to any beneficial conversion rights contained
in the convertible redeemable preferred securities and in accordance with EITF
Topic D-98, classifying the Series C Preferred Stock as temporary equity
on the balance sheet between the captions for liabilities and permanent
shareholders equity. The Company
determined the initial value of the Series C Preferred Stock and investor
warrants using valuation models it considers to be appropriate. The Company is using the effective interest
method to accrete the carrying value of the Series C Preferred stock
through the earliest possible redemption date (November 8, 2011), at which
time the value of the Series C Preferred Stock would be $30.0 million or
120% of its face value.
15
Table of
Contents
Reclassifications
Certain prior-year balances have been reclassified to conform to
current-year presentations. The Company
reclassified the effects of foreign currency translation, of which a portion
was previously accounted for in cost of sales, to other income (expense) in its
statement of operations for the three months ended March 29, 2008. The effect of the reclassification was approximately
$0.2 million of translation related gains being accounted for in other income
for the three month period ended March 29, 2008.
16
Table of Contents
D. DISCONTINUED OPERATIONS
On September 26, 2008, the Company sold its
Electronics and Power Systems US business segments to two unrelated companies,
for approximately $5.6 million in cash and $0.5 million in non-cash consideration
consisting of the accounts receivable balance for the Power Systems US
division. Prior to the sale, each of these divisions were reported by the
Company as its own operating segment.
Operations associated with these discontinued segments have been classified
as loss from discontinued operations in the accompanying consolidated
statements of operations, and cash flows associated with these segments are
included in cash flows from discontinued operations in the consolidated
statements of cash flows.
There were no sales and no loss from discontinued
operations during the three month period ended April 4, 2009. Net sales from discontinued operations were
$3.5 million for the three months ended March 29, 2008. Loss from
discontinued operations was $0.4 million for the three months ended March 29,
2008. Net sales and net loss from
discontinued operations is broken out by division as follows:
|
|
Three Months Ended
|
|
|
|
(amounts in thousands)
|
|
Division
|
|
April 4, 2009
|
|
March 29, 2008
|
|
|
|
|
|
|
|
Electronics
|
|
|
|
|
|
Net Sales
|
|
|
|
$
|
2,598
|
|
Net Loss
|
|
|
|
$
|
(215
|
)
|
|
|
|
|
|
|
Power Systems, US
|
|
|
|
|
|
Net Sales
|
|
|
|
$
|
929
|
|
Net Loss
|
|
|
|
$
|
(228
|
)
|
|
|
|
|
|
|
Discontinued
Operations
|
|
|
|
|
|
Total
Net Sales
|
|
|
|
$
|
3,527
|
|
Total
Net Loss
|
|
|
|
$
|
(443
|
)
|
In accordance with EITF Issue No. 87-24,
Allocation
of Interest to Discontinued Operations
, the Company has not
allocated interest to discontinued operations.
The Company has also eliminated all intercompany activity associated
with discontinued operations.
There were no net
assets of the Electronics and Power Systems US divisions at April 4, 2009
and December 31, 2008.
17
Table of Contents
Note E.
Loss per Share
The following is the reconciliation of the numerators and denominators
of the basic and diluted loss per share computations:
|
|
Three Months Ended
|
|
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Loss from
continuing operations
|
|
$
|
(10,754,456
|
)
|
$
|
(2,957,793
|
)
|
Loss from
discontinued operations
|
|
$
|
|
|
$
|
(443,407
|
)
|
Accretion and
dividends and deemed dividends on Series C Preferred Stock
|
|
$
|
(1,142,532
|
)
|
$
|
(941,953
|
)
|
Net loss
attributable to common shareholders
|
|
$
|
(11,896,988
|
)
|
$
|
(4,343,153
|
)
|
Basic and
diluted:
|
|
|
|
|
|
Common shares
outstanding, beginning of period
|
|
51,479,821
|
|
49,803,979
|
|
Weighted average
common shares issued during the period
|
|
58,043
|
|
130,940
|
|
Weighted average
shares outstandingbasic and diluted
|
|
51,537,864
|
|
49,934,919
|
|
|
|
|
|
|
|
Net loss per
weighted average share, basic and diluted:
|
|
|
|
|
|
From loss on
continuing operations attributable to common stockholders
|
|
$
|
(0.23
|
)
|
$
|
(0.08
|
)
|
From loss on
discontinued operations
|
|
$
|
|
|
$
|
(.01
|
)
|
Net loss per
weighted average share, basic and diluted
|
|
$
|
(0.23
|
)
|
$
|
(0.09
|
)
|
As of April 4, 2009 and March 29, 2008, shares of common
stock issuable upon the exercise of options and warrants were excluded from the
diluted average common shares outstanding, as their effect would have been
antidilutive. In addition, shares of
common stock issuable upon the conversion of Series B Preferred Stock and Series C
Preferred Stock were excluded from the diluted weighted average common shares
outstanding as their effect would also have been anti-dilutive. The Company reports net loss per basic and
diluted common share in accordance with SFAS No. 128,
Earnings Per Share
, which establishes
standards for computing and presenting earnings per share. Basic earnings per
share excludes dilution and is computed by dividing income attributable to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company, except when the effect
would be anti-dilutive.
The table below summarizes the option and warrants and convertible
preferred stock that were excluded from the calculation above due to their
effect being antidilutive:
|
|
Three Months Ended
|
|
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Common Stock
issuable upon the exercise of:
|
|
|
|
|
|
Options
|
|
10,851,370
|
|
4,066,454
|
|
Warrants
|
|
25,350,932
|
|
26,572,055
|
|
Total Options
and Warrants excluded
|
|
36,202,302
|
|
30,638,509
|
|
|
|
|
|
|
|
Common Stock
issuable upon the conversion of redeemable convertible Series B
Preferred Stock
|
|
935,484
|
|
1,096,774
|
|
Common Stock
issuable upon the conversion of redeemable convertible Series C
Preferred Stock
|
|
25,553,278
|
|
24,038,461
|
|
18
Table of Contents
The table below details out shares of common stock underlying securities
for which the securities would have been considered dilutive at April 4,
2009 and March 29, 2008, had the Company not been in a loss position:
|
|
# of Underlying Common Shares
|
|
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Employee stock
options
|
|
1,475,700
|
|
1,944,825
|
|
Warrants to
purchase common stock
|
|
19,863,054
|
|
7,742,530
|
|
Series B
Convertible Preferred Stock
|
|
935,484
|
|
1,096,774
|
|
Series C
Convertible Preferred Stock
|
|
25,553,278
|
|
24,038,461
|
|
Total
|
|
47,827,516
|
|
34,822,590
|
|
Note F.
Inventory
Inventory components at the end of each period were as follows:
|
|
April 4,
2009
|
|
December 31,
2008
|
|
Raw material
|
|
$
|
4,645,927
|
|
$
|
4,920,780
|
|
Work-in-process
|
|
2,441,856
|
|
6,182,835
|
|
Finished goods
|
|
349,029
|
|
353,917
|
|
|
|
$
|
7,436,812
|
|
$
|
11,457,532
|
|
Note G.
Legal Matters
From time to time, the
Company is a party to routine litigation and proceedings in the ordinary course
of business.
On May 9, 2008,
Advanced Energy Industries, Inc. (AE) filed a civil action in Colorado
state court against the Company and its Chief Executive Officer, Charles
S. Rhoades, seeking to enjoin Mr. Rhoades from employment by the
Company based upon its claim that Mr. Rhoades was subject to a
non-competition agreement with AE. On March 3, 2009, the parties
agreed to settle this case. The settlement of the case will not have
a material financial impact on the Company and Mr. Rhoades will be free to
continue to serve as the Companys President and Chief Executive Officer.
The Company is not
aware of any other current or pending litigation in which the Company is or may
be a party that it believes could materially adversely affect the results of
operations or financial condition.
Note H.
Commitments and Contingencies
Operating
Leases
The Company leases its facilities under various operating leases that
expire through October 2011.
Future minimum annual rentals under lease agreements at April 4,
2009 are as follows:
Fiscal Year
|
|
|
|
2009
|
|
$
|
551,383
|
|
2010
|
|
$
|
344,713
|
|
2011
|
|
$
|
224,712
|
|
Total
|
|
$
|
1,120,808
|
|
19
Table of Contents
Letters
of Credit:
The Company utilizes a standby letter of credit to satisfy a security
deposit requirement and in some instances to satisfy warranty commitments.
Outstanding standby letters of credit as of April 4, 2009 and December 31,
2008 were $34,000. The Company is
required to pledge cash as collateral on these outstanding letters of credit.
As of April 4, 2009 and December 31, 2008, the cash pledged as
collateral for these letters of credit was $34,000, and is included in
restricted cash and cash equivalents on the balance sheet.
Employment
Agreements:
The Company had employment agreements with certain former employees
that provided for severance payments and accelerated vesting of options upon
termination of employment under certain circumstances or a change of control,
as defined. During the fourth quarter of
2008, the Company recorded approximately $0.3 million related to the employment
contract of the former Chief Executive Officer which represents amounts due
subsequent to March 1, 2009. The
former Chief Executive Officer will continue on as a director of the Company.
The Companys employment
arrangement with its current Chief Executive Officer provides that if his
employment is terminated by the Company without cause or is constructively
terminated within one year following a change of control transaction, his
salary and medical benefits will be continued for one year thereafter subject
to his execution of a release agreement with the Company.
Line of Credit
On February 26,
2008, the Company entered into a Loan and Security Agreement (the Loan
Agreement) with Silicon Valley Bank (the Bank). Under the terms of the Loan Agreement, the
Bank agreed to provide the Company with a credit line up to $10.0 million. The Companys obligations under the Loan
Agreement are secured by substantially all of the assets of the Company and
advances under the Loan Agreement are limited to 80% of eligible receivables
and the lesser of 25% of the value of the Companys eligible inventory, as
defined, or $1.0 million. Interest on
outstanding borrowings accrues at a rate per annum equal to the Prime Rate plus
one percent (1.0%) per annum, as defined, or the LIBOR Rate plus three and
three quarter percent (3.75%) per annum.
The Loan Agreement contains certain financial covenants relating to
tangible net worth, as defined, which the Company must satisfy in order to
borrow under the agreement. In addition,
the Company agreed to pay to the Bank a collateral monitoring fee of $750 per
month and agreed to the following additional terms: (i) $50,000 commitment
fee, $25,000 to be paid at signing of the Loan Agreement and $25,000 to be paid
on the one year anniversary of the Loan
Agreement; (ii) an unused line fee in the amount of 0.5% per annum of the
average unused portion of the revolving line; and (iii) an early
termination fee of 0.5% of the total credit line if the Company terminates the
Loan Agreement prior to 12 months from the Loan Agreements effective
date. The Loan Agreement, if not sooner
terminated in accordance with its terms, expires on February 25, 2010.
On September 24, 2008, the Company entered into the Second Loan
Modification Agreement with the Bank.
The Second Loan Modification modified certain of the financial covenants
related to the Loan Agreement. The
Company paid legal fees of approximately $15,000 related to the Second Loan
Modification Agreement. As of April 4,
2009, the Company had $4.5 million outstanding under the Loan Agreement and the
Banks prime rate was 4.0%. The rate
used was the Banks prime rate of 4% plus 1% or (5.0% at April 4, 2009).
The Company has certain financial covenants under the Loan Agreement. As the Company was not in compliance with
these covenants as of April 4, 2009, the Company obtained a waiver from
the bank with respect to the covenants as of April 4, 2009. As of April 4, 2009, the Company had
availability of $0.9 million under the line of credit.
20
Table of
Contents
Note I. Product Warranties
In its Renewable Energy Solutions division the Company provides a
warranty to its customers for most of its products sold. In general the Companys warranties are for
one year after the sale of the product and five for photovoltaic inverter
product sales. The Company reviews its
warranty liability quarterly. The
Companys estimate for product warranties is based on an analysis of actual
expenses by specific product line and estimated future costs related to
warranty. Factors taken into
consideration when evaluating the Companys warranty reserve are (i) historical
claims for each product, (ii) the development stage of the product, (iii) volume
increases, (iv) life of warranty and (v) other factors. To the extent actual experience differs from
the Companys estimate, the provision for product warranties will be adjusted
in future periods. Such differences may
be significant.
The following is a summary of the Companys accrued warranty activity for
the following periods:
|
|
Three Months Ended
|
|
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Balance at
beginning of year
|
|
$
|
2,175,281
|
|
$
|
2,001,757
|
|
Provision
|
|
499,308
|
|
489,305
|
|
Usage
|
|
(542,140
|
)
|
(187,200
|
)
|
Balance at end
of year
|
|
$
|
2,132,449
|
|
$
|
2,303,862
|
|
Note J.
Convertible Debt Instruments and Warrant Liabilities
Features
of the Convertible Notes and Warrants
On
July 19, 2006, the Company entered into a Securities Purchase Agreement
(the Purchase Agreement) with the purchasers named therein (the Purchasers)
in connection with the private placement (the Private Placement) of:
·
$12,000,000 aggregate
principal amount of senior secured convertible notes (the Convertible Notes),
convertible into shares of the Companys common stock at a conversion price of
$1.65 per share;
·
Warrant As to purchase
up to an aggregate of 3,636,368 shares of the Companys common stock at a price
of $1.815 per share for a period beginning six months from the date of such
warrants and ending on the seventh anniversary of the date of such warrants;
and
·
Warrant Bs to purchase up to an aggregate
of 3,636,368 shares of the Companys common stock at a price of $1.68 per share
for a period of 90 trading days beginning the later of six months from the date
of such warrants and the date the Securities and Exchange Commission (the SEC)
declares effective a shelf registration statement covering the resale of the
common stock underlying the securities issued in the Private Placement (the Registration
Statement); to the extent the Warrant Bs are exercised, the Purchasers were
entitled to receive additional warrants (the Warrant Cs), as described
below. Because the registration
statement was declared effective on September 27, 2006, these warrants
were originally exercisable for the 90 trading day period beginning six months
from the date of such warrants (i.e. until May 30, 2007). On December 20,
2006 the Warrant Bs were amended to extend the expiration date of the
Warrant Bs issued in the Private Placement from May 30, 2007 to August 31,
2007. The Warrant Bs were exercised in full on July 17, 2007 for $1.31 per
share. See below for a discussion
related to the exercise of the Warrant Bs and the issuance of Warrant Cs to the
holders as a result of such exercise.
