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 September 30, 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.)
|
|
|
|
27 Drydock Avenue
Boston, Massachusetts
(Address
of principal executive offices)
|
|
02210
(Zip
Code)
|
(617) 897-2400
(Registrants telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
o
|
|
Accelerated
filer
x
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
(Do
not check if a smaller reporting company)
|
|
|
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,
116,792,927 shares outstanding as of November 1, 2010.
Table of Contents
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
11,334,854
|
|
$
|
13,369,208
|
|
Restricted
cash and cash equivalents
|
|
|
|
34,000
|
|
Accounts
receivable, net of allowance of $854,887 and $196,909 at September 30,
2010 and December 31, 2009, respectively
|
|
55,216,395
|
|
17,577,640
|
|
Unbilled
contract costs and fees
|
|
174,342
|
|
202,228
|
|
Inventory
|
|
28,438,176
|
|
11,898,571
|
|
Prepaid
expenses and other current assets
|
|
3,103,885
|
|
717,535
|
|
Current
assets of discontinued operations
|
|
|
|
35,004
|
|
|
|
|
|
|
|
Total
current assets
|
|
98,267,652
|
|
43,834,186
|
|
Property
and equipment, net
|
|
4,956,478
|
|
4,633,926
|
|
Non-current
assets of discontinued operations
|
|
|
|
224,227
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
103,224,130
|
|
$
|
48,692,339
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Line
of credit
|
|
$
|
15,000,000
|
|
$
|
3,000,000
|
|
Notes
payable, current portion
|
|
1,563,642
|
|
|
|
Accounts
payable
|
|
40,222,141
|
|
20,751,975
|
|
Accrued payroll and payroll related expenses
|
|
3,489,072
|
|
2,235,349
|
|
Other
accrued expenses
|
|
6,635,564
|
|
2,710,568
|
|
Accrued
restructuring costs
|
|
207,129
|
|
38,034
|
|
Deferred
revenue, current portion
|
|
6,280,031
|
|
451,008
|
|
Current
liabilities of discontinued operations
|
|
|
|
117,702
|
|
Total
current liabilities
|
|
73,397,579
|
|
29,304,636
|
|
Warrant
liabilities
|
|
5,428,437
|
|
4,976,774
|
|
Notes
payable, net of current portion and discount of $950,238
|
|
9,486,120
|
|
|
|
Deferred
revenue, net of current portion
|
|
8,875,934
|
|
5,531,413
|
|
Redeemable
convertible Series B preferred stock (75 shares issued and outstanding
at September 30, 2010 and December 31, 2009; face value $5,000 per
share; liquidation preference at September 30, 2010 $375,000)
|
|
375,000
|
|
375,000
|
|
Other
long-term liabilities
|
|
228,342
|
|
280,472
|
|
Total
liabilities
|
|
97,791,412
|
|
40,468,295
|
|
Commitments
and contingencies (Note I)
|
|
|
|
|
|
Redeemable
convertible Series C preferred stock (25,000 shares issued and outstanding
at September 30, 2010 and December 31, 2009, face value $1,000 per
share, liquidation preference $28,534,932 and $27,600,000 at
September 30, 2010 and December 31, 2009, respectively)
|
|
26,503,432
|
|
22,257,423
|
|
|
|
|
|
|
|
Stockholders
deficit:
|
|
|
|
|
|
Common
stock; $0.01 par value, 200,000,000 shares authorized; 78,540,071 and
70,567,781 shares issued and outstanding at September 30, 2010 and
December 31, 2009, respectively
|
|
$
|
785,401
|
|
$
|
705,678
|
|
Additional
paid-in capital
|
|
223,245,348
|
|
218,599,384
|
|
Accumulated
deficit
|
|
(243,671,895
|
)
|
(231,656,734
|
)
|
Accumulated
other comprehensive loss
|
|
(1,429,568
|
)
|
(1,681,707
|
)
|
Total
stockholders deficit
|
|
(21,070,714
|
)
|
(14,033,379
|
)
|
Total
liabilities and stockholders deficit
|
|
$
|
103,224,130
|
|
$
|
48,692,339
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
3
Table of Contents
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED
STATEMENT OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
2010
|
|
October 3,
2009
|
|
September 30,
2010
|
|
October 3,
2009
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
58,381,821
|
|
$
|
10,040,941
|
|
$
|
100,741,773
|
|
$
|
31,048,409
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
42,678,081
|
|
10,466,120
|
|
77,267,220
|
|
30,686,604
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin (loss)
|
|
15,703,740
|
|
(425,179
|
)
|
23,474,553
|
|
361,805
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
4,320,274
|
|
2,187,554
|
|
9,763,129
|
|
6,302,978
|
|
Selling, general and administrative
|
|
9,677,483
|
|
4,611,625
|
|
23,539,849
|
|
13,377,847
|
|
Restructuring charge
|
|
|
|
211,267
|
|
783,701
|
|
211,267
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses from continuing
operations
|
|
13,997,757
|
|
7,010,446
|
|
34,086,679
|
|
19,892,092
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
1,705,983
|
|
(7,435,625
|
)
|
(10,612,126
|
)
|
(19,530,287
|
)
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liabilities
|
|
(1,269,118
|
)
|
(305,289
|
)
|
(1,038,105
|
)
|
(3,899,623
|
)
|
Other income (loss), net
|
|
340,387
|
|
384,261
|
|
20,929
|
|
(241,329
|
)
|
Interest income
|
|
|
|
2,956
|
|
185
|
|
8,523
|
|
Interest expense
|
|
(628,255
|
)
|
(38,919
|
)
|
(917,651
|
)
|
(259,103
|
)
|
Income (loss) from continuing operations
|
|
148,997
|
|
(7,392,616
|
)
|
(12,546,768
|
)
|
(23,921,819
|
)
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of discontinued operations, net
|
|
|
|
|
|
500,217
|
|
|
|
Income from discontinued operations, net
|
|
|
|
135,303
|
|
31,390
|
|
77,110
|
|
Net income (loss)
|
|
148,997
|
|
(7,257,313
|
)
|
(12,015,161
|
)
|
(23,844,709
|
)
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend and accretion on Series C
preferred stock
|
|
(1,359,514
|
)
|
(961,257
|
)
|
(4,167,639
|
)
|
(2,670,277
|
)
|
Dividend on Series C preferred stock
|
|
(384,613
|
)
|
(320,180
|
)
|
(1,108,370
|
)
|
(1,028,269
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(1,595,130
|
)
|
$
|
(8,538,750
|
)
|
$
|
(17,291,170
|
)
|
$
|
(27,543,255
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per weighted average share, basic and
diluted:
|
|
|
|
|
|
|
|
|
|
From loss on continuing operations attributable to
common stockholders
|
|
$
|
(0.02
|
)
|
$
|
(0.12
|
)
|
$
|
(0.25
|
)
|
$
|
(0.47
|
)
|
From gain on sale of discontinued operations
|
|
|
|
|
|
$
|
0.01
|
|
|
|
From income on discontinued operations
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per
weighted average share, basic and diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.12
|
)
|
$
|
(0.24
|
)
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares, basic
and diluted
|
|
75,467,911
|
|
70,239,878
|
|
72,633,858
|
|
58,831,835
|
|
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 nine months ended September 30, 2010
(Unaudited)
|
|
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
|
|
|
|
|
|
|
|
(12,015,161
|
)
|
|
|
(12,015,161
|
)
|
(12,015,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants to Series C preferred stockholders
|
|
|
|
|
|
515,000
|
|
|
|
|
|
515,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
conversion feature on Series C preferred stock
|
|
|
|
|
|
515,000
|
|
|
|
|
|
515,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C
preferred stock deemed dividend
|
|
|
|
|
|
(515,000
|
)
|
|
|
|
|
(515,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with the exercise of stock options and issuance
of restricted stock to consultants
|
|
1,107,553
|
|
11,075
|
|
1,610,610
|
|
|
|
|
|
1,621,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with the exercise of warrants to purchase
common stock
|
|
6,854,670
|
|
68,547
|
|
3,667,534
|
|
|
|
|
|
3,736,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants in connection with subordinated debt financing
|
|
|
|
|
|
910,612
|
|
|
|
|
|
910,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
of Series C preferred stock to its redemption value
|
|
|
|
|
|
(3,652,639
|
)
|
|
|
|
|
(3,652,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
on Series C preferred stock
|
|
|
|
|
|
(1,108,370
|
)
|
|
|
|
|
(1,108,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
on Series B preferred stock
|
|
10,067
|
|
101
|
|
14,899
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock-based compensation
|
|
|
|
|
|
2,688,318
|
|
|
|
|
|
2,688,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
252,139
|
|
252,139
|
|
252,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,763,022
|
)
|
Balance,
September 30, 2010
|
|
78,540,071
|
|
$
|
785,401
|
|
$
|
223,245,348
|
|
$
|
(243,671,895
|
)
|
$
|
(1,429,568
|
)
|
$
|
(21,070,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
Nine Months Ended
|
|
|
|
September 30,
2010
|
|
October 3,
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(12,015,161
|
)
|
$
|
(23,844,709
|
)
|
Net income from
discontinued operations
|
|
(31,390
|
)
|
(77,110
|
)
|
Gain on sale of
discontinued operations
|
|
(500,217
|
)
|
|
|
Adjustments to reconcile net
loss from continuing operations to net cash used in operating activities:
|
|
|
|
|
|
Effects of foreign currency
exchange rates on cash and cash equivalents
|
|
68,732
|
|
(497,684
|
)
|
Depreciation and
amortization
|
|
1,175,679
|
|
826,775
|
|
Provision for
uncollectible accounts
|
|
651,055
|
|
22,999
|
|
Provision for excess
and obsolete inventory
|
|
774,237
|
|
|
|
Non-cash compensation
expense related to issuance of stock options and issuance of restricted
common stock to consultants
|
|
2,795,475
|
|
2,194,037
|
|
Change in fair value of
warrant liabilities
|
|
1,038,105
|
|
3,899,623
|
|
Non-cash expense
associated with the issuance of warrants
|
|
|
|
515,000
|
|
Non-cash interest
expense
|
|
156,374
|
|
119,906
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(37,773,159
|
)
|
1,053,687
|
|
Unbilled contract costs
and fees
|
|
27,886
|
|
209,032
|
|
Prepaid expenses and
other assets
|
|
(2,378,705
|
)
|
47,264
|
|
Inventory
|
|
(16,836,010
|
)
|
3,084,748
|
|
Accounts payable
|
|
18,982,798
|
|
814,176
|
|
Accrued expenses and
payroll
|
|
5,035,471
|
|
(318,393
|
)
|
Accrued contract loss
|
|
|
|
(1,185,818
|
)
|
Accrued restructuring
|
|
155,627
|
|
(388,388
|
)
|
Deferred revenue,
current and long term portion
|
|
8,921,886
|
|
(1,743,273
|
)
|
Other long term
liabilities
|
|
(52,130
|
)
|
(23,403
|
)
|
Total adjustments
|
|
(17,256,679
|
)
|
8,630,288
|
|
Net cash used in operating
activities in continuing operations
|
|
(29,803,447
|
)
|
(15,291,531
|
)
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Purchases of property
and equipment
|
|
(1,428,710
|
)
|
(1,757,190
|
)
|
Net cash used in
investing activities in continuing operations
|
|
(1,428,710
|
)
|
(1,757,190
|
)
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
