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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2007
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)
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04-2857552
(I.R.S. Employer Identification No.)
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27 Drydock Avenue, Boston, Massachusetts
(Address of principal executive offices)
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02210
(Zip Code)
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(617) 897-2400
(Registrant's telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of Class
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Name of Exchange on Which Registered
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Common Stock, $.01 Par Value
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The NASDAQ Stock Market, LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
o
No
ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
ý
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
ý
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
ý
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 the definitions of "large accelerated filer, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
ý
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
o
No
ý
The aggregate market value of the registrant's Common Stock, $.01 par value per share, held by non-affiliates of the registrant was $49,744,328 based
on the last reported sale price of the registrant's Common Stock on the Nasdaq Capital Market as of the close of business on the last business day of the registrant's most recently completed second
quarter ($1.22). There were 49,961,606 shares of Common Stock outstanding as of March 1, 2008.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's Proxy Statement for its 2008 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K.
SatCon Technology Corporation
TABLE OF CONTENTS
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PAGE
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Part I
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Item 1.
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Business
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3
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Item 1A.
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Risk Factors
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15
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Item 1B.
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Unresolved Staff Comments
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26
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Item 2.
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Properties
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27
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Item 3.
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Legal Proceedings
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27
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Item 4.
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Submission of Matters to a Vote of Security Holders
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27
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Part II
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Item 5.
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Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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28
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Item 6.
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Selected Consolidated Financial Data
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30
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Item 7.
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Management's Discussion and Analysis of Financial Condition and Results of Operation
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32
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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45
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Item 8.
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Consolidated Financial Statements and Supplementary Data
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46
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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106
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Item 9A (T).
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Controls and Procedures
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106
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Item 9B.
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Other Information
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107
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Part III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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108
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Item 11.
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Executive Compensation
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108
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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108
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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108
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Item 14.
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Principal Accounting Fees and Services
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108
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Part IV
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Item 15.
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Exhibits, Financial Statement Schedules
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109
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Signatures
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110
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2
PART I
This Annual Report on Form 10-K contains or incorporates forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934. You can identify these forward-looking statements by our use of the words "believes," "anticipates," "plans," "expects," "may,"
"will," "intends," "estimates," and similar expressions, whether in the negative or in the affirmative. The forward-looking statements contained in this Annual Report are generally located in the
material set forth under the headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," but may be found in other
locations as well. Although we believe that these forward-looking statements reasonably reflect our plans, intentions and expectations disclosed in the forward-looking statements, our actual results
could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements under the
heading "Risk Factors" under Item 1A that we believe could cause our actual results to differ materially from the forward-looking statements that we make. Forward-looking statements contained
in this Annual 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.
Item 1. BUSINESS
Overview
SatCon Technology Corporation designs and manufactures enabling technologies and products for electrical power conversion and control for
high-performance, high-efficiency applications in large, growth markets such as alternative energy, hybrid electric vehicles, distributed power generation, power quality,
semiconductor fabrication capital equipment, industrial motors and drives, and high reliability defense electronics.
Recent Developments
On October 19, 2007, we entered into an Offer to Sell Notes with all of the holders of our then outstanding senior secured convertible notes (the
"Convertible Notes"). Under the terms of the offer, at anytime prior to November 9, 2007, we had the right to purchase the Convertible Notes for an amount equal to 120% of the aggregate
outstanding principal amount of the Convertible Notes plus accrued and unpaid interest thereon. In exchange for the holders' agreement to keep the offer open until November 9, 2007, we issued
an aggregate of 749,999 shares of our common stock to the holders. We recorded a charge to operations of approximately $0.9 million in the fourth quarter ended December 31, 2007 related
to such issuance.
On
October 19, 2007, we entered into a Note Purchase Agreement with Rockport Capital Partners II, L.P. and NGP Energy Technology Partners, L.P. (the "Investors") to
lend us up to $10.0 million to provide funds to repurchase the Convertible Notes, among other things. Pursuant to the Note Purchase Agreement, on November 7, 2007, the Investors
purchased from us promissory notes (the "New Notes") in an aggregate principal amount of $10.0 million. The New Notes bore interest at 17% per annum. All unpaid principal, together with accrued
but unpaid interest, was due and payable in full on February 19, 2008, unless prepaid earlier. The New Notes were paid off in full on December 20, 2007.
On
November 7, 2007, we used approximately $8.5 million of the proceeds from the sale of the New Notes to retire the Convertible Notes, which represented 120% of the then
outstanding amount due under the Convertible Notes. We recorded a charge to operations in the fourth quarter ended December 31, 2007 of approximately $1.4 million, which represents the
20% prepayment penalty under the Convertible Notes. Upon the retirement of the Convertible Notes, the New Notes became
3
immediately
secured by all of our assets, including our ownership interest in the capital stock of our subsidiaries.
On
November 8, 2007, we entered into a Stock and Warrant Purchase agreement with the Investors. Under this purchase agreement, the Investors agreed to purchase in a private
placement up to 25,000 shares of our newly created Series C convertible preferred stock (the "Series C Preferred Stock") and warrants to purchase up to 19,711,539 shares of common stock,
for an aggregate gross purchase price of $25.0 million. Each share of Series C Preferred Stock initially converts into common stock at a price equal to $1.04 per share, subject to
adjustment.
This
private placement occurred in two closings. The first closing occurred on November 8, 2007. At the first closing, we issued 10,000 shares of Series C Preferred Stock
at $1,000 per share for an aggregate gross purchase price of $10 million. These shares are currently convertible into 9,615,384 shares of
common stock. We also issued warrants to purchase an aggregate of 15,262,072 shares of common stock. These warrants had an initial exercise price of $1.44 per share and may not be exercised until
May 8, 2008. As a result of stockholder approval of the second closing and related matters on December 20, 2007, as described below, the exercise price of these warrants was reduced to
$1.25 per share.
At
the second closing, which occurred on December 20, 2007 following stockholder approval, we 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 short-term notes previously issued to the Investors on November 7, 2007.
These shares are currently convertible into 14,423,077 shares of common stock. At this closing, we also issued warrants to purchase an aggregate of 4,449,467 shares of common stock at an exercise
price of $1.25 per share. These warrants are exercisable immediately.
In
the purchase agreement, we 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, we 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 $1.25 per share. As of February 28, 2008, if all of these existing warrants are
exercised, we would need to issue warrants to purchase an additional 3,455,258 shares of common stock to the Investors.
As
a result of our sale of Series C Preferred Stock and warrants, the holders of our Warrant As and Warrant Cs had a limited period of time (45 days after each issuance),
at their election, to require us to redeem those warrants based on a Black-Scholes option pricing model on the date of notification. During the fourth quarter of fiscal 2007, we paid approximately
$2.1 million to redeem Warrant As representing 1,242,426 shares of Common Stock and Warrant Cs representing 621,215 shares of Common Stock. During the first quarter of fiscal 2008, we paid
approximately $0.6 million to redeem Warrant As representing 303,031 shares of Common Stock and Warrant Cs representing 151,516 shares of Common Stock. Following these redemptions, as of
February 28, 2008, Warrant As representing 2,090,911 shares of Common Stock and Warrant Cs representing 1,045,456 shares of Common Stock remain outstanding. The redemption periods under the
Warrant As and Warrant Cs associated with our sale of Series C Preferred Stock and related warrants have expired.
On
February 26, 2008, we entered into a New Loan and Security Agreement (the "New Loan Agreement") with Silicon Valley Bank (the "Bank"). Under the terms of the New Loan
Agreement, the Bank agreed to provide us with a credit line up to $10.0 million. The New Loan Agreement are secured by most of our assets and advances under the New Loan Agreement are limited
to 80% of eligible receivables and the lesser of 25% of the value of our eligible inventory, as defined, or $1.0 million. Interest on outstanding borrowings accrues at a rate per annum equal to
the Prime Rate plus the Prime Rate Margin, as defined, or the LIBOR Rate plus the LIBOR Rate Margin, as defined. In addition we agreed to pay to the Bank a collateral monitoring fee of $750 per month
and agreed to
4
the
following additional terms: (i) $50,000 commitment fee, $25,000 to be paid at signing of the New Loan Agreement and $25,000 to be paid on the one year anniversary of the New 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 we
terminates the New Loan Agreement prior to 12 months from the New Loan Agreement's effective date. The New Loan Agreement, if not sooner terminated in accordance with its terms, expires on
February 25, 2010.
Our History, Beginning in R & D and Transitioning to a Product Based Corporation
From inception in 1985, through the early 1990s, we were primarily funded through research and development contracts with the U.S. government. These contracts
were directed at developing new technologies in motion control, control software and electronics. Through this work, we built an engineering base in magnetics, motor and motor drive technology,
digital signal processing and high-speed electronics. In the 1990s, we expanded that base through commercially funded research and development to include design and packaging of
high-power electronics, high reliability electronic components and advanced materials. These engineering skills form the technical basis of our business. Since the mid 1990s, through a
combination of internal product development and targeted acquisitions, we have leveraged our core technical capabilities into product manufacturing. Our products include: commercial high power
conversion and control systems for alternative energy applications, a variety of advanced power control systems for hybrid electric vehicles, commercial motors including motors for hybrid electric
vehicles, uninterruptible power supplies and ride-through devices for applications requiring high quality sustainable power, specialty magnetically levitated products and microelectronics
primarily used in high reliability applications.
Building Our Capability Through Acquisitions
In January 1997, we acquired our MagMotor division, a manufacturer of custom and standard electric motors. In April 1997, we acquired Film
Microelectronics, Inc., a manufacturer of thin film substrates and custom hybrid microelectronics. In January 1999, we acquired Inductive Components, Inc., a value-added supplier of
customized electric motors. In April 1999 we acquired HyComp, Inc., a manufacturer of hybrid microelectronics, followed in October 1999 by Ling Electronics, Inc., a manufacturer of
shaker vibration test and measurement systems, power converters, amplifiers and controllers (although we sold
our shaker and amplifier product lines in 2005). In November 1999, we acquired intellectual property, tooling, engineers and technicians and other assets from Northrop Grumman Corporation applicable
to power electronics and hybrid electric vehicles. In July 2001, we acquired most of the assets of Inverpower Controls, Ltd., a manufacturer of power electronics and high-speed
digital controls for use in industrial power and power quality systems. The acquisition included Inverpower's UL and CE certification capability. In September 2002, we acquired the machinery,
inventory, backlog and intellectual property of Sipex Corporation's hybrid assembly operations that supply product to the defense and aerospace industry. These acquisitions have provided us with
increased revenues, a manufacturing capability to transition our technology into commercial products, and an expanded customer base.
In
fiscal year 2007 we continued our focus on power distribution and alternative energy as high growth potential markets for SatCon's products.
Alternative Energy
We believe that the fastest growth area for SatCon involves alternative energy and distributed power generation. We sell solar (photo-voltaic) power installations
and high power inverters for stationary fuel cell power plants. In almost all cases the electricity produced by alternative energy technology requires an inverter to transform the power produced into
usable AC electrical power compatible with typical household and commercial appliances. In this fast emerging market in 2007 we
5
continued
to improve our products, enhance our product offerings for wind power generation and technology for connecting to the existing utility grid connection and increase our business development
activities.
Hybrid Electric Vehicles
SatCon has had extensive experience since the mid 1990s in advanced technology applicable to hybrid electric vehicles, or HEVs, and holds significant intellectual
property in this area. In fiscal 2006 and continuing in 2007, we generated motor and DC-DC converter sales in a segment of the HEV market associated with fleets of delivery vans. The HEV
market is developing rapidly and SatCon has technology and manufacturing and outsourcing capability to expand sales into very high annual volume levels of motors, controllers and converters. In
addition, SatCon continues to develop new HEV electrical and electronic technology that will be suitable for a variety of future vehicle types. HEV motors and electronics are a principal focus for our
future plans.
Other Products and Markets
In addition, we have seen increased revenue from our new high reliability microelectronic products for space and avionics applications. We participated in several
defense related development programs through our Small Business Innovative Research ("SBIRs") projects, our Cooperative Agreement with the Army Research Laboratory and as a sub-contractor
to prime contractors such as General Dynamics and the Electric Boat Corporation.
Our
products are described in more detail under the "Products by Business Segment."
Revenue Comparison with Prior Years
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Year Ended December 31,
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2007
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2006
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United States
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$
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47,000,868
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$
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30,475,297
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International
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9,570,315
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3,281,372
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Total
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$
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56,571,183
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$
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33,756,669
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Reports
Our web site is
www.satcon.com.
We make available on this site our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with the SEC. These reports may be accessed through our website's
http://investor.satcon.com/sec.cfm
Industry Background
Global trends are developing which have the effect of accelerating the demand for power electronics and innovative motor technology, including:
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Growing
demand for alternative energy sources such as fuel cells, solar photo-voltaic and wind-turbines as the cost, environmental impact and security
implications of dependence on fossil fuel gain recognition. This demand is also significantly impacted by the burgeoning energy needs of rapidly growing Asian economies,
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Growing
demand for high-quality, high-reliability power, as more critical and sensitive electronics are interconnected,
6
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Increased
concerns regarding the capacity and reliability of the electric utility grid,
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Increasing
per capita demand for electricity, driven by the increase in computers and electronics technology coupled with population growth,
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Increased
use of electrical systems versus mechanical systems,
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Growing
concerns for the inefficiency and adverse environmental impact of conventional automotive power technology leading to high interest in hybrid electric vehicles
(HEVs).
These
trends and concerns have led individuals, businesses and governments to seek more reliable, efficient, cleaner and cost-effective solutions for their power needs. This
demand creates a growing market for alternative energy and power management systems. All of these systems require power control products to manage electricity. In order to be commercially viable and
operate effectively, these power products must be highly reliable, efficient, low-cost and compact. Many of these products must be customized to meet the evolving needs in the marketplace.
We apply SatCon's technical expertise to meet these needs for power control products in emerging global markets for alternative energy, energy storage and power quality systems, distributed power
systems, hybrid electric vehicles and high-reliability defense systems.
SatCon Product Attributes
We strive to meet our customers' needs by providing power control products and systems that encompass the following key attributes:
Performance.
Our products use proprietary designs to ensure that high-quality power is efficiently produced in
all operating conditions.
Reliability.
We design and manufacture high-reliability, long-life electronics for applications such
as aircraft navigation systems and satellite uplink electronics. We design, manufacture and test our electronics to last at least fifteen years. We design our products to support the
long-life, always-on requirements of the power quality markets.
Efficiency.
We design and manufacture our products to meet the efficiency needs of our customers as defined by their
specifications and the end use of the product. The overall efficiency of an alternative energy system, or its ability to deliver power with minimum energy loss, is vital to its effective
commercialization and depends on the efficiency of all of its component parts. For example, in the specific case of the market for solar photo-voltaic inverters in California, the California Energy
Commission requires that rebate-eligible products be tested by a nationally recognized test laboratory in accordance with an Underwriter's Laboratory protocol to objectively measure the product's
efficiency. The twelve different models of power control units we currently sell in California have been tested, as required, with the result that we deliver the highest efficiency units in the
market.
Quality.
We maintain high quality standards. For example, we are a certified manufacturer for hybrid microcircuits in
accordance with MIL-PRF-38534 for military microelectronics ("class H") and microelectronics for applications in space ("class K"), the highest levels of quality
and reliability reserved for these classes. Our Electronics business segment operates with Quality Management Systems and is certified as ISO 9001:2000 compliant. Our Applied Technology
business segment is also ISO 9001:2000 certified.
All
of the high power level inverters manufactured in our Power Systems business unit are Underwriter Laboratory listed as meeting their requirements for safety.
High Power Density.
We design our products to meet market demands for high power density. High power density, or the ability
to convert, condition and manage large amounts of energy within a
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compact
design, is required for cost reduction and is critical in applications such as vehicles, aboard ships and especially in aircraft and spacecraft where weight and space requirements are
stringent.
Flexibility.
We develop and manufacture our products for use in various alternative energy and power quality systems such as
fuel cells, photo-voltaics, wind turbines, micro-turbines and UPS systems. Our products are modular and scalable to meet a wide range of power requirements. Our engineers work closely with our
customers to address overall systems design issues and to ensure that our products meet their system specifications. A close working relationship between the customers' engineers and our engineers is
particularly important in the rapidly evolving alternative energy, power quality and hybrid electric vehicle industries.
