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 March 31,
2010
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.)
|
|
|
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27
Drydock Avenue
Boston,
Massachusetts
(Address of
principal executive offices)
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02210
(Zip Code)
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(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
o
No
o
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
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|
Accelerated
filer
x
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|
Non-accelerated
filer
o
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Smaller
reporting company
o
|
(Do not check if
a smaller reporting company)
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|
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, $0.01 Par Value,
71,316,140
shares outstanding as of May 1, 2010.
Table of Contents
PART I. FINANCIAL
INFORMATION
Item 1. Financial Statements
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31,
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December 31,
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2010
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2009
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ASSETS
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Current assets:
|
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|
|
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Cash and cash equivalents
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$
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11,665,836
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|
$
|
13,369,208
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|
Restricted cash and cash equivalents
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34,000
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34,000
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Accounts receivable, net of allowance of $203,832
and $196,909 at March 31, 2010 and December 31, 2009, respectively
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13,340,640
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17,577,640
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Unbilled contract costs and fees
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174,342
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202,228
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Inventory
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15,786,656
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11,898,571
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|
Prepaid expenses and other current assets
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1,121,182
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717,535
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Current assets of discontinued operations
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35,004
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Total current assets
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42,122,656
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43,834,186
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Property and equipment, net
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4,756,792
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4,633,926
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Non-current assets of discontinued operations
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224,227
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Total assets
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$
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46,879,448
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$
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48,692,339
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|
|
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|
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LIABILITIES
AND STOCKHOLDERS DEFICIT
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Current liabilities:
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Line of credit
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$
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8,600,000
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$
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3,000,000
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Accounts payable
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|
14,562,818
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20,751,975
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|
Accrued payroll and payroll
related expenses
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|
2,908,934
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2,235,349
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|
Other accrued expenses
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|
3,056,318
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|
2,710,568
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|
Accrued restructuring costs
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|
606,168
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38,034
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|
Deferred revenue
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1,524,910
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|
451,008
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Current liabilities of discontinued operations
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117,702
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|
Total current liabilities
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31,259,148
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29,304,636
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Warrant liabilities
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3,712,468
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4,976,774
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Deferred revenue, net of current portion
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6,409,418
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5,531,413
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Redeemable convertible Series B preferred
stock (75 shares issued and outstanding at March 31, 2010 and
December 31, 2009, respectively; face value $5,000 per share;
liquidation preference $375,000)
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375,000
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375,000
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Other long-term liabilities
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256,645
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280,472
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Total liabilities
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42,012,679
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40,468,295
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Commitments and contingencies (Note H)
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Redeemable convertible Series C preferred
stock (25,000 shares issued and outstanding at March 31, 2010 and
December 31, 2009, face value $1,000 per share, liquidation preference
$27,908,219 and $27,600,000 at March 31, 2010 and December 31, 2009
respectively)
|
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23,521,674
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22,257,423
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Stockholders deficit:
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Common stock; $0.01 par value, 200,000,000 shares
authorized; 71,193,322 and 70,567,781 shares issued and outstanding at
March 31, 2010 and December 31, 2009, respectively
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$
|
711,933
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$
|
705,678
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Additional paid-in capital
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219,292,344
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218,599,384
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Accumulated deficit
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(237,229,614
|
)
|
(231,656,734
|
)
|
Accumulated other comprehensive loss
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|
(1,429,568
|
)
|
(1,681,707
|
)
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Total stockholders deficit
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|
(18,654,905
|
)
|
(14,033,379
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)
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Total liabilities and stockholders deficit
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|
$
|
46,879,448
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|
$
|
48,692,339
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|
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)
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Three Months Ended
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March 31,
2010
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April 4,
2009
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Product revenue
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$
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14,732,479
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$
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13,379,849
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Cost of product revenue
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12,699,109
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12,285,038
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Gross margin
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2,033,370
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1,094,811
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Operating expenses:
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Research and development
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2,731,785
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1,871,262
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Selling, general and administrative
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5,579,882
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4,348,281
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Restructuring charges
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783,701
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Total operating expenses from continuing
operations
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9,095,368
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6,219,543
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|
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|
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Operating loss from continuing operations
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|
(7,061,998
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)
|
(5,124,732
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)
|
|
|
|
|
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Change in fair value of warrant liabilities
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|
1,088,978
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|
(5,370,471
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)
|
Other (loss) income, net
|
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(68,415
|
)
|
(138,941
|
)
|
Interest income
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|
175
|
|
3,731
|
|
Interest expense
|
|
(63,227
|
)
|
(82,361
|
)
|
Net loss from continuing operations
|
|
(6,104,487
|
)
|
(10,712,774
|
)
|
Income/(loss) from discontinued operations, net of
tax
|
|
31,390
|
|
(41,682
|
)
|
Gain on sale of discontinued operations, net of
tax
|
|
500,217
|
|
|
|
Net loss
|
|
(5,572,880
|
)
|
(10,754,456
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)
|
|
|
|
|
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|
Deemed dividend and accretion on Series C
preferred stock
|
|
(1,269,191
|
)
|
(821,494
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)
|
Dividend on Series C preferred stock
|
|
(355,060
|
)
|
(321,038
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)
|
Net loss attributable to common stockholders
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|
$
|
(7,197,131
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)
|
$
|
(11,896,988
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)
|
|
|
|
|
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|
Net loss per weighted average share, basic and
diluted:
|
|
|
|
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|
From loss on continuing operations attributable to