Net borrowings under
line of credit
|
|
12,000,000
|
|
|
|
Net proceeds from notes
payable
|
|
11,826,500
|
|
1,297,200
|
|
Net proceeds from
public sale of common stock
|
|
|
|
21,513,225
|
|
Reduction of restricted
cash
|
|
34,000
|
|
|
|
Net proceeds from
exercise of options to purchase common stock
|
|
1,532,885
|
|
49,959
|
|
Net proceeds from
exercise of warrants to purchase common stock
|
|
3,149,639
|
|
|
|
Net cash provided by
financing activities in continuing operations
|
|
28,543,024
|
|
22,860,384
|
|
Cash flows from discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by
(used in) operating activities of discontinued operations
|
|
(61,921
|
)
|
537,167
|
|
Net cash provided by
investing activities of discontinued operations
|
|
716,700
|
|
|
|
|
|
|
|
|
|
Net increase in cash
and cash equivalents from discontinued operations
|
|
654,779
|
|
$
|
537,167
|
|
Net increase (decrease)
in cash and cash equivalents
|
|
(2,034,354
|
)
|
6,348,830
|
|
Cash and cash
equivalents at beginning of period
|
|
13,369,208
|
|
9,957,716
|
|
Cash and cash
equivalents at end of period
|
|
$
|
11,334,854
|
|
$
|
16,306,546
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
6
Table
of Contents
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
Nine Months Ended
|
|
|
|
September 30,
2010
|
|
October 3,
2009
|
|
Non-cash Investing and Financing Activities:
|
|
|
|
|
|
Stock-based
compensation (1)
|
|
$
|
2,777,118
|
|
$
|
2,261,399
|
|
Common stock issued
related to 401(k) contributions
|
|
|
|
107,959
|
|
Accretion of redeemable
convertible preferred stock discount and dividends
|
|
5,276,009
|
|
3,714,772
|
|
Issuance of warrants
and beneficial conversion feature
|
|
1,760,000
|
|
|
|
Modification of
warrants to purchase common stock
|
|
|
|
515,000
|
|
Common stock issued in
lieu of dividends on redeemable convertible Series B preferred stock
|
|
15,000
|
|
71,370
|
|
Conversion of
Series B Preferred Stock into common stock
|
|
|
|
1,075,000
|
|
Exercise of warrant
liabilities for common stock
|
|
586,442
|
|
|
|
Adjustment to conversion
price of Series B Preferred Stock
|
|
|
|
55,369
|
|
|
|
|
|
|
|
Interest
and Income Taxes Paid:
|
|
|
|
|
|
Interest
|
|
$
|
761,276
|
|
$
|
139,197
|
|
Income taxes
|
|
|
|
|
|
(1) Includes
$(18,357) and $67,362 related to discontinued operations for the nine month
periods ended September 30, 2010 and October 3, 2009, respectively.
The accompanying
notes are an integral part of these unaudited consolidated financial
statements.
7
Table of
Contents
SATCON TECHNOLOGY CORPORATION
NOTES TO
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 (2010) AND OCTOBER 3, 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 September 30,
2010 and for the three and nine months ended September 30, 2010 and October 3,
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 and nine
months ended September 30, 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. In addition, on October 27, 2010, the
Company sold 10,350,000 million shares of common stock in a public offering
resulting in net proceeds, after deducting underwriter commissions and
discounts and other offering expenses, of approximately $37.5 million. Concurrently with the consummation of the
public offering, the holders of all the outstanding shares of Series C
Preferred Stock converted their shares of preferred stock and accumulated
dividends into 27,526,344 million shares of common stock. Upon conversion by the Series C
Preferred Stock holders, the Company paid them an aggregate of $1,250,000 in
cash. The Company has developed a
business plan that envisions a significant increase in revenue from the results
experienced in the recent past and that allows 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 credit facility with Silicon Valley Bank and those
restrictions contained within our subordinated debt instrument. Such actions would likely require the consent
of Silicon Valley Bank and/or the lender of the subordinated debt, 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.
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 subsidiary (Satcon Applied Technology, 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, unless
otherwise agreed upon in advance with the customer. 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
8
Table of Contents
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.
Cost
of product revenue includes materials, labor and overhead.
Deferred revenue consists of
cash received for extended product warranties, preventative maintenance plans
and up-time guarantee programs. Deferred
revenue also consists of amounts billed to 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.
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 September 30, 2010 and December 31,
2009, the Company has restricted cash of $0 and $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 valued 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. The Company 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 the Companys 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, the 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 the Company makes every
effort to ensure the accuracy of its forecasts of future product demand, any
significant unanticipated changes in demand or technological developments could
have a significant impact on the value of the
inventory and reported operating results. The Company records, as a charge to cost of
product revenue, any amounts required to reduce the carrying value to net
realizable value.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization is computed
using the straight-line method over the assets estimated useful life. The
estimated useful lives of property and equipment are as follows:
|
|
Estimated Lives
|
Machinery
and equipment
|
|
2-10 years
|
Furniture
and fixtures
|
|
7-10 years
|
Computer
software
|
|
3 years
|
Leasehold
improvements
|
|
Lesser of the remaining
life of the lease or the useful life of the improvement
|
9
Table of Contents
When
assets are retired or otherwise disposed of, the cost and related depreciation
and amortization are eliminated from the accounts and any resulting gain or
loss is reflected in operating expenses.
Foreign
Currency Translation
As
of April 1, 2010, the Company determined that the functional currency of
its foreign subsidiary was the US dollar.
As the functional currency changed from the foreign currency to the
reporting currency, the translation adjustments as of April 1, 2010
remains as a component of accumulated other comprehensive income (loss). Prior to this determination, the functional
currency was the local currency, assets and liabilities were translated at the
rates in effect at the balance sheet dates, while stockholders equity
(deficit) including the long-term portion of intercompany advances was
translated at historical rates. Statements of operations and cash flow amounts
were translated at the average rate for the period. Translation adjustments
were included as a component of accumulated other comprehensive income (loss).
Foreign currency gains and losses were a gain of $0.4 million and $0.4 million
for the three months ended September 30, 2010 and October 3, 2009,
respectively. Foreign currency gains
were $24,000 and $0.4 million for the nine months ended September 30, 2010
and October 3, 2009, respectively.
All foreign currency transaction gains and losses were recorded as a
component of other income (loss), net.
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.
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. 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 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. The Company has not experienced a change
of control at any time since Company formation, utilization of its NOL or
R&D credit carry forwards are not subject to an annual limitation under
Section 382.. 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.
10
Table of Contents
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 historical information in the calculation of
expected life for its plain-vanilla option grants. 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.
The Company recognized the full impact of its
share-based compensation plans in the consolidated financial statements for the
three and nine months ended
September 30, 2010 and October 3, 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
|
|
Nine Months Ended
|
|
|
|
September 30,
2010
|
|
October 3,
2009
|
|
September 30,
2010
|
|
October 3,
2009
|
|
Cost of product revenue
|
|
$
|
55,016
|
|
$
|
42,027
|
|
$
|
167,642
|
|
$
|
128,789
|
|
Research and development
|
|
137,621
|
|
75,433
|
|
360,037
|
|
244,968
|
|
Selling, general and administrative expenses
|
|
711,662
|
|
527,949
|
|
2,178,996
|
|
1,753,530
|
|
Share-based compensation expense from continuing
operations before tax
|
|
904,299
|
|
645,409
|
|
2,706,675
|
|
2,127,287
|
|
Share-based compensation expense from
discontinued operations
|
|
|
|
18,716
|
|
(18,357
|
)
|
67,362
|
|
Total share-based compensation expense before tax
|
|
904,299
|
|
664,125
|
|
2,688,318
|
|
2,194,649
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
Net share-based compensation expense
|
|
$
|
904,299
|
|
$
|
664,125
|
|
$
|
2,688,318
|
|
$
|
2,194,649
|
|
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 and
nine months ended September 30, 2010 and October 3, 2009 were $3.32
and $1.83 and $2.42 and $2.44, 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
|
|
Nine Months Ended
|
|
Assumptions:
|
|
September 30, 2010
|
|
October 3, 2009
|
|
September 30, 2010
|
|
October 3, 2009
|
|
Expected
life
|
|
5.6
years (1)
|
|
6.25
years (1)
|
|
5.0
to 6.25 years (1)
|
|
5.0
to 6.25 years (1)
|
|
Expected
volatility ranging from
|
|
72.8%
to 73.93% (2)
|
|
81.4%
- 81.8%(2)
|
|
72.4%
to 76.5% (2)
|
|
72.9%
- 83.0% (2)
|
|
Dividends
|
|
none
|
|
none
|
|
none
|
|
none
|
|
Risk-free
interest rate
|
|
1.50%
(3)
|
|
2.50%
(3)
|
|
1.10%
to 2.50% (3)
|
|
1.50%
to 2.50% (3)
|
|
Forfeiture
Rate (4)
|
|
6.25%
|
|
6.25%
|
|
0%
to 6.25%
|
|
6.25%
|
|
(1)
The option life
for the three and nine months ended September 30, 2010 was determined
using actual option experience. Prior to
March 31, 2010, 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
11
Table of Contents
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 September 30, 2010 approximately $8.5
million in unrecognized compensation expense remains to be recognized over a
weighted average period of 2.3 years.