Strategy
Leverage our diverse expertise and proprietary technologies.
Our strategy is to use our diverse expertise and proprietary
technologies in the fields of power electronics, motors and microelectronics to develop products with cross-market applications. Our success should be sustainable in the longer term because it depends
on fundamental knowledge of key power technology. We are not critically dependent on the technology of a specific application, the business of a single customer or the success of a single product. We
strive to create balance between breadth and focus.
Develop proprietary products.
We believe that we have a competitive advantage resulting from our proprietary technology in
the areas of power electronics, electro-magnetics, mechanical and thermal dynamics, system controls and microelectronics design. Our products are specifically applicable to the rapidly developing
alternative energy and hybrid-electric vehicle markets.
Establish our products as industry standards.
We are a major supplier of power control units, frequently called inverters, in
alternative energy applications. We are gaining ground in providing standard motors, controllers and converters for hybrid electric vehicles. We also produce standardized high reliability
microelectronic products into aerospace applications.
Develop or acquire new technology.
We believe that new products, manufacturing capabilities and technologies will enhance our
competitive position and growth opportunities. In 2007 we continued to build relationships and were funded through SBIRs to develop application technology for the introduction of silicon-carbide
semi-conductor material into systems. Silicon-carbide will enable much more power dense electronics, which are especially important in applications for vehicles, ships and aerospace.
Develop strategic alliances and relationships.
These alliances may take the form of marketing, sales, distribution or
manufacturing agreements. We also continue to develop and deepen the relationships we have for manufacturing or motor products in China.
Financial Results by Business Segment
Our financial results by business segments for the fiscal years ended December 31, 2007 and 2006 are presented in Note S to the Consolidated
Financial Statements included in this Annual Report on Form 10-K.
Products by Business Segment
Our products are sold through our four business segments: SatCon Power Systems US, Satcon Power Systems, Canada, SatCon Electronics and SatCon Applied Technology.
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SatCon Power Systems
SatCon Power Systems manufactures and sells inverters for alternative energy including Underwriter Laboratory ("UL") compliance testing along with
our high power line of power control systems StarSine amplifiers and power converters. We also make and sell Rotary UPS Systems for back-up power and power quality. Revenues
for the years ended December 31, 2007 and 2006 from our Power Systems business unit were as follows:
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Year Ended
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December 31,
2007
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December 31,
2006
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(Amounts in Millions)
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Product Revenue
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Alternative Energy Products
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$
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23.4
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$
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10.6
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Industrial Power
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5.4
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1.3
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Plasma
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0.3
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Frequency Converters
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1.9
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1.2
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Other
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2.0
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1.0
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Total Power Systems Canada
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$
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33.0
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$
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14.1
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Total Power Systems US
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$
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5.0
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$
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4.4
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Total Power Systems Product Revenue
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$
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38.0
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$
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18.5
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High Power Inverters.
We have developed modular inverters such as our Three Phase Utility Interactive Multi-Mode
Inverter for use in connection with large, commercial-sized, fuel cell alternative energy power systems such as stationary fuel cell power plants, photo-voltaic power plants, wind turbines or
microturbine distributed power generation systems that produce power ranging from 30 kilowatts to 10 megawatts. Our Powergate® inverters are designed to convert the DC power generated by
an alternative energy source, such as a fuel cell, into useable AC power. They also provide the interface with the electric utility grid, an energy storage device, like a battery or flywheel, and the
end user applications. These units use a technology that allows them to be combined and scaled to handle high-power requirements. We introduced this product during fiscal year 2002 and,
further, introduced inverters for photovoltaic applications in fiscal year 2003. Product offerings and orders for these kinds of units have grown quickly in 2006 and 2007.
Rotary UPS Systems.
Our Rotary Uninterruptible Power Supply (RUPS) systems are designed to provide both power quality and UPS
functions in power ranges from 250 kilowatts to 2.2 megawatts and beyond in single or multiple unit systems. For comparison, 2.2 megawatts would be enough power to supply 440 homes each using an
average of 5 kilowatts of power. Our Rotary UPS product combines a diesel generator, supplied by Cummins, Inc., SatCon's preferred supplier, a flywheel energy storage system, electronics and a
proprietary control system into an uninterruptible power supply. We believe that this system is an attractive alternative to lead-acid battery based UPS systems due to its seamless
transition during power outages, increased reliability, longer life and the ability to operate effectively in remote locations. The protection provided by these systems is critical to defense,
government and commercial entities that cannot be out of power even for a fraction of a second. We also combined several of the RUPS technical elements into a Rotary Ride Through Device concept in
which the customer already has an installed emergency generator set but requires the addition of our technology for power sustainability and high power quality. We shipped our third Rotary UPS System
in 2005 and our fourth unit in 2006. In 2007 we shipped 2 Rotary Ride Through Devices to one customer and expect to ship another 2 units in the first part of 2008.
9
Industrial Automation Motors.
We manufacture brush and brushless DC motors for the industrial automation market. These small,
high-efficiency motors are available with a variety of options including optical encoders, tachometers, brakes, custom cables and connectors. Our industrial automation motors are typically
used in semiconductor equipment manufacturing, medical device assembly and other automated assembly processes. This motor business underlies our entry into the hybrid electric vehicle motor market.
Machine Tool Motors.
We manufacture a line of precise positioning motors for use with machine tools such as computer
numerical controlled machines. These include machining centers, lathes and milling machines.
Hybrid Electric Vehicle Motors and Converters.
We manufacture and sell hybrid electric vehicle ("HEV') motors and converters
which continue to see modest revenue growth. We generated motor and DC-DC converter sales in a segment of the HEV market associated with fleets of delivery vans. We continue to develop new
HEV electrical and electronic technology that will be suitable for a variety of future vehicle types. HEV motors and electronics continue to be a principal focus for our future plans.
Magnetic Levitation Systems.
We manufacture magnetic levitation, or MagLev, systems that enable machinery to
rotate or move without contacting other machine parts. Our MagLev systems use electro-magnetic fields to lift mechanical components without any surface contact. Sensors within the system
determine the actual position of the levitated object and send signals to a high-speed digital controller, which commands electricity to activate the electro-magnets thereby making the
object move away from any surface it is about to contact. This is done at extremely high speeds in order to maintain the stability of the levitated object and can be accomplished with objects that
spin, such as motors, or objects that move in one direction, like pistons or push rods.
Other Power Products.
We also sell static transfer switches, static voltage regulators, frequency converters and AC arc
furnace line controllers from 5 kilowatts to 100 megawatts.
SatCon Electronics
SatCon Electronics designs and manufactures advanced electronic assemblies for the aerospace, defense, wireless and telecom industries including thin film
products and custom modules. Revenue for the years ended December 31, 2007 and 2006 from our Electronics business unit is as follows:
|
|
Year Ended
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
(Amounts in Millions)
|
Product Revenue
|
|
$
|
9.6
|
|
$
|
10.2
|
The
following are descriptions of some of our products within the Electronics business unit:
Hybrid Microcircuits.
We manufacture standard and custom hybrid microcircuits, which are a combination of several electronic
components imbedded in a miniature circuit assembly. Due to their size, versatility and high reliability, these hybrid microcircuits are used in a broad spectrum of applications. Using our
semi-automated manufacturing capability, we build and test modules, sub-assemblies and fully integrated electronic systems for both military and commercial customers that
require compact, high reliability systems.
10
Thin Film Substrates.
Thin film substrates are miniature circuit assemblies onto which small electronic components are
mounted, such as those used in hybrid microcircuits. Some of our thin film substrates are sold directly to customers and some are further integrated at SatCon Electronics into devices. Thin film
substrate and resistor products manufactured by SatCon Electronics are used for high-speed telecommunications applications, military modules and high-frequency wireless devices
in military and commercial markets.
Radio Frequency Products.
SatCon Electronics sells products into both military and commercial wireless communications
markets. Using our design, analysis and test capability, we build standard and custom amplifiers, switches and passive devices for secure communication systems, cell tower base stations,
point-to-point data transmission and wireless networks.
SatCon Applied Technology
Our Applied Technology business segment develops, designs and builds power conversion products, which include power electronics, high-efficiency
machines and control systems for a variety of defense and commercial applications. One of our objectives is to transition prototype development contracts into production programs. Revenue for the
years ended December 31, 2007 and 2006 from Applied Technology was as follows:
|
|
Year Ended
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
(Amounts in Millions)
|
Funded Research and Development and other revenue
|
|
$
|
9.0
|
|
$
|
5.0
|
We
pursue development programs in areas where we have technical expertise and where we believe there is significant long-term production potential for the developed
technology. Technical disciplines represented at our Applied Technology business unit include electromechanics, digital and analog electronics, power electronics and electronic packaging, thermal
management, motor dynamics, materials, software development, control technology and system integration. To date, SatCon Applied Technology has built products for use in distributed power generation,
energy storage and power quality, high performance electric machinery, transportation and defense systems, including components for military hybrid-electric vehicles, "all-electric" ships
and aircraft subsystems.
Significant Customers
There was one customer that was classified as significant customer (i.e., sales to any one customer exceeded 10% of our revenue or gross accounts
receivable exceeding 10% of our gross accounts receivable), accounting for approximately 12% of our 2007 revenue and 19% of our gross accounts receivable at December 31, 2007. There were no
customers that were classified as a significant customer for the year ended December 31, 2006. Approximately 22% and 40% of our revenue during the year ended December 31, 2007 and 2006,
respectively, was derived from government contracts and subcontracts with the U.S. government's prime contractors.
Research and Development
We believe that the continued and timely development of new products and enhancements to our existing products is necessary to maintain our competitive position.
We use technologies developed by our business units, together with information supplied by our distributors and customers, to design and
develop new products and product enhancements and to reduce the time-to-market for our products.
During
the years ended December 31, 2007 and 2006, we expended approximately $6.8 million and $4.0 million, respectively, on funded research and development and other
revenue activities funded by
11
commercial
customers and U.S. government agency sponsors. Under the agreements funded by the U.S. government, the government retains a royalty-free license to use the technology developed
for government purposes and we retain exclusive rights to the technology for commercial and industrial applications. The rights to technology developed under contracts funded by commercial customers
are negotiated on a case-by-case basis. We expended approximately $3.2 million and $2.0 million on internally-funded research and development during the years
ended December 31, 2007 and 2006, respectively.
Sales and Marketing
We sell our products and services both domestically and internationally through our direct sales force and through independent distributors and representatives.
Our direct sales staff manages our key customer accounts, provides customer support and identifies significant market opportunities in their respective markets.
Each
of our four divisions manages its own marketing organization and is responsible for developing sales and advertising literature, such as product announcements, catalogs, brochures
and magazine articles in trade and other publications. Publication of significant events or material information is handled through our corporate office.
We
maintain close contact with our customers' design and engineering staffs in order to provide the appropriate products for our customers' applications. We maintain this close working
relationship with our customers throughout the life of a product, and we believe that it has been a key part of our customers' satisfaction.
We
compete for and market our research and development contracts through several methods, including pursuing new and existing customer relationships in the commercial and government
sectors and responding to unsolicited requests for proposals and through our Internet site.
Backlog
Our backlog consists primarily of product development contracts, orders for power control systems, electronics and motion control products. At December 31,
2007, our backlog was approximately $46.0 million. Of this amount, approximately $42.3 million is scheduled to be shipped during 2008. Many of our contracts and sales orders may be
canceled at any time with limited or no penalty. In addition, contract awards may be subject to funding approval from the U.S. government and commercial entities, which involves political, budgetary
and other considerations over which we have no control.
Competition
We believe that competitive performance in the marketplace for power control products depends upon several factors, including product price, technical innovation,
product quality and reliability, range of products, customer service and technical support. We believe our technical innovation emphasizing product performance and reliability, supported by our
commitment to strong customer service and technical support, enables us to continue to compete successfully against the following competitors:
-
-
Manufacturers
of inverters for alternative energy such as Xantrex Technology, Inc., Asea Brown Boveri Ltd., Siemens Corporation and Alstom S.A.;
-
-
Manufacturers
of custom microcircuit such as Natal Engineering, Aeroflex Inc., MS Kennedy and Sensitron;
-
-
Manufacturers
of thin film substrates and resistors such as Vishnay and Ultrasource, Inc.;
-
-
Manufacturers
of power regulators such as International Rectifier, Sensitron and MS Kennedy;
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-
-
Manufacturers
of DC to DC converters such as International Rectifier, VPT, Interpoint and Modular Devices;
-
-
Manufacturers
of motors such as MCG Inc., Reliance Electric CO/DE and other regional and specialty motor manufacturers;
-
-
Manufacturers
of Uninterruptible Power Supplies such as Piller, Inc. and Hitech Power Protection bv.; and
-
-
Developers
of advanced power electronics and machines such as Moog, Semikron, DRS and Silicon Power.
Some
of our competitors have substantially greater financial resources than we do and could devote greater resources to the development, promotion, sale and support of their products and
may have more manufacturing expertise and capacity. In addition, some of our competitors have more extensive customer bases and broader customer relationships than we do.
Manufacturing Facilities
We manufacture our products at our facilities located in Marlborough, Massachusetts; West Boylston, Massachusetts; and Burlington, Ontario, Canada. We believe our
existing manufacturing capacity is sufficient to meet our current needs. However, as our business continues to grow we are looking to increase our manufacturing capabilities, specifically as it
relates to our Power Systems, Canada operations. We believe that most of the raw materials used in our products are readily available from a variety of vendors. Additionally, we design and develop our
products to use commodity parts in order to simplify the manufacturing process. We have a semi-automated production line in our Marlborough, Massachusetts' facility. We intend to add
additional production lines for our products in the future as demand dictates and our revenues enable. We have made and expect to continue to make technological improvements that reduce the costs to
manufacture our products.
Our
manufacturing facilities are subject to numerous environmental laws and regulations, particularly with respect to industrial waste and emissions. Compliance with these laws and
regulations has not had a material impact on our capital expenditures or competitive position.
Intellectual Property
Our success and competitiveness depend on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing on the
proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright law and contract restrictions to protect the proprietary aspects of our technologies. We seek to
limit disclosure of our intellectual property by requiring employees, consultants and any third parties with access to our proprietary information to execute confidentiality agreements and by
restricting access to that information.
As
of December 31, 2007, we held approximately 65 U.S. patents and had 6 patent applications pending with the U.S. Patent and Trademark Office. We have also obtained corresponding
patents in the rest of North America, Europe and Asia. In addition, we have a non-exclusive, royalty-free license for non-automotive applications for 38 other
patents that were issued to our employees and subsequently assigned to DaimlerChrysler. The expiration dates of our patents range from 2009 to 2021, with the majority expiring after 2015.
In
1997, we granted Beacon Power Corporation a perpetual, worldwide, royalty-free, exclusive right and license to our flywheel technology for stationary, terrestrial
applications. Beacon Power was formed as a spin-off of SatCon Technology Corporation.
Many
of the U.S. patents described above are the result of retaining ownership of inventions made under U.S. government-funded research and development programs. As a qualifying small
business, we
13
have
retained commercial ownership rights to proprietary technology developed under various U.S. government contracts and grants, including small business innovation research contracts. With respect
to any invention made with government assistance, the government has a nonexclusive, nontransferable, irrevocable, paid-up license to use the technology or have the technology employed for
or on behalf of the U.S. government throughout the world. Under certain conditions, the U.S. government also has "march-in rights." These rights enable the U.S. government to require us to
grant a nonexclusive, partially exclusive, or exclusive license in any field of use to responsible applicants, upon terms that are reasonable under the circumstances.
Foreign Operations
We have foreign operations through our Power Systems, Canada subsidiary in Burlington, Ontario, Canada.
Government Regulation
We presently are subject to various federal, state and local laws and regulations relating to, among other things, export control energy generation, safe working
conditions, handling and disposal of hazardous and potentially hazardous substances and emissions of pollutants into the atmosphere. To date, we believe that we have obtained all the necessary
government permits and have been in substantial compliance with all of these applicable laws and regulations.
Government Contracts
We act as a prime contractor or major subcontractor for many different U.S. government programs, including those that involve the development of
electro-mechanical transportation, navigation and energy-related products. Over its lifetime, a program may be implemented by the award of many individual contracts and subcontracts, or contracts with
option years, or partially funded contracts.