On November 7, 2007, the Convertible Notes were retired by cash
redemption.
Additionally,
with respect to the common stock underlying the Warrant Cs issued in July 2007
upon exercise of the Warrant Bs, the Company was also obligated to (i) file
a registration statement covering the resale of such common stock with the SEC
within 30 days following the issuance of the Warrant Cs (which it has
satisfied), (ii) use its best efforts to cause such registration statement
to be declared effective within 60 days following the issuance of the Warrant
Cs (or 90 days in the event of a review of such registration statement by the
SEC) (which it has satisfied as such registration statement was declared
effective on September 11, 2007) and (iii) use its best efforts to
keep such registration statement effective until the earlier of (x) the
fifth anniversary of the effective date of the registration statement, (y) the
date all of the securities covered by the registration statement have been
publicly sold and (z) the date all of the securities covered by the
registration statement may be sold without restriction under SEC Rule 144.
21
Table of Contents
Warrant As
The
Warrant As originally entitled the holders thereof to purchase up to an
aggregate of 3,636,368 shares of the Companys common stock at a price of
$1.815 per share for a period beginning six months from the date of such
warrants and ending on the seventh anniversary of the date of such
warrants. The period prior to six months
from the date of the warrants is hereinafter referred to as the non-exercise
period. The exercise price and the number of shares underlying these warrants
are subject to adjustment for stock splits, stock dividends, combinations,
distributions of assets or evidence of indebtedness, mergers, consolidations,
sales of all or substantially all assets, tender offers, exchange offers,
reclassifications or compulsory share exchanges.
If
a change of control of the Company occurs, as defined, the holders may elect to
require us to purchase the Warrant As for a purchase price equal to the
Black-Scholes value of the remaining unexercised portion of each Warrant A.
For so long as any
Warrant As remain outstanding, we may not issue any common stock or common
stock equivalents at a price per share less than $1.65. In the event of a
breach of this provision, the holders may elect to require us to purchase the
Warrant As for a purchase price equal to the Black-Scholes value of the
remaining unexercised portion of each Warrant A. As a result of the November 8, 2007 and December 20,
2007 preferred stock financing, as described in Note K below, the holders were
entitled for a limited period of time (45 days after each issuance) to exercise
this right. During the fourth quarter of
fiscal 2007, the Company paid approximately $1.4 million to redeem Warrant As
representing 1,242,426 shares of common stock.
During the first quarter of fiscal 2008, the Company paid approximately
$0.4 million to redeem Warrant As representing 303,031 shares of common
stock. (See table below for assumptions
used in valuing the warrants redeemed).
As of April 4, 2009 and December 31, 2008, Warrant As to
purchase 2,090,911 shares of common stock were outstanding, respectively.
If
following the later of (i) the effective date of the Registration
Statement and (ii) the six month anniversary of the issuance date, the
volume weighted average price per share of our common stock for any 20
consecutive trading days exceeds 200% of the exercise price, then, if certain
conditions are satisfied, including the Equity Conditions, we may require the
holders of the Warrant As to exercise up to 50% of the unexercised portions of
such warrants. If following the 24 month anniversary of the issuance date, the
volume weighted average price per share of our common stock for any 20
consecutive trading days exceeds 300% of the exercise price, then, if certain
equity conditions are satisfied, we may require the holders of the Warrant As
to exercise all or any part of the unexercised portions of such warrants.
Warrant Bs
The
Warrant Bs entitled the holders thereof to purchase up to an aggregate of
3,636,368 shares of our common stock at a price of $1.68 per share for a period
of 90 trading days beginning the later of six months from the date of such
warrants and the date the SEC declares effective the Registration
Statement. As noted above, as a result
of an amendment, the expiration date of the Warrant Bs was extended to August 31,
2007.
On July 17, 2007, the holders of the Warrant Bs exercised such
warrants in full, acquiring 3,636,638 shares of common stock at $1.31 per
share. The Company received proceeds of
approximately $4.8 million. To entice the
holders of the Warrant Bs to exercise such warrants the Company reduced the exercise
price from $1.68 to $1.31 per share. As
a result of reducing the exercise price the Company recorded a charge to
operations in its fiscal third quarter ending September 29, 2007 related
to the warrant modification of approximately $0.9 million to change in fair
value of the Convertible Notes and warrants on the accompanying statement of
operations. Pursuant to the original
terms of the Warrant Bs, upon exercise of the Warrant Bs, the warrant holders
were entitled to receive additional warrants (Warrant Cs) to purchase a
number of shares of common stock equal to 50% of the number of shares of common
stock purchased upon exercise of the Warrant Bs. As a result of the full exercise of the
Warrant Bs, the holders received Warrant Cs to purchase 1,818,187 shares of
common stock at an exercise price of $1.815 per share for a period beginning
six months from the date of such warrants and ending on the seventh anniversary
of the date of such warrants.
Warrant
Cs
As discussed above, upon
the exercise of the Warrant Bs, the holders were entitled to receive additional
warrants (the Warrant Cs). The Warrant
Cs originally entitled the holders thereof to purchase up to an aggregate of
1,818,187 shares of our common stock at a price of $1.815 per share for a
period beginning six months from the date of such warrants and ending on the
seventh anniversary of the date of such warrants. The period prior to six months from the date
of the warrants is hereinafter referred to as the non-exercise period. The
exercise price and the number of shares underlying these warrants are subject
to adjustment for stock splits, stock dividends, combinations, distributions of
assets or evidence of indebtedness, mergers, consolidations, sales of all or
substantially all assets, tender offers, exchange offers, reclassifications or
compulsory share exchanges.
22
Table of Contents
If
a change of control of the Company occurs, as defined, the holders may elect to
require us to purchase the Warrant Cs for a purchase price equal to the Black-Scholes
value of the remaining unexercised portion of each Warrant C.
For so long as any
Warrant Cs remain outstanding, the Company may not issue any common stock or
common stock equivalents at a price per share less $1.65. In the event of a
breach of this provision, the holders may elect to require the Company to
purchase the Warrant Cs for a purchase price equal to the Black-Scholes value
of the remaining unexercised portion of each Warrant C. As a result of the November 8,
2007 and December 20, 2007 preferred stock financing, as described in Note
K below, the holders were entitled for a limited period of time (45 days after
each issuance) to exercise this right.
During the fourth quarter of fiscal 2007, the Company paid approximately
$0.7 million to redeem Warrant Cs representing 621,215 shares of common
stock. During the quarter ended March 29,
2008, the Company paid approximately $0.2 million to redeem Warrant Cs
representing 151,516 shares of common stock. (See table below for assumptions
used in valuing the warrants redeemed).
As of April 4, 2009 and December 31, 2008, Warrant Cs to
purchase 1,045,456 shares of common stock were outstanding, respectively.
The table below summarizes Black-Scholes option pricing model range of
assumptions that were used in valuing the warrants redeemed for both the
Warrant As and Warrant Cs during the three month period ended March 29,
2008.
Assumptions:
|
|
Warrant As
|
|
Warrant Cs
|
|
Expected life
|
|
5.5 years
|
|
6.5 years
|
|
Expected
volatility ranging from
|
|
83.5%
|
|
85.6%
|
|
Dividends
|
|
none
|
|
none
|
|
Risk-free
interest rate
|
|
3.0%
|
|
3.2%
|
|
If
following the later of (i) the effective date of the Registration
Statement and (ii) the six month anniversary of the issuance date, the
volume weighted average price per share of our common stock for any 20
consecutive trading days exceeds 200% of the exercise price, then, if certain
conditions are satisfied, including the Equity Conditions, the Company may
require the holders of the Warrant Cs to exercise up to 50% of the unexercised
portions of such warrants. If following the 24 month anniversary of the
issuance date, the volume weighted average price per share of our common stock
for any 20 consecutive trading days exceeds 300% of the exercise price, then,
if certain equity conditions are satisfied, the Company may require the holders
of the Warrant Cs to exercise all or any part of the unexercised portions of
such warrants.
Placement Agent Warrants
First
Albany Capital (FAC) acted as placement agent in connection with the Private
Placement. In addition to a cash transaction fee, FAC or its designees were
entitled to receive five-year warrants to purchase 218,182 shares of the
Companys common stock at an exercise price of $1.87 per share. These warrants
will be callable after the second anniversary of the closing of the Private
Placement if the 20-day volume weighted average price per share of the Companys
common stock exceeds 175% of the exercise price. At the direction of FAC, these
warrants were issued to First Albany Companies Inc., the parent of FAC.
Accounting
for the Warrants
Upon issuance, the Warrant As, Warrant Bs and Warrant Cs, along with the
Placement Agent Warrants (together the Warrants), did not meet the
requirements for equity classification set forth in EITF Issue 00-19,
Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in a Companys Own Stock
,
because such warrants (a) must be settled in registered shares, (b) are
subject to substantial liquidated damages if the Company is unable to maintain
the effectiveness of the resale registration of the shares and (c) there
is a cash-out election using a Black-Scholes valuation under various
circumstances. Therefore these Warrants
are required to be accounted for as freestanding derivative instruments
pursuant to the provisions of SFAS 133.
Changes in fair value are recognized as either a gain or loss in the
statement of operations under the caption change in fair value of warrant
liabilities
23
Table of Contents
Upon issuance, the Company allocated $2.7 million of the initial proceeds
to the Warrants and immediately marked them to fair value resulting in a
derivative liability of $4.9 million and a charge to other expense of $2.2
million.
As of April 4, 2009 and December 31, 2008,
the remaining outstanding Warrants have been marked to fair value resulting in
a derivative liability of $3.1 million and $2.4 million, respectively. The charge to Change in Fair Value of warrant
liabilities, for the three months ended April 4, 2009 and March 29,
2008 was $0.7 million and $0.5 million, related to warrant As, Bs and Cs and
placement agent warrants, respectively.
A summary of the changes in the fair value of the warrant liabilities:
|
|
Fair Value
of Warrant
Liabilities
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
$
|
3,244,316
|
|
Fair value
adjustment (2)
|
|
(104,768
|
)
|
Change in fair
value of redeemed Warrant As and Cs at redemption (1) (2)
|
|
572,250
|
|
Warrant
Redemptions:
|
|
|
|
- Cash Paid for
Warrant A redemption (1)
|
|
(387,591
|
)
|
- Cash paid for
Warrant C redemption (1)
|
|
(184,659
|
)
|
Balance
at March 29, 2008
|
|
$
|
3,139,548
|
|
Balance
at December 31, 2008
|
|
$
|
2,407,438
|
|
Reclassification
of Series C Preferred Stock Warrants to liabilities (3)
|
|
22,041,541
|
|
Fair value
adjustment (2)
|
|
5,370,471
|
|
Balance
at April 4, 2009
|
|
$
|
29,819,450
|
|
(1)
As
a result of the Series C Preferred Stock financing, certain holders of
both Warrant As (1,242,426) and Warrant Cs (621,215), through December 31,
2007, exercised their right of redemption, resulting in the Company paying to
each redeeming warrant holder the Black-Scholes value of these warrants on the
date of notification of redemption.
During the three months ended March 29, 2008 holders of both
Warrant As (303,031) and Warrant Cs (151,516) exercised their right of
redemption, resulting in the Company paying to each redeeming warrant holder
the Black-Scholes value of these warrants on the date of notification of
redemption.
(2)
Amounts
included in change in fair value of warrant liabilities on consolidated
statement of operations.
(3)
As
a result of adopting EITF 07-05,
19,899,022
of the
Companys issued and outstanding common stock purchase warrants previously
treated as equity pursuant to the derivative treatment exemption were no longer
afforded equity treatment. As such,
effective January 1, 2009 the Company reclassified the fair value of these
common stock purchase warrants, which have exercised price reset features, from
equity to liability status as if these warrants were treated as derivative
liability since their date of issuance.
24
Table of Contents
Valuation - Methodology and
Significant Assumptions
The valuation of
derivative instruments utilizes certain estimates and judgments that affect the
fair value of the instruments. Fair values for the Companys derivatives are
estimated by utilizing valuation models that consider current and expected
stock prices, volatility, dividends, forward yield curves and discount
rates. Such amounts and the recognition
of such amounts are subject to significant estimates which may change in the
future. (See Note C for valuation related to Series C Preferred Stock
Warrants).
In estimating the fair
value of the Warrants the following methods and significant input assumptions
were applied:
Methods
·
A binomial lattice model was utilized to estimate the fair value of
Warrant As at December 31, 2007, March 29, 2008, December 31,
2008 and April 4, 2009, as well as the fair value of the Placement Agent
Warrants at December 31, 2006 and the Warrant Cs at December 31, 2007
and March 29, 2008, December 31, 2008 and April 4, 2009. The binomial model considers the key features
of the Warrants, and is subject to the significant assumptions discussed
below. First, a discrete simulation of
the Companys stock price was conducted at each node and throughout the
expected life of the instrument. Second,
an analysis of the higher of a holding position (
i.e
.,
fair value of a future node value discounted using an applicable discount rate)
or exercise position was conducted relative to each node, which considers the
non-exercise period, until a final fair value of the instrument is concluded at
the node representing the valuation date.