common stockholders
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|
$
|
(0.11
|
)
|
$
|
(0.23
|
)
|
From income (loss) on discontinued operations
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|
0.00
|
|
(0.00
|
)
|
From gain on sale of discontinued operations
|
|
0.01
|
|
|
|
Net loss attributable to common stockholders per
weighted average share, basic and diluted
|
|
$
|
(0.10
|
)
|
$
|
(0.23
|
)
|
|
|
|
|
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|
Weighted average number of common shares, basic
and diluted
|
|
70,921,357
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|
51,537,864
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|
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 DEFICIT
For the three months ended March 31,
2010
(Unaudited)
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|
Common
Shares
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Stockholders
Deficit
|
|
Comprehensive
Loss
|
|
Balance, December 31, 2009
|
|
70,567,781
|
|
$
|
705,678
|
|
$
|
218,599,384
|
|
$
|
(231,656,734
|
)
|
$
|
(1,681,707
|
)
|
$
|
(14,033,379
|
)
|
|
|
Net loss
|
|
|
|
|
|
|
|
(5,572,880
|
)
|
|
|
(5,572,880
|
)
|
(5,572,880
|
)
|
Issuance of warrants to Series C preferred
stockholders
|
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|
|
|
|
180,000
|
|
|
|
|
|
180,000
|
|
|
|
Beneficial conversion feature on Series C
preferred stock
|
|
|
|
|
|
180,000
|
|
|
|
|
|
180,000
|
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|
|
Series C preferred stock deemed dividend
|
|
|
|
|
|
(180,000
|
)
|
|
|
|
|
(180,000
|
)
|
|
|
Issuance of common stock in connection with the
exercise of stock options
|
|
310,689
|
|
3,106
|
|
488,227
|
|
|
|
|
|
491,333
|
|
|
|
Issuance of common stock in connection with the
exercise of warrants to purchase common stock
|
|
314,852
|
|
3,149
|
|
766,624
|
|
|
|
|
|
769,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of Series C preferred stock to its
redemption value
|
|
|
|
|
|
(1,089,191
|
)
|
|
|
|
|
(1,089,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend on Series C preferred stock
|
|
|
|
|
|
(355,060
|
)
|
|
|
|
|
(355,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation
|
|
|
|
|
|
702,360
|
|
|
|
|
|
702,360
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
252,139
|
|
252,139
|
|
252,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,320,741
|
)
|
Balance, March 31, 2010
|
|
71,193,322
|
|
$
|
711,933
|
|
$
|
219,292,344
|
|
$
|
(237,229,614
|
)
|
$
|
(1,429,568
|
)
|
$
|
(18,654,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
March 31,
2010
|
|
April 4,
2009
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(5,572,880
|
)
|
$
|
(10,754,456
|
)
|
Net (income) loss from discontinued operations
|
|
(31,390
|
)
|
41,682
|
|
Gain on sale of discontinued operations
|
|
(500,217
|
)
|
|
|
Adjustments to reconcile net
loss from continuing operations to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
382,187
|
|
216,874
|
|
Provision for uncollectible accounts
|
|
|
|
4,806
|
|
Provision for excess and obsolete inventory
|
|
239,942
|
|
|
|
Non-cash compensation expense related to issuance
of stock options and issuance of common stock to 401(k) Plan, including
stock-based compensation costs of $720,717 and $656,253 for the three months
ended March 31, 2010 and April 4, 2009, respectively
|
|
720,717
|
|
678,503
|
|
Change in fair value of warrant liabilities
|
|
(1,088,978
|
)
|
5,370,471
|
|
Non-cash interest expense
|
|
7,500
|
|
29,001
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
4,753,652
|
|
2,013,159
|
|
Unbilled contract costs and fees
|
|
27,886
|
|
107,206
|
|
Prepaid expenses and other assets
|
|
(396,003
|
)
|
271,110
|
|
Inventory
|
|
(3,650,195
|
)
|
3,915,177
|
|
Accounts payable
|
|
(6,676,525
|
)
|
(1,586,851
|
)
|
Accrued expenses and payroll
|
|
876,087
|
|
(456,369
|
)
|
Accrued restructuring
|
|
554,666
|
|
(146,594
|
)
|
Accrued contract losses
|
|
|
|
(1,112,412
|
)
|
Deferred revenue, current and long term portion
|
|
1,700,249
|
|
(2,987,732
|
)
|
Other current liabilities
|
|
(23,827
|
)
|
(7,512
|
)
|
Total adjustments
|
|
$
|
(2,572,6429
|
)
|
$
|
6,308,837
|
|
Net cash used in operating
activities in continuing operations
|
|
$
|
(8,677,129
|
)
|
$
|
(4,403,937
|
)
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Purchases of property and equipment
|
|
$
|
(435,532
|
)
|
$
|
(660,100
|
)
|
Net proceeds from sale of business segments
|
|
716,700
|
|
|
|
Net cash provided by (used in) investing activities
in continuing operations
|
|
$
|
281,168
|
|
$
|
(660,100
|
)
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
Net borrowings under line of credit
|
|
$
|
5,600,000
|
|
$
|
1,450,191
|
|
Net proceeds from exercise of options to purchase
common stock
|
|
491,333
|
|
|
|
Net proceeds from exercise of warrants to purchase
common stock
|
|
594,445
|
|
|
|
Net
cash provided by financing activities in continuing operations
|
|
$
|
6,685,778
|
|
$
|
1,450,191
|
|
|
|
|
|
|
|
Cash flows from discontinued
operations:
|
|
|
|
|
|
Net cash provided by (used in) operating activities
of discontinued operations
|
|
$
|
(61,921
|
)
|
$
|
150,962
|
|
Net cash used in investing activities of
discontinued operations
|
|
$
|
|
|
$
|
|
|
Net decrease in cash and cash equivalents from
discontinued operations
|
|
$
|
|
|
$
|
|
|
Effects of foreign currency exchange rates on cash
and cash equivalents
|
|
$
|
68,732
|
|
$
|
251,597
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(1,703,372
|
)
|
$
|
(3,211,287
|
)
|
Cash and cash equivalents at beginning of period
|
|
$
|
13,369,208
|
|
$
|
9,957,716
|
|
Cash and cash equivalents at end of period
|
|
$
|
11,665,836
|
|
$
|
6,746,429
|
|
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
|
|
|
|
March 31,
2010
|
|
April 4,
2009
|
|
Non-cash Investing and
Financing Activities:
|
|
|
|
|
|
Employee stock-based compensation (1)
|
|
$
|
702,360
|
|
$
|
682,317
|
|
Common stock issued related to
401(k) contributions
|
|
|
|
$
|
107,959
|
|
Accretion of redeemable convertible preferred stock
discount and dividends
|
|
$
|
1,624,251
|
|
$
|
1,142,532
|
|
Issuance of warrants and beneficial conversion
feature
|
|
$
|
360,000
|
|
|
|
Interest and Income Taxes Paid:
|
|
|
|
|
|
Interest
|
|
$
|
55,727
|
|
$
|
53,361
|
|
Income taxes
|
|
|
|
|
|
(1) Includes $(18,357) and $26,064 related to discontinued
operations for the three month periods ended March 31, 2010 and April 4,
2009, respectively.
7
Table of Contents
SATCON TECHNOLOGY CORPORATION
NOTES TO
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010 (2010) AND
APRIL 4, 2009 (2009)
(Unaudited)
Note A.
Basis of Presentation
The accompanying
unaudited consolidated financial statements include the accounts of Satcon and
its wholly owned subsidiary (Satcon Power Systems Canada, Ltd., and its
discontinued operating subsidiaries Satcon Applied Technology, Satcon Electronics, Inc.
and Satcon Power Systems, Inc.) (collectively, the Company) as of March 31,
2010 and for the three months ended March 31, 2010 and April 4, 2009
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, 2009. Operating results for the three months ended
March 31, 2010 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, 2010. 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 may need to raise additional funds in the 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 and in the credit facility with Silicon Valley
Bank. Such actions would likely require
the consent of the investors in that financing (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 the Company will be able to raise such funds if they are
required.
8
Table of
Contents
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, 2009
.
Basis
of Consolidation
The consolidated
financial statements include the accounts of Satcon and its wholly owned
subsidiary (Satcon Power Systems Canada, Ltd., and its discontinued operating
subsidiaries Satcon Applied Technology, 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, total estimated
contract 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.
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 March 31, 2010 the Company had no provision
for contract losses on commercial contracts.
Cost of product
revenue includes materials, labor and overhead.
Deferred revenue
primarily consists of cash received for extended product warranties,
preventative maintenance plans and up-time guarantee programs. Deferred revenue also consists of payments
received from customers in advance of services performed, product shipped or
installation completed. When an item is
deferred for revenue recognition purposes, the deferred revenue is recorded as
a liability and the deferred costs are recorded as a component of inventory in
the consolidated balance sheets.
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.
9
Table of
Contents
Cash
and Cash Equivalents
Cash and cash
equivalents include demand deposits and highly-liquid investments with maturities
of three months or less when acquired. Cash equivalents are stated at cost,
which approximates market value. At March 31, 2010 and December 31,
2009, the Company has restricted cash of $34,000, respectively.
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 product revenue, any amounts required to reduce the carrying
value to net realizable value.
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 $0.1 million for the three months ended March 31,
2010 and April 4, 2009, respectively.
All foreign currency transaction gains and losses are recorded as a
component of other income (expense).
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, 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 utilizing the asset and liability method for
accounting and reporting for income taxes. Under this method, 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, the Company is required to
establish 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
Company is required 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. In addition,
the Company is required to provide 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.
10
Table of Contents
As of December 31,
2009, 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 2030. 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. 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 carry forwards before
utilization. Further, until a study is completed and any limitation known, no
amounts are being presented as an uncertain tax position. 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 1994 through 2009 remain open to examination by major
taxing jurisdictions to which the Company is subject, which are primarily in
the United States, as carryforward 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. 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.
The Company uses
the Black-Scholes valuation model for valuing options. This model incorporates several assumptions,
including volatility, expected life and discount rate. 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 for
its plain-vanilla option grants. The
simplified method for plain-vanilla options calculates the expected life
based on a preset formula where the expected life is equal to the sum of
vesting term of the option and the contractual term of the option divided by
two. 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 would 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 March 31,
2010 and April 4, 2009 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
|
|
|
|
March 31,
2010
|
|
April 4,
2009
|
|
Cost of product revenue
|
|
$
|
50,613
|
|
$
|
48,628
|
|
Un-funded research and
development and other revenue expenses
|
|
94,183
|
|
84,474
|
|
Selling, general and
administrative expenses
|
|
575,921
|
|
523,151
|
|
Share based compensation
expense from continuing operations before tax
|
|
$
|
720,717
|
|
$
|
656,253
|
|
Share based compensation
expense from discontinued operations
|
|
$
|
(18,357
|
)
|
$
|
26,064
|
|
Total share based
compensation expense before tax
|
|
$
|
702,360
|
|
$
|
682,317
|
|
Income tax benefit
|
|
$
|
|
|
$
|
|
|
Net share-based
compensation expense
|
|
$
|
702,360
|
|
$
|
682,317
|
|
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 March 31,
2010 and April 4, 2009 were $2.36 and $1.22, 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
|
|
|
|
March 31, 2010
|
|
April 4, 2009
|
|
Assumptions:
|
|
|
|
|
|
Expected
life
|
|
6.25 years (1)
|
|
6.25 years (1)
|
|
Expected
volatility ranging from
|
|
73.41% -
74.21%(2)
|
|
82.14% - 82.81%(2)
|
|
Dividends
|
|
none
|
|
none
|
|
Risk-free
interest rate
|
|
2.5%(3)
|
|
2%(3)
|
|
Forfeiture
Rate (4)
|
|
0% - 6.25%
|
|
0% - 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 between 0% - 6.25%. The Company periodically reviews the
estimated forfeiture rate, in light of actual experience.