The table below summarizes 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
|
|
$
|
933,552
|
|
2011
|
|
3,678,141
|
|
2012
|
|
2,318,717
|
|
2013
|
|
1,322,983
|
|
2014
|
|
282,879
|
|
Total
|
|
$
|
8,536,272
|
|
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 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. 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 and nine months ended September 30,
2010, there were three customers and two customers, respectively, which were
deemed significant with regards to revenue.
For the three and nine months ended September 30, 2010, these
customers accounted for 43.7%, or $25.5 million, and 29.0%, or $29.2 million,
of revenue. At September 30, 2010,
there were two customers that were deemed significant with regards to accounts
receivable. At September 30, 2010,
these customers accounted for 31.2%, or $17.3 million, of accounts receivable. For the three and nine months ended October 3,
2009, there were three and two customers, respectively, that were deemed
significant with regards to revenue. For
the three months ended October 3, 2009, these customers accounted for 44%,
or $4.5 million, of revenue. For the
nine months ended October 3, 2009, these customers accounted for 30%, or
$9.5 million, of revenue. At October 3,
2009, there were four customers that were deemed significant with regards to
accounts receivable. At October 3,
2009, these customers accounted for 45.3%, or $4.7 million, of accounts
receivable.
Research
and Development Costs
The
Company expenses research and development costs as incurred. Cost of research
and development and other revenue includes costs incurred in connection with
both funded research and development and other revenue arrangements and
unfunded research and development activities.
12
Table of Contents
Comprehensive
Income (Loss)
Comprehensive
income (loss) includes net loss and foreign currency translation adjustments
prior to the changing of the functional currency in Canada to the US dollar.
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, subordinated note payable and the line of
credit. The estimated fair values of these financial instruments approximate
their carrying values at September 30, 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 Measurements below. The carrying value of the subordinated notes
payable, as of September 30, 2010, is not materially different from the fair
value of the notes.
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 September 30, 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
|
|
|
|
September 30,
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
Description
|
|
2010
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Money
market funds (2)
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Warrant
liabilities (1)
|
|
$
|
5,428,437
|
|
$
|
|
|
$
|
5,428,437
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
5,428,437
|
|
$
|
|
|
$
|
5,428,437
|
|
$
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Warrant
liabilities (1)
|
|
$
|
4,976,774
|
|
$
|
|
|
$
|
4,976,774
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
4,976,774
|
|
$
|
|
|
$
|
4,976,774
|
|
$
|
|
|
13
Table of Contents
(1)
The Companys
Level 2 financial liabilities consist of long term investor warrant liabilities
comprised of the Warrant As, Warrant Cs, the warrants issued to the investors
in connection with the 2007 preferred stock financing (the 2007 Financing
Warrants) and the placement agent warrants.
The fair value of the Warrant As and Warrant Cs is being estimated using
a binomial lattice model and the fair value of the placement agent warrants and
the 2007 Financing Warrants is being estimated 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.
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 2007
Financing Warrants determined that the 2007 Financing Warrants covering
19,799,023 shares of common stock 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:
Assumptions:
|
|
January 1, 2009
|
|
April 4, 2009
|
|
July 3, 2009
|
|
|
|
|
|
|
|
|
|
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 2007 Financing Warrants. Under the terms of the original 2007 Financing
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.
14
Table of
Contents
Redeemable
Convertible Series B Preferred Stock
The Company initially accounted for its issuance of
Series B Preferred Stock and associated warrants by
allocating the proceeds
received net of transaction costs based on the relative fair value of the
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.
In
October 2010, the holders of the remaining 75 shares of Series B Preferred
Stock converted their shares into common stock, resulting in the issuance of
251,677 shares of common stock.
Redeemable
Convertible Series C Preferred Stock
The Company initially accounted for its 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
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 used 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 have been $30.0 million or 120% of
its face value and dividends.
On
October 27, 2010, the holders of all of the outstanding shares of Series C
Preferred Stock converted their shares and accumulated dividends into common
stock, resulting in the issuance of 27,526,344 shares of common stock. To induce the Series C Preferred Stock
holders to convert their shares, the Company paid these holders an aggregate
$1.25 million in cash upon conversion.
The entitlement to a redemption of the Series C Preferred Shares was
eliminated upon the holders conversion of the Series C Preferred Stock into
common shares in October 2010.
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 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 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 nine months ended September 30, 2010.
Net sales
from discontinued operations were $0.1 million and $4.7 million for the nine
months ended September 30, 2010 and October 3, 2009, respectively. Net income (loss)
from discontinued operations was income of approximately $31,000 for the nine
months ended September 30, 2010 and net income of approximately $135,303 and
$77,100 for the three and nine months ended October 3, 2009, respectively.
The Company has not
allocated interest to discontinued operations.
The Company has eliminated all intercompany activity associated with
discontinued operations.
The
net assets of the Applied Technology division as December 31, 2009 consisted of
the following, which have been reclassified in the accompanying consolidated
balance sheets:
|
|
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
|
|
$
|
|
|
15
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
|
|
Nine Months Ended
|
|
|
|
September 30,
2010
|
|
October 3,
2009
|
|
September 30,
2010
|
|
October 3,
2009
|
|
Income
(loss) from continuing operations
|
|
$
|
148,997
|
|
$
|
(7,392,616
|
)
|
$
|
(12,546,768
|
)
|
$
|
(23,921,819
|
)
|
Gain
on sale of discontinued operations
|
|
|
|
|
|
500,217
|
|
|
|
Income
from discontinued operations
|
|
|
|
135,303
|
|
31,390
|
|
77,110
|
|
Accretion
and dividends and deemed dividends on Series C Preferred Stock
|
|
(1,744,127
|
)
|
(1,281,437
|
)
|
(5,276,009
|
)
|
(3,698,546
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(1,595,130
|
)
|
$
|
(8,538,750
|
)
|
$
|
(17,291,170
|
)
|
$
|
(27,543,225
|
)
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
Common
shares outstanding, beginning of period
|
|
72,126,226
|
|
70,211,491
|
|
70,567,781
|
|
51,479,822
|
|
Weighted
average common shares issued during the period
|
|
3,341,685
|
|
28,387
|
|
2,066,077
|
|
7,352,013
|
|
Weighted
average shares outstandingbasic and diluted
|
|
75,467,911
|
|
70,239,878
|
|
72,633,858
|
|
58,831,835
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per weighted average share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
From
loss on continuing operations attributable to common stockholders
|
|
$
|
(0.02
|
)
|
$
|
(0.12
|
)
|
$
|
(0.25
|
)
|
$
|
(0.47
|
)
|
From
gain on discontinued operations
|
|
|
|
|
|
|
|
|
|
From
gain on sale of discontinued operations
|
|
|
|
|
|
$
|
0.01
|
|
|
|
Net
loss per weighted average share, basic and diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.12
|
)
|
$
|
(0.24
|
)
|
$
|
(0.47
|
)
|
As
of September 30, 2010 and October 3, 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 actual number of options and warrants and
convertible preferred stock that were excluded from the calculation above due
to their effect being antidilutive:
|
|
September 30,
2010
|
|
October 3,
2009
|
|
Common
Stock issuable upon the exercise of:
|
|
|
|
|
|
Options
|
|
12,337,319
|
|
10,979,370
|
|
Warrants
|
|
16,417,892
|
|
25,597,328
|
|
Total
Options and Warrants excluded
|
|
28,755,211
|
|
36,576,698
|
|
|
|
|
|
|
|
Common
Stock issuable upon the conversion of redeemable convertible Series B
Preferred Stock
|
|
251,677
|
|
251,677
|
|
Common
Stock issuable upon the conversion of redeemable convertible Series C
Preferred Stock
|
|
27,437,434
|
|
26,245,390
|
|
16
Table of Contents
The
table below details out shares of common stock underlying securities for which
the securities would have been considered dilutive at September 30, 2010 and October
3, 2009, had the Company not been in a loss position:
|
|
# of Underlying Common Shares
|
|
|
|
September 30,
2010
|
|
October 3,
2009
|
|
Employee
stock options
|
|
12,141,819
|
|
8,247,720
|
|
Warrants
to purchase common stock
|
|
16,417,892
|
|
25,597,328
|
|
Series
B Convertible Preferred Stock
|
|
251,677
|
|
251,677
|
|
Series
C Convertible Preferred Stock
|
|
27,437,434
|
|
26,245,390
|
|
Total
|
|
56,248,822
|
|
60,342,115
|
|
Note F.
Inventory
Inventory
components at the end of each period were as follows:
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Raw
material
|
|
$
|
8,376,510
|
|
$
|
7,268,446
|
|
Work-in-process
|
|
4,623,686
|
|
2,588,205
|
|
Finished
goods
|
|
15,437,980
|
|
2,041,920
|
|
|
|
$
|
28,438,176
|
|
$
|
11,898,571
|
|
Note G.