This model requires the following key inputs with respect to the Company
and/or instrument:
Warrant As
|
|
|
|
|
|
|
|
|
|
|
|
Input
|
|
Dec. 31,
2007
|
|
Mar. 29,
2008
|
|
Dec. 31,
2008
|
|
Apr. 4,
2009
|
|
Quoted Stock
Price
|
|
$
|
1.650
|
|
$
|
1.84
|
|
$
|
1.55
|
|
$
|
1.88
|
|
Conversion Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
Time to Maturity
(in years)
|
|
5.60
|
|
5.30
|
|
4.60
|
|
4.30
|
|
Stock Volatility
|
|
83
|
%
|
80
|
%
|
73
|
%
|
75
|
%
|
Risk-Free Rate
|
|
3.53
|
%
|
2.57
|
%
|
1.44
|
%
|
1.69
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise
Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Warrant Cs (1)
|
|
|
|
|
|
|
|
|
|
|
|
Input
|
|
Dec. 31,
2007
|
|
Mar. 29,
2008
|
|
Dec. 31,
2008
|
|
Apr. 4,
2009
|
|
Quoted Stock
Price
|
|
$
|
1.650
|
|
$
|
1.84
|
|
$
|
1.55
|
|
$
|
1.88
|
|
Conversion Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
Time to Maturity
(in years)
|
|
6.5
|
|
6.3
|
|
5.50
|
|
5.30
|
|
Stock Volatility
|
|
85
|
%
|
85
|
%
|
80
|
%
|
75
|
%
|
Risk-Free Rate
|
|
3.64
|
%
|
2.77
|
%
|
1.63
|
%
|
1.97
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise
Period
|
|
Until 1/17/08
|
|
N/A
|
|
N/A
|
|
N/A
|
|
(1) Warrant
Cs were issued on July 17, 2007 upon the exercise of the Warrant Bs.
·
A Black-Scholes option pricing model was
utilized to estimate the fair value of Placement Agent Warrants after December 31,
2007, March 29, 2008, December 31, 2008 and April 4, 2009. A
change in method from the binomial to Black-Scholes was warranted because the
warrants non-exercise period ended prior to the valuation date and all
required inputs were fixed. This model requires the following key inputs with
respect to the Company and/or instrument:
Input
|
|
Dec. 31,
2007
|
|
March 29,
2008
|
|
Dec. 31,
2008
|
|
Apr. 4,
2009
|
|
Quoted Stock
Price
|
|
$
|
1.65
|
|
$
|
1.84
|
|
$
|
1.55
|
|
$
|
1.88
|
|
Conversion Price
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
Time to Maturity
(in years)
|
|
3.55
|
|
3.31
|
|
2.55
|
|
2.29
|
|
Stock Volatility
|
|
70
|
%
|
70
|
%
|
80
|
%
|
75
|
%
|
Risk-Free Rate
|
|
3.175
|
%
|
1.91
|
%
|
0.89
|
%
|
1.08
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise
Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
25
Table of Contents
Significant
Assumptions:
·
Stock volatility
was estimated by annualizing the daily volatility of the Companys stock price
during the historical period preceding the respective valuation dates and
measured over a period corresponding to the remaining life of the
instruments. Historic stock prices were
used to estimate volatility as the Company did not have traded options as of
the valuation dates;
·
The volume
weighted average price for the 20 trading days preceding a payment date was
reasonably approximated by the average of the simulated stock price at each
respective node of the binomial model;
·
Based on the
Companys historical operations and management expectations for the near
future, the Companys stock was assumed to be a non-dividend-paying stock;
·
The quoted
market price of the Companys stock was utilized in the valuations because SFAS
133 requires the use of quoted market prices without considerations of blockage
discounts. Because the stock is thinly traded, the quoted market price may not
reflect the market value of a large block of stock; and
·
The quoted
market price of the Companys stock as of measurement dates and expected future
stock prices were assumed to reflect the effect of dilution upon conversion of
the instruments to shares of common stock.
Note K.
Redeemable Convertible Series B and Series C Preferred Stock
Series B
Convertible Preferred Stock
On October 31,
2003, the Company completed a $7.7 million equity transaction involving
the issuance of 1,535 shares of its Series B Convertible Preferred Stock,
$0.01 par value per share (the Series B Preferred Stock), and warrants
to purchase up to 1,228,000 shares of the Companys common stock, to accredited investors (the October 2003
Financing Transaction). In connection
with the October 2003 Financing Transaction, the Company issued shares of Series B
Preferred Stock for $5,000 per share. The Series B Preferred Stock is
convertible into a number of shares of common
stock equal to $5,000 divided by the conversion price of the Series B
Preferred Stock, which was initially $2.50.
As of April 4, 2009 and December 31, 2008, the conversion
price for the Series B Preferred Stock was $1.55, respectively. As of April 4, 2009 and December 31,
2008, 290 shares of Series B Preferred Stock were outstanding,
respectively. As of April 4, 2009
and December 31, 2008, the liquidation preference of the remaining 290
shares of Series B Preferred Stock was $1,450,000, respectively, and these
were convertible into 935,484 shares of common stock, respectively.
Dividends on Series B Preferred Stock
The shares of Series B
Preferred Stock initially bore a cumulative dividend at a rate of 6% per annum;
pursuant to its terms, this was increased to a rate of rate of 8% per annum on October 1,
2005. Dividends on the Series B Preferred Stock are payable semi-annually
and, except in certain limited circumstances, may be paid by the Company, at
its option, either through the issuance of shares of common stock or in cash. If
the Company elects to pay the dividend in shares of common stock, the Company will issue a number of shares of common stock equal to the quotient of
the dividend payment divided by the greater of 80% of the average closing bid
and ask price of the common stock on
the Nasdaq Stock Market for the 15 trading days ending on the 11th trading day
prior to the date the dividend is required to be paid, and the conversion
price, which was initially $2.50, but which has since been adjusted in
accordance with the terms of the Series B Preferred Stock to $1.55 (as of April 4,
2009 and December 31, 2008). The
Company has paid all dividends in shares of common stock, in lieu of cash
dividends.
As part of the October 2003
Financing Transaction, the Company also issued warrants to purchase up to
1,228,000 shares of its common stock. These warrants were exercisable for a
five-year term and had an initial exercise price of $3.32 per share, which represented
110% of the average closing price of the common stock for the five trading days
preceding October 31, 2003. The exercise price had been adjusted due to
anti-dilution provisions to $2.93 per share.
These warrants were immediately exercisable and expired on October 31,
2008. As of December 31, 2008, none
of these warrants remained outstanding.
During 2008, warrants to purchase an aggregate of 1,116,000 shares of
common stock, which were outstanding at March 29, 2008, expired
unexercised.
Burnham Hill
Partners, LLC, a division of Pali Capital, Inc. (BHP), served as
placement agent for this transaction. As part of its commission BHP, or its
assigns, received warrants, with an exercise price of $0.01 per share, to
purchase an aggregate of 150,430 shares of common stock. These warrants were
immediately exercisable and would expire on October 31, 2008. The Company valued
26
Table of Contents
these warrants at
$435,166, using the Black-Scholes option-pricing model and has treated this as
a transaction cost. As of December 31,
2008, none of these warrants were outstanding as the remaining warrants to
purchase an aggregate of 5,182 shares of common stock, which were outstanding
as of March 29, 2008, expired unexercised.
Liquidation
Preference on Series B Preferred Stock
In the event of a
liquidation of the Company, the holders of shares of the Series B
Preferred Stock are entitled to receive a liquidation payment prior to the
payment of any amount with respect to the shares of the common stock. The amount of this preferential liquidation payment
is $5,000 per share of Series B Preferred Stock, plus the amount of any
accrued but unpaid dividends on those shares. After payment of the full
liquidation preference amount, the holders of the Series B Preferred Stock
will not be entitled to any further participation as such in any distribution
of the Companys assets.
Optional Conversion of Series B Preferred Stock
The Series B
Preferred Stock is convertible into common
stock at any time at the option of the holder. Each outstanding share of
Series B Preferred Stock is convertible into a number of shares of common stock equal to $5,000 divided
by the conversion price of the Series B Preferred Stock, which was
initially $2.50, but which has since been adjusted in accordance with the terms
of the Series B Preferred Stock to $1.55 (as of April 4, 2009 and December 31,
2008). The Series B Preferred Stock has anti-dilution protections which
adjust the conversion price, in the event of the issuance of shares of common stock at a price less than the
conversion price then in effect. If the
Company issues equity securities for a per share price less than the conversion
price of the Series B Preferred Stock, which was initially $2.50, the
conversion price will be adjusted downwards using a weighted average
calculation.
Mandatory Conversion of Series B Preferred Stock
If certain conditions
described below are met, each share of Series B Preferred Stock will be
automatically converted into a number of shares of common stock equal to $5,000 divided by the conversion price of
the Series B Preferred Stock, which was initially $2.50, but which has
since been adjusted in accordance with the terms of the Series B Preferred
Stock to $1.55 (as of April 4, 2009 and December 31, 2008). Mandatory conversion may only occur if the
average of the closing bid and ask price of the common stock on the Nasdaq Stock Market exceeds $5.00 (as adjusted
for stock splits, stock dividends, combinations and similar transactions) for
20 consecutive trading days and either the registration statement governing the
underlying shares of common stock is
effective or the shares of common stock
issuable upon conversion of the Series B Preferred Stock can be
sold without restriction pursuant to Rule 144 of the Securities Act of
1933. The mandatory conversion date will
be extended for so long as the following events have occurred and are
continuing:
·
the effectiveness of the registration statement covering the resale of
the shares of common stock issuable upon the conversion of the Series B
Preferred Stock lapses for 20 consecutive trading days (other than as a result
of factors solely in control of the holders of the Series B Preferred
Stock) and the shares of common stock into which the shares of Series B
Preferred Stock are convertible cannot be sold without restriction pursuant to Rule 144;
·
the common stock is
suspended from listing without subsequent listing on any one of, or is not
listed on at least one of, the Nasdaq Global Market, the Nasdaq Capital Market,
the OTC Bulletin Board, the New York Stock Exchange, Inc. or the American
Stock Exchange, Inc. for five consecutive trading days;
·
the Company provides notice to the holders of Series B Preferred
Stock that it will not or cannot comply with a proper conversion notice; or
·
the Company fails to comply with a proper conversion notice within 10
business days of receipt of that notice.
If, however, on the
mandatory conversion date, a holder is prohibited from converting all of its
shares of Series B Preferred Stock as a result of the restrictions
described below under Conversion Restrictions, such shares of Series B
Preferred Stock will not be converted, will remain outstanding and will not
accrue any dividends.
Conversion Restrictions
Unless the Company seeks
and obtains stockholder approval, the number of shares of common stock the Company may issue
upon the conversion of the shares of Series B Preferred Stock (when
aggregated with the number of shares of common
stock issued as dividends on the Series B Preferred Stock and upon
exercise of the warrants issued to the placement agent and its affiliates for
the
27
Table of Contents
Series B Preferred
Stock financing) is limited to 4,947,352 shares (representing 19.999% of the
Companys total outstanding common
stock as of October 31, 2003 immediately prior to the issuance of
the Series B Preferred Stock). In
addition, no holder may convert shares of Series B Preferred Stock if
conversion of those shares would result in the holder owning more than 4.99% of
the common stock then
outstanding or would result in the holder beneficially owning more than 9.999%
of the common stock then
outstanding, unless the holder waives this limitation at least 61 days
prior to the proposed conversion.
Failure to Convert
If for any reason upon an
optional or mandatory conversion the Company cannot issue shares of common stock which have been
registered for resale pursuant to an effective registration statement, then the
Company will be obligated to issue as many shares of common stock as its is able to issue. If the Company does not have enough shares of
common stock to cover the
conversion of all outstanding shares of Series B Preferred Stock, then
with respect to the unconverted shares of Series B Preferred Stock (other
than unconverted Series B Preferred Stock resulting from the restrictions
described above under Conversion Restrictions), the holder will have the
right to (i) void its conversion notice, (ii) require the Company to
redeem the unconverted shares of Series B Preferred Stock at a price per
share equal to $6,250 plus liquidated damages and any accrued but unpaid
dividends or (iii) require the Company to issue shares of common stock that have not been
registered pursuant to the Securities Act.
If the holder elects redemption, the Company may pay the redemption
price either in cash or in shares of common
stock based on the quotient of the redemption price divided by the
greater of 80% of the average of the closing bid and ask price of the common stock on the Nasdaq Stock Market
for the 15 trading days ending on the 11th trading day prior to the redemption
date and the conversion price, which was initially $2.50, but which has since
been adjusted in accordance with the terms of the Series B Preferred Stock
to $1.55 (as of April 4, 2009 and December 31, 2008).
Redemption of Series B Preferred Stock
The holders of Series B
Preferred Stock are entitled to redeem their shares of Series B Preferred
Stock immediately prior to the consolidation, merger or business combination of
the Company with another entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation
of the Company or a consolidation, merger or other business combination in
which holders of the Companys voting power immediately prior to the
transaction continue after the transaction to hold, directly or indirectly, the
voting power of the surviving entity or entities necessary to elect a majority
of the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities), the sale or transfer of more than 50%
of the Companys assets (other than inventory in the ordinary course of
business) or the closing of a purchase, tender or exchange offer made to the
holders of more than 50% of the outstanding common stock. In such an
event, the redemption price per share will equal $6,250 plus any accrued but
unpaid dividends and liquidated damages. The Company may pay the redemption
price in either cash or shares of common
stock based on the quotient of the redemption price divided by the
greater of 80% of the average of the closing bid and ask price of the common stock on the Nasdaq Stock
Market for the 15 trading days ending on the 11th trading day prior to the
redemption date and the conversion price, which was initially $2.50, but which
has since been adjusted in accordance with the terms of the Series B
Preferred Stock to $1.55 (as of April 4, 2009 and December 31, 2008).