|
At March 31, 2010 approximately $9.6 million in unrecognized
compensation expense remains to be recognized in future periods. The table below summaries the recognition of
the deferred compensation expense associated with employee stock options over
the next four years as follows:
Calendar Years Ending December 31,
|
|
Non Cash
Stock-Based
Compensation
Expense
|
|
2010
|
|
$
|
2,721,668
|
|
2011
|
|
$
|
3,583,044
|
|
2012
|
|
$
|
2,203,793
|
|
2013
|
|
$
|
1,136,699
|
|
|
|
|
|
Total
|
|
$
|
9,645,204
|
|
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 commercial customers and to a lesser extent U.S. government
agencies. 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 March 31,
2010, there were two customers that were deemed significant with regards to
revenue. For the three months ended March 31,
2010, these customers accounted for approximately 27%, or approximately $4.0
million, of revenue. At March 31,
2010, there was one customer that was deemed significant with regards to
accounts receivable. At March 31,
2010, this customer accounted for approximately 16%, or approximately
$2.1million, of accounts receivable. 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 80%, 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 61%, or approximately $5.8 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 the line of credit. The estimated fair values of these
financial instruments approximate their carrying values at March 31, 2010
and December 31, 2009. 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 below.
13
Table of
Contents
Fair
Value Measurements
The Companys financial assets and liabilities are
measured using inputs from the three levels of fair value hierarchy which are
as follows:
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.
Assets and Liabilities
Measured at Fair Value on a Recurring Basis as of March 31, 2010 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
|
|
|
|
March 31,
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
Description
|
|
2010
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market funds (2)
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term warrant liability (1)
|
|
$
|
3,712,468
|
|
$
|
|
|
$
|
3,712,468
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
3,712,468
|
|
$
|
|
|
$
|
3,712,468
|
|
$
|
|
|
Assets and Liabilities
Measured at Fair Value on a Recurring Basis as of December 31, 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
|
|
|
|
December 31,
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
Description
|
|
2009
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market funds (2)
|
|
$
|
10,003,805
|
|
$
|
10,003,805
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
10,003,805
|
|
$
|
10,003,805
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term warrant liability (1)
|
|
$
|
4,976,774
|
|
$
|
|
|
$
|
4,976,774
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
4,976,774
|
|
$
|
|
|
$
|
4,976,774
|
|
$
|
|
|
(1)
The Companys Level 2
financial assets, consist 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.
Convertible Debt Instruments and Warrant Liabilities-Valuation Methodology
and Significant Assumptions
;
Note K -
Redeemable
Convertible Series B and Series C Preferred Stock; and Warrant
Liabilities below
).
(2)
Included as a component of
cash and cash equivalents on accompanying consolidated balance sheets.
14
Table
of Contents
Warrant
Liabilities
On January 1,
2009, the Company adopted ASC 815-40-15 relating to evaluating whether an
instrument is considered indexed to an entitys own stock. The Companys evaluation of the Series C
Preferred Stock Warrants determined that the 19,799,023 Series C Preferred
Stock Warrants did not qualify for a scope exception under ASC 815-40-15 as
they were determined not to be indexed to the Companys stock as prescribed by
ASC 815-40-15. As a result, on the date of adoption, January 1, 2009, the
Company reclassified these warrants from additional paid in capital to warrant
liabilities through a cumulative effect of a change in accounting
principle. The initial value of the
warrant liability at adoption was $22,041,541.
For the period
through July 3, 2009, the Company recorded a charge to change in fair
value of warrants of approximately $3.2 million for the increase in the fair
value related to these warrants during the period. The warrants did not qualify for hedge
accounting, and as such, all subsequent changes in the fair value of these
warrants were recognized currently in earnings until such time as the warrants
were modified in the manner described below, or exercised or expired. These common stock purchase warrants do not
trade in an active securities market, and as such, the Company estimated the
fair value of these warrants using the Black-Scholes option pricing model using
the following assumptions:
|
|
January 1, 2009
|
|
April 4, 2009
|
|
July 3, 2009
|
|
Assumptions:
|
|
|
|
|
|
|
|
Expected life
|
|
5.9 6.7 years
|
|
5.6 6.5 years
|
|
5.4 6.2 years
|
|
Expected volatility
|
|
80% - 85%
|
|
75% - 85%
|
|
75% - 80%
|
|
Dividends
|
|
none
|
|
none
|
|
none
|
|
Risk-free interest rate
|
|
1.69% - 1.83%
|
|
2.06% - 2.35%
|
|
2.56% 2.87%
|
|
On July 3, 2009, the
Company modified certain provisions contained within the Series C
Preferred Stock Warrants. Under the
terms of the original Series C Preferred Stock Warrants (prior to their
modification), in addition to standard anti-dilution protection for stock
splits or dividends, stock combinations, mergers, liquidation or similar
events, the exercise price and number of shares issuable upon exercise of these
warrants were subject to adjustment in the event of certain dilutive issuances
(the Dilutive Issuance Provision).
Upon each adjustment of the exercise price pursuant to the Dilutive
Issuance Provision, the number of shares subject to the warrant were also to be
adjusted by multiplying the current exercise price prior to the adjustment by
the number of shares subject to the warrant and dividing the product by the
exercise price resulting from the adjustment.
The Dilutive Issuance Provision was modified to (i) limit the
instances in which a dilutive issuance will cause an adjustment to the exercise
price of the warrants and (ii) eliminate the provision that
correspondingly increased the number of shares underlying the warrants in the
event of a dilutive issuance that causes an adjustment to the exercise
price. As a result of this modification
these warrants were determined to be equity instruments by the Company, as they
now qualify for the scope exception under ASC 815-40-15. Previously the warrants, due to the adoption
of the provisions of ASC 815-40, were accounted for as a derivative
liability. The Company is no longer
required to mark these warrants to fair value each quarter. See Note
J. Convertible Debt Instruments and Warrant Liabilities.
In addition, the Company
determined the fair value of the investor warrants (the Warrant As and Warrant
Cs) 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.
15
Table
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Redeemable
Convertible Series B Preferred Stock
The Company initially accounted for its Series B Preferred Stock and
associated warrants by
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 or is otherwise modified,
the Series B Preferred Stock will be reclassified to temporary equity.
Redeemable
Convertible Series C Preferred Stock
The Company initially accounted for its issuance of Convertible Series C
Preferred Stock (the Series C Preferred Stock), and associated warrants
by
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. The Series C Preferred
Stock is classified as temporary equity on the balance sheet. 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.
Note
D. Discontinued Operations
On January 10,
2010, the Company sold its Applied Technology business unit for approximately
$0.7 million in cash, net of closing costs.
Prior to the sale the Applied Technology business unit was reported by
the Company as its own operating segment.
Operations associated with the Applied Technology business unit have
been classified as income (loss) from discontinued operations in the
accompanying consolidated statements of operations, and cash flows associated
with this segment are included in cash flows from discontinued operations in
the consolidated statements of cash flows.
The Company evaluated the assets of the Applied Technology business unit
and as of December 31, 2009 has classified them as held for sale. The Company recorded a gain on the sale of
the Applied Technology business unit of approximately $0.5 million in its
results of operations for the first quarter ended March 31, 2010.
Net sales from discontinued operations were $0.1
million and $1.5 million for the three months ended March 31, 2010 and April 4,
2009, respectively. Net income (loss) from discontinued operations was income
of approximately $31,000 for the three months ended March 31, 2010 and a
net loss of approximately $42,000 for the three months ended April 4,
2009.
The Company has not allocated interest to discontinued operations. The Company has also eliminated all
intercompany activity associated with discontinued operations.