Property and Equipment
Property
and equipment consisted of the following:
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Machinery
and equipment
|
|
$
|
4,739,703
|
|
$
|
4,153,178
|
|
Assets
under construction
|
|
343,139
|
|
1,616,022
|
|
Furniture
and fixtures
|
|
511,000
|
|
324,689
|
|
Computer
software
|
|
769,126
|
|
707,667
|
|
Leasehold
improvements
|
|
3,162,488
|
|
1,098,882
|
|
|
|
9,525,456
|
|
7,900,438
|
|
Less:
accumulated depreciation and amortization
|
|
(4,568,978
|
)
|
(3,266,512
|
)
|
|
|
|
|
|
|
|
|
$
|
4,956,478
|
|
$
|
4,633,926
|
|
Depreciation
and amortization expense from continuing operations relating to property and
equipment for the nine months ended
September 30, 2010 and 2009 was $1.2
million and $0.8 million, respectively.
Note H.
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.
17
Table of
Contents
Note I. 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 September 30, 2010 are as
follows:
Fiscal Year
|
|
|
|
2010
|
|
$
|
352,605
|
|
2011
|
|
1,132,575
|
|
2012
|
|
596,644
|
|
2013
|
|
422,265
|
|
2014
|
|
436,263
|
|
thereafter
|
|
565,137
|
|
Total
|
|
$
|
3,505,489
|
|
Letters of Credit:
The Company utilized a standby letter of credit to
satisfy a security deposit requirement. Outstanding standby letters of credit
as of September 30, 2010 and December 31, 2009 were $0 and $34,000,
respectively. The Company is required to
pledge cash as collateral on these outstanding letters of credit. As of
September 30, 2010 and December 31, 2009, the cash pledged as collateral for
these letters of credit was $0 and $34,000, respectively, and is included in
restricted cash and cash equivalents on the consolidated balance sheets.
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 accrued 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
containedcertain 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 terminated 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 originally 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 was extended to October 18, 2011, (ii) the Companys tangible net
worth covenant, as defined, was set at approximately $7.5 million and (iii) the
Companys liquidity covenant, as defined, was 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.
18
Table of
Contents
On
April 22, 2010, the Company entered into the Sixth Loan Modification
Agreement with the Bank providing for a new $5,000,000 non-formula sublimit
within its overall $10,000,000 borrowing facility. This new sublimit
provided the Company with working capital borrowing capacity in excess of the
amount that would otherwise have
been available under its existing
formula based on accounts receivable. The availability of the new
sublimit was to be reduced by $2,500,000 on June 29, 2010 and was subject
to the Company meeting prescribed liquidity, tangible net worth and other
covenants.
On
June 16, 2010, the Company entered into the Seventh Loan Modification
Agreement with the Bank that reduced the existing $5,000,000 non-formula sub
limit of the borrowing facility to $2,500,000 as of July 1, 2010 and $0 as
of August 30, 2010. The Company
could continue to be able to borrow up to $10,000,000 from the Bank under the
Loan Agreement on a formula basis.
On August 3, 2010,
the Company entered into an Eighth Loan Modification Agreement with the
Bank. Under the terms of this amendment,
the Bank agreed to increase the Companys existing credit limit up to $15.0
million on a formula basis. The existing non-formula sub-limit will
continue to be eliminated as of August 30, 2010. Interest on
outstanding formula-based borrowings will now accrue at a rate per
annum equal to the Prime Rate plus one half percent (.50%) per annum.
In addition, (i) the tangible net worth covenant was eliminated, (ii) the
Companys liquidity covenant, as defined, was set at approximately $5.0 million
until March 31, 2011 and thereafter at approximately $6.5 million and (iii) a
covenant relating to adjusted earnings before interest, taxes, depreciation and
amortization (Adjusted EBITDA) was added.
The Companys obligation under the Loan Agreement continues to be
secured by substantially all of the assets of the Company.
At September 30, 2010,
the Company was in full compliance with the liquidity and Adjusted EBITDA
covenant requirements. As of September 30,
2010, the Company had $0 available under the line of credit.
At September 30, 2010
and December 31, 2009, the Company had $15.0 million and $3.0 million
outstanding under the Loan Agreement and the Banks prime rate was 4%. The rate used was the Banks prime rate of
4.0% plus 0.50% (or 4.5% at September 30, 2010) and 4.0% plus 1% (or 5% at
December 31, 2009).
Notes Payable
On
June 16, 2010, the Company entered into a Venture Loan and Security
Agreement with Compass Horizon Funding Company LLC (the Lender) pursuant to
which the Lender has loaned the Company $12,000,000 (the Subordinated Loan). After the Lenders closing fees and expenses,
the net proceeds to the Company were $11,826,500. Interest on the Subordinated Loan will accrue
at a rate per annum equal to 12.58%. The
Subordinated Loan is subordinated to up to $15,000,000 of senior indebtedness,
provided that from and after August 31, 2010, the senior indebtedness
cannot exceed an amount equal to 80% of the Companys accounts receivable plus
40% of its inventory. The Subordinated
Loan is to be repaid over 42 months following the closing. During the first 9 months after the closing the
Company is only required to pay interest on the Subordinated Loan and
thereafter the Subordinated Loan will be repaid in 33 substantially equal
monthly installments of interest and principal.
In connection with the Subordinated Loan, the Company has issued to the
Lender five year warrants to acquire up to an aggregate of 591,716 shares of
the Companys common stock at an exercise price of $2.4336 per share (which was
the 20-day trailing volume weighted average price of the Companys common
stock). The relative fair value of the
warrants was $0.9 million and will be recorded as interest expense over the
term of the loan. The Company estimated
the fair value of the warrants using the Black-Scholes option pricing model
using the following assumptions:
Assumptions:
|
|
June 16, 2010
|
|
Expected
life
|
|
5
years
|
|
Expected
volatility
|
|
74.9%
|
|
Dividends
|
|
none
|
|
Risk-free
interest rate
|
|
2.0%
|
|
The Subordinated Loan is to be repaid over 42 months
as follows:
Fiscal Year
|
|
Principal
Repayment
|
|
2010
|
|
$
|
|
|
2011
|
|
2,541,720
|
|
2012
|
|
4,233,191
|
|
2013
|
|
4,797,531
|
|
2014
|
|
427,558
|
|
Total
|
|
$
|
12,000,000
|
|
19
Table of Contents
Note J. Product Warranties
In general the Companys warranties are for one year
after the sale of the non-photovoltaic product and five years for photovoltaic
inverter product sales. The Company
provides a warranty to its customers for most of its products sold. . 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.
Accrued warranty is included in other accrued
expenses on the Companys Consolidated Balance Sheets. The following is a summary of the Companys
accrued warranty activity for the following periods:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
2010
|
|
October 3,
2009
|
|
September 30,
2010
|
|
October 3,
2009
|
|
Balance
at beginning of period
|
|
$
|
2,842,859
|
|
$
|
2,037,892
|
|
$
|
1,869,579
|
|
$
|
1,982,087
|
|
Provision
|
|
1,089,120
|
|
403,706
|
|
2,390,699
|
|
1,239,166
|
|
Usage
|
|
(312,344
|
)
|
(308,642
|
)
|
(640,643
|
)
|
(1,088,297
|
)
|
Balance
at end of period
|
|
$
|
3,619,635
|
|
$
|
2,132,956
|
|
$
|
3,619,635
|
|
$
|
2,132,956
|
|
Note K. Warrant Liabilities
Features
of the Warrants Issued in Connection with the July 2006 Financing
In connection with the July 19,
2006 private placement of $12.0 million aggregate principal amount of senior
secured convertible notes (which notes were subsequently retired by cash
redemption in November 2007), the Company issued as part of the private
placement:
·
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 were exercised, the investors 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.
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
20
Table of Contents
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 September 30, 2010
and December 31, 2009, Warrant As to purchase 1,795,456 and, 2,090,911
shares of common stock were outstanding, respectively. During the nine month period ended September 30,
2010, warrants to purchase 295,455 shares of common stock were exercised.
If the closing bid 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 certain
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 the closing
bid 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 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 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 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.
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 September 30, 2010 and December 31, 2009, Warrant Cs to
purchase 848,486 and 1,045,456 shares of common stock were outstanding,
respectively. During the nine month
period ended September 30, 2010, warrants to purchase 196,970 shares of
common stock were exercised.
21
Table of Contents
If the closing bid 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 certain
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 the closing
bid price per share of our common stock for any 20 consecutive trading days
exceeds 300% of the exercise price, then, if certain equity conditions are
satisfied, the Company may require the holders of the Warrant Cs to exercise
all or any part of the unexercised portions of such warrants.
Placement
Agent Warrants
First
Albany Capital (FAC) acted as placement agent in connection with the private
placement. In addition to a cash transaction fee, FAC or its designees were
entitled to receive five-year warrants to purchase 218,182 shares of the
Companys common stock at an exercise price of $1.87 per share. As of September 30, 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
income (loss), net of $2.2 million.
As of September 30,
2010 and December 31, 2009, the remaining outstanding Warrants have been
marked to fair value resulting in a derivative liability of $5.4 million and
$5.0 million, respectively.
A summary of the changes in the fair value of the
warrant liabilities:
Balance at December 31, 2008
|
|
$
|
2,407,438
|
|
|
|
|
|
Reclassification
of 2007 Financing Warrants to liabilities (2)
|
|
22,041,541
|
|
Fair
value adjustment (1)
|
|
5,370,471
|
|
Balance
at April 4, 2009
|
|
$
|
29,819,450
|
|
Fair
value adjustment (1)
|
|
(1,776,137
|
)
|
Reclassification
of 2007 Financing Warrants to equity (2)
|
|
(25,193,785
|
)
|
Balance
at July 4, 2009
|
|
$
|
2,849,528
|
|
Fair
value adjustment (1)
|
|
305,289
|
|
Balance
at October 3, 2009
|
|
$
|
3,154,817
|
|
|
|
|
|
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
|
|
Warrants
exercised
|
|
(123,691
|
)
|
Fair
value adjustment (1)
|
|
857,965
|
|
Balance
at June 30, 2010
|
|
$
|
4,446,742
|
|
Warrants
exercised
|
|
(287,423
|
)
|
Fair
value adjustment (1)
|
|
1,269,118
|
|
Balance
at September 30, 2010
|
|
$
|
5,428,437
|
|
(1)
Amounts
included in change in fair value of warrant liabilities on consolidated
statement of operations.