In addition, the holders
of Series B Preferred Stock are entitled to redeem their shares of Series B
Preferred Stock if the following events occur:
·
the effectiveness of the registration statement lapses
for 20 consecutive trading days (other than as a result of factors solely in
control of the holders of the Series B Preferred Stock) and the shares of common stock into which the Series B
Preferred Stock are convertible cannot be sold without restriction pursuant to Rule 144;
·
the common
stock is suspended from listing without subsequent listing on any one
of, or is not listed on at least one of, the Nasdaq Global Market, the Nasdaq
Capital Market, the OTC Bulletin Board, the New York Stock Exchange, Inc.
or the American Stock Exchange, Inc. for five consecutive trading days;
·
the Company provides notice to the holders of Series B
Preferred Stock that it will not or cannot comply with a conversion notice that
was properly executed and delivered; or
·
the Company fails to comply with a proper conversion
notice within 10 business days of receipt of that notice (other than as a
result of the restrictions described above under Conversion Restrictions).
With respect to the
events set forth in the first three bullet points above, the redemption price
per share will equal $6,000 plus liquidated damages and any accrued but unpaid
dividends. With respect to the event described in the fourth bullet point above,
the redemption price per share will be the greater of (i) $6,000 plus
liquidated damages and any accrued but unpaid dividends and
28
Table of Contents
(ii) the product of
the number of shares of common stock issuable
upon the relevant shares of Series B Preferred Stock multiplied by the
highest closing price for the common
stock during the period beginning on the date of first occurrence of the
event and ending one day prior to the date of payment of the redemption
price. If the effectiveness of the
registration statement lapses, listing is suspended or the holders receive a
notice that the Company will not or cannot comply with a conversion notice, the
Company may choose to pay the redemption price in shares of common stock based on the quotient of
the redemption price divided by the greater of 80% of the average of the
closing bid and ask price of the common
stock on the Nasdaq Stock Market for the 15 trading days ending on the
11th trading day prior to the redemption date and the conversion price, which
was initially $2.50, but which has since been adjusted in accordance with the
terms of the Series B Preferred Stock to $1.55 (as of April 4, 2009
and December 31, 2008).
Commencing October 31,
2006 (and so long as a registration statement covering the resale of the shares
of common stock underlying the Series B
Preferred Stock and related warrants is effective and none of the events listed
in the four bullet points above has occurred and is continuing), the Company
may redeem all or any portion of the outstanding Series B Preferred Stock
upon five days prior written notice at a price per share of $7,500, plus
liquidated damages and any accrued but unpaid dividends. However, if a holder has delivered a
conversion notice to the Company within three trading days of receipt of the
Companys redemption notice for all or a portion of the shares of Series B
Preferred Stock, such shares of Series B Preferred Shares which the
Company has designated for redemption may be converted by the holder. In addition, if during the period between the
date of the Companys redemption notice and the redemption date a holder
becomes entitled to redeem the Series B Preferred Stock as a result of a
consolidation, merger or business combination of the Company with another
entity, the sale or transfer of more than 50% of the Companys assets (other
than inventory in the ordinary course of business) or the closing of a
purchase, tender or exchange offer made to the holders of more than 50% of the common stock, the right of the holder
with respect to the conversion will take precedence over the Companys
redemption notice. If a holder delivers
a conversion notice but is prohibited from converting all of its shares of Series B
Preferred Stock as a result of the restrictions described above under Conversion
Restrictions, such shares of Series B Preferred Stock will not be
converted, will remain outstanding and will not accrue any dividends.
Accounting
for the Series B Preferred Stock and Adjustments to the Conversion Price
The Company
accounted for the transaction in accordance with EITF 00-27,
Application of Issue No. 98-5 to Certain
Convertible Instruments,
allocating the proceeds received net of
transaction costs based on the relative fair value of the redeemable
convertible Series B Preferred Stock and the warrants issued to the
investors, and then to any beneficial conversion rights contained in the convertible
redeemable preferred securities as follows:
Security
|
|
Face
Value
|
|
Fair
Value
|
|
Allocation of
Proceeds, Net of
Transaction Costs
|
|
Beneficial
Conversion
Feature
|
|
Discount
|
|
Redeemable
convertible Series B Preferred Stock
|
|
$
|
7,675,000
|
|
$
|
12,398,195
|
|
$
|
5,247,393
|
|
$
|
3,655,607
|
|
$
|
6,083,214
|
|
Warrants
|
|
|
|
$
|
2,935,558
|
|
$
|
1,242,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the
issuance of shares of common stock in
lieu of cash for the principal and interest payments due on the Convertible
Notes the issuance of 850,000 shares of common stock related to the early
termination of a lease, conversion of a portion of the Convertible Notes by the
note holders, the exercise of the Warrant Bs, the issuance of 749,999 shares of
common stock to the note holders as an inducement and the closing of the
private placement of Series C Preferred Stock and warrants in the fourth
quarter of 2007, the Company adjusted the conversion price on the Series B
Preferred Stock as to $1.55.
Series C Convertible Preferred Stock
On November 8, 2007,
the Company entered into a Stock and Warrant Purchase agreement with Rockport
Capital Partners II, L.P. and NGP Energy Technology Partners, L.P. (the Investors). Under this purchase agreement, the Investors
agreed to purchase in a private placement up to 25,000 shares of the Companys
newly created Series C convertible preferred stock (the Series C
Preferred Stock) and warrants to purchase up to 19,711,539 shares of common
stock, for an aggregate gross purchase price of $25.0 million. Each share of Series C Preferred Stock
initially converts into common stock at a price equal to $1.04 per share,
subject to adjustment.
This private placement
occurred in two closings. The first
closing occurred on November 8, 2007.
At the first closing, the Company issued 10,000 shares of Series C
Preferred Stock at $1,000 per share for an aggregate gross purchase price of
$10.0 million. These shares are
currently convertible into 9,615,384 shares of common stock. The Company also issued warrants to purchase
an aggregate of 15,262,072 shares of common stock. These warrants are exercisable for a
seven-year term and had an initial exercise price of $1.44 per share and may
not be exercised until May 8, 2008.
As a result of stockholder approval of the second closing and related
matters on December 20, 2007, as described below, the exercise price of
these warrants was reduced to $1.25 per share.
The
29
Table of Contents
Company considered this a
cancellation and reissuance of new warrants and accounted for the change in the
fair value of the warrants in the allocation of net proceeds associated with
the second closing and treated it as a deemed dividend to the Series C
Preferred Stock holders. (See Accounting for the Series C Preferred Stock
below).
At the second closing,
which occurred on December 20, 2007, following stockholder approval, the
Company issued 15,000 shares of Series C Preferred Stock for an aggregate
gross purchase price of $15.0 million, of which $10.0 million was paid through
the cancellation of the promissory notes previously issued to the Investors on November 7,
2007. These shares are currently
convertible into 14,423,076 shares of common stock. At this closing, the Company also issued
warrants to purchase an aggregate of 4,449,467 shares of common stock at an
exercise price of $1.25 per share. These
warrants are exercisable for a seven-year term and are exercisable immediately.
In the purchase
agreement, the Company also agreed to issue the Investors additional warrants
in the event that the holders of certain existing warrants (none of whom are
affiliated with the Investors) exercise those warrants in the future. Upon such exercises, the Company will issue
to the Investors additional warrants to purchase common stock equal to one-half
of the number of shares of common stock issued upon exercise of these existing
warrants. The exercise price of these
warrants will be $1.66 per share (during 2008, prior to the issuance of any
such warrants, the warrant holders agreed to change the exercise price to $1.66
per share from $1.25 per share). During
2008, the Company issued warrants to purchase an aggregate of 87,484 shares of
common stock to the Investors as a result of warrant exercises during
2008. No additional warrants were issued
during the quarter ended April 4, 2009.
As of April 4, 2009, if all of the remaining existing warrants are
exercised, the Company would need to issue warrants to purchase an additional
2,725,955 shares of common stock to the Investors.
Dividends on Series C
Preferred Stock
The shares of Series C
Preferred Stock accrue a cumulative dividend at a rate of 5% per annum of the
Stated Liquidation Preference Amount, as defined below. Dividends on the Series C Preferred
Stock shall be cumulative, shall accrue, whether or not declared, and be
payable quarterly in cash or, at the Companys option, added to the Stated
Liquidation Preference Amount. So long as any shares of Series C Preferred
Stock are outstanding, the Company shall not declare, pay or set apart for
payment any dividend or make any distribution on any Series B Preferred
Stock (other than dividends or distributions paid on the Series B
Preferred Stock in common stock in accordance with the terms of the Series B
Preferred Stock) or junior stock (other than dividends or distributions on
common stock payable solely in shares of common stock), unless at the time of
such dividend or distribution the Company shall have paid all accrued and
unpaid dividends on the outstanding shares of Series C Preferred
Stock. In addition, so long as any
shares of Series C Preferred Stock are outstanding, the Company shall not
declare, pay or set apart for payment any dividend or make any distribution on
any common stock (other than dividends or distributions on common stock payable
solely in shares of common stock), unless at the time of such dividend or
distribution the Company simultaneously pays a dividend or distribution on each
outstanding share of Series C Preferred Stock in an amount equal to the
product of (i) the dividend or distribution payable on each share of
common stock and (ii) the number of shares of common stock issuable upon
conversion of a share of Series C Preferred Stock, calculated on the
record date for determination of holders entitled to receive such dividend or
distribution.
Voting Rights
The holders of Series C Preferred Stock shall be entitled to notice
of all meetings of stockholders in accordance with the Companys bylaws. On any matter presented to the stockholders of the
Company for their action or consideration at any meeting of stockholders of the
Company (or by written consent of stockholders in lieu of meeting), each holder
of outstanding shares of Series C Preferred Stock shall be entitled to
cast the number of votes equal to quotient determined by dividing (i) the Series C
Original Issue Price ($1,000 per share) of the shares of Series C
Preferred Stock held by such holder as of the record date for determining
stockholders entitled to vote on such matter by (ii) $1.44 (as adjusted
for any stock dividends, combinations, splits and the like with respect to
shares of common stock). Except as provided by law or as described below,
holders of Series C Preferred Stock shall vote together with the holders
of common stock as a single class.
30
Table of Contents
The Company is not
permitted, without the affirmative vote or written consent of the holders of at
least 67% of the outstanding Series C Preferred Stock (50% of the
outstanding Series C Preferred Stock with respect to items (4), (5) and
(8) below), directly or indirectly, to take any of the following actions
or agree to take any of the following actions:
(1) authorize, create or issue any shares
of preferred stock or other equity securities ranking senior to or on a parity
with the Series C Preferred Stock;
(2) increase or decrease the total number
of authorized shares of Series C Preferred Stock;
(3) amend or modify the Companys
certificate of incorporation (including the Certificate of Designation
governing the Series C Preferred Stock) or bylaws that would adversely
affect the rights, preferences, powers and privileges of the Series C
Preferred Stock;
(4) repurchase or redeem any shares of Series B
Preferred Stock (except pursuant to the existing terms of the Series B
Preferred Stock) or any equity securities ranking junior to the Series C
Preferred Stock, subject to certain exceptions;
(5) effect any distribution or declare,
pay or set aside any dividend with respect to any equity securities ranking
junior to the Series C Preferred Stock;
(6) incur any form of indebtedness for
borrowed money in excess of $5,000,000 in the aggregate (other than
indebtedness existing at November 8, 2007);
(7) effect a liquidation, consummate a
reorganization event or dispose, transfer or license any material assets,
technology or intellectual property, other than non-exclusive licenses in
connection with sales of the Companys products in the ordinary course of
business;
(8) consummate any transaction that
results in the transfer or issuance of securities, or options, warrants or other
rights to receive securities of a subsidiary or any other transaction following
which a subsidiary no longer remains wholly-owned by the Company or pursuant to
which any third party has a right to purchase securities of a subsidiary;
(9) change the size of the Companys
board of directors;
(10) encumber or grant a security interest
in all or substantially all or a material part of the Companys assets except
to secure indebtedness permitted above that is approved by the Companys board
of directors;
(11) acquire a material amount of assets of
another entity, through a merger, purchase of assets or purchase of capital
stock or otherwise; or
(12) enter into any agreement to do or cause
to be done any of the foregoing.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary (a Liquidation), the holders
of shares of the Series C Preferred Stock then outstanding shall be
entitled to receive, out of the assets of the Company available for
distribution to its stockholders before any payment shall be made to the
holders of junior stock by reason of their ownership thereof, an amount per
share equal to the greater of:
(i) the Series C Original Issue Price ($1,000 per share) plus
any dividends accrued but unpaid thereon (the Stated Liquidation Preference
Amount); or
(ii) such amount per share as would have been payable had all shares
of Series C Preferred Stock been converted into common stock immediately
prior to such Liquidation (the amount payable to the holders of Series C
Preferred Stock pursuant to clause (i) or (ii) of this sentence is
hereinafter referred to as the
Series C
Liquidation Amoun
t).