The net assets of
the Applied Technology division as of March 31, 2010 and December 31,
2009 consisted of the following, which have been reclassified in the
accompanying consolidated balance sheets:
|
|
March 31,
2010
|
|
December 31,
2009
|
|
Prepaid expenses
|
|
$
|
|
|
$
|
35,004
|
|
Current assets of
discontinued operations
|
|
$
|
|
|
$
|
35,004
|
|
Property and equipment, net
|
|
|
|
$
|
56,076
|
|
Goodwill other long-term
assets
|
|
|
|
$
|
168,151
|
|
Non-current assets of
discontinued operations
|
|
$
|
|
|
$
|
224,227
|
|
Accrued payroll and related
expenses
|
|
|
|
$
|
117,702
|
|
Current liabilities of
discontinued operations
|
|
$
|
|
|
$
|
117,702
|
|
Long-term
liabilities of discontinued operations
|
|
$
|
|
|
$
|
|
|
16
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
|
|
|
|
March 31,
2010
|
|
April 4,
2009
|
|
Loss
from continuing operations
|
|
$
|
(6,104,487
|
)
|
$
|
(10,712,774
|
)
|
Income
(loss) from discontinued operations
|
|
31,390
|
|
(41,682
|
)
|
Gain
from discontinued operations
|
|
500,217
|
|
|
|
Accretion
and dividends and deemed dividends on Series C Preferred Stock
|
|
(1,624,251
|
)
|
(1,142,532
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(7,197,131
|
)
|
$
|
(11,896,988
|
)
|
Basic and diluted:
|
|
|
|
|
|
Common
shares outstanding, beginning of period
|
|
70,567,781
|
|
51,479,821
|
|
Weighted
average common shares issued during the period
|
|
353,576
|
|
58,043
|
|
Weighted
average shares outstandingbasic and diluted
|
|
70,921,357
|
|
51,537,864
|
|
|
|
|
|
|
|
Net
loss per weighted average share, basic and diluted:
|
|
|
|
|
|
From
loss on continuing operations attributable to common stockholders
|
|
$
|
(0.11
|
)
|
$
|
(0.23
|
)
|
From
loss on discontinued operations
|
|
0.00
|
|
0.00
|
|
From
gain on sale of discontinued operations
|
|
0.01
|
|
0.00
|
|
Net
loss per weighted average share, basic and diluted
|
|
$
|
(0.10
|
)
|
$
|
(0.23
|
)
|
As of March 31,
2010 and April 4, 2009, 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 and related dividends were excluded from the diluted weighted
average common shares outstanding as their effect would also have been antidilutive. 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 antidilutive.
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
|
|
|
|
March 31,
2010
|
|
April 4,
2009
|
|
Common Stock issuable upon the exercise of:
|
|
|
|
|
|
Options
|
|
12,999,683
|
|
10,851,370
|
|
Warrants
|
|
24,683,740
|
|
25,350,932
|
|
Total Options and Warrants excluded
|
|
37,683,423
|
|
36,202,302
|
|
|
|
|
|
|
|
Common Stock issuable upon the conversion of
redeemable convertible Series B Preferred Stock
|
|
251,678
|
|
935,484
|
|
Common Stock issuable upon the conversion of
redeemable convertible Series C Preferred Stock
|
|
26,834,826
|
|
25,646,075
|
|
17
Table
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The table below
details out shares of common stock underlying securities for which the
securities would have been considered dilutive at March 31, 2010 and April 4,
2009, had the Company not been in a loss position:
|
|
# of Underlying Common Shares
|
|
|
|
March 31,
2010
|
|
April 4,
2009
|
|
Employee
stock options
|
|
11,078,183
|
|
3,114,700
|
|
Warrants
to purchase common stock
|
|
24,683,740
|
|
19,863,054
|
|
Series B
Convertible Preferred Stock
|
|
251,678
|
|
935,484
|
|
Series C
Convertible Preferred Stock
|
|
26,834,826
|
|
25,646,075
|
|
Total
|
|
62,848,427
|
|
49,559,313
|
|
Note F.
Inventory
Inventory
components at the end of each period were as follows:
|
|
March 31,
2010
|
|
December 31,
2009
|
|
Raw
material
|
|
$
|
7,360,050
|
|
$
|
7,268,446
|
|
Work-in-process
|
|
3,179,615
|
|
2,588,205
|
|
Finished
goods
|
|
5,246,991
|
|
2,041,920
|
|
|
|
$
|
15,786,656
|
|
$
|
11,898,571
|
|
Note G.
Legal Matters
From time to time, the
Company is a party to routine litigation and proceedings in the ordinary course
of business.
The Company is not
aware of any 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.
18
Table
of Contents
Note H.
Commitments and Contingencies
Operating
Leases
The Company leases
its facilities under various operating leases that expire through October 2016.
Future minimum
annual rentals under lease agreements at March 31, 2010 are as follows:
Fiscal Year
|
|
|
|
2010
|
|
$
|
976,845
|
|
2011
|
|
$
|
941,343
|
|
2012
|
|
$
|
398,355
|
|
2013
|
|
$
|
243,525
|
|
2014
|
|
$
|
251,643
|
|
thereafter
|
|
$
|
411,287
|
|
Total
|
|
$
|
3,222,998
|
|
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 March 31, 2010 and December 31, 2009 were
$34,000. The Company is required to
pledge cash as collateral on these outstanding letters of credit. As of March 31,
2010 and December 31, 2009, 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 Companys employment
arrangements with its current Chief Executive Officer and Chief Financial
Officer provide that if the executives 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.
On February 18,
2010, the Company entered into the Fourth Loan Modification Agreement with the
Bank. The Fourth Loan Modification
modified the term of the Loan Agreement to expire on March 19, 2010.
On March 10, 2010,
the Company entered into the Fifth Loan Modification Agreement with the Bank.
The Fifth Loan Modification Agreement amended certain provisions of the Loan
Agreement. Among other modifications and amendments, (i) the term of the
Loan Agreement has been extended to October 18, 2011, (ii) the
Companys tangible net worth covenant, as defined, has been set at
approximately $7.5 million and (iii) the Companys liquidity covenant, as
defined, has been set at approximately $4.0 million. In addition to the above, pursuant to the
terms of the Fifth Loan Modification Agreement, the Bank provided the Company
two additional tranches of term debt each in a maximum principal amount of
$1,000,000, which, if drawn down, would reduce availability under the revolving
credit line. The Company paid a
modification fee of $37,500 in connection with the Fifth Loan Modification
Agreement.
19
Table
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As of March 31, 2010
and December 31, 2009, the Company had $8.6 million and $3.0 million
outstanding under the Loan Agreement and the Banks prime rate was 4% and 4%,
respectively. The rate used was the Banks
prime rate of 4% plus 1% or (5% at March 31, 2010 and December 31,
2009).
The Company has certain
financial covenants under the Loan Agreement.
At March 31, 2010, the Companys most restrictive covenant under
the line of credit was a tangible net worth covenant, as defined, which was set
at approximately $7.5 million. At March 31,
2010, the Companys tangible net worth, as defined, was approximately $9.8
million. The Company also has a
liquidity covenant, as defined, which was set at approximately $4.0
million. As of March 31, 2010, the
Companys liquidity, as defined, was approximately $12.0 million, which
exceeded the covenant requirement. As of
March 31, 2010, the Company had availability of $0.4 million under the
line of credit.
On April 22, 2010, the Company entered into an
amendment to its Credit Facility with Silicon Valley Bank providing for a new
$5,000,000 sublimit within its overall $10,000,000 borrowing facility.
This new sublimit provides the Company with working capital borrowing capacity
in excess of the amount that would otherwise be available under its existing
formula based on accounts receivable. The availability of the new
sublimit will be reduced by $2,500,000 on June 29, 2010 and will be
subject to the Company meeting prescribed liquidity, tangible net worth and
other covenants.
Note I. Product Warranties
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 years 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
|
|
|
|
March 31,
2010
|
|
April 4,
2009
|
|
Balance
at beginning of period
|
|
$
|
1,869,579
|
|
$
|
1,982,087
|
|
Provision
|
|
529,619
|
|
499,308
|
|
Usage
|
|
(177,313
|
)
|
(542,140
|
)
|
Balance
at end of period
|
|
$
|
2,221,885
|
|
$
|
1,939,255
|
|
20
Table
of Contents
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 further discussion below
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.