U.S.
government contracts include provisions permitting termination, in whole or in part, without prior notice, at the U.S. government's discretion. The U.S. government generally pays
compensation for work actually done and commitments made at the time of termination, and some allowance for profit on the work performed. The U.S. government may also terminate for default in
performance and pay only the value delivered to the U.S. government. It can also hold the contractor responsible for re-procurement costs.
Our
government contract business is also subject to specific procurement statutes and regulations and a variety of socio-economic and other factors. Failure to comply with these
regulations and requirements could lead to loss of contract or suspension or debarment from U.S. government contracting or subcontracting for a period of time. Examples of these statutes and
regulations are those related to procurement integrity, export control, employment practices, the accuracy of records and the recording of costs.
Sales
to the U.S. government may be affected by changes in research interests in the areas in which we engage, changing government department budgets, and changing procurement policies.
Employees
At December 31, 2007, we had a total of 246 full-time employees, 10 part-time employees and 77 contract employees. Of the total, 74
persons were employed in engineering, 198 in manufacturing, 47 in administration and 14 in sales and marketing. Our future success depends in large part on the continued service of our key technical
and senior management personnel, and on our ability to attract, retain and motivate qualified employees, particularly those highly skilled design, process and test engineers involved in the
manufacture of existing products and the development of new products and
14
processes.
The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on us. None of our employees are represented by a union. We believe that
our relations with our employees are good.
Item 1A. Risk Factors
Our future results remain difficult to predict and may be affected by a number of factors which could cause actual results to differ
materially from forward-looking statements contained in this Annual Report on Form 10-K and presented elsewhere by management from time to time. These factors include business
conditions within the distributed power, power quality, aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive
industries and the world economies as a whole. Our revenue growth is dependent, in part, on technology developments and contract research and development for both the government and commercial sectors
and no assurance can be given that we will continue to obtain such funds. In addition, our growth opportunities are dependent on our new products penetrating the distributed power, power quality,
aerospace, transportation, industrial, utility, telecommunications, silicon wafer manufacturing, factory automation, aircraft and automotive markets. No assurance can be given that new products can be
developed, or if developed, will be commercially viable; that competitors will not force prices to unacceptably low levels or take market share from us; or that we can achieve and maintain
profitability in these or any new markets. Because of these and other factors, including, without limitation, the factors set forth below, past financial performance should not be considered an
indicator of future performance. Investors should not use historical trends to anticipate future results and should be aware that the market price of our common stock experiences significant
volatility.
Risks Related to Our Company
We have a history of operating losses, may not be able to achieve profitability and may require additional capital in order to sustain our
businesses.
For
each of the past ten fiscal years, we have experienced losses from operating our businesses. As of December 31, 2007, we had an accumulated deficit of approximately
$176.8 million. During the year ended December 31, 2007 we had a loss from operations of approximately $11.0 million. In the fourth quarter of fiscal 2007, we raised
$25.0 million through the sale of short-term notes, Series C Preferred Stock and related warrants. The net proceeds of these transactions were approximately
$23.0 million, after deducting placement fees and other offering-related expenses. If, however, we are unable to operate on a cash flow breakeven basis in the future, we may need to raise
additional capital in order to sustain our operations. There can be no assurance that we will be able to achieve such results or to raise such funds if they are required.
We could issue additional common stock, which might dilute the book value of our common stock.
We have authorized 200,000,000 shares of our common stock, of which 49,803,979 shares were issued and outstanding as of December 31, 2007. Our board of
directors has the authority, without action or vote of our stockholders in most cases, to issue all or a part of any authorized but unissued shares. Such stock issuances may be made at a price that
reflects a discount from the then-current trading price of our common stock. In addition, in order to raise the capital that we may need at today's stock prices, we will need to issue
securities that are convertible into or exercisable for a significant amount of our common stock. For example, in the fourth quarter of 2007, we sold Series C Preferred Stock and related
warrants for $25.0 million. These issuances would dilute your percentage ownership interest, which will have the effect of reducing your influence on matters on which our stockholders vote, and
might dilute the book value of our common stock. You may incur additional dilution of net tangible book value if holders of stock options, whether currently outstanding or
15
subsequently
granted, exercise their options or if warrant holders exercise their warrants to purchase shares of our common stock.
The sale or issuance of a large number of shares of our common stock could depress our stock price.
As of March 1, 2008, we have reserved 31,749,634 shares of common stock for issuance upon exercise of stock options and warrants, 12,288,077 shares for
future issuances under our stock plans and 924,517 shares for future issuances as matching contributions under our 401(k) plan. We have also reserved 1,096,774 shares of common stock for issuance upon
conversion of the outstanding Series B Preferred Stock, which can be converted at any time. In addition, we have reserved 24,038,062 shares of common stock for issuance upon conversion of the
outstanding Series C Preferred Stock, which can be converted at any time. As of March 1, 2008, holders of warrants and options to purchase an aggregate of 30,718,756 shares of our common
stock may exercise those securities and transfer the underlying common stock at any time subject, in some cases, to Rule 144.
We have not consistently complied with Nasdaq's Marketplace Rules for continued listing, which exposes us to the risk of delisting from the Nasdaq Stock Market.
As a result of our failure to comply with the continued listing requirements of The Nasdaq Global Market, on October 25, 2006 we transferred our securities
to The Nasdaq Capital Market. However, if we fail to maintain compliance with the rules for continued listing on The Nasdaq Capital Market, including, without limitation, the minimum $1.00 bid price
requirement, and our common stock is delisted from The Nasdaq Capital Market, there could be a number of negative implications, including reduced liquidity in our common stock as a result of the loss
of market efficiencies associated with The Nasdaq Capital Market, the loss of federal preemption of state securities law, the potential loss of confidence by suppliers, customers and employees, as
well as the loss of analyst coverage and institutional investor interest, fewer business development opportunities and greater difficulty in obtaining financing.
We expect to generate a significant portion of our future revenues from sales of our power control products and cannot assure market acceptance or commercial viability of
our power control products.
We intend to continue to expand development of our power control products. We cannot assure you that potential customers will select SatCon's products to
incorporate into their systems or that our customers' products will realize market acceptance, that they will meet the technical demands of their end users or that they will offer
cost-effective advantages over existing products. Our marketing efforts have included development contracts with several customers and the targeting of specific market segments for power
and energy management systems. We cannot know if our commercial marketing efforts will be successful in the future. Additionally, we may not be able to develop competitive products, our products may
not receive market acceptance, and we may not be able to compete profitably in this market, even if market acceptance is achieved. If our products do not gain market acceptance or achieve commercial
viability, we will not attain our anticipated levels of profitability and growth.
If we are unable to maintain our technological expertise in design and manufacturing processes, we will not be able to successfully compete.
We believe that our future success will depend upon our ability to develop and provide products that meet the changing needs of our customers. This requires that
we successfully anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. As a result, we continually evaluate the
advantages and feasibility of new product design and manufacturing processes. We cannot, however, assure you that our process improvement efforts will be
16
successful.
The introduction of new products embodying new technologies and the emergence of shifting customer demands or changing industry standards could render our existing products obsolete and
unmarketable, which would have a significant impact on our ability to generate revenue. Our future success will depend upon our ability to continue to develop and introduce a variety of new products
and product enhancements to address the increasingly sophisticated needs of our customers. We may experience delays in releasing new products and product enhancements in the future. Material delays in
introducing new products or product enhancements may cause customers to forego purchases of our products and purchase those of our competitors.
We are heavily dependent on contracts with the U.S. government and its agencies or from subcontracts with the U.S. government's prime contractors for revenue to develop
our products, and the loss of one or more of our government contracts could preclude us from achieving our anticipated levels of growth and revenues.
Our ability to develop and market our products is dependent upon maintaining our U.S. government contract revenue and research grants. Many of our U.S. government
contracts are funded incrementally on a year-to-year basis. Approximately 22% of our revenue during the year ended December 31, 2007 was derived from government
contracts and subcontracts. Changes in government policies, priorities or programs that result in budget reductions could cause the government to cancel existing contracts or eliminate
follow-on phases in the future which would severely inhibit our ability to successfully complete the development and commercialization of our products. In addition, there can be no
assurance that, once a government contract is completed, it will lead to follow-on contracts for additional research and development, prototype build and test or production. Furthermore,
there can be no assurance that our U.S. government contracts or subcontracts will not be terminated or suspended in the future. In the event that any of our government contracts are terminated for
cause, it could significantly affect our ability to obtain future government contracts, which could seriously harm our ability to develop our technologies and products.
Our contracts with the U.S. government are subject to audit by the Defense Contract Audit Agency and other agencies of the government, which may challenge our treatment of
direct and indirect costs and reimbursements, resulting in a material adjustment and adverse impact on our financial condition.
The accuracy and appropriateness of our direct and indirect costs and expenses under our contracts with the U.S. government are subject to extensive regulation
and audit by the Defense Contract Audit Agency or by other appropriate agencies of the U.S. government. These agencies have the right to challenge our cost estimates or allocations with respect to any
such contract. Additionally, substantial portions of the payments to us under U.S. government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies.
Adjustments that result from inquiries or audits of our contracts could have a material adverse impact on our financial condition or results of operations. Currently 2006 and 2007 remain open for
review with the Defense Contract Audit Agency.
Since
our inception, we have not experienced any material adjustments as a result of any inquiries or audits, but there can be no assurance that our contracts will not be subject to
material adjustments in the future.
The U.S. government has certain rights relating to our intellectual property.
Many of our patents are the result of inventions made under U.S. government-funded research and development programs. With respect to any invention made with
government assistance, the government has a nonexclusive, nontransferable, irrevocable, paid-up license to use the technology or have the technology employed for or on behalf of the U.S.
government throughout the world. Under
17
certain
conditions, the U.S. government also has "march-in rights," which enable the U.S. government to require us to grant a nonexclusive, partially exclusive, or exclusive license in any
field of use to responsible applicants, upon terms that are reasonable under the circumstances.
Our business could be adversely affected if we are unable to protect our patents and proprietary technology.
As of March 1, 2008, we held approximately 65 U.S. patents and had 6 patent applications pending with the U.S. Patent and Trademark Office. We have also
obtained corresponding patents in the rest of North America, Europe and Asia for many of these patents. The expiration dates of our patents range
from 2009 to 2021, with the majority expiring after 2015. As a qualifying small business from our inception to date, we have retained commercial ownership rights to proprietary technology developed
under various U.S. government contracts and grants.
Our
patent and trade secret rights are of significant importance to us and to our future prospects. Our ability to compete effectively against other companies in our industry will
depend, in part, on our ability to protect our proprietary technology and systems designs relating to our products. Although we have attempted to safeguard and maintain our proprietary rights, we do
not know whether we have been or will be successful in doing so. Further, our competitors may independently develop or patent technologies that are substantially equivalent or superior to ours. No
assurance can be given as to the issuance of additional patents or, if so issued, as to their scope. Patents granted may not provide meaningful protection from competitors. Even if a competitor's
products were to infringe patents owned by us, it would be costly for us to pursue our rights in an enforcement action and there can be no assurance that we would be successful in enforcing our
intellectual property rights. Because we intend to enforce our patents, trademarks and copyrights and protect our trade secrets, we may be involved from time to time in litigation to determine the
enforceability, scope and validity of these rights. This litigation could result in substantial costs to us and divert resources from operational goals. In addition, effective patent, trademark,
service mark, copyright and trade secret protection may not be available in every country where we operate or sell our products.
We may not be able to maintain confidentiality of our proprietary knowledge.
In addition to our patent rights, we also rely on treatment of our technology as trade secrets through confidentiality agreements, which all of our employees are
required to sign, assigning to us all patent rights and other intellectual property developed by our employees during their employment with us. Our employees have also agreed not to disclose any trade
secrets or confidential information without our prior written consent. We also rely on non-disclosure agreement to protect our trade secrets and proprietary knowledge. These agreements may
be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of these agreements or may be independently developed by competitors. Failure to
maintain the proprietary nature of our technology and information could harm our results of operations and financial condition by reducing or eliminating our technological advantages in the
marketplace.
Others may assert that our technology infringes their intellectual property rights.
We believe that we do not infringe the proprietary rights of others and, to date, no third parties have asserted an infringement claim against us, but we may be
subject to infringement claims in the future. The defense of any claims of infringement made against us by third parties could involve significant legal costs and require our management to divert time
from our business operations. If we are unsuccessful in defending any claims of infringement, we may be forced to obtain licenses or to pay royalties to continue to use our technology. We may not be
able to obtain any necessary licenses on commercially reasonable terms or at all. If we fail to obtain necessary licenses or other rights, or if
18
these
licenses are costly, our operating results may suffer either from reductions in revenues through our inability to serve customers or from increases in costs to license third-party technologies.
Our success is dependent upon attracting and retaining highly qualified personnel and the loss of key personnel could significantly hurt our business.
To achieve success, we must attract and retain highly qualified technical, operational and executive employees. The loss of the services of key employees or an
inability to attract, train and retain qualified and skilled employees, specifically engineering, operations and business development personnel, could result in the loss of business or could otherwise
negatively impact our ability to operate and grow our business successfully.
We expect significant competition for our products and services.
In the past, we have faced limited competition in providing research services, prototype development and custom and limited quantity manufacturing. We expect
competition to intensify greatly as commercial applications increase for our products under development. Many of our competitors and potential competitors are well established and have substantially
greater financial, research and development, technical, manufacturing and marketing resources than we do. Some of our competitors and potential competitors are much larger than we are. If these larger
competitors decide to focus on the development of distributed power and power quality products, they have the manufacturing, marketing and sales capabilities to complete research, development and
commercialization of these products more quickly and effectively than we can. There can also be no assurance that current and future competitors will not develop new or enhanced technologies perceived
to be superior to those sold or developed by us. There can be no assurance that we will be successful in this competitive environment.
We are dependent on third-party suppliers for the supply of key components for our products.
We use third-party suppliers for components in many of our systems. From time to time, shipments can be delayed because of industry-wide or other
shortages of necessary materials and components from third-party suppliers. A supplier's failure to supply components in a timely manner, or to supply components that meet our quality, quantity or
cost requirements, or our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could impair our ability to deliver our products in accordance with
contractual obligations.
19
On occasion, we agree to fixed price engineering contracts, which exposes us to losses.
Most of our engineering design contracts are structured on a cost-plus basis. However, on occasion we have entered into fixed price contracts, which
may expose us to loss. In addition, in our manufacturing divisions we accept fixed price contracts via customer purchase orders. A fixed priced contract, by its very nature, requires cost estimates
during the bidding process and throughout the contract, as the program proceeds to completion. Depending upon the complexity of the program, the estimated completion costs could change frequently and
significantly during the course of the contract. We regularly involve the appropriate people on the program and finance staffs to arrive at a reasonable estimate of the cost to complete. However, due
to unanticipated technical challenges and other factors, there is the potential for substantial cost overruns in order to complete a contract in accordance with the contract specifications. At
December 31, 2007, we have accrued approximately $1.3 million related to an anticipated loss on a fixed price contract. At December 31, 2006 there were no contract losses
recorded.
If we experience a period of significant growth or expansion, it could place a substantial strain on our resources.
If our power control products are successful in achieving rapid market penetration, we may be required to deliver large volumes of technically complex products or
components to our customers on a timely basis at reasonable costs to us. We have limited experience in ramping up our manufacturing capabilities to meet large-scale production requirements and
delivering large volumes of our power control products. If we were to commit to deliver large volumes of our power control products, we cannot assure you that we will be able to satisfy large-scale
commercial production on a timely and cost-effective basis or that such growth will not strain our operational, financial and technical resources.
Our business could be subject to product liability claims.
Our business exposes us to potential product liability claims, which are inherent in the manufacturing, marketing and sale of our products, and we may face
substantial liability for damages resulting from
the faulty design or manufacture of products or improper use of products by end users. We currently maintain a moderate level of product liability insurance, and there can be no assurance that this
insurance will provide sufficient coverage in the event of a claim. Also, we cannot predict whether we will be able to maintain such coverage on acceptable terms, if at all, or that a product
liability claim would not harm our business or financial condition. In addition, negative publicity in connection with the faulty design or manufacture of our products would adversely affect our
ability to market and sell our products.