(2)
On
July 3, 2009, the Company modified certain provisions contained within the
common stock purchase warrants
22
Table of Contents
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 19,799,023
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.
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 the 2007 Financing 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
|
|
Quoted
Stock Price
|
|
$
|
1.55
|
|
$
|
1.88
|
|
$
|
1.80
|
|
$
|
2.01
|
|
$
|
2.82
|
|
Exercise
Price
|
|
$
|
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
|
|
Stock
Volatility
|
|
73
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
Risk-Free
Rate
|
|
1.44
|
%
|
1.69
|
%
|
1.98
|
%
|
1.72
|
%
|
2.00
|
%
|
Dividend
Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise
Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Warrant As
Input
|
|
Jan. 7,
2010
|
|
Jan. 14,
2010
|
|
Mar. 31,
2010
|
|
April 26,
2010
|
|
May 12,
2010
|
|
June 30,
2010
|
|
July 27,
2010
|
|
Sept 30,
2010
|
|
Quoted Stock Price
|
|
$
|
2.78
|
|
$
|
2.77
|
|
$
|
2.42
|
|
$
|
2.88
|
|
$
|
2.74
|
|
$
|
2.86
|
|
$
|
3.41
|
|
$
|
3.76
|
|
Exercise Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
Time to Maturity (in years)
|
|
3.6
|
|
3.6
|
|
3.3
|
|
3.2
|
|
3.2
|
|
3.0
|
|
3.0
|
|
2.8
|
|
Stock Volatility
|
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
Risk-Free Rate
|
|
1.74
|
%
|
1.74
|
%
|
1.74
|
%
|
1.0
|
%
|
1.0
|
%
|
1.0
|
%
|
0.6
|
%
|
0.60
|
%
|
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
|
|
June 30,
2010
|
|
July 29,
2010
|
|
Sept. 30,
2010
|
|
Quoted Stock Price
|
|
$
|
1.55
|
|
$
|
1.88
|
|
$
|
1.80
|
|
$
|
2.01
|
|
$
|
2.82
|
|
$
|
2.77
|
|
$
|
2.42
|
|
$
|
2.86
|
|
$
|
3.40
|
|
$
|
3.76
|
|
Exercise Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
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
|
|
4.1
|
|
4.0
|
|
3.8
|
|
Stock Volatility
|
|
80
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
70
|
%
|
75
|
%
|
75
|
%
|
Risk-Free Rate
|
|
1.63
|
%
|
1.97
|
%
|
2.43
|
%
|
2.14
|
%
|
2.22
|
%
|
2.22
|
%
|
2.22
|
%
|
1,41
|
%
|
0.89
|
%
|
0.89
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
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
|
|
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:
23
Table of Contents
Input
|
|
Dec. 31,
2008
|
|
Apr. 4,
2009
|
|
Jul. 4
2009
|
|
Oct. 3
2009
|
|
Dec. 31,
2009
|
|
Mar. 31,
2010
|
|
June 30,
2010
|
|
Sept. 30,
2010
|
|
Quoted
Stock Price
|
|
$
|
1.55
|
|
$
|
1.88
|
|
$
|
1.80
|
|
$
|
2.01
|
|
$
|
2.82
|
|
$
|
2.42
|
|
$
|
2.86
|
|
$
|
3.76
|
|
Exercise
Price
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
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
|
|
1.05
|
|
.80
|
|
Stock
Volatility
|
|
80
|
%
|
75
|
%
|
85
|
%
|
80
|
%
|
75
|
%
|
75
|
%
|
60
|
%
|
60
|
%
|
Risk-Free
Rate
|
|
0.89
|
%
|
1.08
|
%
|
1.00
|
%
|
0.77
|
%
|
0.84
|
%
|
0.59
|
%
|
0.34
|
%
|
0.24
|
%
|
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
|
|
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 the authoritative guidance requires the use of quoted market
prices without considerations of blockage discounts. 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 L. 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 was 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 September 30, 2010 and December 31,
2009, the conversion price for the Series B Preferred Stock was $1.49 (as
a result of adjustments to the conversion price since issuance in accordance
with the terms of the Series B Preferred Stock). As of September 30, 2010 and December 31,
2009, 75 shares of Series B Preferred Stock were outstanding. As of September 30, 2010 and December 31,
2009, the liquidation preference of the remaining 75 shares of Series B
Preferred Stock was $375,000, and these were convertible into 251,677 shares of
common stock. The Series B
Preferred Stock was also redeemable under certain circumstances.
In
October 2010, the holders of the remaining 75 shares of Series B
Preferred Stock converted their shares into common stock, resulting in the
issuance of 251,677 shares of common stock.
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 were payable semi-annually and, except in certain limited circumstances,
were entitled to be paid by the Company, at its option, either through the
issuance of shares of common stock or
in cash. If the Company elected to pay
the dividend in shares of common stock,
the Company would 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 had subsequently been adjusted in accordance with
the terms of the Series B Preferred Stock to $1.49 (as of September 30,
2010 and
24
Table of Contents
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.
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 would have been 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 would have been $5,000 per share of
Series B Preferred Stock, plus the amount of any accrued but unpaid
dividends on those shares. This
entitlement to a liquidation preference was eliminated upon the holders
conversion of the Series B Preferred Stockinto common shares in October 2010.
Accounting
for the Series B Preferred Stock
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 25,000 shares of the Companys 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, with a face value of $1,000 per share,
plus accumulated dividends, initially converts into common stock at a price
equal to $1.04 per share. As of September 30,
2010, the outstanding shares of Series C Preferred Stock, including
accumulated dividends, were convertible into 27,437,434 shares of common stock.
On October 27, 2010,
the holders of all of the outstanding shares of Series C Preferred Stock,
including accumulated dividends, converted their shares into common stock,
resulting in the issuance of 27,526,244 shares of common stock. To induce the Series C Preferred Stock
holders to convert their shares, the Company paid them an aggregate $1.25
million in cash upon conversion.
The 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. 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.
During the nine months ended September 30, 2010, Tranche I Warrants
to purchase 7,631,036 shares of common stock were exercised via a cashless
exercise, resulting in the issuance of 5,038,970 shares of common stock. As of September 30, 2010 and December 31,
2009, Tranche I Warrants to purchase 7,631,036 and 15,262,072 shares of common
stock were outstanding, respectively.
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. At this closing, the Company also
issued warrants (the Tranche II 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. During the nine months ended September 30,
2010, Tranche II Warrants to purchase 253,580 shares of common stock were
exercised via a cashless exercise, resulting in the issuance of 167,445 shares
of common stock. As of September 30,
2010 and December 31, 2009, Tranche II
25
Table of Contents
Warrants to purchase
4,195,887 and 4,449,467 shares of common stock were outstanding, respectively.
In
the purchase agreement, the Company also agreed to issue the Investors
additional warrants in the event that the holders of certain existing warrants
(none of whom are affiliated with the Investors) exercise those warrants in the
future. Upon such exercises, the Company
will issue to the Investors additional warrants to purchase common stock equal
to one-half of the number of shares of common stock issued upon exercise of
these existing warrants. The exercise
price of these warrants will be $1.66 per share (during 2008, prior to the
issuance of any such warrants, the warrant holders agreed to change the
exercise price to $1.66 per share from $1.25 per share). During the nine month period ended September 30,
2010, as a result of warrant exercises, the Company issued warrants to purchase
an aggregate of 816,863 shares of common stock to the Investors; of these
warrants, 157,426 expire on March 31, 2017, 246,134 expire on June 30,
2017 and 413,303 expire on September 30, 2017. Since the closing of the financing, the
Company has issued additional warrants to purchase 970,640 shares of common
stock. During the nine months ended September 30,
2010, warrants to purchase 61,511 shares of common stock were exercised via a
cashless exercise, resulting in the issuance of 33,764 shares of common
stock. At September 30, 2010 and December 31,
2009, such warrants to purchase 909,129 and 153,778 shares of common stock were
outstanding, respectively. The Company
valued these warrants using a Black-Scholes option pricing model with the
assumptions detailed below at approximately $1.3 million. 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 approximately $0.5 million 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 approximately $1.0 million related to the beneficial conversion
feature. See Accounting for the Series C
Preferred Stock below.
Input
|
|
March 31,
2010
|
|
June 30,
2010
|
|
Sept. 30,
2010
|
|
Quoted
Stock Price
|
|
$
|
2.42
|
|
$
|
2.86
|
|
$
|
3.76
|
|
Exercise
Price
|
|
$
|
1.66
|
|
$
|
1.66
|
|
$
|
1.66
|
|
Time
to Maturity (in years)
|
|
7.00
|
|
7.00
|
|
7.00
|
|
Stock
Volatility
|
|
80.8
|
%
|
79.13
|
%
|
73.44
|
%
|
Risk-Free
Rate
|
|
2.4
|
%
|
2.5
|
%
|
1.75
|
%
|
Dividend
Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
As
of September 30, 2010, if all of the remaining existing warrants are
exercised, the Company would need to issue warrants to purchase an additional
1,431,062 shares of common stock to the Investors.
Dividends on Series C
Preferred Stock
The shares of Series C Preferred Stock accrued
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 were cumulative and were
payable quarterly in cash or, at the Companys option, were to be added to the
Stated Liquidation Preference Amount.
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
would have been entitled to receive, out of the assets of the Company available
for distribution to its stockholders before any payment was 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 entitlement to dividends and a
liquidation preference were eliminated upon the holders conversion of the Series C
Preferred Stock into common shares on October 27, 2010.
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
could have elected to have all or any portion of the outstanding shares of Series C
Preferred Stock redeemed. The Company
could 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).