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 the Company 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, the Company 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 the Company 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 March 31, 2010 and December 31, 2009, Warrant As to purchase
2,005,911 and, 2,090,911 shares of common stock were outstanding,
respectively. During the three month
period ended
21
Table
of Contents
March 31, 2010,
warrants to purchase 85,000 shares of common stock were exercised.
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 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, the Company 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.
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 March 31, 2010 and December 31, 2009, Warrant Cs to
purchase 946,971 and 1,045,456 shares of common stock were outstanding,
respectively. During the three month
period ended March 31, 2010, warrants to purchase 98,485 shares of common
stock were exercised.
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.
22
Table
of Contents
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
Placement Agent warrants were issued to First Albany Companies Inc., the parent
of FAC. As of March 31, 2010 and December 31,
2009, Placement Agent warrants to purchase 218,182 shares of common stock were
outstanding, respectively.
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, 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) provide
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. 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 notes and warrants.
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 March 31, 2010 and December 31, 2009,
the remaining outstanding Warrants have been marked to fair value resulting in
a derivative liability of $3.7 million and $29.8 million, respectively.
A summary of the changes in the fair value of the warrant liabilities:
|
|
Fair Value
of Warrant
Liabilities
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
2,407,438
|
|
Reclassification
of Series C Preferred Stock Warrants to liabilities (2)
|
|
22,041,541
|
|
Fair
value adjustment (1)
|
|
5,370,471
|
|
Balance at April 4, 2009
|
|
$
|
29,819,450
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
4,976,774
|
|
Warrants
exercised
|
|
(175,328
|
)
|
Fair
value adjustment (1)
|
|
(1,088,978
|
)
|
Balance at March 31, 2010
|
|
$
|
3,712,468
|
|
(1)
Amounts included in change in fair value of warrant liability on
consolidated statement of operations.
(2)
On July 3, 2009, the Company modified certain provisions contained
within the common stock purchase warrants issued in connection with the Series C
Preferred Stock financing. See Note C.
Significant Accounting Policies and Basis of Consolidation Warrant
Liabilities for a description of the modifications. As a result of these modifications 19,799,022
of the Companys issued and outstanding common stock purchase warrants,
previously treated as a derivative liability on January 1, 2009 will now
be treated as equity pursuant to the derivative treatment exemptions afforded
the Company. In addition, as a result of
this modification, the Company will no longer be required to mark these
warrants to their fair value each quarter.
23
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 and Warrant Cs on the dates in the corresponding table below, as
well as the fair value of the Placement Agent Warrants on the dates in the
corresponding table below. 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,
2008
|
|
Apr. 4,
2009
|
|
Jul. 4
2009
|
|
Oct. 3
2009
|
|
Dec. 31,
2009
|
|
Jan. 7,
2010
|
|
Jan. 14,
2010
|
|
Mar. 31,
2010
|
|
Quoted Stock Price
|
|
$
|
1.55
|
|
$
|
1.88
|
|
$
|
1.80
|
|
$
|
2.01
|
|
$
|
2.82
|
|
$
|
2.78
|
|
$
|
2.77
|
|
$
|
2.42
|
|
Exercise Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
Time to Maturity (in years)
|
|
4.6
|
|
4.3
|
|
4.0
|
|
3.8
|
|
3.6
|
|
3.6
|
|
3.6
|
|
3.3
|
|
Stock Volatility
|
|
73
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
Risk-Free Rate
|
|
1.44
|
%
|
1.69
|
%
|
1.98
|
%
|
1.72
|
%
|
2.00
|
%
|
1.74
|
%
|
1.74
|
%
|
1.74
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
Warrant Cs (1)
|
|
Input
|
|
Dec. 31,
2008
|
|
Apr. 4,
2009
|
|
Jul. 4
2009
|
|
Oct 3
2009
|
|
Dec. 31,
2009
|
|
Jan. 14,
2010
|
|
Mar. 31,
2010
|
|
Quoted Stock Price
|
|
$
|
1.55
|
|
$
|
1.88
|
|
$
|
1.80
|
|
$
|
2.01
|
|
$
|
2.82
|
|
$
|
2.77
|
|
$
|
2.42
|
|
Exercise Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
Time to Maturity (in years)
|
|
5.5
|
|
5.3
|
|
5.0
|
|
4.8
|
|
4.5
|
|
4.5
|
|
4.3
|
|
Stock Volatility
|
|
80
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
Risk-Free Rate
|
|
1.63
|
%
|
1.97
|
%
|
2.43
|
%
|
2.14
|
%
|
2.22
|
%
|
2.22
|
%
|
2.22
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
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 on the dates in
the corresponding table shown below. 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,
2008
|
|
Apr. 4,
2009
|
|
Jul. 4
2009
|
|
Oct. 3
2009
|
|
Dec. 31,
2009
|
|
Mar. 31,
2010
|
|
Quoted Stock Price
|
|
$
|
1.55
|
|
$
|
1.88
|
|
$
|
1.80
|
|
$
|
2.01
|
|
$
|
2.82
|
|
$
|
2.42
|
|
Exercise Price
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
Time to Maturity (in years)
|
|
2.55
|
|
2.29
|
|
2.04
|
|
1.79
|
|
1.55
|
|
1.30
|
|
Stock Volatility
|
|
80
|
%
|
75
|
%
|
85
|
%
|
80
|
%
|
75
|
%
|
75
|
%
|
Risk-Free Rate
|
|
0.89
|
%
|
1.08
|
%
|
1.00
|
%
|
0.77
|
%
|
0.84
|
%
|
0.59
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
24
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 March 31, 2010 and December 31, 2009, the conversion
price for the Series B Preferred Stock was $1.49, respectively. As of March 31, 2010 and December 31,
2009, 75 shares of Series B Preferred Stock were outstanding,
respectively. As of March 31, 2010,
and December 31, 2009, the liquidation preference of the remaining 75
shares of Series B Preferred Stock was $375,000, respectively, and these
were convertible into 251,678 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 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 $1.49 (as of March 31,
2010 and December 31, 2009). 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. These warrants expired unexercised.
25
Table
of Contents
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 $1.49 (as of March 31, 2010 and December 31,
2009). 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 $1.49 (as of March 31, 2010 and December 31, 2009). 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 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.
26
Table
of Contents
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 $1.49 (as of March 31, 2010 and December 31, 2009).
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 $1.49 (as of March 31, 2010 and December 31,
2009).
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 (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 $1.49 (as of March 31, 2010
and December 31, 2009).
27
Table
of Contents
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 by 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, not
including accumulated dividends, 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
(the Tranche I Warrants). These
warrants are exercisable for a seven-year term and had an initial exercise
price of $1.44 per share and were not exercisable 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 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, not including
accumulated dividends, 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
28
Table
of Contents
from $1.25 per
share). During the quarter ended March 31,
2010, as a result of warrant exercises, the Company issued warrants to purchase
an aggregate of 157,426 shares of common stock to the Investors; these warrants
expire on March 31, 2017. No
additional warrants were issued during the quarter ended March 31,
2010. The Company valued these warrants
using a Black-Scholes option pricing model with the assumptions detailed below
at approximately $300,000. After valuing
these warrants the Company allocated the calculated value to the relative fair
value of each tranche of preferred stock.
As a result, the Company recorded the allocated value of the warrant and
the beneficial conversion feature of $180,000 in the aggregate to the second
closing of the Series C Preferred Stock.
The Company recorded a deemed dividend on the Series C Preferred
Stock of $360,000 related to the beneficial conversion feature. See Accounting for the Series C
Preferred Stock below.
Input
|
|
March 31,
2010
|
|
Quoted
Stock Price
|
|
$
|
2.42
|
|
Exercise
Price
|
|
$
|
1.66
|
|
Time
to Maturity (in years)
|
|
7.00
|
|
Stock
Volatility
|
|
80.8
|
%
|
Risk-Free
Rate
|
|
2.4
|
%
|
Dividend
Rate
|
|
0
|
%
|
As of March 31,
2010, if all of the remaining existing warrants are exercised, the Company
would need to issue warrants to purchase an additional 2,090,498 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.
29
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 respective amounts which would otherwise be
payable in respect of the shares held by them upon such distribution if all
amounts
30
Table
of Contents
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.