We are subject to a variety of environmental laws that expose us to potential financial liability.
Our operations are regulated under a number of federal, state and foreign environmental and safety laws and regulations that govern, among other things, the
discharge or release of hazardous materials into the air and water as well as the handling, storage and disposal of these materials. These laws and regulations include the Clean Air Act, the Clean
Water Act, the Resource, Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws. Because we use
hazardous materials in certain of our manufacturing processes, we are required to comply with these environmental laws. In addition, because we generate hazardous wastes, we, along with any other
person who arranges for the disposal of our wastes, may be subject to potential financial exposure for costs associated with an investigation and remediation of sites at which we have arranged for the
disposal of hazardous wastes if those sites become contaminated and even if we fully comply with applicable environmental laws. If we were found to be a responsible party, we could be held jointly and
severably liable for the costs of remedial actions. To date, we have not been cited for any improper discharge or release of hazardous materials.
20
Businesses and consumers might not adopt alternative energy solutions as a means for obtaining their electricity and power needs.
On-site distributed power generation solutions, such as fuel cell, photovoltaic and wind turbine systems, which utilize our products, provide an
alternative means for obtaining electricity and are relatively new methods of obtaining electrical power that businesses may not adopt at levels sufficient to grow this part of our business.
Traditional electricity distribution is based on the regulated industry model whereby businesses and consumers obtain their electricity from a government regulated utility. For alternative methods of
distributed power to succeed, businesses and consumers must adopt new purchasing practices and must be willing to rely upon less traditional means of purchasing electricity. We cannot assure you that
businesses and consumers will choose to utilize on-site distributed power at levels sufficient to sustain our business in this area. The
development of a mass market for our products may be impacted by many factors which are out of our control, including:
-
-
market
acceptance of fuel cell, photovoltaic and wind turbine systems that incorporate our products;
-
-
the
cost competitiveness of these systems;
-
-
regulatory
requirements; and
-
-
the
emergence of newer, more competitive technologies and products.
If
a mass market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop these products.
Our quarterly operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors, our share price may decrease
significantly.
Our annual and quarterly results may vary significantly depending on various factors, many of which are beyond our control. Because our operating expenses are
based on anticipated revenue levels, our sales cycle for development work is relatively long and a high percentage of our expenses are fixed for the short term, a small variation in the timing of
recognition of revenue can cause significant variations in operating results from quarter to quarter. If our earnings do not meet the expectations of securities analysts or investors, the price of our
stock could decline.
Provisions in our charter documents and Delaware law may delay, deter or prevent the acquisition of SatCon, which could decrease the value of your shares.
Some provisions of our certificate of incorporation and bylaws may delay, deter or prevent a change in control of SatCon or a change in our management that you,
as a stockholder, may consider favorable. These provisions include:
-
-
authorizing
the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and deter a takeover
attempt;
-
-
a
board of directors with staggered, three-year terms, which may lengthen the time required to gain control of our board of directors;
-
-
prohibiting
cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; and
-
-
limitations
on who may call special meetings of stockholders.
In
addition, Section 203 of the Delaware General Corporation Law and provisions in some of our stock incentive plans may delay, deter or prevent a change in control of SatCon.
Those provisions serve to limit the circumstances in which a premium may be paid for our common stock in proposed
21
transactions,
or where a proxy contest for control of our board may be initiated. If a change of control or change in management is delayed, deterred or prevented, the market price of our common stock
could suffer.
We are subject to stringent export laws and risks inherent in international operations.
We market and sell our products and services both inside and outside the United States. We are currently selling our products and services throughout North
America and in certain countries in South America, Asia, Canada and Europe. Certain of our products are subject to the International Traffic in Arms Regulations (ITAR) 22 U.S.C 2778, which restricts
the export of information and material that may be used for military or intelligence applications by a foreign person. Additionally, certain products of ours are subject to export regulations
administered by the Department of Commerce, Bureau of Industry Security, which require that we obtain an export license before we can export certain products or technology. Failure to comply with
these laws could result in enforcement responses by the government, including substantial monetary penalties, denial of export privileges, debarment from government contracts and possible criminal
sanctions.
Revenue
from sales to our international customers for the years ended December 31, 2007 and 2006 were approximately $9.6 million and $3.3 million, respectively. Our
success depends, in part, on our ability to expand our market for our products and services to foreign customers and our ability to manufacture products that meet foreign regulatory and commercial
requirements. We have limited experience developing and manufacturing our products to comply with the commercial and legal requirements of international markets. We face numerous challenges in
penetrating international markets, including unforeseen changes in regulatory requirements, export restrictions, fluctuations in currency exchange rates, longer accounts receivable cycles,
difficulties in managing international operations, and the challenges of complying with a wide variety of foreign laws.
We are exposed to credit risks with respect to some of our customers.
To the extent our customers do not advance us sufficient funds to finance our costs during the execution phase of our contracts, we are exposed to the risk that
they will be unable to accept delivery or that they will be unable to make payment at the time of delivery. Occasionally, we accept the risk of dealing with thinly financed entities. We attempt to
mitigate this risk by seeking to negotiate more timely progress payments and utilizing other risk management procedures.
Our loan agreement with Silicon Valley Bank subjects us to various restrictions, which may limit our ability to pursue business opportunities.
Our
loan agreement with Silicon Valley Bank subjects us to various restrictions on our ability to engage in certain activities without the prior written consent of the bank, including,
among other things, our ability to:
-
-
dispose
of or encumber assets, other than in the ordinary course of business,
-
-
incur
additional indebtedness,
-
-
merge
or consolidate with other entities, or acquire other businesses, and
-
-
make
investments
The
agreement also subjects us to various financial and other covenants with which we must comply on an ongoing or periodic basis. The financial covenant requires us to maintain a
minimum level of tangible net worth, as defined, which varies from month to month. If we violate this or any other covenant, any outstanding debt under this agreement could become immediately due and
payable, the bank could proceed against any collateral securing indebtedness and our ability to borrow funds in
22
the
future may be restricted or eliminated. These restrictions may also limit our ability to pursue business opportunities or strategies that we would otherwise consider to be in the best interests of
the company.
The holders of our Series B Preferred Stock are entitled to receive liquidation payments in preference to the holders of our common stock.
As of March 1, 2008, 340 shares of our Series B Preferred Stock were outstanding. Pursuant to the terms of the certificate of designation creating
the Series B Preferred Stock, upon a liquidation of our company, the holders of shares of the Series B Preferred Stock are entitled to receive a liquidation payment prior to the payment
of any amount with respect to the shares of our common stock. The amount of this preferential liquidation payment is $5,000 per share of Series B Preferred Stock, plus the
amount of any accrued but unpaid dividends on those shares. Dividends accrue on the shares of Series B Preferred Stock at a rate of 8% per annum.
The holders of our certain of our outstanding warrants have the right to put those warrants to us for cash if we issue common stock or common stock equivalents at a price
per share less than $1.65.
As of March 1, 2008, we had outstanding Warrant As to purchase up to an aggregate of 2,090,911 shares of common stock and Warrant Cs to purchase up
to an aggregate of 1,045,456 shares of common stock. The holder of those warrants may put those warrants to us for a cash amount equal to their Black-Scholes value if we issue common stock or
common stock equivalents at a price per share less than $1.65, subject to certain exceptions. These rights are exercisable for the 45-day period following any such issuance. The existence
of these rights could limit our ability to raise necessary capital in the future. Furthermore, the exercise of these rights could materially impact our capital resources and materially affect our
ability to fund operations.
Risks Related to Our Private Placement of Series C Preferred Stock and Related Warrants
The holders of our Series C Preferred Stock are entitled to receive liquidation payments in preference to the holders of our common stock.
As of March 1, 2008, 25,000 shares of our Series C Preferred Stock were outstanding. Upon a liquidation of our company, the holders of shares of
Series C Preferred Stock are entitled to receive a liquidation payment prior to the payment of any amount with respect to the shares of our common stock. The amount of this preferential
liquidation payment is the greater of (i) $1,000 per share of Series C Preferred Stock, plus the amount of any accrued but unpaid dividends on those shares, or (ii) the amount per
share that a holder would have received if, immediately prior to the liquidation, that holder's share had been converted to our common stock. Dividends accrue on the shares of Series C
Preferred Stock at a rate of 5% per annum. Because of the substantial liquidation preference to which the holders of the Series C Preferred Stock are entitled, the amount available to be
distributed to the holders of our common stock upon a liquidation of our company could be substantially limited or reduced to zero.
We are responsible for having the resale of shares of common stock underlying the Series C Preferred Stock and related warrants registered with the SEC within
defined time periods and will incur liquidated damages if the shares are not registered with the SEC within those defined time periods.
Pursuant to our agreement with the investors in the Series C Preferred Stock financing transaction, we are obligated to (i) file a
registration statement covering the resale of the common stock underlying the Series C Preferred Stock and related warrants with the SEC by the earlier of (x) five business days after we
file this Annual Report on Form 10-K and (y) April 7, 2008, (ii) use our best efforts to cause
23
the
registration statement to be declared effective within 60 days following the required filing date, and (iii) use our best efforts to keep the registration statement effective until
the earlier of (x) the date all of the securities covered by the registration statement have been publicly sold and (y) the date all of the securities covered by the registration
statement may be sold without restriction under SEC Rule 144. If we fail to comply with these or certain other provisions, then we will be required to pay liquidated damages of one twentieth of
a percent (.05%) of the aggregate purchase price paid by the investors for the securities that can be registered on the registration statement for each day the failure continues. The total liquidated
damages under this provision are capped at 9.9% of the aggregate purchase price paid by the investors in the private placement. Any such payments could materially affect our ability to fund
operations.
The certificate of designation governing the Series C Preferred Stock contains various covenants and restrictions which may limit our ability to operate our
business.
Under the certificate of designation governing the Series C Preferred Stock we are not permitted, without the affirmative vote or written consent of the
holders of 50% of the Series C Preferred Stock, directly or indirectly, to take any of the following actions or agree to take any of the following actions:
-
-
authorize,
create or issue any shares of preferred stock or other equity securities ranking senior to or on a parity with the Series C Preferred Stock;
-
-
increase
or decrease the total number of authorized shares of Series C Preferred Stock;
-
-
amend
or modify our certificate of incorporation (including the certificate of designation governing the Series C Preferred Stock) or bylaws that would adversely
affect the rights, preferences, powers and privileges of the Series C Preferred Stock;
-
-
incur
any form of indebtedness for borrowed money in excess of $5,000,000 in the aggregate (other than indebtedness existing at November 8, 2007);
-
-
repurchase
or redeem any equity securities ranking junior to the Series C Preferred Stock, subject to certain exceptions;
-
-
effect
any distribution or declare, pay or set aside any dividend with respect to any equity securities ranking junior to the Series C Preferred Stock;
-
-
effect
a liquidation, consummate a reorganization event or dispose, transfer or license any material assets, technology or intellectual property, other than
non-exclusive licenses in connection with sales of our products in the ordinary course of business;
-
-
change
the size of our board of directors;
-
-
encumber
or grant a security interest in all or substantially all or a material part of our assets except to secure indebtedness permitted above that is approved by our
board of directors;
-
-
acquire
a material amount of assets of another entity, through a merger, purchase of assets or purchase of capital stock or otherwise; or
-
-
enter
into any agreement to do or cause to be done any of the foregoing.
These
restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities, any of which could
have a material adverse impact on our business.
24
The holders of the Series C Preferred Stock will have substantial voting power on matters submitted to a vote of stockholders.
Generally, the holders of Series C Preferred Stock are entitled to vote on all matters on which the holders of our common stock are entitled to vote,
voting together with the holders of our common stock as a single class. Each share of Series C Preferred Stock is entitled to 694 votes. Based on 49,961,606 shares of common stock outstanding
as of March 1, 2008, the outstanding shares of Series C Preferred Stock represent, in the aggregate, 25.8% of the voting power of our stock. The voting percentage held by the investors
would increase to the extent the shares of Series C Preferred Stock are converted or the warrants issued in the private placement are exercised. Because the investors will own a significant
percentage of our voting power, they may 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, the ownership by the investors of a substantial percentage of our total voting power and the terms of the Series C convertible preferred stock could make it more
difficult and expensive for a third party to pursue a change of control of our company, even if a change of control would generally be beneficial to our stockholders.
The Series C Preferred Stock is redeemable at the option of the holders under certain circumstances.
On or after November 8, 2011, the holders of two-thirds of the outstanding shares of Series C Preferred Stock may require us to redeem
all or any portion of the outstanding shares of Series C Preferred Stock. The redemption price is equal to 120% of the stated liquidation preference amount, to the extent that the redemption is
made in cash, or 140% of the stated liquidation preference amount to the extent that, at our election, the redemption is made in shares of our common stock. If the redemption is made in shares of
common stock, the shares will be based on the fair market value of the common stock, based on a 10 day volume weighted average, as of the redemption date. Depending on our cash resources at the
time that this redemption right is exercised, we may or
may not be able to fund the redemption from our available cash resources. If we were unable to fund the redemption from available cash we would need to find an alternative source of financing to do
so. The can be no assurances that we would be able to raise such funds if they are required. If we were not able to finance the redemption in cash, we would have to make the redemption payment in
shares of our common stock which would be dilutive to our common stockholders.
The investors in our private placement of Series C Preferred Stock will have the right to designate up to four individuals to be elected to our board of directors.
In the purchase agreement, we agreed that for as long as each investor beneficially owns at least 25% of the Series C Preferred Stock and warrants issued
to them in the private placement, each investor would be entitled to designate one individual to be nominated to our board of directors. We also agreed that as long as either investor or both
investors beneficially owns at least 25% of the Series C Preferred Stock and warrants issued to them in the private placement, we would include one investor designee in the corporate governance
and nominating committee and one investor designee on the compensation committee of our board of directors. Upon the first closing, our board of directors elected Philip J. Deutch, as the designee of
NGP Energy Technology Partners, L.P., and David J. Prend, as the designee of RockPort Capital Partners II, L.P., to serve on our board.
Upon
the second closing, as required under the purchase agreement, our board of directors was reduced from nine directors to seven directors, and the investors jointly had the right to
designate one additional director who is "independent" (as that term is defined in the regulations of the Nasdaq
25
Stock
Market) to serve as a director. Accordingly, effective as of the second closing, three existing directors resigned and the board duly appointed Robert G. Schoenberger, Chairman of the Board and
Chief Executive Officer of Unitil Corporation, as the investors' additional independent designee. However, in the event the size of our board of directors is increased to nine members in order to
comply with Nasdaq rules, the investors will be entitled to designate an additional independent director.
The
number of investor designees will be appropriately adjusted to the extent required by the applicable rules of Nasdaq.
Because
the holders of Series C Preferred Stock will have the right to designate these members to of our board of directors, as well as designees to serve on our board committees,
they will be able to exert considerable influence over the board level decision-making at our company.
We have agreed to give the holders of Series C Preferred Stock the right to participate in subsequent stock issuances.
We agreed that if we issue and sell any new equity securities prior to December 20, 2009, subject to some exceptions, we will give the investors the right
to purchase all or some of those new securities so as we permit the investors to maintain their ownership percentage in our stock. The existence of this right may make it more difficult for us to
obtain financing from third parties that do not wish to have the Series C Preferred Stock investors participating in their financing.
The Series C Preferred Stock private placement had a substantial dilutive effect on our common stock, and subsequent anti-dilution adjustments could
increase the dilutive effect.
Consummation of the private placement had a substantial dilutive effect on our common stockholders. The aggregate number of shares issued pursuant to the private
placement substantially increased the number of shares of our capital stock outstanding on an as converted basis. As a result, the percentage ownership of our common stockholders significantly
declined as a result of the private placement. As a result of the private placement, the investors own approximately 46.77% of the outstanding shares of our capital stock, on an as converted basis
assuming conversion of all the shares of Series C Preferred Stock and exercise of all warrants (excluding the additional warrants that may be issued from time to time upon the exercise of
certain existing warrants).