26
Table of Contents
If
such redemption was for cash, the Company would have effected the redemption 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 was for
shares of common stock, the Company would have effected 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.
This right of redemption was eliminated upon the
holders conversion of the Series C Preferred Stock into common shares on October 27,
2010.
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
Series C Preferred Stock is classified as temporary equity on the balance
sheet.
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 used 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 have been $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 and nine months ended October 3, 2009 and September 30,
2010, is as follows:
|
|
Total
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
17,248,593
|
|
Accretion
of original issue discount to redemption value for the nine months ended
October 3, 2009
|
|
2,662,857
|
|
Dividend
and accretion of the Series C Preferred dividends for the nine months
ending October 3, 2009 (1)
|
|
1,051,915
|
|
Additional
discount from issuance of warrants and beneficial conversion feature
|
|
(17,000
|
)
|
Balance
at October 3, 2009
|
|
$
|
20,946,365
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
22,257,423
|
|
Accretion
of original issue discount to redemption value for the nine months ended
September 30, 2010
|
|
3,652,639
|
|
Dividend
and accretion of the Series C Preferred dividends for the nine months
ending September 30, 2010 (1)
|
|
1,108,370
|
|
Additional
discount from issuance of warrants
|
|
(515,000
|
)
|
Balance
at September 30, 2010
|
|
$
|
26,503,432
|
|
(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
27
Table of
Contents
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:
Assumptions:
|
|
November 8, 2007
|
|
December 20, 2007
|
|
Expected life
|
|
4.0
years
|
|
5.2
years
|
|
Expected volatility
|
|
70%
|
|
70%
|
|
Dividends
|
|
none
|
|
none
|
|
Risk-free interest rate
|
|
3.64%
|
|
3.48%
|
|
The Company currently
designates these warrants as
equity instruments; see Warrant Liabilities in Note C.
As
stated above, the holders of the Series C Preferred Stock converted their Series C
Preferred Stock into common stock on October 27, 2010.
Note M. 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 September 30, 2010, 7,171,912 shares 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 cannot
exceed 500,000 shares in any year and 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.
28
Table of Contents
The
following table summarizes the Companys stock option activity (both under the
Plans and outside of the 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
|
|
(280,248
|
)
|
$
|
1.75
|
|
|
|
|
|
Outstanding
at March 31, 2010
|
|
12,994,683
|
|
$
|
2.20
|
|
7.95
|
|
$
|
5,888,575
|
|
Grants
|
|
467,500
|
|
$
|
2.49
|
|
|
|
|
|
Exercises
|
|
(397,720
|
)
|
$
|
1.59
|
|
|
|
|
|
Cancellations
|
|
(620,080
|
)
|
$
|
5.17
|
|
|
|
|
|
Outstanding
at June 30, 2010
|
|
12,444,383
|
|
$
|
2.09
|
|
7.76
|
|
$
|
10,492,461
|
|
Grants
|
|
162,000
|
|
$
|
3.32
|
|
|
|
|
|
Exercises
|
|
(238,377
|
)
|
$
|
1.71
|
|
|
|
|
|
Cancellations
|
|
(30,687
|
)
|
$
|
2.40
|
|
|
|
|
|
Outstanding
at September 30,
2010
|
|
12,337,319
|
|
$
|
2.11
|
|
7.62
|
|
$
|
21,034,259
|
|
Vested or Expected to vest at
September 30, 2010
|
|
11,907,505
|
|
$
|
2.10
|
|
7.57
|
|
$
|
20,395,134
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30,
2010
|
|
5,749,659
|
|
$
|
2.08
|
|
6.50
|
|
$
|
10,333,624
|
|
29
Table of Contents
Information
relating to stock options outstanding (both under the Plans and outside of the
Plans) as of September 30, 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
|
|
$0.62
|
to
|
$1.62
|
|
1,800,386
|
|
6.16
|
|
$
|
1.28
|
|
1,265,012
|
|
$
|
1.32
|
|
$1.67
|
to
|
$1.89
|
|
325,000
|
|
7.76
|
|
$
|
1.78
|
|
123,313
|
|
$
|
1.77
|
|
$1.90
|
to
|
$1.90
|
|
4,841,583
|
|
7.54
|
|
$
|
1.90
|
|
2,733,137
|
|
$
|
1.90
|
|
$1.91
|
to
|
$2.33
|
|
1,824,850
|
|
8.31
|
|
$
|
2.24
|
|
578,945
|
|
$
|
2.12
|
|
$2.35
|
to
|
$2.46
|
|
2,197,500
|
|
8.92
|
|
$
|
2.39
|
|
335,001
|
|
$
|
2.45
|
|
$2.50
|
to
|
$5.26
|
|
1,248,000
|
|
7.34
|
|
$
|
2.97
|
|
614,251
|
|
$
|
3.10
|
|
$9.25
|
to
|
$9.25
|
|
100,000
|
|
0.51
|
|
$
|
9.25
|
|
100,000
|
|
$
|
9.25
|
|
$0.62
|
to
|
$9.25
|
|
12,337,319
|
|
7.62
|
|
$
|
2.11
|
|
5,749,659
|
|
$
|
2.08
|
|
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 October 3, 2009, the Company had 92,135 shares of restricted stock
outstanding of which all 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 a general and administrative
expense of $0 and $75,000 for the three and nine months ended October 3,
2009, respectively, and $22,250 and $66,750 in cost of product revenue for the
three and nine months ended October 3, 2009, respectively. The Company had no unvested shares of
restricted stock outstanding as of September 30, 2010.
Options
to purchase 238,377 and 946,786 shares were exercised during the three and nine
month period ended September 30, 2010, and these options had an intrinsic
value of approximately $0.8 million and approximately $2.7 million on the date
of exercise, respectively. There were
options to purchase 31,500 and 36,250 shares of common stock exercised during
the three and nine months ended October 3, 2009 and these options had an
intrinsic value of approximately $60,000 and $69,000 on the date of exercise,
respectively.
During 2008, as an
inducement to his joining the Company, the Company granted its 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 September 30, 2010 and December 31,
2009, this option was outstanding and is included in the table above.
During 2010, as an
inducement to his joining the Company, the Company granted its 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 September 30, 2010, these options were outstanding and are included in
the table above.
30
Table of Contents
Note N. Warrants
A summary of the status of the Company s warrants
as of the nine months ended September 30, 2010 and October 3, 2009
and the changes for these periods are presented below. The actual shares of common stock issued from
warrants exercised in 2010 and 2009 is less than the table presented below due
to cashless exercises of warrants in 2010 and 2009. The actual number of shares of common stock
issued from warrant exercises for 2010 and 2009 was 6,983,155 and 35,821,
respectively. The Company received
proceeds of $3.2 million related to the 2010 exercises and did not receive any
proceeds related to the 2009 exercises, as the warrants exercised in 2009 were
all exercised via a cashless exercise.
|
|
Nine Months Ended
September 30,
2010
|
|
Nine Months Ended October 3,
2009
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
|
Outstanding at beginning of period
|
|
24,841,165
|
|
$
|
1.48
|
|
25,350,932
|
|
$
|
1.49
|
|
Granted (1)(2)
|
|
1,408,579
|
|
1.99
|
|
397,911
|
|
1.79
|
|
Exercised (3)
|
|
(9,831,852
|
)
|
1.38
|
|
(151,515
|
)
|
1.39
|
|
Outstanding at end of period
|
|
16,417,892
|
|
$
|
1.42
|
|
25,597,328
|
|
$
|
1.39
|
|
(1)
As described
above in Note l, the Company issued warrants to purchase 816,863 shares of
common stock during 2010 at $1.66 per share to the Investors as a result of
warrant exercises during the nine months ended September 30, 2010. During the nine months ended October 3,
2010 the Company issued warrants to purchase 17,911 shares of common stock at
$1.66 per share. These warrants are immediately exercisable upon their issuance
and have a 7 year life.
(2)
In connection
with the Company s subordinated debt financing, see Note I - Commitments and
Contingencies
Notes Payable
for more information,
warrants to purchase 591,716 shares of common stock were issued to the lender
in 2010. These warrants were immediately
exercisable and expire on June 18, 2015.
(3)
During the nine
months ended September 30, 2010, warrants to purchase 8,098,127 shares of
common stock were exercised via a cashless exercise resulting in the issuance
of 5,317,831 shares of common stock.
During the nine months ended October 3, 2009, warrants to purchase
151,515 shares of common stock were exercised via a cashless exercise resulting
in the issuance of 35,821 shares of common stock.
Note O. 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:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
Sept. 30,
2010
|
|
Oct. 3,
2009
|
|
Sept. 30,
2010
|
|
Oct. 3,
2009
|
|
Revenue
by geographic region based on location of customer (1):
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
22,024,172
|
|
$
|
9,459,745
|
|
$
|
41,971,093
|
|
$
|
27,407,026
|
|
China
|
|
4,421,741
|
|
|
|
8,076,062
|
|
|
|
Czech
Republic
|
|
19,189,294
|
|
49,860
|
|
30,595,894
|
|
2,895,511
|
|
Canada
|
|
8,750,445
|
|
|
|
11,891,347
|
|
7,310
|
|
France
|
|
2,878,950
|
|
|
|
2,878,950
|
|
|
|
Germany
|
|
162,434
|
|
|
|
2,187,579
|
|
|
|
Belgium
|
|
72,823
|
|
531,336
|
|
1,781,647
|
|
531,336
|
|
Greece
|
|
369,174
|
|
|
|
806,969
|
|
|
|
Rest
of World
|
|
512,788
|
|
|
|
552,232
|
|
207,226
|
|
Total
Revenue
|
|
$
|
58,381,821
|
|
$
|
10,040,941
|
|
$
|
100,741,773
|
|
$
|
31,048,409
|
|
(1)
Does not include revenue
from discontinued operations for all periods presented.