31
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 the Company accounted for the transaction by
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 Company
classifies the Series C Preferred Stock as temporary equity.
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 and dividends.
The components of
the carrying value of the Series C Preferred Stock from inception on November 8,
2007, the years ended December 31, 2008 and December 31, 2009, and
the three months ended April 4, 2009 and March 31, 2010, is as
follows:
|
|
Total
|
|
|
|
|
|
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
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
22,257,423
|
|
Accretion
of original issue discount to redemption value for the three months ended
March 31, 2010
|
|
1,089,191
|
|
Dividend
for the three months ending March 31, 2010 (1)
|
|
355,060
|
|
Additional
discount from issuance of warrants and beneficial conversion feature
|
|
(180,000
|
)
|
Balance
at March 31, 2010
|
|
$
|
23,521,674
|
|
(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.
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:
|
|
November 8, 2007
|
|
December 20, 2007
|
|
Assumptions:
|
|
|
|
|
|
Expected
life
|
|
4.0 years
|
|
5.2 years
|
|
Expected
volatility
|
|
70%
|
|
70%
|
|
Dividends
|
|
none
|
|
none
|
|
Risk-free
interest rate
|
|
3.64%
|
|
3.48%
|
|
32
Table
of Contents
The Company currently
designates these warrants as equity instruments; see Warrant
Liabilities in Note C.
Note L.
Stock Option Plans
Stock
Option Plans
Under the Companys
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 March 31, 2010, 7,307,195 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.
33
Table
of Contents
The following
table summarizes activity of the Companys stock plans since December 31,
2009:
|
|
Options
Outstanding
|
|
|
|
|
|
Number
of
|
|
Weighted
Average
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
|
|
|
|
Shares
|
|
Exercise
Price
|
|
(years)
|
|
Value
|
|
Outstanding
at December 31, 2009
|
|
10,949,620
|
|
$
|
2.14
|
|
7.66
|
|
$
|
10,096,729
|
|
Grants
|
|
2,636,000
|
|
$
|
2.36
|
|
|
|
|
|
Exercises
|
|
(310,689
|
)
|
$
|
1.58
|
|
|
|
|
|
Cancellations
|
|
(275,248
|
)
|
$
|
1.75
|
|
|
|
|
|
Outstanding
at March 31, 2010
|
|
12,999,683
|
|
$
|
2.20
|
|
7.95
|
|
$
|
5,888,575
|
|
|
|
|
|
|
|
|
|
|
|
Vested or Expected to vest at March 31, 2010
|
|
12,317,306
|
|
$
|
2.21
|
|
0.80
|
|
$
|
5,663,663
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2010
|
|
5,652,300
|
|
$
|
2.41
|
|
6.71
|
|
$
|
3,066,920
|
|
Information
relating to stock options outstanding as of March 31, 2010 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
|
|
$1.49
|
|
1,914,700
|
|
7.43
|
|
$
|
1.23
|
|
1,211,638
|
|
$
|
1.24
|
|
$1.51
|
|
to
|
|
$1.89
|
|
857,250
|
|
7.59
|
|
$
|
1.71
|
|
407,563
|
|
$
|
1.64
|
|
$1.90
|
|
to
|
|
$1.90
|
|
4,852,520
|
|
8.06
|
|
$
|
1.90
|
|
2,128,259
|
|
$
|
1.90
|
|
$1.91
|
|
to
|
|
$2.35
|
|
3,246,650
|
|
9.07
|
|
$
|
2.27
|
|
585,400
|
|
$
|
2.06
|
|
$2.40
|
|
to
|
|
$5.26
|
|
1,915,063
|
|
7.28
|
|
$
|
2.79
|
|
1,105,940
|
|
$
|
2.99
|
|
$9.20
|
|
to
|
|
$17.56
|
|
206,000
|
|
0.54
|
|
$
|
13.34
|
|
206,000
|
|
$
|
13.34
|
|
$17.75
|
|
to
|
|
$17.75
|
|
7,500
|
|
0.61
|
|
$
|
17.75
|
|
7,500
|
|
$
|
17.75
|
|
$0.41
|
|
to
|
|
$17.75
|
|
12,999,683
|
|
7.95
|
|
$
|
2.20
|
|
5,652,300
|
|
$
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options for the
purchase of 5,322,244 shares were exercisable at December 31, 2009, with a
weighted average exercise price of $2.44.
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 31, 2010.
Options to
purchase 310,689 shares were exercised during the three month period ended March 31,
2010, and these options had an intrinsic value of approximately $0.8 million on
the date of exercise. There were no
options exercised during the three months ended April 4, 2009.
34
Table
of Contents
During 2008, as an
inducement to his joining the Company, the Company granted the new Chief
Executive Officer 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 March 31, 2010 and December 31,
2009, this option was outstanding and is included in the above table.
During 2010, as an
inducement to his joining the Company, the Company granted the new Chief
Financial Officer options to acquire 1,000,000 shares of common stock at a
price per share equal to $2.33, the closing price of the common stock on March 15,
2010, the date his employment commenced. The option vests over four years, with
the first 25% vesting on March 15, 2011 and the balance vesting in equal
quarterly installments over the following three years of these options, one
option to purchase 500,000 shares was issued under the Companys 2005 Plan and
one option to purchase 500,000 shares was issued outside of the 2005 Plan. As of March 31, 2010, these options were
outstanding and is included in the above table.
Note M. Warrants
The
table below summarizes the Companys warrants currently outstanding as of March 31,
2010 and activity from December 31, 2009:
|
|
|
|
Beginning
of
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
Year
Number
|
|
|
|
|
|
|
|
|
|
Shares
of
|
|
|
|
|
|
|
|
of
Shares of
|
|
|
|
2010
Activity
|
|
Common
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
|
|
|
Warrants
|
|
|
|
Stock
|
|
|
|
Date of
|
|
|
|
Underlying
|
|
Exercise
|
|
Warrant
|
|
Exercised
or
|
|
Warrants
|
|
underlying
|
|
Term
|
|
Warrant Issuance
|
|
Holder
of Warrant
|
|
Warrant
|
|
Price $
|
|
Issued
|
|
Redeemed
|
|
Expired
|
|
the
warrant
|
|
(Years)
|
|
August 12,
2005
|
|
August 2005
Financing Investors
|
|
1,047,777
|
|
$
|
1.99
|
|
|
|
(131,367
|
)
|
|
|
916,410
|
|
5
|
|
August 12,
2005
|
|
Ardour Capital
Investment, LLC
|
|
93,523
|
|
$
|
1.84
|
|
|
|
|
|
|
|
93,523
|
|
5
|
|
July 19,
2006
|
|
Warrant A,
July 2006 Private Placement
|
|
2,090,911
|
|
$
|
1.82
|
|
|
|
(85,000
|
)
|
|
|
2,005,911
|
|
7
|
|
July 19,
2006
|
|
First Albany Warrants
|
|
218,182
|
|
$
|
1.87
|
|
|
|
|
|
|
|
218,182
|
|
5
|
|
July 17,
2007
|
|
Warrant C,
July 2006 Private Placement
|
|
1,045,456
|
|
$
|
1.82
|
|
|
|
(98,485
|
)
|
|
|
946,971
|
|
7
|
|
November 8,
2007
|
|
Series C Preferred
Warrants (2)
|
|
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
|
|
100,000
|
|
$
|
1.84
|
|
|
|
|
|
|
|
100,000
|
|
5
|
|
June 28,
2008
|
|
Series C Preferred
Warrant
|
|
77,378
|
|
$
|
1.66
|
|
|
|
|
|
|
|
77,378
|
|
7
|
|
September 27,
2008
|
|
Series C Preferred
Warrant
|
|
10,105
|
|
$
|
1.66
|
|
|
|
|
|
|
|
10,105
|
|
7
|
|
July 3,
2009
|
|
Series C Preferred
Warrant
|
|
380,000
|
|
$
|
1.80
|
|
|
|
|
|
|
|
380,000
|
|
7
|
|
October 3,
2009
|
|
Series C Preferred
Warrant
|
|
17,911
|
|
$
|
1.66
|
|
|
|
|
|
|
|
17,911
|
|
7
|
|
December 31,
2009
|
|
Series C Preferred
Warrant
|
|
48,384
|
|
$
|
1.66
|
|
|
|
|
|
|
|
48,384
|
|
7
|
|
March 31,
2010
|
|
Series C Preferred
Warrant (3)
|
|
|
|
$
|
1.66
|
|
157,426
|
|
|
|
|
|
157,426
|
|
7
|
|
Total
Warrants outstanding as of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
24,683,740
|
|
|
|
(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) These
warrants vested in full on May 7, 2008, six months from their date of
inception.