Furthermore,
the anti-dilution protection provided to both the Series C Preferred stock and the warrants could substantially increase the number of shares of our
common stock currently outstanding. Upon a dilutive issuance, the conversion price or exercise price will be adjusted down and the number of shares issuable upon conversion or exercise of the
Series C Preferred Stock and warrants will increase. Accordingly, if any shares of our capital stock are issued below the current conversion price, there will be additional dilution.
Finally,
sales in the public market of the common stock acquired upon conversion of the Series C Preferred Stock or exercise of the warrants, or the perception that such sales
could occur, could adversely affect the prevailing market price of our common stock and impair our ability to raise funds in additional stock financings.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
26
Item 2. PROPERTIES
We lease office, manufacturing and research and development space in the following locations:
Location
|
|
Primary Use
|
|
Approximate
Number of
Square Feet
|
|
Expiration
of Lease
|
Boston, MA
|
|
Corporate headquarters and research and development
|
|
28,000
|
|
2011
|
Marlborough, MA
|
|
Manufacturing
|
|
24,000
|
|
2010
|
West Boylston, MA
|
|
Manufacturing
|
|
13,000
|
|
2008
|
Baltimore, MD
|
|
Research and development
|
|
16,000
|
|
2009
|
Burlington, Ontario, Canada
|
|
Manufacturing
|
|
60,000
|
|
2009
|
We
believe our facilities are adequate for our current needs and that adequate facilities for expansion, if required, are available.
Item 3. 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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 19, 2007, we held a special meeting of stockholders to consider and act upon a proposal to approve the issuance of additional shares of our
common stock sufficient to allow for the full conversion of our outstanding senior secured convertible notes, as well as the full payment of interest and principal on such notes, all in accordance
with the terms of such notes. A summary of the vote is as follows:
Proposals
|
|
Votes For
|
|
Votes Against
|
|
Votes Abstain
|
|
Broker Non-Votes
|
1
|
|
27,392,170
|
|
2,340,047
|
|
223,331
|
|
0
|
On
December 20, 2007, we held a special meeting of stockholders to consider and act upon the following matters:
-
1.
-
To
approve the following transactions in connection with the second closing of the Private Placement of equity securities:
-
a.
-
The
issuance of Series C Preferred Stock;
-
b.
-
The
issuance of warrants to purchase shares of common stock;
-
c.
-
The
repricing of the exercise price of certain previously issued warrants;
-
d.
-
The
potential future issuance of additional warrants to purchase shares of our common stock; and
-
e.
-
The
issuance of shares of our common stock sufficient to allow for the full conversion, redemption or exercise of the Series C Preferred Stock and warrants.
-
2.
-
To
approve an amendment to our certificate of incorporation increasing the number of authorized shares of common stock from 100,000,000 to 200,000,000.
-
3.
-
To
approve the increase in the number of shares of common stock available for issuance under our 2005 Incentive Compensation Plan by 10,000,000, from 4,000,000 to 14,000,000.
A
summary of the vote is as follows:
Proposals
|
|
Votes For
|
|
Votes Against
|
|
Votes Abstain
|
|
Broker Non-Votes
|
1
|
|
30,854,711
|
|
3,648,379
|
|
459,775
|
|
0
|
2
|
|
37,072511
|
|
4,440,336
|
|
394,462
|
|
0
|
3
|
|
34,143297
|
|
7,212,435
|
|
551,576
|
|
0
|
27
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is publicly traded on the Nasdaq Capital Market under the symbol "SATC."
The
following table sets forth the range of high and low sales prices of our common stock as reported on the Nasdaq Capital Market for our years ended December 31, 2006 and 2007:
|
|
High
|
|
Low
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.44
|
|
$
|
1.36
|
Second Quarter
|
|
$
|
3.24
|
|
$
|
1.80
|
Third Quarter
|
|
$
|
1.88
|
|
$
|
0.89
|
Fourth Quarter
|
|
$
|
1.52
|
|
$
|
0.86
|
Year ended December 31, 2007
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.58
|
|
$
|
1.14
|
Second Quarter
|
|
$
|
1.31
|
|
$
|
1.08
|
Third Quarter
|
|
$
|
1.65
|
|
$
|
1.02
|
Fourth Quarter
|
|
$
|
1.81
|
|
$
|
1.09
|
On
March 1, 2008, the last reported sale price of our common stock as reported on the Nasdaq Capital Market was $1.93 per share. As of March 1, 2008, there were 49,961,606
shares of our common stock outstanding held by approximately 254 holders of record. The number of record holders does not include beneficial owners of common stock whose shares are held in the names
of banks, brokers, nominees or other fiduciaries.
Dividend Policy
We have never paid cash dividends on our common stock. We currently intend to retain earnings, if any, to fund the development and growth of our business and do
not anticipate paying cash dividends for the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various
factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. In addition, under the terms of our Series B Preferred Stock, we may
not pay dividends on our common stock without the consent of the holders of at least 75% of the outstanding shares of Series B Preferred Stock. Furthermore under the terms of our
Series C Preferred Stock, we may not pay dividends on our common stock without the consent of the holders of at least 67% of the outstanding Series C Preferred Stock. In addition, we may
not pay dividends on our common stock, unless we have paid all dividends owing on the Series B Preferred Stock and Series C Preferred Stock. Finally, under the New Loan Agreement, we may
not pay dividends on our common stock without the consent of the Bank.
Recent Sales of Unregistered Securities
None
Comparative Stock Performance Graph
The comparative stock performance graph below compares the cumulative total stockholder return (assuming reinvestment of cash dividends, if any) from investing
$100 on December 31, 2002, and plotted at the end of the last trading day of each year, in each of (i) our common stock; (ii) the Nasdaq National Market Index of U.S. Companies
(the "Nasdaq Market Index"); and (iii) a peer group index of four companies that provide similar services to those of our company (Ballard Power
28
Systems, Inc.,
IMPCO Technologies, Inc., Mechanical Technology Incorporated and UQM Technologies, Inc. (formerly known as Unique Mobility, Inc.) (the "Peer Group
Index")).
The
comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it
intended to forecast, the potential future performance of our common stock.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG SATCON TECHNOLOGY CORPORATION,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
SATCON TECHNOLOGY CORP.
|
|
$
|
100.00
|
|
$
|
146.43
|
|
$
|
144.29
|
|
$
|
107.14
|
|
$
|
81.43
|
|
$
|
117.86
|
PEER GROUP INDEX
|
|
$
|
100.00
|
|
$
|
118.49
|
|
$
|
77.59
|
|
$
|
49.29
|
|
$
|
64.88
|
|
$
|
55.67
|
NASDAQ MARKET INDEX
|
|
$
|
100.00
|
|
$
|
152.01
|
|
$
|
165.75
|
|
$
|
171.72
|
|
$
|
192.65
|
|
$
|
211.26
|
The
performance graph above shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to
the liability of that section. This graph will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after
the date hereof, regardless of any general incorporation language in such filing.
29
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
You should read the data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data set forth below for the years
ended December 31, 2007 and 2006, and the consolidated balance sheet data as of December 31, 2007 and 2006 are derived from our audited consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the three month transition period ended December 31, 2005 and our
fiscal years ended September 30, 2005, 2004 and 2003 and the consolidated balance sheet data as of December 31, 2005 and September 30, 2005, 2004 and 2003 are derived from our
audited consolidated financial statements that are not included in this Annual Report on Form 10-K.
|
|
Year Ended
December 31,
|
|
Three Months Ended December 31,
|
|
Fiscal Year Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Amounts in thousands, except per share data)
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
47,577
|
|
$
|
28,767
|
|
$
|
6,038
|
|
$
|
29,891
|
|
$
|
26,971
|
|
$
|
21,648
|
|
Funded research and development and other revenue
|
|
|
8,994
|
|
|
4,990
|
|
|
1,079
|
|
|
6,064
|
|
|
7,187
|
|
|
5,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
56,571
|
|
|
33,757
|
|
|
7,117
|
|
|
35,955
|
|
|
34,158
|
|
|
26,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
44,876
|
|
|
27,824
|
|
|
5,802
|
|
|
27,631
|
|
|
22,373
|
|
|
26,019
|
|
Research and development and other revenue expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded research and development and other revenue expenses
|
|
|
6,727
|
|
|
4,041
|
|
|
1,111
|
|
|
5,412
|
|
|
5,982
|
|
|
5,038
|
|
|
Unfunded research and development expenses
|
|
|
3,159
|
|
|
2,000
|
|
|
260
|
|
|
514
|
|
|
3
|
|
|
1,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development and other revenue expenses
|
|
|
9,886
|
|
|
6,041
|
|
|
1,371
|
|
|
5,926
|
|
|
5,985
|
|
|
6,530
|
|
Selling, general and administrative expenses
|
|
|
12,403
|
|
|
13,008
|
|
|
2,488
|
|
|
10,802
|
|
|
9,363
|
|
|
13,564
|
|
Amortization of intangibles
|
|
|
351
|
|
|
431
|
|
|
112
|
|
|
447
|
|
|
447
|
|
|
505
|
|
Gain on sale of assets
|
|
|
|
|
|
(399
|
)
|
|
(1,443
|
)
|
|
(318
|
)
|
|
|
|
|
|
|
Restructuring costs
|
|
|
82
|
|
|
1,419
|
|
|
|
|
|
(256
|
)
|
|
|
|
|
|
|
Write-off of impaired long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
1,190
|
|
|
|
|
|
700
|
|
Write-off of impaired goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
67,598
|
|
|
48,324
|
|
|
8,330
|
|
|
45,422
|
|
|
38,168
|
|
|
53,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(11,027
|
)
|
|
(14,567
|
)
|
|
(1,213
|
)
|
|
(9,467
|
)
|
|
(4,010
|
)
|
|
(26,139
|
)
|
Net unrealized gain (loss) on warrants to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
(90
|
)
|
|
82
|
|
Unrealized loss on Series B warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
(1,879
|
)
|
Write-down of investment in Beacon Power Corporation common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(542
|
)
|
Realized gain on sale of Beacon Power Corporation common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
899
|
|
Change in Fair Value of Notes and Warrants
|
|
|
(2,252
|
)
|
|
(4,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
|
(977
|
)
|
|
41
|
|
|
(4
|
)
|
|
(117
|
)
|
|
(1
|
)
|
|
71
|
|
Interest income
|
|
|
280
|
|
|
384
|
|
|
47
|
|
|
42
|
|
|
12
|
|
|
5
|
|
Interest expense
|
|
|
(3,790
|
)
|
|
(1,444
|
)
|
|
(138
|
)
|
|
(697
|
)
|
|
(6,905
|
)
|
|
(3,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,766
|
)
|
$
|
(19,778
|
)
|
$
|
(1,308
|
)
|
$
|
(10,246
|
)
|
$
|
(10,959
|
)
|
$
|
(31,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on Series C Preferred Stockholders
|
|
|
(11,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend on Series C Preferred Stock
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(29,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per weighted average share, basic and diluted
|
|
$
|
(0.66
|
)
|
$
|
(0.50
|
)
|
$
|
(0.03
|
)
|
$
|
(0.31
|
)
|
$
|
(0.41
|
)
|
$
|
(1.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares, basic and diluted
|
|
|
45,434
|
|
|
39,290
|
|
|
38,356
|
|
|
32,900
|
|
|
26,834
|
|
|
18,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Year Ended December 31,
|
|
Three Months Ended December 31,
|
|
As of September 30,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(in thousands)
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, including restricted cash and cash equivalents
|
|
$
|
12,700
|
|
$
|
8,275
|
|
$
|
9,279
|
|
$
|
6,711
|
|
$
|
2,183
|
|
$
|
1,235
|
|
Total assets
|
|
|
46,609
|
|
|
30,577
|
|
|
28,328
|
|
|
27,732
|
|
|
25,586
|
|
|
24,982
|
|
Working capital
|
|
|
18,071
|
|
|
6,007
|
|
|
10,690
|
|
|
11,393
|
|
|
5,141
|
|
|
(1,413
|
)
|
Redeemable convertible Series A preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,659
|
|
Redeemable convertible Series B preferred stock
|
|
|
1,700
|
|
|
1,725
|
|
|
2,125
|
|
|
2,125
|
|
|
2,125
|
|
|
|
|
Redeemable convertible Series C preferred stock
|
|
|
13,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated debentures
|
|
|
|
|
|
12,740
|
|
|
|
|
|
|
|
|
|
|
|
763
|
|
Investor warrant and Placement Agent Warrant Liability
|
|
|
3,244
|
|
|
2,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities, net of current portion
|
|
|
133
|
|
|
108
|
|
|
452
|
|
|
460
|
|
|
875
|
|
|
770
|
|
Stockholders' equity (deficit)
|
|
$
|
4,363
|
|
$
|
(2,468
|
)
|
$
|
14,501
|
|
$
|
15,602
|
|
$
|
11,659
|
|
$
|
6,162
|
|
31
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Information
This Annual Report on Form 10-K, including, without limitations, this Item 7, contains or incorporates forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. You can identify these forward-looking statements by our use of the words
"believes," "anticipates," "plans," "expects," "may," "will," "intends," "estimates," and similar expressions, whether in the negative or in the affirmative. Although we believe that these
forward-looking statements reasonably reflect our plans, intentions and expectations, our actual results could differ materially from the plans, intentions and expectations disclosed in the
forward-looking statements we make. We have included important factors in the cautionary statements under the heading "Risk Factors" under Item 1A above that we believe could cause our actual
results to differ materially from the forward-looking statements that we make. Forward-looking statements contained in this Annual 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.
Recent Developments
On October 19, 2007, we entered into an Offer to Sell Notes with all of the holders of our then outstanding senior secured convertible notes (the
"Convertible Notes"). Under the terms of the offer, at anytime prior to November 9, 2007, we had the right to purchase the Convertible Notes for an amount equal to 120% of the aggregate
outstanding principal amount of the Convertible Notes plus accrued and unpaid interest thereon. In exchange for the holders' agreement to keep the offer open until November 9, 2007, we issued
an aggregate of 749,999 shares of our common stock to the holders.
We recorded a charge to operations of approximately $0.9 million in the fourth quarter ended December 31, 2007 related to such issuance.
On
October 19, 2007, we entered into a Note Purchase Agreement with Rockport Capital Partners II, L.P. and NGP Energy Technology Partners, L.P. (the
"Investors") to lend us up to $10.0 million to provide funds to repurchase the Convertible Notes, among other things. Pursuant to the Note Purchase Agreement, on November 7, 2007, the
Investors purchased from us promissory notes (the "New Notes") in an aggregate principal amount of $10.0 million. The New Notes bore interest at 17% per annum. All unpaid principal, together
with accrued but unpaid interest, was due and payable in full on February 19, 2008, unless prepaid earlier. The New Notes were paid off in full on December 20, 2007.
On
November 7, 2007, we used approximately $8.5 million of the proceeds from the sale of the New Notes to retire the Convertible Notes, which represented 120% of the then
outstanding amount due under the Convertible Notes. We recorded a charge to operations in the fourth quarter ended December 31, 2007 of approximately $1.4 million, which represents the
20% prepayment penalty under the Convertible Notes. Upon the retirement of the Convertible Notes, the New Notes became immediately secured by all of our assets, including our ownership interest in the
capital stock of our subsidiaries.
On
November 8, 2007, we entered into a Stock and Warrant Purchase agreement with the Investors. Under this purchase agreement, the Investors agreed to purchase in a private
placement up to 25,000 shares of our newly created Series C convertible preferred stock (the "Series C Preferred Stock") and warrants to purchase up to 19,711,539 shares of common stock,
for an aggregate gross purchase price of $25.0 million. Each share of Series C Preferred Stock initially converts into common stock at a price equal to $1.04 per share, subject to
adjustment.
32
This
private placement occurred in two closings. The first closing occurred on November 8, 2007. At the first closing, we issued 10,000 shares of Series C Preferred
Stock at $1,000 per share for an aggregate gross purchase price of $10.0 million. These shares are currently convertible into 9,615,384 shares of common stock. We also issued warrants to
purchase an aggregate of 15,262,072 shares of common stock. These warrants had an initial exercise price of $1.44 per share and may not be exercised until May 8, 2008. As a result
of stockholder approval of the second closing and related matters on December 20, 2007, as described below, the exercise price of these warrants was reduced to $1.25 per share.