31
Table of Contents
|
|
September 30,
2010
|
|
December 31,
2009
|
|
Long-lived
assets by geographic region based on location of operations (2):
|
|
|
|
|
|
United
States
|
|
$
|
3,170,320
|
|
$
|
2,517,288
|
|
Canada
|
|
1,786,158
|
|
2,116,638
|
|
Total
long-lived assets
|
|
$
|
4,956,478
|
|
$
|
4,633,926
|
|
(2) Does
not include assets from discontinued operations for all periods presented.
Note P.
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 September 30,
2010 approximately $0.2 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 was 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 was paid
in twenty six equal bi-weekly installments beginning after March 1, 2009.
The following is a summary of the Companys accrued
restructuring activity for the following periods:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
2010
|
|
October 3,
2009
|
|
September 30,
2010
|
|
October 3,
2009
|
|
Balance
at beginning of period
|
|
$
|
375,023
|
|
$
|
292,318
|
|
$
|
38,034
|
|
$
|
602,782
|
|
Provision
|
|
|
|
211,267
|
|
783,701
|
|
211,267
|
|
Usage
|
|
(167,894
|
)
|
(287,102
|
)
|
(614,606
|
)
|
(597,566
|
)
|
Balance
at end of period
|
|
$
|
207,129
|
|
$
|
216,483
|
|
$
|
207,129
|
|
$
|
216,483
|
|
Note Q. 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.
32
Table of Contents
Note R.
Subsequent Events
The Company has evaluated all events or transactions through the date
of this filing. During this period, the Company did not have any material
subsequent events that impacted its consolidated financial statements except as
follows:
In October 2010, the holders
of the remaining 75 shares of Series B Preferred Stock converted their
shares, valued at $375,000, into 251,677 shares of common stock. See Note K for more information related to
the Series B Preferred Stock.
On October 27, 2010,
the Company completed a public offering of its common stock. The Company issued 10,350,000 shares of
common stock and received net proceeds, after deducting underwriter commissions
and discounts and other offering expenses, of approximately $37.5 million. Concurrently with the consummation of the
public offering, the holders of all of the outstanding shares of Series C
Preferred Stock converted their shares of Series C Preferred Stock and
accumulated dividend into 27,526,344 shares of common stock. To induce the Series C Preferred Stock
holders to convert their shares, the Company paid them an aggregate $1.25 million
in cash upon conversion.
After the conversion of the Series B
Preferred Stock and the Series C Preferred Stock, the sale of common stock
in the public offering and the exercise of employee stock options and warrants
subsequent to September 30, 2010, there were 116,772,927 shares of common
stock outstanding, as of October 27, 2010.
I
tem 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
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.
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. All statements,
other than statements of historical facts, included or incorporated in this
report regarding our strategy, future operations, financial position, future
revenues, projected costs, prospects, plans and objectives of management are
forward-looking statements. The words anticipates, believes, estimates, expects,
intends, may, plans, projects, will, would and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. Examples of
forward-looking statements include statements concerning our expected financial
results; the competitive nature of the markets in which we compete; the demand
for our products; our ability to introduce new products and technologies; our
ability to effectively manage growth; and our ability to obtain sufficient
capital to expand our business. We cannot guarantee that we actually will
achieve the plans, intentions or expectations disclosed in our forward-looking
statements and you should not place undue reliance on our forward-looking
statements. There are a number of important factors that could cause our actual
results to differ materially from those indicated by these forward-looking
statements. These important factors include the factors set forth in Part I, Item
1A of our Annual Report on Form 10-K for the year ended December 31,
2009 and in Part II, Item 1A of our Quarterly Reports, including this
Quarterly Report, which identify certain risks and uncertainties that may have
an impact on our future earnings and the direction of our Company.
These risks include, among
others, the following: our history of operating losses;; our ability to
maintain compliance with Nasdaq Marketplace Rules for continued listing on
Nasdaq; the demand for our products; the availability of third-party financing
arrangements for our customers; our ability to maintain our technological
expertise in design and manufacturing processes; our ability to protect our
intellectual property; our ability to attract and retain highly qualified
personnel; our success against our competitors; our dependence on third-party
suppliers; our exposure to losses from fixed price engineering contracts; our
ability to manage our growth; product liability claims; environmental laws and
regulations; demand for alternative energy solutions; the risks associated with
international operations; the credit risks associated with some of our
customers; our ability to meet our debt obligations; and the availability of
sufficient funds for our corporate needs.
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.
33
Table of Contents
Overview
We
are a leading clean energy technology provider of utility-grade power
conversion solutions, primarily for the large-scale commercial and
utility-scale solar photovoltaic (PV) markets. For more than 10 years, we have designed and
delivered advanced power conversion products that enable large-scale producers
of renewable energy to convert the clean energy they produce into
grid-connected efficient and reliable power.
Our
power conversion solutions boost total system power production and increase the
profitability of PV power plants through system intelligence, advanced command
and control capabilities, industrial-grade engineering, and total lifecycle
performance optimization. Our power
conversion solution portfolio offers the widest range of power ratings (from 30
kilowatts (kW) to one megawatt (MW)) in the solar industry. We believe our PowerGate Plus® is the worlds
most widely deployed large-scale, utility-ready solution, with hundreds of
millions of grid connected kW hours delivered to date, and forms the foundation
of our other power conversion solutions.
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:
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. 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
of product revenue includes material, labor and overhead.
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.
34
Table of Contents
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.
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 exercise prices of such instruments are fixed at $1.815
per share, 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
35
Table of Contents
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.
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.
In October 2010, the
holders of the remaining 75 shares of Series B Preferred Stock converted
their shares into common stock, resulting in the issuance of 251,677 shares of
common stock.
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 used 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 have been $30.0
million, 120% of its face value and accrued dividends.
On October 27, 2010,
the holders of all of the outstanding shares of Series C Preferred Stock
converted their shares and accumulated dividends into common stock, resulting
in the issuance of 27,526,344 shares of common stock. To induce the Series C Preferred Stock
holders to convert their shares, we paid the holders an aggregate $1.25 million
in cash upon conversion.
Recent
Accounting Pronouncements
See Note Q of our Notes to
Consolidated Financial Statements for information regarding recently issued
accounting pronouncements.
36
Table of Contents
Results of
Operations
Three Months Ended September 30,
2010 (2010) Compared to Three Months Ended October 3, 2009 (2009)
Revenue.
Total revenue for the 2010 increased
approximately $48.4 million, or 484%, from $10.0 million in the 2009 to $58.4
million in the 2010.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
October 3,
|
|
|
|
|
|
(Amounts in Millions)
|
|
2010
|
|
2009
|
|
Change $
|
|
% Change
|
|
Product Revenue
|
|
|
|
|
|
|
|
|
|
Alternative
Energy Products
|
|
$
|
58.4
|
|
$
|
9.9
|
|
$
|
48.5
|
|
490
|
%
|
Other
Legacy
|
|
|
|
0.1
|
|
(0.1
|
)
|
(100
|
)%
|
Total
Revenue
|
|
$
|
58.4
|
|
$
|
10.0
|
|
$
|
48.4
|
|
484
|
%
|
Alternative
Energy Product revenue increased by approximately $48.5 million, or 490%,
from approximately $9.9 million in the 2009
to approximately $58.4 million in the 2010 due to the continued adoption of our
photovoltaic power conversion solutions and our continued growth in Europe and
China. The increase in Alternative Energy Products was offset by a decrease in
revenue of $0.1 million related to legacy product revenue recognized in the
2009 and classified as Other Legacy
product revenue.
Gross
Margin.
Gross margin increased from (4.2) % in 2009 to 26.9%
in 2010. The increase in gross margin
over the period of a year ago continues to be due to our material cost reduction
programs, the results of our restructuring efforts over the past year, the
successful transfer of a significant portion of our manufacturing to our
contract manufacturer and to a lesser extent increases in our labor efficiency.
Research and development expenses.
We expended approximately $4.3 million on
research and development in 2010 compared with $2.2 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 $5.1 million, or 110%, from $4.6 million in
2009 to $9.7 million in 2010.
Approximately $0.2 million of the increase is directly attributable to
compensation costs related to the issuance of stock options to our employees
and directors. Approximately $1.2
million of the increase was associated with increased corporate costs and
approximately $4.0 million of the increase was due to the higher sales and
marketing costs directly related to international business development,
increased commission expense and sales expansion in Europe and Asia, company
re-branding and our continued outbound marketing efforts, offset by a decrease
in reserves related to potentially uncollectible accounts of $0.3 million in
2010 compared to 2009.
Change
in fair value of warrant liabilities
. The change in fair value of the warrants for
2010 was a charge of approximately $1.3 million. This charge related to the
change in valuation of our Warrant As, Warrant Cs and placement agent warrants
in 2010. The change in fair value of the
warrants for 2009 was a charge of approximately $0.3 million.
Other income (expense).
Other income was approximately $0.3 million
for 2010 compared to other expense of approximately $0.4 million for 2009. Other income for 2010 consists primarily of
$0.4 million of foreign currency translation gains. Other income for 2009 consists primarily of
approximately $0.4 million of foreign currency translation gains.
Interest expense.
Interest expense increased in 2010 to $0.6
million as compared to $39,000 for 2009.
Interest expense for 2010 includes approximately $0.5 million related to
our subordinated debt and $0.1million related to our line of credit. Interest expense for 2009 includes
approximately $8,000 of non-cash dividends on our Series B Preferred
Stock, which we had elected to pay in shares of our common stock and$31,000 in
interest related our line of credit during the period.
Income (loss) from discontinued operations
. Income from discontinued operations
was $0 for the three months ended September 30, 2010 compared to a loss of
approximately $135,000 for the three months ended October 3, 2009. The income (loss) from
37
Table of Contents
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.
Deferred Revenue
. Deferred revenue was approximately $15.2
million at September 30, 2010 as compared to $6.0 million at December 31,
2009, an increase of approximately $9.2 million. We record deferred revenue (i) when a
customer is invoiced or 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 $6.3 million related to
pre-payments on orders currently being manufactured and $8.9 million on
deferred revenue related to extended warranties sold to customers that
purchased our products.