If upon any such Liquidation, the assets of the Company available for
distribution to its stockholders shall be insufficient to pay the holders of
shares of Series C Preferred Stock the full amount to which they shall be
entitled and the holders of shares of parity stock the full amount to which
they shall be entitled pursuant to the terms of such Parity Stock, the holders
of shares of Series C Preferred Stock and the holders of shares of parity
stock shall share ratably in any distribution of the assets available for
distribution in proportion to the
31
respective
amounts which would otherwise be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to such shares
were paid in full. The liquidation
payment with respect to each outstanding fractional share of Series C
Preferred Stock shall be equal to a ratably proportionate amount of the
liquidation payment with respect to each outstanding share of Series C
Preferred Stock. All payments shall be
in cash, property (valued at its fair market value as determined by an
independent appraiser reasonably acceptable to the holders of a majority of the
shares of Series C Preferred Stock then outstanding) or a combination
thereof; provided, however, that no cash shall be paid to holders of junior
stock unless each holder of the outstanding shares of Series C Preferred
Stock has been paid in cash the full amount to which such holder shall be
entitled. After payment of the full Series C
Liquidation Amount, such holders of shares of Series C Preferred Stock
will not be entitled to any further participation as such in any distribution
of the assets of the Company.
Conversion
The
holder of Series C Preferred Stock shall have the following conversion
rights:
Holders Right to Convert
.
At any time the holder of
any such shares of Series C Preferred Stock may, at such holders option,
elect to convert all or any portion of the shares of Series C Preferred
Stock held by such person into a number of fully paid and nonassessable shares
of common stock equal to the quotient of (i) the Stated Liquidation
Preference Amount of the shares of Series C Preferred Stock being
converted divided by (ii) the conversion price then in effect as of the
date of the delivery by such holder of its notice of election to convert. The initial conversion price of the Series C
Preferred Stock is $1.04 per share. The Series C
Preferred Stock will receive weighted average anti-dilution protection in the
event of a dilutive issuance (i.e. stock splits, stock dividends or other
issuances deemed to be dilutive to the investor) in accordance with a formula
set forth in the Certificate of Designation, subject to certain exceptions.
Companys Right to Convert
.
At any time on or after November 8,
2009, if the average closing price of the Companys common stock for any
immediately preceding 180-day period exceeds $7.00 (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or
other similar recapitalization with respect to the common stock), the Company
will have the right, but not the obligation, to convert each outstanding share
of Series C Preferred Stock into a number of fully paid and nonassessable
shares of common stock equal to the quotient of (i) the Stated Liquidation
Preference Amount divided by (ii) the conversion price in effect as of the
Company conversion date.
Redemption
At any time and
from time to time on or after November 8, 2011 the holders of at least
66.7% of the then outstanding shares of Series C Preferred Stock may elect
to have all or any portion of the outstanding shares of Series C Preferred
Stock redeemed. The Company shall effect
the redemption on a redemption date by paying cash or, at the Companys
election, shares of common stock (valued in the manner described below).
If such redemption
shall be for cash, the Company shall effect the redemption, out of funds
legally available therefor, by paying in cash in exchange for each share of Series C
Preferred Stock to be redeemed a sum equal to the
product of (i) 1.2 multiplied by (ii) the Stated Liquidation
Preference Amount.
If such redemption shall
be for shares of common stock, the Company shall effect the redemption by
issuing, in exchange for each share of Series C Preferred Stock to be
redeemed, that number of shares of common stock equal to (A) the product of (i) 1.4 multiplied by (ii) the
Stated Liquidation Preference Amount divided by (B) the fair market
value of the common stock, based on a 10 day volume weighted average, as of the
redemption date.
32
Table of Contents
Accounting
for the Series C Preferred Stock
Initially, based
on the accounting guidance available at the closing of the Series C
Preferred Stock transaction (see
Change in Accounting
Principle
below), the Company accounted for the transaction in
accordance with EITF 00-27,
Application of
Issue No. 98-5 to Certain Convertible Instruments,
allocating
the proceeds received net of transaction costs based on the relative fair value
of the redeemable convertible Series C Preferred Stock and the warrants
issued to the Investors, and then to any beneficial conversion rights contained
in the convertible redeemable preferred securities as follows:
Security
|
|
Face
Value
|
|
Fair
Value
|
|
Allocation of
Proceeds, Net of
Transaction
Costs
|
|
Beneficial
Conversion
Feature
|
|
Initial
Carrying
Value
|
|
Redeemable
convertible Series C Preferred Stock
|
|
$
|
25,000,000
|
|
$
|
18,193,950
|
|
$
|
12,991,097
|
|
$
|
11,762,887
|
|
$
|
1,228,210
|
|
Warrants
|
|
|
|
$
|
18,352,179
|
|
$
|
10,092,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The re-pricing of
the exercise price of the Tranche I warrants from $1.44 to $1.25, as described
above, was treated as a cancellation of the original warrants issued on November 8,
2007 and a re-issuance of new warrants on December 20, 2007. The difference in fair value of the warrant
was included in the allocation of net proceeds associated with the second
closing of the Series C Preferred Stock on December 20, 2007. The Company treated this as a deemed dividend
on the Series C Preferred Stock.
The Company recorded a discount, including the re-pricing and beneficial
conversion feature of $11,762,887 and recorded a deemed dividend of $11,947,881
to the holders of the Series C Preferred Stock, which included the initial
allocation of the discount of $11,762,887 and $184,994 related to the accretion
of the Series C Preferred Stock to its redemption value through the date
that holders of the Series C Preferred Stock may first exercise their
redemption right. The Company is using the
effective interest method to accrete the carrying value of the Series C
Preferred Stock through the earliest possible redemption date (November 8,
2011), at which time the value of the Series C Preferred Stock would be
$30.0 million or 120% of its face value.
The components of the carrying value of the Series C Preferred
Stock from inception on November 8, 2007, the year ended December 31,
2007, March 29, 2008, December 31, 2008 and April 4, 2009, is as
follows:
|
|
Total
|
|
Initial carrying
value November 8, 2007
|
|
$
|
1,228,210
|
|
Deemed dividend
through December 31, 2007
|
|
$
|
11,762,887
|
|
Accretion of
original issue discount to redemption value through December 31, 2007
|
|
$
|
184,994
|
|
Total
|
|
$
|
13,176,091
|
|
Dividend through
December 31, 2007 (1)
|
|
$
|
100,000
|
|
Balance at
December 31, 2007
|
|
$
|
13,276,091
|
|
Accretion of
original issue discount to redemption value for the three months ended
March 29, 2008
|
|
637,991
|
|
Dividend for the
three months ending March 29, 2008 (1)
|
|
303,962
|
|
Balance at
March 29, 2008
|
|
$
|
14,218,044
|
|
|
|
|
|
Balance at
December 31, 2008
|
|
$
|
17,248,593
|
|
Accretion of
original issue discount to redemption value for the three months ended
April 4, 2009
|
|
821,494
|
|
Dividend for the
three months ending April 4, 2009 (1)
|
|
321,038
|
|
Balance at
April 4, 2009
|
|
$
|
18,391,125
|
|
(1)
The Company
elected to add the dividend to the liquidation preference of the Series C
Preferred Stock and it was recorded as a dividend to the holders of the Series C
Preferred Stock.
33
Table of Contents
In valuing the warrants, at issuance, associated with the Series C
Preferred Stock the Company used the Black-Scholes option pricing model with
the following range of assumptions:
Assumptions:
|
|
November 8, 2007
|
|
December 20, 2007
|
|
|
|
|
|
|
|
Expected life
|
|
4.0 years
|
|
5.2 years
|
|
Expected
volatility
|
|
70%
|
|
70%
|
|
Dividends
|
|
none
|
|
none
|
|
Risk-free
interest rate
|
|
3.64%
|
|
3.48%
|
|
Initially the Company had
designated the warrants as equity instruments in
accordance with FAS 133 and EITF 00-19, see warrant liabilities in Note C.
34
Table of Contents
Note L.
Stock Option Plans
Stock
Option Plans
Under the Companys
1998, 1999, 2000, 2002 and 2005 Stock Option Plans (collectively, the Plans),
both qualified and non-qualified stock options may be granted to certain
officers, employees, directors and consultants to purchase shares of the
Companys common stock. At April 4, 2009 10,091,767 stock options are
available for future grants under the Plans.
The Plans are
subject to the following provisions:
·
The aggregate fair market value
(determined as of the date the option is granted) of the Companys common stock
that any employee may purchase in any calendar year pursuant to the exercise of
qualified options may not exceed $100,000. No person who owns, directly or
indirectly, at the time of grant of a qualified option to him or her, more than
10% of the total combined voting power of all classes of stock of the Company
shall be eligible to receive any qualified options under the Plans unless the
exercise price is at least 110% of the fair market value of the Companys
common stock subject to the option, determined on the date of grant. Non-qualified options are not subject to this
limitation.
·
Qualified options are issued only to
employees of the Company, while non-qualified options may be issued to
non-employee directors, consultants and others, as well as to employees of the
Company. Options granted under the Plans may not be granted with an exercise
price less than 100% of fair value of the Companys common stock, as determined
by the Board of Directors on the grant date.
·
Options under the Plans must be granted
within 10 years from the effective date of the Plan. Qualified options
granted under the Plans cannot be exercised more than 10 years from the
date of grant, except that qualified options issued to 10% or greater stockholders
are limited to five-year terms.
·
Generally, the options vest and become
exercisable ratably over a four-year period.
·
The Plans contain antidilutive provisions
authorizing appropriate adjustments in certain circumstances.
·
Shares of the Companys common stock
subject to options that expire without being exercised or that are canceled as
a result of the cessation of employment are available for future grants.
The following
table summarizes activity of the Companys stock plans since December 31,
2008:
|
|
Options Outstanding
|
|
|
|
|
|
Number
of
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2008
|
|
10,147,996
|
|
$
|
2.39
|
|
8.09
|
|
$
|
382,951
|
|
Grants
|
|
1,038,000
|
|
$
|
1.22
|
|
|
|
|
|
Exercises
|
|
|
|
$
|
|
|
|
|
|
|
Cancellations
|
|
(334,626
|
)
|
$
|
6.28
|
|
|
|
|
|
Outstanding
at April 4, 2009
|
|
10,851,370
|
|
$
|
2.16
|
|
8.20
|
|
$
|
1,676,828
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at April 4, 2009
|
|
3,005,725
|
|
$
|
2.86
|
|
5.69
|
|
$
|
807,875
|
|
35
Table of Contents
Information
relating to stock options outstanding as of April 4, 2009 is as follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise
Prices
|
|
Number
of Shares
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
Weighted
Average
Exercise Price
|
|
Exercisable
Number of
Shares
|
|
Exercisable
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.41
|
|
to
|
|
$1.38
|
|
1,613,200
|
|
8.41
|
|
$
|
1.14
|
|
714,950
|
|
$
|
1.11
|
|
$1.39
|
|
to
|
|
$1.88
|
|
1,501,500
|
|
8.12
|
|
$
|
1.56
|
|
760,750
|
|
$
|
1.54
|
|
$1.90
|
|
to
|
|
$1.90
|
|
4,826,020
|
|
9.05
|
|
$
|
1.90
|
|
30,000
|
|
$
|
1.90
|
|
$1.91
|
|
to
|
|
$2.46
|
|
1,573,650
|
|
7.25
|
|
$
|
2.27
|
|
627,650
|
|
$
|
2.04
|
|
$2.50
|
|
to
|
|
$12.61
|
|
1,229,500
|
|
6.59
|
|
$
|
3.75
|
|
764,875
|
|
$
|
4.43
|
|
$17.56
|
|
to
|
|
$17.56
|
|
100,000
|
|
1.03
|
|
$
|
17.56
|
|
100,000
|
|
$
|
17.56
|
|
$17.750
|
|
to
|
|
$17.75
|
|
7,500
|
|
1.60
|
|
$
|
17.75
|
|
7,500
|
|
$
|
17.75
|
|
$0.41
|
|
to
|
|
$17.75
|
|
10,851,370
|
|
8.20
|
|
$
|
2.16
|
|
3,005,725
|
|
$
|
2.86
|
|
Options for the
purchase of 3,249,976 shares were exercisable at December 31, 2008, with a
weighted average exercise price of $3.22.
As of April 4,
2009, the Company had 92,135 shares of restricted stock outstanding of which
33,565 were vested. Restricted stock is
comprised of restricted stock awards to non-employee consultants of the Company
for services to be rendered in fiscal 2009.
The Company valued the restricted stock grants at $165,000, the price of
the Companys stock on the day of the grant ($1.78 per share). In connection with these restricted stock
grants the Company recognized an expense of $37,500 in its general and
administrative department for the period ended April 4, 2009 and $22,250
in its cost of product sales line item for the period ended April 4,
2009. The Company had no unvested shares
of restricted stock outstanding as of March 29, 2008.
As of April 4,
2009, there was approximately $8.4 million of total unrecognized costs related
to non-vested share-based compensation arrangements. The Company expects to recognize the cost
over a weighted average period of approximately 2.3 years. There were no options to purchase shares
exercised during the three months ended April 4, 2009. Options to purchase
70,045 shares were exercised during the three month period ended March 29,
2008, and these options had an intrinsic value of $0.1 million on the date of
exercise.
During 2000, the
Company granted 216,000 non-qualified stock options to non-executive employees
at an exercise price of $17.56 per share outside of the Board-approved Plans.
As of December 31, 2008 and April 4, 2009, 21,000 of these options
remained outstanding, respectively, which are included in the above table.
During 2008, as an
inducement to his joining the Company, the Company granted the new CEO an
option to acquire 4,796,020 shares of common stock at a price per share equal
to $1.90, the closing price of the common stock on May 1, 2008, the date
his employment commenced. The option vests over four years, with the first 25%
vesting on May 1, 2009 and the balance vesting in equal quarterly
installments over the following three years. The option was issued outside of
the Companys 2005 Incentive Compensation Plan.
As of December 31, 2008 and April 4, 2009, this option was
outstanding and is included in the above table.