At
the second closing, which occurred on December 20, 2007 following stockholder approval, we 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 short-term notes previously issued to the Investors on November 7, 2007.
These shares are currently convertible into 14,423,076
shares of common stock. At this closing, we also issued warrants to purchase an aggregate of 4,449,467 shares of common stock at an exercise price of $1.25 per share. These warrants are exercisable
immediately.
In
the purchase agreement, we 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, we 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 $1.25 per share. As of February 28, 2008, if all of these existing warrants are
exercised, we would need to issue warrants to purchase an additional 3,455,258 shares of common stock to the Investors.
As
a result of our sale of Series C Preferred Stock and warrants, the holders of our Warrant As and Warrant Cs had a limited period of time (45 days after each issuance),
at their election, to require us to redeem those warrants based on a Black-Scholes option pricing model on the date of notification. During the fourth quarter of fiscal 2007, we paid approximately
$2.1 million to redeem Warrant As representing 1,242,426 shares of Common Stock and Warrant Cs representing 621,215 shares of Common Stock. During the first quarter of fiscal 2008, we paid
approximately $0.6 million to redeem Warrant As representing 303,031 shares of Common Stock and Warrant Cs representing 151,516 shares of Common Stock. Following these redemptions, as of
February 28, 2008, Warrant As representing 2,090,911 shares of Common Stock and Warrant Cs representing 1,045,456 shares of Common Stock remain outstanding. The redemption periods under the
Warrant As and Warrant Cs associated with our sale of Series C Preferred Stock and related warrants have expired.
On
February 26, 2008, we entered into a New Loan and Security Agreement (the "New Loan Agreement") with the Silicon Valley Bank (the "Bank"). Under the terms of the Loan
Agreement, the Bank agreed to provide us with a credit line up to $10.0 million. The New Loan Agreement is secured by most of our assets and advances under the Loan Agreement are limited to 80%
of eligible receivables and the lesser of 25% of the value of our eligible inventory, as defined, or $1.0 million. Interest on outstanding borrowings accrues at a rate per annum equal to the
Prime Rate plus the Prime Rate Margin, as defined, or the LIBOR Rate plus the LIBOR Rate Margin, as defined. The New Loan Agreement contains certain financial covenants relating to tangible net worth,
as defined, which we must satisfy in order to borrow under the agreement. In addition we 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 New Loan Agreement and $25,000 to be paid on the one year anniversary of the New 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 we terminates the New Loan
Agreement prior to 12 months from the New Loan Agreement's effective date. The New Loan Agreement, if not terminated sooner in accordance with its terms, expires on February 25, 2010.
33
Overview
We design and manufacture enabling technologies and products for electrical power conversion and control for high-performance,
high-efficiency applications in large, growth markets such as alternative energy, hybrid electric vehicles, distributed power generation, power quality, semiconductor fabrication capital
equipment, industrial motors and drives, and high reliability defense electronics.
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, except for
certain foreign shipments. If the product requires installation to be performed by us, all revenue related to the product is deferred and recognized upon the completion of the installation. If the
product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless we can objectively and reliably demonstrate that the
criteria specified in the acceptance
provisions are satisfied. When appropriate, we provide for a warranty reserve at the time the product revenue is recognized. If a contract involves the provisions of multiple elements and the elements
qualify for separation under EITF 00-21
Revenue Arrangements with Multiple Deliverables
, total estimated contact revenue is allocated
to each element based on the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another
element in the future. Revenue is recognized on each element as described above.
We
perform funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts. Cost
reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts may contain incentive clauses providing for increases or
decreases in the fee depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage of completion method based upon the proportion of costs
incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as services are performed. In each type of contract, we receive periodic progress payments or
payment upon
34
reaching
interim milestones and retain the rights to the intellectual property developed in government contracts. All payments to us for work performed on contracts with agencies of the U.S.
government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. The Defense Contract Audit Agency has agreed-upon the
final indirect cost rates for the fiscal year ended September 30, 2003. When the current estimates of total contract revenue and contract costs for product development contracts indicate a
loss, a provision for the entire loss on the contract is recorded. As of December 31, 2007 and 2006, we have accrued approximately $1.3 million and $0, respectively, for anticipated
contract losses on commercial contracts.
Cost
of product revenue includes material, labor and overhead. Costs incurred in connection with funded research and development and other revenue arrangements are included in funded
research and development and other revenue expenses.
Deferred
revenue consists of payments received from customers in advance of services performed, product shipped or installation completed.
Unbilled
contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred costs that have not yet been recognized as revenue or
billed to the customer.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is
based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial
condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.
Inventory
We value our inventory at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We
periodically review inventory quantities on hand and record a provision for excess and/or obsolete inventory based primarily on our estimated forecast of product demand, as well as based on historical
usage. Due to the custom and specific nature of certain of our products, demand and usage for products and materials can fluctuate significantly. A significant decrease in demand for our products
could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, our industry is characterized by rapid
technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although we
make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the
value of our inventory and our reported operating results.
Goodwill and Intangible Assets
Purchase accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets purchased
and liabilities assumed. We have accounted for our acquisitions using the purchase method of accounting. Values were assigned to goodwill and intangible assets based on third-party independent
valuations, as well as management's forecasts and projections that include assumptions related to future revenue and cash flows generated from the acquired assets.
We
have adopted the provisions of SFAS No. 142,
Goodwill and Other Intangible Assets
. This statement affects our treatment of
goodwill and other intangible assets. The statement requires
35
impairment
tests be periodically repeated and on an interim basis, if certain conditions exist, with impaired assets written down to fair value. Additionally, existing goodwill and intangible assets
must be assessed and classified within the statement's criteria. Intangible assets with finite useful lives will continue to be amortized over those periods. Amortization of goodwill and intangible
assets with indeterminable lives ceased.
We
determine the fair value of each of the reporting units based on a discounted cash flow income approach. The income approach indicates the fair value of a business enterprise based on
the discounted value of the cash flows that the business can be expected to generate in the future. This analysis is largely based upon projections prepared by us and data from sources of publicly
available information available at the time of preparation. These projections are based on management's best estimate of future results. In making these projections, we consider the markets we are
addressing, the competitive environment and our advantages. There will usually be differences between estimated and actual results as events and circumstances frequently do not occur as expected, and
those differences may be material. In addition, we perform a macro assessment of the overall likelihood that we would achieve the projected cash flows and performed sensitivity analysis using
historical data as the basis for projected cash flows.
Long-Lived Assets
We have adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
,
which supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of
, and the accounting and reporting provisions of APB Opinion No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. The statement requires that long-lived assets be reviewed for possible impairment, if certain conditions exist, with impaired assets written down
to fair value.
We
determine the fair value of certain of the long-lived assets based on a discounted cash flow income approach. The income approach indicates the fair value of a
long-lived assets based on the discounted value of the cash flows that the long-lived asset can be expected to generate in the future over the life of the
long-lived asset. This analysis is based upon projections prepared by us. These projections represent management's best estimate of future results. In making these projections, we consider
the markets we are addressing, the competitive environment and our advantages. There will usually be differences between estimated and actual results as events and circumstances frequently do not
occur as expected, and those differences may be material. In addition, we perform a macro assessment of the overall likelihood that we would achieve the projected cash flows and performed sensitivity
analysis using historical data as the basis for projected cash flows.
Convertible Debt Instruments and Warrant Liabilities
We accounted for our senior secured convertible notes (the "Convertible Notes"), which were paid off on November 7, 2007, and associated warrants in
accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities.
The Convertible Notes included features that qualify
as embedded derivatives, such as (i) the holders' conversion option, (ii) our option to settle the Convertible Notes at the scheduled dates in cash or shares of our common stock and
(iii) premiums and penalties we would be liable to pay in the event of default. As permitted under SFAS 155, we irrevocably elected, as of January 1, 2007, to measure the
Convertible Notes in their entirety at fair value with changes in fair value recognized as either gain or loss. Subsequent to the pay-off of the Convertible Notes, we will continue to
account for the associated warrants as described above.
We
recorded interest expense under the Convertible Notes based on the greater of (i) 7% or (ii) the six-month LIBOR, in effect at the time plus 350 basis
points, as well as the amortization of the debt discount, which we computed using the effective interest method. The debt discount represents the
36
difference
between our gross proceeds of $12.0 million and the fair value of the convertible debt upon issuance, after separately valuing the investor warrants, the placement agent warrants and
the Convertible Notes on a relative fair value basis. By amortizing the debt discount to interest expense, rather than recognizing it as a change in fair value of the Convertible debt instrument and
warrants, which is a separate line item in our statement of operations, we believe our interest expense line item more appropriately reflects the cost of the debt associated with our Convertible
Notes.
We
determined the fair values of the Convertible Notes, 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 Convertible Notes and related warrants. An increase in our common stock price would cause the fair values of both the Convertible Notes and warrants to
increase, because the conversion and exercise prices, respectively, of such instruments are fixed at $1.65 and $1.815 per share, respectively, and result in a charge to our statement of operations. A
decrease in our stock price would likewise cause the fair value of the Convertible Notes and the warrants to decrease and result in a credit to our statement of operations. If the price of our common
stock were to decline significantly, however, the decrease in the fair value of the Convertible Notes would be limited by the instrument's debt characteristics. Under such circumstances, our estimated
cost of capital would become another significant variable affecting the fair value of the Convertible Notes.
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 $51.9 million and $47.4 million as of December 31, 2007 and 2006,
respectively, 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.
Convertible Series C Preferred Stock
We account for our Convertible Series C Preferred Stock (the "Series C Preferred Stock"), and associated warrants in accordance with in accordance
with EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments,
allocating the proceeds
received net of transaction costs based on the relative fair value of the redeemable convertible Series C Preferred Stock and the warrants issued to the Investors, and then to any beneficial
conversion rights contained in the convertible redeemable preferred securities. 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 above, was treated as a cancellation of the original warrants issued on
November 8, 2007 and a re-issuance or new warrants on December 21, 2007. The difference in fair value of the warrant was
37
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. As of December 31, 2007 we recorded $11,947,881 as a deemed dividend to the holders of the Series C Preferred Stock, which included the beneficial
conversion feature 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 the holders of the Series C
Preferred Stock may first exercise their redemption right. We are using the effective interest method to accrete the carrying value of the Series C Preferred stock through November 8,
2011, at which time the value of the Series C Preferred Stock would be $30.0 million, 120% of its face value.
Recent Accounting Pronouncements
See Note F of our Notes to Consolidated Financial Statements for information regarding recently issued accounting pronouncements.
Results of Operations
Fiscal Year Ended December 31, 2007 ("2007") Compared to the Fiscal Year Ended December 31, 2006 ("2006").
Product Revenue.
Product revenue increased by $18.8 million, or 65%, from $28.8 million in 2006 to
$47.6 million in 2007. Product revenue by segment for the fiscal years ended December 31, 2007 and 2006 is as follows:
|
|
December 31,
|
|
|
|
|
|
|
|
Year Ended
|
|
Division
|
|
2007
|
|
2006
|
|
$ Change
|
|
% Change
|
|
|
|
(in thousands)
|
|
Power Systems, US
|
|
$
|
4,962
|
|
$
|
4,361
|
|
$
|
601
|
|
14
|
%
|
Power Systems, Canada
|
|
|
33,033
|
|
|
14,164
|
|
|
18,869
|
|
133
|
%
|
Electronics
|
|
|
9,582
|
|
|
10,241
|
|
|
(659
|
)
|
-6
|
%
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
$
|
47,577
|
|
$
|
28,766
|
|
$
|
18,810
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
The
increase of $18.8 million in revenue in 2007 in the Power Systems, Canada division, as compared to 2006, was largely due to an increase in Solar Inverter line revenue of
$12.4 million, an increase in Industrial Power Supply revenue of $4.8 million, an increase in Frequency Converter line revenue of approximately $0.8 million, an increase in Fuel
Cell Inverter product line revenue of approximately $0.4 million, an increase in Plasma product line revenue of approximately $0.3 million and an increase in other product revenue of
approximately $0.8 million.
Power
Systems, US, which currently focuses on Motors and Hybrid Electric Vehicle (HEV) components, saw revenues increase from approximately $4.4 million in 2006 to approximately
$5.0 million in 2007. The increase in product revenue related to our Power Systems, US product lines was mainly due to an increase in HEV product line revenue of approximately
$0.9 million, an increase in Motor
product line revenue of approximately $0.2 million and an increase in other revenue of approximately $0.1 million. These increases were offset by an overall decrease in our legacy
product line revenue, which include our Test and Measurement and MagLev product line, of approximately $0.5 million.
Revenues
in the Electronics division decreased approximately $0.7 million. The decrease was primarily due to a decrease in sales to government customers of approximately
$1.0 million offset by an overall increase in sales to commercial non-government customers of approximately $0.3 million.
Funded research and development and other revenue.
Funded research and development and other revenue increased
$4.0 million, or 80%, from $5.0 million in 2006 to $9.0 million in 2007. The increase in revenue is due to the delivery of two Stationary Rotary UPS ride through units which
accounted for approximately $3.0 million of the increase and an overall increase in revenue from our government contracts of $1.0 million.
38
Cost of product revenue.
Cost of product revenue increased $17.1 million, or 61%, from $27.8 million in 2006 to
$44.9 million in 2007. Cost of product revenue by division is broken out below.
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
|
|
Division
|
|
|
|
% Change
|
|
|
2007
|
|
2006
|
|
$ Change
|
|
|
|
(in thousands)
|
|
Power Systems, US
|
|
$
|
4,113
|
|
$
|
5,765
|
|
$
|
(1,652
|
)
|
(29
|
)%
|
Power Systems, Canada
|
|
|
33,074
|
|
|
13,545
|
|
|
19,529
|
|
144
|
%
|
Electronics
|
|
|
7,689
|
|
|
8,514
|
|
|
(825
|
)
|
(10
|
)%
|
|
|
|
|
|
|
|
|
|
|
Total cost of product revenue
|
|
$
|
44,876
|
|
$
|
27,823
|
|
$
|
17,052
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
The
increase was primarily attributable the mix of products sold during 2007 and higher revenues compared to 2006 in our Power Systems, Canada and US divisions. This increase was offset,
in part, by a decrease in overhead costs during the period in our Power Systems, US division and, in part, by a decrease in the cost of product revenue due to a decrease in revenue and lower material
and overhead costs during the period in our Electronics division. In our Power Systems, US division, a majority of the costs associated with a three phase StareSine unit, for which revenue was
recognized in 2007 had been written-down in prior periods resulting in the better than planned margins in our Power Systems, US division. In our Power Systems, Canada division, the
increase in costs is mainly due to the 133% increase in revenues from 2006 to 2007, along with increased material component cost, labor costs and the effects of the increase in the Canadian dollar
over the past year. In addition, the increase includes the write-off of approximately $1.3 million related to cost overruns in the production of several prototype units for the
Navy, for which we are seeking some economic relief due to design changes, increases in major component costs and increases in anticipated exchange rates; we have not booked any benefit for such
relief as of December 31, 2007.
Gross Margin.
Gross margins on product revenue improved from 3% in 2006 to approximately 6% in 2007. Gross margin by division
is broken out below.
|
|
Twelve Months Ended
December 31,
|
|
Division
|
|
|
2007
|
|
2006
|
|
Power Systems, US
|
|
17
|
%
|
(32
|
)%
|
Power Systems, Canada
|
|
0
|
%
|
4
|
%
|
Electronics
|
|
20
|
%
|
17
|
%
|
|
|
|
|
|
|
Total gross margin %
|
|
6
|
%
|
3
|
%
|
|
|
|
|
|
|
In
our Power Systems, US division, the increase in gross margin by 49% is a direct result of the reduced costs of the three phase StarSine unit recognized during 2007 and the results of
restructuring and streamlining the operating facility in 2006. Our Power Systems, Canada division had a decrease in gross margin of 4% partially due increased materials costs, increased overtime, for
which a premium is paid, the effect of the increase of the Canadian dollar over the past year and a one-time charge related to prototype costs that were in excess of the realizable amount
of approximately $1.3 million in 2007. The increase in gross margin of 3% in our Electronics division is primarily due to mix of products sold resulting in lower material costs.
Funded research and development and other revenue expenses.