(3)
As described above in Note K,
the Company issued warrants to purchase 157,426, shares of common stock at
$1.66 per share to the Investors as a result of warrant exercises during the
three months ended March 31, 2010.
These warrants are immediately exercisable and have a 7 year life.
35
Table
of Contents
Note N.
Segment Disclosures
Following the sale
in 2008 of its Electronics and Power Systems US segments and the classification
in 2009 of its Applied Technology segment as part of discontinued operations,
and subsequent sale during the quarter ended March 31, 2010, the Company
believes it operates in one business segment, Renewable Energy Solutions.
The Company
operates and markets its services and products on a worldwide basis with its
principal markets as follows:
|
|
For the Three Months ended
|
|
|
|
March 31,
2010
|
|
April 4,
2009
|
|
Revenue
by geographic region based on location of customer (1):
|
|
|
|
|
|
United
States
|
|
$
|
9,006,712
|
|
$
|
9,833,197
|
|
China
|
|
2,175,942
|
|
11,700
|
|
Czech
Republic
|
|
3,085,432
|
|
1,898,311
|
|
Canada
|
|
115,243
|
|
1,536,641
|
|
Rest
of World
|
|
349,150
|
|
|
|
Total
Revenue
|
|
$
|
14,732,479
|
|
$
|
13,379,849
|
|
(1)
Does not include revenue from discontinued
operations for all periods presented.
36
Table
of Contents
|
|
March 31,
2010
|
|
December 31,
2009
|
|
Long-lived
assets by geographic region based on location of operations (2):
|
|
|
|
|
|
United
States
|
|
$
|
2,773,807
|
|
$
|
2,517,288
|
|
Canada
|
|
1,982,985
|
|
2,116,638
|
|
Total
long-lived assets
|
|
$
|
4,756,792
|
|
$
|
4,633,926
|
|
(2)
Does not
include assets from discontinued
operations
for all periods presented.
Note O.
Restructuring Costs
During the quarter ended March 31, 2010, the Company completed the
final steps of its reorganization efforts in accordance with a plan of
reorganization approved by the Board of Directors. As a result of the March 2010
restructuring the Company recorded approximately $0.8 million in payroll
related costs. As of March 31, 2010
approximately $0.6 million remains to be paid to the terminated employees. None of the terminated employees were
required to provide any service to the Company subsequent to their receiving
notification.
In August 2009, the Company eliminated certain positions within its
operations and sales organizations in accordance with a plan of reorganization
approved by the Board of Directors. As a
result of the 2009 restructuring the Company recorded approximately $0.3
million in payroll and related costs. As
of March 31, 2010 all payments have been made to the terminated
employees. None of the terminated
employees were required to provide any services to the Company subsequent to
their receiving notification.
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.
Note P. Recent Accounting Pronouncements
In January 2010, the
FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value
Measurements (ASU 2010-06), which is included in the ASC Topic 820 (Fair
Value Measurements and Disclosures). ASU 2010-06 requires new disclosures on
the amount and reason for transfers in and out of Level 1 and 2 fair value
measurements. ASU 2010-06 also requires disclosure of activities,
including purchases, sales, issuances, and settlements within the Level 3 fair
value measurements and clarifies existing disclosure requirements on levels of
disaggregation and disclosures about inputs and valuation
techniques. ASU 2010-06 is effective for interim and annual
reporting periods beginning after December 15, 2009. The adoption of this
standard did not have a material effect on our financial statements.
In February 2010,
the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and
Disclosure Requirements (ASU 2010-09), which is included in the FASB
Accounting Standards Codification (the ASC) Topic 855 (Subsequent
Events). ASU 2010-09 clarifies that an SEC filer is required to
evaluate subsequent events through the date that the financial statements are
issued. ASU 2010-09 is effective upon the issuance of the final
update and did not have a significant impact on the Companys financial
statements.
37
Table
of Contents
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, 2009.
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, , intends, estimates, and similar expressions,
whether in the negative or in the affirmative.
Such forward-looking statements include 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,
2009, 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
expressly disclaim any duty to update such statements.
Overview
We are a world
leading technology provider of utility grade power conversion solutions for the
renewable energy market. Our products
feature the widest range of power ratings in the industry, and are utilized by
businesses and utility companies to efficiently convert renewable energy
sources into stable and reliable electrical power.
Our suite of photovoltaic and fuel cell power inverters
offer rugged and reliable solutions that enhance the total output and power
production of a 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 an installation.
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.
The significant
accounting policies that management believes are most critical to aid in fully
understanding and evaluating our reported financial results include the
following:
38
Table
of Contents
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, 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.
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 September 30, 2004. 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. For the
three months ended March 31, 2010 and for the year ended December 31,
2009, there have been no provisions 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. When an item is deferred for revenue
recognition purposes, the deferred revenue is recorded as a liability and the
deferred costs are recorded as a component of inventory in our consolidated
balance sheets. Deferred revenue also
consists of cash received for extended product warranties.
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.
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, and costs are
determined based on the first-in, first-out method of accounting and include
material, labor and manufacturing overhead costs. We periodically review
inventory quantities on hand and record a provision for excess and/or obsolete
inventory within cost of sales based primarily on our historical usage, as well
as based on estimated forecast of product demand. 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.
39
Table
of Contents
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
re-evaluated 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 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 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 $57.4 million as of December 31,
2009, 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 utilizing asset and liability method for accounting and reporting
for income taxes. Under this method, 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, we are required to establish 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 1994 through 2009 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 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.
40
Table
of Contents
Redeemable
Convertible Series B Preferred Stock
We initially accounted for our Series B Preferred Stock and
associated warrants by
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 we consider 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, or is otherwise modified, the Series B
Preferred Stock will be reclassified to temporary equity.
Redeemable
Convertible Series C Preferred Stock
We
initially accounted for our issuance of Series C Preferred Stock and
associated warrants by
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 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 of new warrants on December 21, 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 21, 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 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.
41
Table
of Contents
Results of Operations
Three Months Ended March 31,
2010 (2010) Compared to Three Months Ended April 4, 2009 (2009)
Revenue.
Total revenue for 2010 increased approximately $1.3 million, or 10.1%,
from $13.4 million in 2009 to $14.7 million in 2010.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March 31,
|
|
April 4,
|
|
|
|
|
|
(Amounts in Millions)
|
|
2010
|
|
2009
|
|
Change $
|
|
% Change
|
|
Product Revenue
|
|
|
|
|
|
|
|
|
|
Alternative Energy Products
|
|
$
|
14.6
|
|
$
|
9.2
|
|
$
|
5.4
|
|
59.2
|
%
|
Other Legacy
|
|
0.1
|
|
4.2
|
|
(4.1
|
)
|
(97.5
|
)%
|
Total Revenue
|
|
$
|
14.7
|
|
$
|
13.4
|
|
$
|
1.3
|
|
10.1
|
%
|
Alternative Energy
Product revenue increased by $5.4 million, or 59.2%, from $9.2 million in
2009 to $14.6 million in 2010 due to the continued adoption of our photovoltaic
solutions. The increase in Alternative Energy Products was offset by a decrease
in revenue of $4.1 million related to legacy product revenue recognized in 2009
and classified as Other Legacy product revenue.
Gross
Margin.
Total
Company gross margin increased from 8.2% in 2009 to 13.8% in 2010. The increase in gross margin over the period
of a year ago is due to material cost reduction programs and increased labor
efficiency. The $4.2 million legacy
product revenues recognized during 2009 had no gross margin, the amount
recognized as revenue equaled the related costs recognized for the period. Without this single item, our gross margin
would have been approximately 12% for the 2009.
Research
and development expenses.
We expended approximately $2.7
million on research and development in 2010 compared with $1.9
million spent in 2009. The increase
in spending during 2010 was driven by a planned increase in costs associated
with certification of our new products and continued new product development,
including increases 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 $1.3 million, or 28%, from $4.3 million in
2009 to $5.6 million in 2010.