36
Table of Contents
Note M. Warrants
The table below summarizes the Companys warrants currently outstanding
as of April 4, 2009:
|
|
|
|
Original
Warrant to
Purchase
|
|
|
|
2009
Activity
|
|
Remaining
Shares of
Common
|
|
|
|
Date of
Warrant Issuance
|
|
Holder
of Warrant
|
|
Shares
of
Common
Stock
|
|
Exercise
Price $
|
|
Warrant
Issued
|
|
Warrants
Exercised or
Redeemed
|
|
Warrants
Expired
|
|
Stock
underlying
the warrant
|
|
Term
(Years)
|
|
December 22,
2004
|
|
December 2004 Financing Investors
|
|
2,181,818
|
|
$
|
2.00
|
|
|
|
|
|
|
|
804,546
|
|
5
|
|
May 31, 2005
|
|
Silicon Valley Bank
|
|
151,515
|
|
$
|
1.39
|
|
|
|
|
|
|
|
151,515
|
|
10
|
|
August 12,
2005
|
|
August 2005 Financing Investors
|
|
1,169,038
|
|
$
|
1.99
|
|
|
|
|
|
|
|
1,047,777
|
|
5
|
|
August 12,
2005
|
|
Ardour Capital Investment, LLC
|
|
93,523
|
|
$
|
1.84
|
|
|
|
|
|
|
|
93,523
|
|
5
|
|
July 19,
2006
|
|
Warrant A, July 2006 Private Placement
|
|
3,636,368
|
(2)
|
$
|
1.82
|
|
|
|
|
|
|
|
2,090,911
|
|
7
|
|
July 19,
2006
|
|
First Albany Warrants
|
|
218,182
|
|
$
|
1.87
|
|
|
|
|
|
|
|
218,182
|
|
5
|
|
July 17,
2007
|
|
Warrant C, July 2006 Private Placement
|
|
1,818,187
|
(2)
|
$
|
1.82
|
|
|
|
|
|
|
|
1,045,456
|
|
7
|
|
November 8,
2007
|
|
Series C Preferred Warrants (3)
|
|
15,262,072
|
|
$
|
1.25
|
(1)
|
|
|
|
|
|
|
15,262,072
|
|
7
|
|
December 20,
2007
|
|
Series C Preferred Warrants
|
|
4,449,467
|
|
$
|
1.25
|
|
|
|
|
|
|
|
4,449,467
|
|
7
|
|
April 7,
2008
|
|
International Master Technologies (4)
|
|
100,000
|
|
$
|
1.84
|
|
|
|
|
|
|
|
100,000
|
|
5
|
|
June 28,
2008
|
|
Series C Preferred Warrant (5)
|
|
77,378
|
|
$
|
1.66
|
|
|
|
|
|
|
|
77,378
|
|
7
|
|
September 27,
2008
|
|
Series C Preferred Warrant (5)
|
|
10,105
|
|
$
|
1.66
|
|
|
|
|
|
|
|
10,105
|
|
7
|
|
Total Warrants
outstanding as of April 4, 2009
|
|
|
|
|
|
|
|
|
|
|
|
25,350,932
|
|
|
|
(1)
|
These
warrants originally had an exercise price of $1.44. Upon the second closing of the
Series C Preferred Stock financing on December 20, 2007, these
warrants were repriced to $1.25.
|
(2)
|
During
the quarter ended March 29, 2008 Warrant As and Warrant Cs representing
303,031 and 151,516 shares of common stock, respectively, were redeemed
resulting in the Company paying to the redeeming warrant holders
approximately $0.6 million cash in the aggregate.
|
(3)
|
These
warrants vested in full on May 7, 2008, six months from their date of
inception.
|
(4)
|
On
April 7, 2008, the Company issued a warrant to purchase 100,000 shares
of common stock at a price of $1.84 per share, the closing price on the date
of issuance, in connection with a sales and marketing agreement. The Company recorded a charge to operations
of approximately $121,000 related to the issuance of this warrant to the
contractor. This warrant is
immediately exercisable and had no vesting provisions. The Company used a Black-Scholes Option
pricing model to value this warrant with key inputs as follows:
|
Input
|
|
April 7, 2008
|
|
Quoted Stock
Price
|
|
$
|
1.84
|
|
Exercise Price
|
|
$
|
1.84
|
|
Time to Maturity
(in years)
|
|
5.0
|
|
Stock Volatility
|
|
80.6
|
%
|
Risk-Free Rate
|
|
2.80
|
%
|
Dividend Rate
|
|
0
|
%
|
(5)
|
As
described above in Note K, the Company issued warrants to purchase 87,484
(77,379 and 10,105) shares of common stock at $1.66 per share to the Investors
as a result of warrant exercises during the year ended December 31,
2008. These warrants are immediately
exercisable and have a 7 year life.
|
Note N.
Segment Disclosures
The Companys
organizational structure is based on strategic business units that perform
services and offer various products to the principal markets in which the
Companys products are sold. These business units equate to two reportable
segments: Applied Technology and Renewable Energy Solutions. Applied Technology is run through the Companys
subsidiary, Satcon Applied Technology, Inc., and Renewable Energy
Solutions is run through the Companys subsidiary, Satcon Power Systems,
Canada, Ltd. The summary of continuing
operations by operating segment below has been adjusted due to the sale of the
Power Systems US and Electronics divisions, each of which was previously
reported as its own reportable segment, and no longer reflects the information
for either or these two segments.
37
Table of Contents
Applied Technology
performs research and development services in collaboration with third parties.
Renewable Energy Solutions specializes in the engineering and manufacturing of
power systems. The Companys principal operations and markets are located in
the United States.
The accounting
policies of each of the segments are the same as those described in the summary
of significant accounting policies. The Company evaluates performance based on
revenue and profit and loss from operations, including amortization of
intangibles. Common costs not directly attributable to a particular segment are
included in the corporate segment. These costs include corporate costs such as
executive officer compensation, engineering, facility costs, legal, audit and
tax and other professional fees.
The following is a
summary of the Companys operations by operating segment:
|
|
Three Months
Ended
|
|
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Applied
Technology:
|
|
|
|
|
|
Funded research
and development and other revenue
|
|
$
|
1,481,667
|
|
$
|
1,183,678
|
|
Loss from
operations
|
|
$
|
(131,682
|
)
|
$
|
(527,265
|
)
|
|
|
|
|
|
|
Renewable
Energy Solutions:
|
|
|
|
|
|
Product revenue
|
|
$
|
13,379,849
|
|
$
|
10,175,918
|
|
Loss from
operations
|
|
$
|
(616,915
|
)
|
$
|
(1,678,586
|
)
|
|
|
|
|
|
|
Corporate:
|
|
|
|
|
|
Loss from
operations
|
|
$
|
(4,417,817
|
)
|
$
|
(566,578
|
)
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
Product revenue
|
|
$
|
13,379,849
|
|
$
|
10,175,918
|
|
Funded research
and development and other revenue
|
|
$
|
1,481,667
|
|
$
|
1,183,678
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
14,861,516
|
|
$
|
11,359,596
|
|
|
|
|
|
|
|
Operating loss
from continuing operations
|
|
$
|
(5,166,414
|
)
|
$
|
(2,772,429
|
)
|
Change in fair
value of warrants liabilities
|
|
(5,370,471
|
)
|
(467,481
|
)
|
Other (loss)
income
|
|
(138,941
|
)
|
258,923
|
|
Interest income
|
|
3,731
|
|
69,385
|
|
Interest expense
|
|
(82,361
|
)
|
(46,191
|
)
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(10,754,456
|
)
|
$
|
(2,957,793
|
)
|
|
|
|
|
|
|
Discontinued
Operations:
|
|
|
|
|
|
Loss from
discontinued operations, net
|
|
|
|
$
|
(443,407
|
)
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,754,456
|
)
|
$
|
(3,401,200
|
)
|
38
Table of Contents
Common assets not
directly attributable to a particular segment are included in the Corporate
segment. These assets include cash and cash equivalents, prepaid and other
corporate assets. The following is a
summary of the Companys assets by operating segment:
|
|
April 4,
2009
|
|
December 31,
2008
|
|
Applied
Technology:
|
|
|
|
|
|
Segment assets
|
|
$
|
2,137,717
|
|
$
|
2,622,534
|
|
Renewable Energy
Solutions
|
|
|
|
|
|
Segment assets
|
|
18,371,609
|
|
24,462,978
|
|
Corporate:
|
|
|
|
|
|
Segment assets
|
|
6,937,277
|
|
9,811,763
|
|
Total assets
|
|
$
|
27,446,603
|
|
$
|
36,897,275
|
|
The Company
operates and markets its services and products on a worldwide basis with its
principal markets as follows:
|
|
Three Months Ended
|
|
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Revenue by
geographic region based on location of customer:
|
|
|
|
|
|
United States
|
|
$
|
11,414,533
|
|
$
|
10,955,012
|
|
Rest of world
|
|
3,446,983
|
|
404,584
|
|
Total revenue
|
|
$
|
14,861,516
|
|
$
|
11,359,596
|
|
|
|
April 4,
2009
|
|
December 31,
2008
|
|
Long-lived
assets (including goodwill and intangible assets) by geographic region based
on location of operations:
|
|
|
|
|
|
United States
|
|
$
|
806,015
|
|
$
|
906,209
|
|
Rest of world
|
|
1,967,949
|
|
1,580,999
|
|
Total long-lived
assets (including goodwill and intangible assets)
|
|
$
|
2,773,964
|
|
$
|
2,487,208
|
|
O.
RESTRUCTURING COSTS
In June 2008, the Company began its restructuring efforts by
eliminating the position of divisional presidents in its Applied Technology and
Renewable Energy Solutions divisions and recorded a restructuring charge of
approximately $0.6 million. During the
third quarter of 2008, the Company consolidated its Applied Technology division
into one facility. As a result, the
Company recorded an additional restructuring charge of approximately $0.5
million. These restructuring charges are
comprised of approximately $0.8 million in employee severance, which will be
paid out over the term of each specific employee agreement and $0.3 million in
non-cash stock based compensation charges associated with the acceleration of
certain unvested stock options and extensions of time to exercise certain stock
options from 90 days to 2 years. In
addition, during the fourth quarter of 2008, as part of its restructuring
efforts, the Company elected to terminate the employment contract of its former
president. As a result of this election,
the Company recorded a restructuring charge of approximately $0.3 million,
which will be paid in twenty six equal bi-weekly installments beginning after March 1,
2009. As of April 4, 2009 and December 31,
2008, the accrued restructuring balance was approximately $0.5 million and $0.6
million, respectively.
39
Table of Contents
Note P. Recent Accounting Pronouncements
In September 2006,
the FASB issued SFAS No. 157,
Fair
Value Measurements
(SFAS No. 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 applies to other existing accounting pronouncements that
require or permit fair value measurements. SFAS No. 157 does not require
any new fair value measurements. However, the application of this statement may
change the current practice for fair value measurements. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. However, in February 2008, the
FASB issued a final Staff Position to allow filers to defer the effective date
of SFAS No. 157 for one year for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. This pronouncement was adopted on January 1,
2009 by the Company. The FASB Staff
Position (FSP) does not defer recognition and disclosure requirements for financial
assets and financial liabilities or for nonfinancial assets and nonfinancial
liabilities that are remeasured at least annually. For financial assets and liabilities adopted
see Note C Significant Accounting
Policies and Basis of Presentation, Fair Value Measurements.
In
April 2008, the FASB issued FSP No. 142-3, Determination of the
Useful Life of Intangible Assets (FSP No. 142-3). FSP No. 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142 and requires enhanced disclosures relating to: (a) the
entitys accounting policy on the treatment of costs incurred to renew or
extend the term of a recognized intangible asset; (b) in the period of
acquisition or renewal, the weighted-average period prior to the next renewal
or extension (both explicit and implicit), by major intangible asset class and (c) for
an entity that capitalizes renewal or extension costs, the total amount of
costs incurred in the period to renew or extend the term of a recognized
intangible asset for each period for which a statement of financial position is
presented, by major intangible asset class. FSP No. 142-3 must be applied
prospectively to all intangible assets acquired as of and subsequent to fiscal
years beginning after December 15, 2008, and interim periods within those
fiscal years. Early adoption is prohibited. The
adoption of FSP No. 142-3 did not have
a material impact on the consolidated financial statements of the Company.
In April 2009,
the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments, which requires
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
This Staff Position is effective for interim reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. The Company believes that the adoption of
this standard on its effective date will not have a material effect on its
consolidated financial statements.
In
April 2009, the FASB issued FSP No. FAS 157-4,
Determining
Fair Value When the Volume and Level of Activity for the Asset or the Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly
.
FSP No. FAS 157-4 amends SFAS No. 157 to provide additional guidance
on (i) estimating fair value when the volume and level of activity for an
asset or liability have significantly decreased in relation to normal market
activity for the asset or liability, and (ii) circumstances that may
indicate that a transaction is not orderly. FSP No. FAS 157-4 also
requires additional disclosures about fair value measurements in interim and
annual reporting periods. FSP No. FAS 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009. The Company does
not expect the adoption of FSP No. FAS 157-4 to have a material effect on
its financial statements.
The Company adopted SFAS
No. 161,
Disclosures
About Derivative Instruments and Hedging Activitiesan amendment of FASB
Statement No. 133
(SFAS No. 161),
which expands the disclosure requirements in SFAS 133 about an entitys
derivative instruments and hedging activities. SFAS No. 161 expands the
disclosure provisions to apply to all entities with derivative instruments
subject to SFAS No. 133 and its related interpretations. The provisions also
apply to related hedged items, bifurcated derivatives, and nonderivative
instruments that are designated and qualify as hedging instruments. Entities
with instruments subject to SFAS No. 161 must provide more robust
qualitative disclosures and expanded quantitative disclosures. Such
disclosures, as well as existing SFAS No. 133 required disclosures,
generally will need to be presented for every annual and interim reporting
period. The adoption of SFAS No. 161 did not have a material impact on the
consolidated financial statements of the Company.