Funded research and development and other revenue expenses
increased by approximately $2.7 million, or 68%, from $4.0 million in 2006 to $6.7 million in 2007. The gross margin on funded research and other revenue increased from 19% in
2006 to 25% in 2007. This increase is a due to the sale of two Stationary Ride Through UPS systems
39
during
2007, which have better margins than our traditional engineering services and continued increased efficiency in our engineering labor pool.
Unfunded research and development expenses.
We expended approximately $3.2 million on unfunded research and
development in 2007 compared with approximately $2.0 million spent in 2006. The spending in 2007 and 2006 was related primarily to unfunded engineering in our Electronics and Power Systems US
and Canada divisions for the development of new products and technologies.
Selling, general and administrative expenses.
Selling, general and administrative expenses decreased by approximately
$0.6 million, or 5.0%, from $13.0 million in 2006 to $12.4 million in 2007. Approximately $0.3 million of the decrease is directly attributable to compensation costs
related to the issuance of stock options to our employees and directors charged to operations during 2007 and 2006 pursuant to SFAS 123(R). Approximately $0.9 million of the decrease was
associated with reduced corporate costs and approximately $1.2 million of the decrease was due to the restructuring of our Power Systems, US division at the end of 2006, offset by higher sales
and marketing and general and administrative costs in our Power Systems, Canada division in 2007 of $1.1 million and our Applied Technology Division of approximately $0.3 million.
Amortization of intangibles.
Amortization of intangibles decreased approximately $0.1 million due to some items
becoming fully amortized during 2007.
Gain on sale of assets.
In 2006, we received approximately $0.4 million related to our 2004 sale of our SPLC
technology. There are no further amounts due related to this sale.
Restructuring costs.
During 2006 we commenced a restructuring plan designed to streamline our manufacturing and production
base, improve efficiency and enhance our competitiveness and recorded a restructuring charge of approximately $1.6 million. These charges are comprised employee severance and benefits costs and
the write-down in carrying value of assets along with the settlement of the Worcester facility lease. (See Note T. Restructuring Costs). The total pre-tax charges
included employee severance and benefits costs of approximately $0.2 million, the write down in carrying value of assets (of which approximately $0.2 million were recorded in the period
ended December 31, 2006) and facility exit costs of approximately $1.1 million, for which we issued 850,000 shares of common stock to the landlord on January 3, 2007 as
consideration for the early termination of the lease. We incurred approximately $0.1 million in additional costs associated with our restructuring in 2007.
Change in fair value of the Convertible Notes and related warrants.
There was an increase in the fair value related to the
Convertible Notes and related warrants during 2007, resulting in an expense of approximately $2.3 million. One factor that contributes to the change in fair value of the Convertible Notes and
related warrants is our stock price. The Convertible Notes were paid off in November 2007. (See Note G
Convertible Debt Instrument and Warrant
Liabilities
)
Other Income (expense).
Other expense was approximately $1.0 million for 2007 compared to other income of approximately
$0.1 million
for 2006. Other expense for 2007 consists primarily of consulting services related to the valuation of our Convertible Note financing transaction as well as other expenses not related to ongoing
operations offset by approximately $0.1 million in foreign exchange gains from Power Systems Canada related to inter-company balances. Other income for 2006 consists primarily of payments
received for miscellaneous items sold during the period that had previously been charged off in prior periods.
Interest income.
Interest income decreased slightly from approximately $0.4 million in 2006 to approximately
$0.3 million in 2007. The decrease is directly attributable to our cash on hand.
40
Interest expense.
Interest expense for 2007 was approximately $3.8 million, which is comprised primarily of the
following:
-
-
$0.7 million
in non-cash interest related to the Convertible Notes, which was paid in shares of common stock,
-
-
$0.1 million
in cash interest paid related to the Convertible Notes,
-
-
$0.2 million
paid related to the New Notes, which were repaid in full on December 20, 2007,
-
-
$2.1 million
in amortization of the debt discount related to the valuation of the Convertible Notes,
-
-
$0.3 million
of non-cash interest associated with dividends on the Series B Preferred Stock, which we paid in shares of common stock, and
-
-
$0.5 million
related to the change in the Series B Preferred Stock conversion price as a result of subsequent issuances of equity-based securities due to its
anti-dilution provision.
In
2006 interest expense was approximately $1.4 million and was comprised of the following:
-
-
Approximately
$0.5 million in interest related to the Convertible Notes, which was paid in shares of common stock,
-
-
$0.5 million
in amortization of the debt discount related to the valuation of the Convertible Notes,
-
-
$0.1 million
of non-cash interest associated with dividends on the Series B Preferred Stock, which were paid in shares of common stock,
-
-
approximately
$0.1 million related to change in the Series B Preferred Stock conversion price as a result of the Convertible Note financing transaction due to
its anti-dilution provisions, and
-
-
$0.1 million
in interest charges related to our credit facility with Silicon Valley Bank, which was terminated on July 19, 2006.
Deferred Revenue.
Deferred revenue was $8.1 million at December 31, 2007, an increase of $2.3 million
from the $5.8 million balance at December 31, 2006. During 2007 we recognized previously deferred revenue in our Applied Technology division of approximately $1.2 million and
approximately $5.3 million related to the sale of an industrial power supply in our Power Systems, Canada division. We record deferred revenue (i) when a customer pays in advance or
(ii) when provisions for revenue recognition on items shipped have not been achieved or the items have not yet been received by the customer due to shipping terms such as FOB destination.
Currently deferred revenue is composed of approximately $2.6 million Rotary UPS units that have been shipped to the customer site and are awaiting customer installation and final
on-site acceptance testing, which is scheduled to occur in the later stages of 2008, $1.7 million in our Applied Technology division related to the second stage of a Flywheel
Generation Set order for which the customer has paid a significant portion of the sales price in advance of delivery, which is expected to occur in the beginning of 2008, and approximately
$3.4 million in our Power Systems, Canada division related to pre-payments received on orders currently being manufactured.
41
Quarterly Results of Operations (Unaudited)
The following table presents unaudited quarterly statement of operations data for the eight quarters ended December 31, 2007. This data has been prepared
on a basis consistent with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. This data includes all adjustments, consisting solely
of normal recurring adjustments, which we believe necessary for a fair presentation of this information. The operating results for any quarter are not necessarily indicative of results to be expected
for any future period.
|
|
Three Months Ended
|
|
|
|
Dec. 31,
2007
|
|
Sept. 29,
2007
|
|
June 30,
2007
|
|
Mar. 31,
2007
|
|
Dec. 31,
2006
|
|
Sept. 30,
2006
|
|
July 1,
2006
|
|
April 1,
2006
|
|
|
|
(in thousands, except per share data)
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
12,858
|
|
$
|
18,266
|
|
$
|
9,919
|
|
$
|
6,533
|
|
$
|
8,021
|
|
$
|
7,232
|
|
$
|
6,853
|
|
$
|
6,661
|
|
Funded research and development and other revenue
|
|
|
2,710
|
|
|
2,725
|
|
|
1,775
|
|
|
1,785
|
|
|
1,534
|
|
|
1,259
|
|
|
1,250
|
|
|
946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
15,568
|
|
|
20,991
|
|
|
11,694
|
|
|
8,318
|
|
|
9,555
|
|
|
8,491
|
|
|
8,103
|
|
|
7,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
12,312
|
|
|
16,149
|
|
|
10,045
|
|
|
6,370
|
|
|
8,039
|
|
|
7,264
|
|
|
6,676
|
|
|
5,845
|
|
Research and development and other revenue expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded research and development and other revenue expenses
|
|
|
2,069
|
|
|
1,990
|
|
|
1,312
|
|
|
1,357
|
|
|
839
|
|
|
1,123
|
|
|
1,100
|
|
|
978
|
|
Unfunded research and development expenses
|
|
|
988
|
|
|
848
|
|
|
646
|
|
|
677
|
|
|
405
|
|
|
522
|
|
|
513
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development and other revenue expenses
|
|
|
3,057
|
|
|
2,838
|
|
|
1,958
|
|
|
2,034
|
|
|
1,244
|
|
|
1,645
|
|
|
1,613
|
|
|
1,538
|
|
Selling, general and administrative expenses
|
|
|
3,490
|
|
|
3,058
|
|
|
3,114
|
|
|
2,742
|
|
|
3,356
|
|
|
2,899
|
|
|
3,394
|
|
|
3,359
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|
(190
|
)
|
|
|
|
Restructuring costs
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
1,157
|
|
|
262
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
|
79
|
|
|
79
|
|
|
84
|
|
|
110
|
|
|
110
|
|
|
98
|
|
|
112
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
18,938
|
|
|
22,124
|
|
|
15,201
|
|
|
11,338
|
|
|
13,906
|
|
|
11,959
|
|
|
11,605
|
|
|
10,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,369
|
)
|
|
(1,133
|
)
|
|
(3,507
|
)
|
|
(3,021
|
)
|
|
(4,351
|
)
|
|
(3,468
|
)
|
|
(3,502
|
)
|
|
(3,247
|
)
|
Change in value of convertible notes and warrants
|
|
|
(1,829
|
)
|
|
(1,008
|
)
|
|
385
|
|
|
200
|
|
|
(619
|
)
|
|
(3,573
|
)
|
|
|
|
|
|
|
Other income (loss)
|
|
|
(847
|
)
|
|
(64
|
)
|
|
(25
|
)
|
|
(41
|
)
|
|
127
|
|
|
(150
|
)
|
|
42
|
|
|
21
|
|
Interest income
|
|
|
101
|
|
|
57
|
|
|
37
|
|
|
86
|
|
|
110
|
|
|
122
|
|
|
57
|
|
|
95
|
|
Interest expense
|
|
|
(2,058
|
)
|
|
(496
|
)
|
|
(626
|
)
|
|
(610
|
)
|
|
(742
|
)
|
|
(515
|
)
|
|
(85
|
)
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,001
|
)
|
$
|
(2,645
|
)
|
$
|
(3,737
|
)
|
$
|
(3,385
|
)
|
$
|
(5,475
|
)
|
$
|
(7,584
|
)
|
$
|
(3,488
|
)
|
$
|
(3,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend on Series C Preferred Stock
|
|
$
|
(11,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend on Series C Preferred Stock
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(20,049
|
)
|
$
|
(2,645
|
)
|
$
|
(3,737
|
)
|
$
|
(3,385
|
)
|
$
|
(5,475
|
)
|
$
|
(7,584
|
)
|
$
|
(3,488
|
)
|
$
|
(3,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per weighted average share, basic and diluted
|
|
$
|
(0.40
|
)
|
$
|
(0.06
|
)
|
$
|
(0.09
|
)
|
$
|
(0.08
|
)
|
$
|
(0.14
|
)
|
$
|
(0.19
|
)
|
$
|
(0.09
|
)
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares, basic and diluted
|
|
|
49,629
|
|
|
47,841
|
|
|
42,869
|
|
|
41,395
|
|
|
40,002
|
|
|
39,519
|
|
|
39,115
|
|
|
38,524
|
|
42
Liquidity and Capital Resources
As of December 31, 2007, we had $12.7 million of cash, of which approximately $0.1 million was restricted.
Based
upon our current working capital position, current operating plans and expected business conditions, we believe that our current cash, as well as the availability from our new line
of credit with Silicon Valley Bank, will be adequate to fund our operations through December 31, 2008. In the long run, we expect to fund our working capital needs and other commitments
primarily through our operating cash flow, which we expect to improve as we improve our operating margins and grow our business. We also expect to rely on our credit facility to fund a portion of our
capital needs and other commitments.
Our
funding plans for our working capital needs and other commitments may be adversely impacted if we fail to realize our underlying assumed levels of revenues and expenses or if we fail
to remain in compliance with the covenants of our bank line. If either of those events occur, we may need to raise additional funds in order to sustain operations by selling equity or taking other
actions to conserve our cash position, which could include selling of certain assets, delaying capital expenditures and incurring additional indebtedness, subject to the restrictions in the preferred
stock financing with the investors and in the new credit facility with Silicon Valley Bank. Such actions would likely require the consent of the Investors and/or Silicon Valley Bank, and there can be
no assurance that such consents would be given. Furthermore, there can be no assurance that we will be able to raise such funds if they are required.
If
additional funds are raised in the future through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and our
stockholders will experience additional dilution. The terms of additional funding may also limit our operating and financial flexibility. There can be no assurance that additional financing of any
kind will be available to us on terms acceptable to us, or at all. Failure to obtain future funding when needed or on acceptable terms would materially, adversely affect our results of operations.
As
a result of the preferred stock financing, the holders of certain outstanding warrants had the right for a limited period of time (45 days after each closing) to seek
redemption of those warrants at their Black-Scholes value. During the fourth quarter of fiscal 2007, we paid approximately $2.1 million to redeem Warrant As representing 1,242,426 shares of
common stock and Warrant Cs representing 621,215 shares of common stock. During the first quarter of fiscal 2008, we paid approximately $0.6 million to redeem Warrant As representing 303,031
shares of common stock and Warrant Cs representing 151,516 shares of common stock. Following these redemptions, as of February 28, 2008, Warrant As representing 2,090,911 shares of common stock
and Warrant Cs representing 1,045,456 shares of common stock remain outstanding. The redemption periods under these warrants associated with our preferred stock financing have expired. If these
redemption rights are triggered again in the future as a result of subsequent equity issuances below $1.65 per share, our liquidity position would be adversely impacted.
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 December 31, 2007, we had an accumulated deficit of approximately $176.8 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 previous line of credit and capital equipment leases.
As
of December 31, 2007, our cash and cash equivalents were $12.7 million, including restricted cash and cash equivalents of $0.1 million; this represents increase
in our cash and cash equivalents of approximately $4.4 million from the $8.3 million on hand at December 31, 2006. Cash used in
43
operating
activities for the year ended December 31, 2007 was $10.3 million as compared to $9.8 million for the year ended December 31, 2006. Cash used in operating
activities during the year ended December 31, 2007 was primarily attributable to the net loss of approximately $17.8 million offset by non-cash items such as the change in
the fair value of the Convertible Notes and placement agent fees, depreciation and amortization, deferred revenue, increases in allowances for uncollectible accounts and excess and obsolete inventory,
non-cash compensation and consulting expense, non-cash interest expense and decreases in working capital.
Cash
used in investing activities during the year ended December 31, 2007 was $1.3 million as compared to $0.1 million for the year ended December 31, 2006.
Cash used in investing activities during the fiscal years ended December 31, 2007 and December 31, 2006, was a result of capital expenditures during each of the respective periods. In
addition, during the fiscal year ended December 31, 2006 we recorded approximately $0.4 million related to the sale of our SPLC technology.
Cash
provided by financing activities for the year ended December 31, 2007 was $17.9 million as compared to $8.1 million for the year ended December 31, 2006.
Net cash provided by financing activities during 2007 includes net proceeds from the sale of Series C Preferred Stock of approximately $23.9 million, approximately $4.7 million in
net proceeds related to cash received upon the exercise of the Warrant Bs in July 2007 and $1.0 million decrease in restricted cash, offset by approximately
$9.5 million related to monthly principal payments and final settlement of our Convertible Notes and approximately $2.1 million related to payments to certain Warrant A and Warrant C
holders that exercised their redemption rights under these warrants. Net cash provided by financing activities during 2006 includes $11.0 million of net proceeds from the Convertible Note
private placement, $1.0 million designated as restricted cash, and approximately $0.3 million received from the exercise of incentive stock options and warrants to purchase common stock,
offset in part by approximately $0.2 million related to payments on our capital lease obligations and $2.0 million related to payments on our bank line of credit.
Payments Due Under Contractual Obligations
The following table summarizes the payments due under our contractual obligations at December 31, 2007, and the effect such obligations are expected to
have on liquidity and cash flow in future periods:
Calendar Years Ending December 31,
|
|
Capital Leases
|
|
Operating Leases
|
2008
|
|
$
|
|
|
$
|
1,442,770
|
2009
|
|
|
|
|
$
|
1,058,346
|
2010
|
|
|
|
|
$
|
523,797
|
2011
|
|
|
|
|
$
|
159,408
|
2012
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
3,184,321
|
|
|
|
|
|
We
lease equipment and office space under non-cancelable capital and operating leases. The future minimum rental payments, as of December 31, 2007, under the capital
and operating leases with non-cancelable terms are included in the table above.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or
operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are
44
not
consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.