Nine Months Ended September 30, 2010 (2010)
Compared to Nine Months Ended October 3, 2009 (2009)
Revenue.
Total revenue for the 2010 was $100.7 million, an increase of
approximately $69.7 million, or 225%, from $31.0 million in the 2009.
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
September 30,
|
|
October 3,
|
|
|
|
|
|
(Amounts in Millions)
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
|
Product
Revenue
|
|
|
|
|
|
|
|
|
|
Alternative
Energy Products
|
|
$
|
100.6
|
|
$
|
26.4
|
|
74.2
|
|
281
|
%
|
Other
Legacy
|
|
0.1
|
|
4.6
|
|
(4.5
|
)
|
-98
|
%
|
Total
Product Revenue
|
|
$
|
100.7
|
|
$
|
31.0
|
|
$
|
69.7
|
|
225
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative
Energy Product revenue increased by $74.2 million, or 281%, from $26.4 million
in the 2009 to $100.6 million in the
2010 . The increase is due to the
continued acceptance of our photovoltaic power conversion solutions
domestically and overseas. The decrease in other legacy product revenue was due
to the recognition of approximately $4.6 million related to the sale of
frequency converters, classified as Other Legacy product revenue, in the 2009
, for which the recognition of revenue had been deferred until the product was
accepted by the customer, which was obtained during the 2009 .
Gross
Margin.
Gross margin increased from 1.2% in 2009 to 23.3% in
2010. The increase in gross margin over
the of a year ago is due to our continued material cost reduction programs, the
results of our restructuring efforts over the past year, the successful
transfer of a significant portion of our manufacturing to our contract
manufacturer and to a lesser extent increases in our labor efficiency. In addition, $4.2 million of deferred
frequency converter revenues recognized during 2009 had no gross margin as the
amount recognized as revenue equaled the related costs recognized for the .
Research and development expenses.
We expended approximately $9.8 million on research
and development in 2010 compared with $6.3 million spent in 2009. The increase in spending during 2010 was
driven by a planned increase in costs associated with 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 $10.2 million, or 76.0%,
from $13.4 million in 2009 to $23.5 million in 2010. Approximately $0.4 million of the increase is
directly attributable to compensation costs related to the issuance of stock
options to our employees and directors. Approximately $3.3 million of the
increase was related to higher legal and general corporate costs in 2010 as
compared to 2009. In addition,
approximately $6.5 million of the increase was due to the higher sales and
marketing costs directly related to international business development, sales
commissions and sales expansion in Europe and Asia, company re-branding and our
increased outbound marketing efforts and increased provisions for potentially
uncollectible accounts in 2010 compared to 2009.
Change
in fair value of warrant liabilities
. The change in fair value of the warrants for
2010 was a charge of approximately $1.0 million. The change in fair value of the warrants for
2009 was a charge of approximately $3.9 million. Of the 2009 $3.9 million
charge, approximately $0.5 million of the related to the change in valuation of
our Warrant As and Warrant Cs and the remaining
38
Table of Contents
$3.2 million charge related
to our 2007 Financing Warrants and their change in fair value which 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 income was approximately $21,000 for
2010 compared to other expense of approximately $0.2 million for 2009. Other expense for 2010 consisted primarily of
approximately $25,000 of foreign currency translation gains . Other expense for
2009 consists primarily of approximately $0.5 million related to the issuance
of warrants to purchase 380,000 shares of common stock to our Investors for
modifying the anti-dilution provisions of their existing warrants, offset by
$0.4million of foreign currency translation gains.
Interest expense.
Interest expense increased approximately $0.6
million in 2010 to approximately $0.9 million as compared to approximately $0.3
million in 2009. Interest expense for
2010 includes approximately $23,000 of non-cash dividends on our Series B
Preferred Stock, approximately $0.3 million related to our line of credit
during the period, approximately $0.6
million of interest and amortization
of the deferred financing costs related to our subordinated debt. Interest expense for 2009 includes
approximately $65,000 of non-cash dividends on our Series B Preferred
Stock, approximately $140,000 in interest related our line of credit during the
period, and approximately $55,000 of expense related to the reduction in
conversion price related to our Series B Preferred Stock.
Liquidity
and Capital Resources
As
of September 30, 2010, we had approximately $11.3 million of cash.
Based upon our current
working capital position, current operating plans and expected business
conditions, we believe that our current cash, as well as the availability
from our line of credit with Silicon Valley Bank will be adequate to fund our
operations through December 31, 2010. In addition, on October 27,
2010 we raised approximately $37.5 million, net of offering costs, by issuing
10,350,000 shares of our common stock in a public offering. Beyond 2010, we expect to fund our working
capital needs and our debt service on the subordinated debt 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 no
additional availablity under our line of credit as of September 30, 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 and our
subordinated debt. If any 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 credit
facility with Silicon Valley Bank and those restrictions contained within our
subordinated debt instrument. Such actions would likely require the consent of
Silicon Valley Bank and/or the lender of the subordinated debt, 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 September 30, 2010, we had an accumulated
deficit of approximately $243.7 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 September 30, 2010, our cash and cash equivalents were $11.3 million;
this represents a decrease in our cash and cash equivalents of approximately
$2.1 million from the $13.4 million on hand at December 31, 2009. Cash
used in operating activities for the nine months ended September 30, 2010
was $29.8 million as compared to $15.3 million for the nine months ended October 3,
2009. Cash used in operating activities during the nine months ended September 30,
2010 was primarily attributable to the net loss of approximately $12.0 million,
a general increase in working capital, offset by non-cash items such as the
change in the fair value of our
39
Table of Contents
warrants, depreciation and
amortization, deferred revenue, increases in allowances for uncollectible
accounts and excess and obsolete inventory, non-cash compensation and
consulting expense, and non-cash interest expense.
Cash
used in investing activities during the nine months ended September 30,
2010 was $1.4 million as compared to cash used in investing activities of $1.8
million for the nine months ended October 3, 2009. Cash used in investing activities for 2010
and 2009 was for capital expenditures.
Cash
provided by financing activities for the nine months ended September 30, 2010
was approximately $28.5 million as compared to cash provided by financing
activities of $22.9 million for the nine months ended October 3,
2009. Net cash provided by financing
activities during 2010 primarily related to the proceeds of our borrowings under
our subordinated loan of $11.8 million and our line of credit of $12.0
million, approximately $1.5 million from
the exercise of employee stock options and approximately $3.1 million related
to the exercise of warrants. Net cash
provided by financing activities during 2009 was a primarily the result of our
sale of common stock resulting in net proceeds of $21.5 million and proceeds
from a short term note payable of $1.3 million.
Cash
used in operating activities from discontinued operations was approximately
$62,000 for 2010 as compared to cash provided by discontinued operations of
approximately $537,000 for 2009. Cash
provided by investing activities from discontinued operations for 2010 was $0.7
million. Cash provided by investing
activities for 2010 was from net proceeds of the sale of the Applied Technology
division. There was no cash provided by investing activities for 2009.
Payments Due Under Contractual
Obligations
We
lease equipment and office space under non-cancelable capital and operating
leases. In addition, in June 2010
we entered into a $12 million subordinated debt agreement. The future minimum principal payments under
the subordinated debt agreement and the future minimum rental payments as of September 30,
2010 under the capital and operating leases with non-cancelable terms are
included in the table below:
Calendar Years Ending December 31,
|
|
Subordinated Debt
|
|
Operating Leases
|
|
|
|
|
|
|
|
2010
|
|
$
|
|
|
$
|
352,605
|
|
2011
|
|
2,541,720
|
|
1,132,575
|
|
2012
|
|
4,233,192
|
|
596,644
|
|
2013
|
|
4,797,531
|
|
422,265
|
|
2014
|
|
427,557
|
|
436,263
|
|
Thereafter
|
|
|
|
565,137
|
|
Total
|
|
$
|
12,000,000
|
|
$
|
3,505,489
|
|
40
Table of Contents
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. See Forward -Looking Statements above in Managements Discussion
and Analysis of Financial Condition and Results of Operations. 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 0.5% per
annum (as of September 30, 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
A majority 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 portion of our current costs
are incurred in foreign currencies, especially the Canadian Dollar. If the US
Dollar weakens versus these currencies, it may result in an increase in our
cost structure.
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 September 30, 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 third quarter of fiscal year 2010 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
41
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, except
for the following:
Following the conversion of the Series C
Preferred Stock, the former holders continue to have substantial voting power
on matters submitted to our stockholders and to be able to exert considerable
influence over the board level decision-making at our company
.
Following the conversion of
the Series C Preferred Stock on October 27, 2010, and after giving
effect to the issuance of 10,350,000 shares of common stock in a public
offering on such date, the former holders of the Series C Preferred Stock
hold approximately 24% of our outstanding common stock. In addition, such
holders own warrants to acquire approximately 13 million shares of our common
stock. Because these holders continue to own a significant percentage of our
voting power, they have considerable influence in determining the outcome of
any corporate transaction or other matter submitted to our stockholders for
approval, including the election of directors and approval of merger,
consolidations and the sale of all or substantially all of our assets. In
addition, these holders continue to be entitled to designate members of our
board of directors and designees to serve on our board committees, enabling
them to exert considerable influence over the board level decision-making at
our company.
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.
42
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: November 8,
2010
|
By:
|
/s/ DONALD R. PECK
|
|
|
Donald
R. Peck
Chief Financial Officer and Treasurer
|
43
Table of Contents
EXHIBIT INDEX
Exhibit
Number
|
|
Exhibit
|
|
|
|
10.1
|
|
Eighth Loan Modification
Agreement, dated as of August 3, 2010, between Silicon Valley Bank and
the Registrant, Satcon Power Systems, Inc., Satcon
Electronics, Inc., and Satcon Power Systems Canada Ltd.
|
31.1
|
|
Certification by Principal
Executive 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.
|
44
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