40
Item
2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statement
You should read the
following discussion and analysis in conjunction with our consolidated
financial statements and notes in Item 1 of this report and with our audited
consolidated financial statements and notes included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008.
In addition to the
historical information contained in this report, this report contains or
incorporates by reference forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. You can identify
these forward-looking statements by our use of the words believes, anticipates,
plans, expects, may, will, intends, estimates, and similar
expressions, whether in the negative or in the affirmative. Such forward-looking statements includes
those related to expected revenue growth, our ability to continue to make
interest and principal payments on our Notes in shares of our common stock, our
ability to achieve our business plan, and our ability to reduce costs in the
future. Although we believe that these
forward-looking statements reasonably reflect our plans, intentions and
expectations, these forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially. We caution that these statements are
qualified by various factors that may affect future results, including the
following: business conditions within the distributed power, power quality,
aerospace, transportation, industrial, utility, telecommunications, silicon
wafer manufacturing, factory automation, aircraft and automotive industries and
the world economies as a whole; technology developments and contract research
and development for both the government and commercial sectors; the ability of
our new products in penetrating the distributed power, power quality,
aerospace, transportation, industrial, utility, telecommunications, silicon
wafer manufacturing, factory automation, aircraft and automotive markets. This report should be read in conjunction
with our Annual Report on Form 10-K for the fiscal year ended December 31,
2008, including particularly Part I, Item 1A, Risk Factors.
Forward-looking
statements contained in this Quarterly Report speak only as of the date of this
report. Subsequent events or
circumstances occurring after such date may render these statements incomplete
or out of date. We undertake no
obligation and express disclaim any duty to update such statements.
Overview
(Executive Summary)
Satcon Technology
Corporation (Satcon or Company) is a leading clean energy technology
provider of utility grade power solutions for the renewable and distributed
energy markets. We deliver power
conversion solutions and system design services for large-scale renewable
energy plants. Our products are utilized by businesses and utility companies to
efficiently convert renewable energy sources into stable and reliable
electrical power.
Our PowerGate® Plus suite of photovoltaic and fuel cell
power inverters, which are sold through the Companys Renewable Energy
Solutions division, offer rugged and
reliable solutions that enhance the total output and power production of the
solar installation. We also offer
system design services and solutions for
management, monitoring, and performance measurement to maximize capital
investment and improve overall quality and performance over the entire lifespan
of the installation.
In addition to our core power conditioning solutions,
we also develop,
design
and build power conversion electronics, power management and distribution
systems for a variety of defense and commercial applications
through our Applied Technology division.
Critical
Accounting Policies and Significant Judgments and Estimates
Our discussion and
analysis of our financial condition and results of our operations are based on
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these consolidated financial statements requires management
to make significant estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported revenue
and expenses during the reporting periods. On an ongoing basis, management
evaluates its estimates and judgments, including those related to revenue
recognition, receivable reserves, inventory reserves, goodwill and intangible
assets, contract losses and income taxes. Management bases its estimates on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Our critical accounting
estimates were discussed with our Audit Committee. There have been no material changes from the Critical
Accounting Policies and Significant Judgments and Estimates previously
disclosed in Part II, Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations
of our Annual Report on Form 10-K for the fiscal year ending December 31,
2008.
41
Table of Contents
The significant
accounting policies that management believes are most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
Revenue Recognition
We recognize
revenue from product sales in accordance with SEC Staff Accounting Bulletin No. 104,
Revenue Recognition
. Product
revenue is recognized when there is persuasive evidence of an arrangement, the
fee is fixed or determinable, delivery of the product to the customer has
occurred and we have determined that collection of the fee is probable. Title
to the product passes upon shipment of the product, as the products are
typically shipped FOB shipping point, except for certain foreign shipments. If
the product requires installation to be performed by us, all revenue related to
the product is deferred and recognized upon the completion of the installation.
If the product requires specific customer acceptance, revenue is deferred until
customer acceptance occurs or the acceptance provisions lapse, unless we can
objectively and reliably demonstrate that the criteria specified in the acceptance
provisions are satisfied. When appropriate, we provide for a warranty reserve
at the time the product revenue is recognized. If a contract involves the
provisions of multiple elements and the elements qualify for separation under
EITF 00-21
Revenue Arrangements with Multiple Deliverables
,
total estimated contact revenue is allocated to each element based on the
relative fair value of each element provided.
The amount of revenue allocated to each element is limited to the amount
that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as
described above.
We perform funded
research and development and product development for commercial companies and
government agencies under both cost reimbursement and fixed-price contracts.
Cost reimbursement contracts provide for the reimbursement of allowable costs
and, in some situations, the payment of a fee. These contracts may contain
incentive clauses providing for increases or decreases in the fee depending on
how costs compare with a budget. On fixed-price contracts, revenue is generally
recognized on the percentage of completion method based upon the proportion of
costs incurred to the total estimated costs for the contract. Revenue from
reimbursement contracts is recognized as services are performed. In each type
of contract, we receive periodic progress payments or payment upon reaching
interim milestones and retain the rights to the intellectual property developed
in government contracts. All payments to us for work performed on contracts
with agencies of the U.S. government are subject to audit and adjustment by the
Defense Contract Audit Agency. Adjustments are recognized in the period made.
The Defense Contract Audit Agency has agreed-upon the final indirect cost rates
for the fiscal year ended December 31, 2005. When the current estimates of
total contract revenue and contract costs for product development contracts
indicate a loss, a provision for the entire loss on the contract is recorded.
As of April 4, 2009 and December 31, 2008, we have accrued
approximately $0 and $1.1 million, respectively, for anticipated contract
losses on commercial contracts.
Cost of product
revenue includes material, labor and overhead. Costs incurred in connection
with funded research and development and other revenue arrangements are
included in funded research and development and other revenue expenses.
Deferred revenue
consists of payments received from customers in advance of services performed,
product shipped or installation completed.
Unbilled contract
costs and fees represent revenue recognized in excess of amounts billed due to
contractual provisions or deferred costs that have not yet been recognized as
revenue or billed to the customer.
Accounts Receivable
Accounts
receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on a specific analysis of accounts in the receivable
portfolio and historical write-off experience. While management believes the
allowance to be adequate, if the financial condition of our customers were to
deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required.
42
Table of Contents
Inventory
We value our
inventory at the lower of actual cost to purchase and/or manufacture the
inventory or the current estimated market value of the inventory. We
periodically review inventory quantities on hand and record a provision for
excess and/or obsolete inventory based primarily on our estimated forecast of
product demand, as well as based on historical usage. Due to the custom and
specific nature of certain of our products, demand and usage for products and
materials can fluctuate significantly. A significant decrease in demand for our
products could result in a short-term increase in the cost of inventory
purchases and an increase of excess inventory quantities on hand. In addition,
our industry is characterized by rapid technological change, frequent new
product development, and rapid product obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand. Therefore,
although we make every effort to ensure the accuracy of our forecasts of future
product demand, any significant unanticipated changes in demand or
technological developments could have a significant impact on the value of our
inventory and our reported operating results.
Warranty
We offer warranty
coverage for our products for periods typically ranging from 1 to 5 years after
shipment. We estimate the anticipated costs of repairing products under
warranty based on the historical or expected cost of the repairs and expected
failure rates. The assumptions used to estimate warranty accruals are
reevaluated quarterly, at a minimum, in light of actual experience and, when
appropriate, the accruals or the accrual percentage is adjusted based on
specific estimates of project repair costs and quantity of product returns. Our
determination of the appropriate level of warranty accrual is based on
estimates of the percentage of units affected and the repair costs. Estimated
warranty costs are recorded at the time of sale of the related product, and are
recorded within cost of sales in the consolidated statements of operations.
Warrant
Liabilities
We evaluated our warrants in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, EITF No. 00-19 and EITF No. 07-05.
We determined the fair values of the investor warrants
and placement agent warrants using valuation models we consider to be
appropriate. Our stock price has the most significant influence on the fair
value of the warrants. An increase in our common stock price would cause the
fair values of warrants to increase, because the conversion and exercise
prices, respectively, of such instruments are fixed at $1.65 and $1.815 per
share, respectively, and result in a charge to our statement of operations. A
decrease in our stock price would likewise cause the fair value of the warrants
to decrease and result in a credit to our statement of operations.
Income Taxes
The preparation of
our consolidated financial statements requires us to estimate our income taxes
in each of the jurisdictions in which we operate, including those outside the
United States, which may be subject to certain risks that ordinarily would not
be expected in the United States. The income tax accounting process involves
estimating our actual current exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in the
recognition of deferred tax assets and liabilities. We must then record a
valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized.
Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against deferred tax assets. We have recorded a full valuation allowance
against our deferred tax assets of approximately $47.9 million as of December 31,
2008, due to uncertainties related to our ability to utilize these assets. The
valuation allowance is based on our estimates of taxable income by jurisdiction
in which we operate and the period over which our deferred tax assets will be
recoverable. In the event that actual results differ from these estimates or we
adjust these estimates in future periods we may need to adjust our valuation
allowance which could materially impact our financial position and results of
operations.
We account for
income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
, which is the asset and
liability method for accounting and reporting for income taxes. Under SFAS No. 109,
deferred tax assets and deferred tax liabilities are recognized based on temporary
differences between the financial reporting and income tax basis of assets and
liabilities using statutory rates. In addition, SFAS No. 109 requires a
valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
The
tax years 2003 through 2008 remain open to examination by major taxing
jurisdictions to which we are subject, which are primarily in the United
States, as carry forward attributes generated in years past may still be
adjusted upon examination by the Internal Revenue Service or state tax
authorities if they are or will be used in a future period. We are currently not under examination by the
Internal Revenue Service or any other jurisdiction for any tax years. We did not recognize any interest and
penalties associated
43
Table of Contents
with
unrecognized tax benefits in the accompanying financial statements.
We would record any such interest and penalties as a
component of interest expense. We do not expect any material changes to the
unrecognized benefits within 12 months of the reporting date.
Redeemable
Convertible Series B Preferred Stock
We account for our Series B Preferred Stock and associated warrants
in accordance with
in
accordance with EITF 00-27,
Application of
Issue No. 98-5 to Certain Convertible Instruments,
allocating
the proceeds received net of transaction costs based on the relative fair value
of the redeemable convertible Series B Preferred Stock and the warrants
issued to the Investors, and then to any beneficial conversion rights contained
in the convertible redeemable preferred securities. We determined the initial value of the Series B
Preferred Stock and investor warrants using valuation models it considers to be
appropriate. The Series B Preferred
Stock is classified within the liability section of our balance sheet. To the extent that the Series B Preferred
Stock is subject to a remeasurement event under EITF Topic D-98,
Classification and Measurement of Redeemable Securities,
or
is otherwise modified, the Series B Preferred Stock will be reclassified
to temporary equity.
Redeemable
Convertible Series C Preferred Stock
We
account for our issuance of Series C Preferred Stock and associated
warrants in accordance with
in accordance with EITF 00-27,
Application
of Issue No. 98-5 to Certain Convertible Instruments,
allocating
the proceeds received net of transaction costs based on the relative fair value
of the redeemable convertible Series C Preferred Stock and the warrants
issued to the Investors, and then to any beneficial conversion rights contained
in the convertible redeemable preferred securities and in accordance with EITF
Topic D-98, classifying the Series C Preferred Stock as temporary equity
on the balance sheet between the captions for liabilities and permanent
shareholders equity. We determined the
initial value of the Series C Preferred Stock and investor warrants using
valuation models we consider to be appropriate.
The re-pricing of
the exercise price of the first tranche warrants from $1.44 to $1.25, as
described in the footnotes to the financial statements, was treated as a
cancellation of the original warrants issued on November 8, 2007 and a
re-issuance or new warrants on December 20, 2007. The difference in fair value of the warrant
was included in the allocation of net proceeds associated with the second
closing of the Series C Preferred Stock on December 20, 2007. We treated this as a deemed dividend on the Series C
Preferred Stock. We are using the
effective interest method to accrete the carrying value of the Series C
Preferred stock through the earliest possible redemption date ( November 8,
2011), at which time the value of the Series C Preferred Stock would be
$30.0 million, 120% of its face value.
Recent Accounting Pronouncements
See
Note P of our Notes to Consolidated Financial Statements for information
regarding recently issued accounting pronouncements.
44
Table of Contents
Results of Operations
Three Months Ended April 4, 2009 (2009) Compared to
Three Months Ended March 29, 2008 (2008)
Revenue.
Total revenue for 2009 increased approximately $3.5 million or 31% from
$11.4 million in 2008 to $14.9 million in 2009.
|
|
Three Months Ended
|
|
(Amounts in Millions)
|
|
April 4,
2009
|
|
March 29,
2008
|
|
Change $
|
|
% Change
|
|
Product Revenue
|
|
|
|
|
|
|
|
|
|
Alternative
Energy Products
|
|
$
|
9.2
|
|
$
|
9.8
|
|
$
|
(0.6
|
)
|
(6
|
)%
|
Other Legacy
|
|
4.2
|
|
0.4
|
|
3.8
|
|
950
|
%
|
Total Product
Revenue
|
|
$
|
13.4
|
|
$
|
10.2
|
|
$
|
3.2
|
|
31
|
%
|
Funded Research
and Development and other revenue
|
|
$
|
1.5
|
|
$
|
1.2
|
|
$
|
0.3
|
|
25
|
%
|
Total Revenue
|
|
$
|
14.9
|
|
$
|
11.4
|
|
$
|
3.5
|
|
31
|
%
|
Alternative Energy
Product revenue decreased by $0.6 million, or 6%, from $9.8 million in
2008 to $9.2 million in 2009 due to the overall macroeconomic market conditions.