Approximately $1.0 million of the increase was associated with increased
corporate costs and approximately $0.3 million of the increase was due to the
higher sales and marketing costs directly related to international business
development, company re-branding and our continued outbound marketing efforts
in 2010 compared to 2009.
Restructuring
costs
. In
2010, we eliminated certain positions within our operations and sales
organizations in accordance with a plan of reorganization approved by the Board
of Directors. As a result of the 2010
restructuring we recorded approximately $0.8 million in payroll and related
costs for 2010. As of March 31,
2010 approximately $0.6 million remains to be paid to the terminated
employees. None of the terminated
employees were required to provide any services subsequent to their receiving
notification.
Change in
fair value of warrant liabilities
. The change in
fair value of the warrants for 2010 was a credit of approximately $1.1 million.
This credit related to the change in valuation of our Warrant As and Warrant Cs
in 2010. 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 ASC
815-40-15. As a result of this adoption,
warrants to purchase 19,799,022 shares of our common stock, originally
classified as equity, were reclassified to warrant liabilities and were
required to be fair valued moving forward.
In July 2009 warrants to purchase 19,799,022 shares of our common
stock were modified resulting in these warrants being classified as equity and
therefore not requiring any fair value adjustments in the future.
Other
Income (expense).
Other expense
was approximately $68,000 for 2010 compared to other expense of approximately
$139,000 for 2009. Other expense for
2010 consists primarily of $93,000 of foreign currency translation losses and
other fees relating to consulting services for the valuation of our warrant
liability as well as other expenses not related to ongoing operations offset by
other income not related to operations.
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 warrant liability as
well as other
42
Table
of Contents
expenses
not related to ongoing operations.
Interest
income
. Interest income was
$0 in 2010 and 2009, respectively.
Interest
expense.
Interest expense decreased $19,000 in 2010 to
$63,000 as compared to $82,000 in
2009. Interest expense for 2010 includes
approximately $7,500 of non-cash dividends on our Series B Preferred
Stock, which we have elected to pay in shares of our common stock, and $56,000
in interest related to our line of credit during the period. 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.
Income (loss) from discontinued operations
. Income from discontinued operations was
approximately $31,000 for the three months ended March 31, 2010 compared
to a loss of approximately $42,000 for the three months ended April 4,
2010. The income (loss) from discontinued
operations is a result of the sale of our Applied Technology division.
See Note D. Discontinued Operations for
more information related to the sale of this division.
Gain on sale of discontinued operations
. As a result of the sale of our Applied
Technology division, we recorded income of approximately $500,000. See Note D. Discontinued Operations for
more information related to the sale of this division and the composition of
the gain calculated.
Deferred Revenue
.
Deferred revenue was approximately $7.9 million at March 31, 2010
as compared to $6.0 million at December 31, 2009, an increase of
approximately $1.9 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.
When an item is deferred for revenue
recognition purposes, the deferred revenue is recorded as a liability and the
deferred costs are recorded as a component of inventory in our consolidated
balance sheets. Deferred revenue also
consists of cash received for extended product warranties. Currently
deferred revenue is composed of approximately $1.5 million related to pre-payments
on orders currently being manufactured and $6.4 million on deferred revenue
related to extended warranties sold to customers that purchased our products.
43
Table
of Contents
Liquidity
and Capital Resources
As of March 31,
2010, we had approximately $11.7 million of cash, of which approximately
$34,000 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, as amended on April 22,
2010, will be adequate to fund our operations through December 31,
2010. Beyond 2010, 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. We had
availability under our line of credit of $0.4 million as of March 31,
2010.
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 2007 preferred stock financing
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 March 31, 2010, we had an accumulated deficit of
approximately $237.2 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 March 31,
2010, our cash and cash equivalents were $11.7 million, including restricted
cash and cash equivalents of $34,000; this represents a decrease in our cash
and cash equivalents of approximately $1.7 million from the $13.4 million on
hand at December 31, 2009. Cash used in operating activities for the three
months ended March 31, 2010 was $8.7 million as compared to
$4.4 million for the three months ended April 4, 2009. Cash used in
operating activities during the three months ended March 31, 2010 was
primarily attributable to the net loss of approximately $5.6 million offset by
non-cash items such as the change in the fair value of our warrants,
depreciation and amortization, deferred revenue, increases in allowances for
uncollectible accounts and excess and obsolete inventory, non-cash compensation
and consulting expense, non-cash interest expense and decreases in working
capital.
Cash provided by
investing activities during the three months ended March 31, 2010 was $0.3
million as compared to cash used in investing activities of $0.7 million for
the three months ended April 4, 2009.
Cash provided by investing activities for 2010 was from net proceeds of
the sale of the Applied Technology division offset by cash used for capital
expenditures. Cash used in investing
activities in 2009 was for capital expenditures.
Cash provided by
financing activities for the three months ended March 31, 2010 was
approximately $6.7 million as compared to cash provided by financing activities
of $1.5 million for the three months ended April 4, 2009. Net cash provided by financing activities
during 2010 primarily related to borrowings under our line of credit of $5.6
million and approximately $1.1 million from the exercise of employee stock
options and the exercise of warrants.
Net cash provided by financing activities during 2009 related to net
borrowings under our line of credit of $1.5 million.
Cash used in
discontinued operations was approximately $62,000 for 2010 as compared to cash
provided by discontinued operations of approximately $151,000 for 2009. Net cash used in operating activities from
discontinued operations was approximately $62,000 in 2010 compared to cash
provided by discontinued operations of approximately $151,000 in 2009. Net cash used in investing activities from
discontinued operations was $0 in 2010 and 2009. Net cash used in financing activities from
discontinued operations was $0 in 2010 and 2009.
44
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 March 31, 2010 under the capital and
operating leases with non-cancelable terms are included in the table below:
Calendar Years Ending December 31,
|
|
Operating Leases
|
|
|
|
|
|
2010
|
|
$
|
976,845
|
|
2011
|
|
$
|
941,343
|
|
2012
|
|
$
|
398,355
|
|
2013
|
|
$
|
243,525
|
|
2014
|
|
$
|
251,643
|
|
Thereafter
|
|
$
|
411,287
|
|
Total
|
|
$
|
3,222,998
|
|
We lease equipment
and office space under non-cancelable capital and operating leases. The future
minimum rental payments, as of March 31, 2010, under the capital and
operating leases with non-cancelable terms are included in the table above.
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 (as of March 31, 2010). 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.
45
Table of Contents
Item 4. Controls and
Procedures
(a)
Evaluation of Disclosure Controls and Procedures
.
We maintain
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities
and Exchange Commission, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
As of the end of
the period covered by this report, we conducted an evaluation, with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b).
Based upon this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of March 31, 2010. The conclusions of the Chief Executive Officer and
Chief Financial Officer from this evaluation were communicated to the Audit
Committee. We intend to continue to review and document our disclosure controls
and procedures, including our internal controls and procedures for financial
reporting, and may from time to time make changes aimed at enhancing their
effectiveness and to ensure that our systems evolve with our business.
(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 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
46
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. 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, 2009.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
Not
applicable.
Item 3. Defaults Upon Senior Securities.
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.
47
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 10, 2010
|
By:
|
|
|
|
|
|
|
/s/ DONALD R.
PECK
|
|
|
Donald R. Peck
|
|
|
Vice President,
Chief Financial Officer and Treasurer
|
48
Table
of Contents
EXHIBIT INDEX
Exhibit
Number
|
|
Exhibit
|
|
|
|
10.1
|
|
Fourth Loan
Modification Agreement, dated as of February 18, 2010, between Silicon
Valley Bank and the Registrant, Satcon Power Systems, Inc., Satcon
Applied Technology, Inc., Satcon Electronics, Inc., and Satcon
Power Systems Canada Ltd.
|
10.2
|
|
Fifth Loan Modification
Agreement, dated as of March 10, 2010, between Silicon Valley Bank and
the Registrant, Satcon Power Systems, Inc., Satcon Applied
Technology, Inc., Satcon Electronics, Inc., and Satcon Power
Systems Canada Ltd.
|
10.3
|
|
Donald R. Peck
Employment Offer Letter dated March
, 2010.
|
10.4
|
|
Donald R. Peck
Incentive Stock Option Agreement dated March 15, 2010.
|
31.1
|
|
Certification by
Principal Executive Officer and Interim Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2
|
|
Certification by
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
|
49
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