The decrease in Alternative Energy Products was offset by the recognition of
approximately $4.2 million related to the sale of frequency converters,
classified as Other Legacy product revenue, in 2009, for which the
recognition of revenue had been deferred until the product was accepted by the
customer, which was obtained during the quarter ended April 4, 2009.
Funded research and
development and other revenue increased $0.3 million, or 25%, from
$1.2 million in 2008 to $1.5 million in 2009. The increase is driven by an
increased in revenue from commercial customer by $0.2 million, and an increase
in government contracts during the period of approximately $0.1 million.
Gross
Margin.
Total
Company gross margin increased from 5.6% in 2008 to 9.8% in 2009. The increase in gross margin over the period
of a year ago is due to material cost reduction programs and increased labor
efficiency. In addition, the $4.2
million of deferred frequency converter revenues recognized during the current
quarter had no gross margin as the amount recognized as revenue equaled the
related costs recognized for the period.
Without this single item, our gross margin would have been approximately
13.8% for the period.
Gross margins on
funded research and development and other revenue increased from approximately
14% in 2008 to approximately 25% in 2009 due to the favorable mix of commercial
customer revenues as compared to that of 2008.
45
Table of Contents
Research
and development expenses.
We expended approximately $1.9
million on research and development in 2009 compared with $0.9
million spent in 2008. The increase
in spending during 2009 was driven by a planned increase in costs associated
with certification of our new products and continued new product development,
including a small increase in our technical staffing. .
These additional resources are developing the new products, features and
customer solutions which we believe will allow us to take advantage of both
short-term and long-term market opportunities.
This investment in research and development is critical to both our
current and future success and we anticipate this level of investment to
continue.
Selling,
general and administrative expenses.
Selling, general and administrative
expenses increased by approximately $2.2 million, or 88%, from
$2.5 million in 2008 to $4.7 million in 2009. Approximately $0.5 million of the increase is
directly attributable to compensation costs related to the issuance of stock
options to our employees and directors pursuant to SFAS 123(R) charged to
operations in 2009. Approximately $0.4 million of the increase was associated
with increased corporate costs and approximately $1.3 million of the increase
was due to the higher sales and marketing costs directly related to
international business development, company re-branding and our increased
outbound marketing efforts in 2009 compared to 2008.
Amortization
of intangibles.
Amortization of intangibles remained flat at
$0.1 million.
Change in
fair value of warrant liabilities
. The change in
fair value of the warrants for 2009 was a charge of approximately $5.4 million.
Approximately $0.7 million related to the change in valuation of our Warrant As
and Warrant Cs. The remaining $4.7
million charge related to the change in fair value of our warrant liabilities
was due to our adoption during the period of EITF No. 07-05
Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock
. As a result of our adoption of EITF
07-05 19,899,022 warrants to purchase our common stock, originally classified
as equity, were reclassified to warrant liabilities and will continue to be
fair valued moving forward. The change
in fair value of the warrants for 2008 was a charge of approximately $0.5
million.
Other
Income (expense).
Other expense
was approximately $139,000 for 2009 compared to other income of approximately
$259,000 for 2008. Other expense for
2009 consists primarily of approximately $123,000
foreign currency transaction losses during the period and other fees paid
related to consulting services for the valuation of our Convertible Note
financing transaction as well as other expenses not related to ongoing
operations. Other income for 2008
consists primarily of approximately $205,000 foreign currency
transaction gains and $70,000 related
to order cancellation charges during the period off set by fees paid related to
consulting services for the valuation of our Convertible Note financing
transaction as well as other expenses not related to ongoing operations.
Interest
income
. Interest income decreased from
$0.1 million in
2008 to $0 in 2009. This is due to a
decrease in cash on hand coupled with a decrease in returns on our money market
account.
Interest
expense.
Interest expense increased $35,000 in 2009 to
$82,000 as compared to $47,000 in 2008.
Interest expense for 2009 includes approximately $29,000 of non-cash dividends
on our Series B Preferred Stock, which we have elected to pay in shares of
our common stock, and $53,000 in interest related our line of credit during the
period. Interest expense for 2008
includes approximately $30,000 of non-cash dividends on our Series B
Preferred Stock, which we have elected to pay in shares of our common stock,
and interest on outstanding amounts under our line of credit during the period.
Deferred Revenue
.
Deferred revenue was approximately $3.7 million at April 4, 2009 as
compared to $6.7 million at December 31, 2008, a decrease of approximately
$3.0 million. We record deferred revenue
(i) when a customer pays in advance or (ii) when provisions for
revenue recognition on items shipped have not been achieved or the items have
not yet been received by the customer due to shipping terms such as FOB
destination.
Currently deferred revenue is composed of $1.0 million of current
deferred product revenue and $2.7 million of long-term deferred warranty
revenue. During 2009 we recognized
approximately $4.1 million upon the completion of a contract related to a
project with the Navy for which all units had been delivered during the first
quarter of 2008. For items that have
shipped and are awaiting recognition of revenue their costs are included in our
finished goods inventory value at the end of the period.
46
Table of Contents
Liquidity
and Capital Resources
As of April 4,
2009, we had approximately $6.8 million of cash, of which approximately
$0.1 million was restricted.
Based upon our current
working capital position, current operating plans and expected business
conditions, we believe that our current cash, as well as the availability
from our line of credit with Silicon Valley Bank, will be adequate to fund
our operations through December 31, 2009. Beyond 2009, we
expect to fund our working capital needs and other commitments primarily
through our operating cash flow, which we expect to improve as our product
costs continue to decrease and as our unit volumes grow. We also expect to rely
on our credit facility to fund a portion of our capital needs and other
commitments. The credit facility
contains certain financial covenants. As
we were not in compliance with these covenants as of April 4, 2009,
Silicon Valley Bank granted us a waiver with respect to these covenants as of April 4,
2009.
Our funding plans for our
working capital needs and other commitments may be adversely impacted if we
fail to realize our underlying assumed levels of revenues and expenses, or
if we fail to remain in compliance with the covenants of our bank line.
If either of those events occur, we may need to raise
additional funds in order to sustain operations by selling equity or taking
other actions to conserve our cash position, which could include selling of
certain assets, delaying capital expenditures and incurring additional
indebtedness, subject to the restrictions in the preferred stock financing with
the Investors and in the credit facility with Silicon Valley Bank. Such actions
would likely require the consent of the Investors and/or Silicon Valley Bank,
and there can be no assurance that such consents would be given. Furthermore,
there can be no assurance that we will be able to raise such funds if they are
required.
If additional
funds are raised in the future through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced
and our stockholders will experience additional dilution. The terms of
additional funding may also limit our operating and financial flexibility.
There can be no assurance that additional financing of any kind will be
available to us on terms acceptable to us, or at all. Failure to obtain future
funding when needed or on acceptable terms would materially, adversely affect
our results of operations.
We have incurred
significant costs to develop our technologies and products. These costs have exceeded
total revenue. As a result, we have incurred losses in each of the past five
years. As of April 4, 2009, we had an accumulated deficit of approximately
$213 million. Since inception, we have
financed our operations and met our capital expenditure requirements primarily
through the sale of private equity securities and convertible debt, public
security offerings, borrowings under our lines of credit and capital equipment
leases.
As of April 4,
2009, our cash and cash equivalents were $6.8 million, including restricted
cash and cash equivalents of $0.1 million; this represents a decrease in
our cash and cash equivalents of approximately $3.2 million from the $10.0
million on hand at December 31, 2008. Cash used in operating activities
for the three months ended April 4, 2009 was $4.3 million as compared to
$2.3 million for the three months ended March 29, 2008. Cash used in
operating activities during the three months ended April 4, 2009 was
primarily attributable to the net loss of approximately $5.4 million offset by
non-cash items such as the change in the fair value of our warrants,
depreciation and amortization, deferred revenue, non-cash compensation and
consulting expense, non-cash interest expense and decreases in working capital.
Cash used in
investing activities during the three months ended April 4, 2009 was $0.7
million as compared to $0.1 million for the three months ended March 29,
2008. Cash used in investing activities
during these periods was a result of capital expenditures during each of the
respective periods.
Cash provided by
financing activities for the three months ended April 4, 2009 was
approximately $1.5 million as compared to cash provided by financing activities
of $2.5 million for the three months ended March 29, 2008. Net cash provided by financing activities
during 2009 related to net borrowings under our line of credit of $1.5
million. Net cash provided by financing
activities during 2008 primarily related to borrowings under our line of credit
of $3.0 million and approximately $0.1 million from the exercise employee stock
options offset in part by approximately $0.6 million paid to warrant holders
exercising their redemption right during the period and payments on our capital
lease obligations.
Cash used in
discontinued operations was $0.0 for 2009 as compared to $1.0 million for
2008. Net cash used in operating
activities from discontinued operations was $0.0 in 2009 compared to $0.9
million in 2007. Net cash used in
investing activities from discontinued operations was $0.0 in 2009 compared to
$0.1 million in 2008. Net cash used in
financing activities from discontinued operations was $0 in 2009 and 2008.
47
Table of Contents
Payments
Due Under Contractual Obligations
We lease equipment
and office space under non-cancelable capital and operating leases. The future
minimum rental payments as of April 4, 2009 under the capital and
operating leases with non-cancelable terms are included in the table below:
Calendar Years Ending December 31,
|
|
Capital Leases
|
|
Operating Leases
|
|
|
|
|
|
|
|
2009
|
|
$
|
|
|
$
|
551,383
|
|
2010
|
|
|
|
$
|
344,713
|
|
2011
|
|
|
|
$
|
224,712
|
|
Total
|
|
$
|
|
|
$
|
1,120,808
|
|
Effects
of Inflation
We believe that
inflation and changing prices over the past three years have not had a
significant impact on our net revenue or on our income from continuing
operations.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
The following discussion
about our market risks disclosures involves forward-looking statements. Actual
results could differ materially from those discussed in the forward-looking
statements. We are exposed to market risk related to changes in interest rates
and foreign currency exchange rates. We do not use derivative financial
instruments for speculative or trading purposes.
Interest
Rate Risk
We are exposed to market
risk from changes in interest rates primarily through our financing activities.
Interest on outstanding balances under our credit facility with Silicon Valley
Bank accrues at a rate equal to the Banks prime rate of interest plus 1.0% per
annum. Our ability to carry out our business plan or our ability to finance
future working capital requirements may be impacted if the cost of carrying
debt fluctuates to the point where it becomes a burden on our resources.
Foreign
Currency Risk
Nearly all of our sales
outside the United States are priced in US Dollars. If the US Dollar
strengthens versus local currencies, it may result in our products becoming
more expensive in foreign markets. In addition, a significant amount of our
current costs are incurred in foreign currencies, especially the Canadian
Dollar. If the US Dollar weakens versus these local currencies, it may result
in an increase in our cost structure.
Item 4. Controls and
Procedures
(a)
Evaluation of Disclosure Controls and Procedures
.
As required by Rule 13a-15
under the Securities Exchange Act of 1934, as of the end of the period covered
by this report, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer (who is
also currently our interim principal financial officer) of the effectiveness of
our disclosure controls and procedures as of April 4, 2009. Based upon
that evaluation, the Chief Executive Officer, acting as both the principal
executive officer and interim principal financial officer, concluded that our
disclosure controls and procedures are effective as of April 4, 2009.
(b)
Changes in Internal Control Over Financial Reporting
.
There was no
change in our internal control over financial reporting that occurred during
the first quarter of fiscal year 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
48
Table
of Contents
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings.
From time to time, we are a party to routine
litigation and proceedings in the ordinary course of business.
On May 9, 2008, Advanced Energy Industries, Inc.
(AE) filed a civil action in Colorado state court against us and our
Chief Executive Officer, Charles S. Rhoades, seeking to enjoin Mr. Rhoades
from employment by the Company based upon its claim that Mr. Rhoades
was subject to a non-competition agreement with AE. On March 3, 2009,
the parties agreed to settle this case. The settlement of the case
will not have a material financial impact on the Company and Mr. Rhoades
will be free to continue to serve as the Companys President and Chief
Executive Officer.
We are not aware of any
other current or pending litigation to which we are or may be a party that we
believe could materially adversely affect our results of operations or
financial condition or net cash flows.
Item 1A.
Risk Factors.
There have been no material changes from the risk
factors previously disclosed in Part I, Item 1A, Risk Factors, of our
Annual Report on Form 10-K for the fiscal year ending December 31,
2008.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
Not
applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4.
Submission of Matters to a Vote of Security Holders
.
Not applicable
Item 5.
Other Information
.
Not applicable.
Item 6. Exhibits.
The exhibits listed in
the Exhibit Index immediately preceding the exhibits are filed as part of
this Quarterly Report on Form 10-Q.
49
Table of Contents
SIGNATURE
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
SATCON TECHNOLOGY CORPORATION
|
Date: May 12, 2009
|
By:
|
|
|
|
|
|
|
/s/ CHARLES S. RHOADES
|
|
|
Charles S. Rhoades
|
|
|
President, Chief
Executive Officer and Interim Principal Financial Officer
|
50
EXHIBIT INDEX
Exhibit
Number
|
|
Exhibit
|
|
|
|
10.1
|
|
Satcon 2009 Incentive Plan for Management is
incorporated herein by reference to Exhibits to the Registrants Current
Report on Form 8-K dated February 24, 2009 (File No. 1-11512).
|
31.1
|
|
Certification by Principal Executive Officer and
Interim Principal Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
32.1
|
|
Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
51
Satcon Technology Corp. (MM) (NASDAQ:SATC)
Historical Stock Chart
From Jun 2024 to Jul 2024
Satcon Technology Corp. (MM) (NASDAQ:SATC)
Historical Stock Chart
From Jul 2023 to Jul 2024