Effects of Inflation
We believe that inflation and changing prices over the past three years have not had a significant impact on our net revenue or on our income from continuing
operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required.
45
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
SatCon Technology Corporation:
We
have audited the accompanying consolidated balance sheets of SatCon Technology Corporation and its subsidiaries (the Company) (a Delaware corporation) as of December 31, 2007
and December 31, 2006 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and comprehensive loss and cash flows for the years ended
December 31, 2007 and 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of SatCon Technology Corporation and
its subsidiaries as of December 31, 2007 and 2006 and the consolidated results of their operations and their cash flows for the years ended December 31, 2007 and 2006, in conformity with
accounting principles generally accepted in the United States of America.
Boston,
Massachusetts
March 25, 2008
47
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
2007
|
|
December 31,
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,615,566
|
|
$
|
7,190,827
|
|
|
Restricted cash and cash equivalents
|
|
|
84,000
|
|
|
84,000
|
|
|
Accounts receivable, net of allowance of $211,263 and $792,245 at December 31, 2007 and 2006, respectively
|
|
|
10,462,323
|
|
|
8,549,923
|
|
|
Unbilled contract costs and fees
|
|
|
536,567
|
|
|
267,247
|
|
|
Inventory
|
|
|
17,190,424
|
|
|
7,945,874
|
|
|
Prepaid expenses and other current assets
|
|
|
1,073,194
|
|
|
756,884
|
|
|
|
|
|
|
|
|
Total current assets
|
|
$
|
41,962,074
|
|
$
|
24,794,755
|
|
Property and equipment, net
|
|
|
3,059,651
|
|
|
2,783,900
|
|
Goodwill, net
|
|
|
704,362
|
|
|
704,362
|
|
Intangibles, net
|
|
|
793,739
|
|
|
1,224,488
|
|
Restricted cash
|
|
|
|
|
|
1,000,000
|
|
Other long-term assets
|
|
|
88,851
|
|
|
69,782
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
46,608,677
|
|
$
|
30,577,287
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
$
|
123,219
|
|
|
Accounts payable
|
|
|
9,153,234
|
|
|
4,538,569
|
|
|
Accrued payroll and payroll related expenses
|
|
|
1,880,867
|
|
|
1,449,185
|
|
|
Other accrued expenses
|
|
|
3,453,883
|
|
|
2,405,447
|
|
|
Accrued contract losses
|
|
|
1,300,000
|
|
|
|
|
|
Accrued restructuring costs
|
|
|
|
|
|
1,200,326
|
|
|
Current portion of senior secured convertible notes
|
|
|
|
|
|
5,500,000
|
|
|
Current portion of warrant liability
|
|
|
|
|
|
436,919
|
|
|
Deferred revenue
|
|
|
8,103,093
|
|
|
5,834,537
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
23,991,077
|
|
$
|
21,488,202
|
|
Long-term Senior secured convertible notes, net of current portion
|
|
$
|
|
|
$
|
7,240,482
|
|
Long-term warrant liability, net of current portion
|
|
|
3,244,316
|
|
|
2,483,634
|
|
Redeemable convertible Series B preferred stock (340 and 345 shares issued and outstanding at December 31, 2007 and 2006, respectively; face value $5,000 per share; liquidation preference $1,700,000 and $1,725,000,
respectively.
|
|
|
1,700,000
|
|
|
1,725,000
|
|
Other long-term liabilities
|
|
|
133,900
|
|
|
108,049
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
28,969,293
|
|
$
|
33,045,367
|
|
Commitments and contingencies (Note L)
|
|
|
|
|
|
|
|
Redeemable convertible Series C preferred stock (25,000 shares issued and outstanding at December 31, 2007, face value $1,000 per share, liquidation preference $30,000,000 at December 31, 2007)
|
|
|
13,276,091
|
|
|
|
|
Stockholders' equity (deficit):
|
|
|
|
|
|
|
|
|
Common stock; $0.01 par value, 200,000,000 and 100,000,000 shares authorized; 49,803,979 and 40,105,073 shares issued and outstanding at December 31, 2007 and 2006, respectively
|
|
|
498,040
|
|
|
401,051
|
|
|
Additional paid-in capital
|
|
|
180,933,100
|
|
|
156,379,193
|
|
|
Accumulated deficit
|
|
|
(176,757,615
|
)
|
|
(158,991,838
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(310,232
|
)
|
|
(256,486
|
)
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit)
|
|
$
|
4,363,293
|
|
$
|
(2,468,080
|
)
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
46,608,677
|
|
$
|
30,577,287
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
48
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Revenue:
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
47,576,601
|
|
$
|
28,766,647
|
|
Funded research and development and other revenue
|
|
|
8,994,582
|
|
|
4,990,022
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
56,571,183
|
|
|
33,756,669
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
|
44,875,818
|
|
|
27,823,402
|
|
Research and development and other revenue expenses:
|
|
|
|
|
|
|
|
|
Funded research and development and other revenue expenses
|
|
|
6,727,122
|
|
|
4,041,137
|
|
|
Unfunded research and development expenses
|
|
|
3,159,184
|
|
|
2,000,271
|
|
|
|
|
|
|
|
Total research and development and other revenue expenses
|
|
|
9,886,306
|
|
|
6,041,408
|
|
Selling, general and administrative expenses
|
|
|
12,403,952
|
|
|
13,007,946
|
|
Amortization of intangibles
|
|
|
350,739
|
|
|
430,959
|
|
Gain on sale of assets
|
|
|
|
|
|
(399,015
|
)
|
Restructuring costs
|
|
|
81,644
|
|
|
1,418,928
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
67,598,459
|
|
|
48,323,628
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(11,027,276
|
)
|
|
(14,566,959
|
)
|
Change in fair value of notes and warrants
|
|
|
(2,252,264
|
)
|
|
(4,191,768
|
)
|
Other (loss) income, net
|
|
|
(976,776
|
)
|
|
41,086
|
|
Interest income
|
|
|
280,392
|
|
|
384,394
|
|
Interest expense
|
|
|
(3,789,853
|
)
|
|
(1,444,764
|
)
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,765,777
|
)
|
$
|
(19,778,011
|
)
|
|
|
|
|
|
|
Deemed dividend and accretion on Series C Preferred Stock
|
|
$
|
(11,947,881
|
)
|
|
|
|
Dividend on Series C Preferred Stock
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(29,813,658
|
)
|
$
|
(19,778,011
|
)
|
|
|
|
|
|
|
Net loss attributable to common stockholders per weighted average share, basic and diluted
|
|
$
|
(0.66
|
)
|
$
|
(0.50
|
)
|
|
|
|
|
|
|
Weighted average number of common shares, basic and diluted
|
|
|
45,433,539
|
|
|
39,290,167
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
49
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
For the Year Ended December 31, 2007
|
|
Common Shares
|
|
Common Stock
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Total Stockholders' Equity (Deficit)
|
|
Comprehensive Loss
|
|
Balance, December 31, 2006
|
|
40,105,073
|
|
$
|
401,051
|
|
$
|
156,379,193
|
|
$
|
(158,991,838
|
)
|
$
|
(256,486
|
)
|
$
|
(2,468,080
|
)
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(17,765,777
|
)
|
|
|
|
|
(17,765,777
|
)
|
$
|
(17,765,777
|
)
|
Beneficial conversion feature on Series C Preferred Stock
|
|
|
|
|
|
|
|
11,762,887
|
|
|
|
|
|
|
|
|
11,762,887
|
|
|
|
|
Series C Preferred Stock deemed dividend
|
|
|
|
|
|
|
|
(11,762,887
|
)
|
|
|
|
|
|
|
|
(11,762,887
|
)
|
|
|
|
Issuance of warrants and re-pricing of warrants to Series C Preferred Stock holders
|
|
|
|
|
|
|
|
10,092,623
|
|
|
|
|
|
|
|
|
10,092,623
|
|
|
|
|
Accretion of Series C Preferred Stock to its carrying value
|
|
|
|
|
|
|
|
(184,994
|
)
|
|
|
|
|
|
|
|
(184,994
|
)
|
|
|
|
Dividend on Series C Preferred Stock
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
|
Issuance of common stock to 401(k) Plan
|
|
474,379
|
|
|
4,744
|
|
|
562,417
|
|
|
|
|
|
|
|
|
567,161
|
|
|
|
|
Issuance of common stock in connection with the exercise of stock options to purchase common stock
|
|
27,205
|
|
|
272
|
|
|
20,420
|
|
|
|
|
|
|
|
|
20,692
|
|
|
|
|
Issuance of common stock in connection with the termination of Worcester lease
|
|
850,000
|
|
|
8,500
|
|
|
1,113,500
|
|
|
|
|
|
|
|
|
1,122,000
|
|
|
|
|
Issuance of common stock in lieu of cash principal payments on the Convertible Notes
|
|
3,163,186
|
|
|
31,632
|
|
|
3,777,814
|
|
|
|
|
|
|
|
|
3,809,446
|
|
|
|
|
Issuance of common stock in lieu of cash interest on the Convertible Notes
|
|
396,522
|
|
|
3,965
|
|
|
514,200
|
|
|
|
|
|
|
|
|
518,165
|
|
|
|
|
Issuance of common stock in connection with the exercise of Warrant Bs
|
|
3,636,368
|
|
|
36,364
|
|
|
5,525,006
|
|
|
|
|
|
|
|
|
5,561,370
|
|
|
|
|
Issuance of common stock to Convertible Note holders as incentive to accelerate pay-off of the Convertible Notes
|
|
749,999
|
|
|
7,500
|
|
|
907,499
|
|
|
|
|
|
|
|
|
914,999
|
|
|
|
|
Issuance of common stock upon conversion of a portion of the Convertible Notes
|
|
318,182
|
|
|
3,182
|
|
|
521,818
|
|
|
|
|
|
|
|
|
525,000
|
|
|
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
1,112,099
|
|
|
|
|
|
|
|
|
1,112,099
|
|
|
|
|
Issuance of common stock in lieu of six-months cash dividend on redeemable convertible Series B preferred stock
|
|
70,045
|
|
|
700
|
|
|
137,156
|
|
|
|
|
|
|
|
|
137,856
|
|
|
|
|
Issuance of common stock in connection with the conversion of Series B preferred stock
|
|
13,020
|
|
|
130
|
|
|
24,870
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
Adjustment to conversion price of Series B preferred stock, due to anti-dilution provisions
|
|
|
|
|
|
|
|
529,479
|
|
|
|
|
|
|
|
|
529,479
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,746
|
)
|
|
(53,746
|
)
|
|
(53,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(17,819,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
49,803,979
|
|
$
|
498,040
|
|
$
|
180,933,100
|
|
$
|
(176,757,615
|
)
|
$
|
(310,232
|
)
|
$
|
4,363,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements
50
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
For the Year Ended December 31, 2006
|
|
Common
Shares
|
|
Common
Stock
|
|
Additional Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated Other
Comprehensive Loss
|
|
Total Stockholders'
Equity (deficit)
|
|
Comprehensive
Loss
|
|
Balance, December 31, 2005
|
|
38,382,706
|
|
$
|
383,827
|
|
$
|
153,450,771
|
|
$
|
(139,213,827
|
)
|
$
|
(119,702
|
)
|
$
|
14,501,069
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(19,778,011
|
)
|
|
|
|
|
(19,778,011
|
)
|
|
(19,778,011
|
)
|
Issuance of common stock to 401(k) Plan
|
|
391,431
|
|
|
3,914
|
|
|
600,826
|
|
|
|
|
|
|
|
|
604,740
|
|
|
|
|
Issuance of common stock in connection with the exercise of stock options to purchase common stock and issuance of restricted stock to employees
|
|
279,851
|
|
|
2,799
|
|
|
359,973
|
|
|
|
|
|
|
|
|
362,772
|
|
|
|
|
Issuance of common stock in lieu of six-months dividend on redeemable convertible Series B preferred stock
|
|
70,792
|
|
|
708
|
|
|
151,070
|
|
|
|
|
|
|
|
|
151,778
|
|
|
|
|
Issuance of common stock in connection with the exercise of warrants to purchase common stock
|
|
430,134
|
|
|
4,301
|
|
|
(4,097
|
)
|
|
|
|
|
|
|
|
204
|
|
|
|
|
Issuance of common stock in connection with the conversion of redeemable convertible Series B preferred stock
|
|
180,995
|
|
|
1,810
|
|
|
398,190
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
Issuance of common stock in lieu of cash interest on July 19, 2006 Convertible Notes
|
|
369,164
|
|
|
3,692
|
|
|
311,168
|
|
|
|
|
|
|
|
|
314,860
|
|
|
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
986,251
|
|
|
|
|
|
|
|
|
986,251
|
|
|
|
|
Adjustment to conversion price of Series B preferred stock, due to anti-dilution provisions
|
|
|
|
|
|
|
|
125,041
|
|
|
|
|
|
|
|
|
125,041
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136,784
|
)
|
|
(136,784
|
)
|
|
(136,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(19,914,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
40,105,073
|
|
$
|
401,051
|
|
$
|
156,379,193
|
|
$
|
(158,991,838
|
)
|
$
|
(256,486
|
)
|
$
|
(2,468,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements
51
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,765,777
|
)
|
$
|
(19,778,011
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,552,933
|
|
|
1,446,121
|
|
|
Provision (recovery) for uncollectible accounts
|
|
|
70,295
|
|
|
(8,409
|
)
|
|
Provision for excess and obsolete inventory
|
|
|
237,492
|
|
|
248,299
|
|
|
Non-cash compensation expense related to issuance of stock options and warrants to employees and non-employees and issuance of common stock to 401(k) Plan, including stock based compensation costs of $1,112,099 and $986,251
for the years ended December 31, 2007 and 2006, respectively
|
|
|
2,586,242
|
|
|
1,588,554
|
|
|
Change in fair value of Senior Secured Convertible Notes and investor and placement agent warrant liability
|
|
|
2,252,264
|
|
|
3,998,651
|
|
|
Non-cash interest expense
|
|
|
3,581,760
|
|
|
1,314,747
|
|
|
Non-cash restructuring charges
|
|
|
|
|
|
1,532,231
|
|
|
Gain on sale of assets held for sale
|
|
|
|
|
|
(399,015
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(878,636
|
)
|
|
(3,208,846
|
)
|
|
Unbilled contract costs and fees
|
|
|
(269,320
|
)
|
|
(152,348
|
)
|
|
Prepaid expenses and other assets
|
|
|
(1,027,434
|
)
|
|
(60,889
|
)
|
|
Inventory
|
|
|
(8,408,636
|
)
|
|
(1,692,005
|
)
|
|
Other long-term assets
|
|
|
(19,069
|
)
|
|
481,968
|
|
|
Accounts payable
|
|
|
3,867,176
|
|
|
1,294,894
|
|
|
Accrued expenses and payroll
|
|
|
1,933,548
|
|
|
321,593
|
|
|
Accrued restructuring
|
|
|
(1,200,326
|
)
|
|
78,326
|
|
|
Accrued contract losses
|
|
|
1,447,161
|
|
|
(84,779
|
)
|
|
Deferred revenue
|
|
|
1,694,641
|
|
|
3,474,865
|
|
|
|
Other current liabilities
|
|
|
25,851
|
|
|
(226,386
|
)
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
7,445,942
|
|
|
9,947,572
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(10,319,835
|
)
|
|
(9,830,439
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,267,434
|
)
|
|
(546,388
|
)
|
|
Proceeds from sale of assets
|
|
|
|
|
|
406,364
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,267,434
|
)
|
|
(140,024
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net repayment under line of credit
|
|
|
|
|
|
(2,000,000
|
)
|
|
Proceeds from short-term loan
|
|
|
10,000,000
|
|
|
|
|
|
Repayment of short-term loan
|
|
|
(10,000,000
|
)
|
|
|
|
|
Repayment of long-term debt
|
|
|
(123,219
|
)
|
|
(150,415
|
)
|
|
Net proceeds from issuance of convertible redeemable Series C preferred stock
|
|
|
23,856,281
|
|
|
|
|
|
Net proceeds from issuance of Senior Secured Convertible Notes
|
|
|
|
|
|
10,935,793
|
|
|
Repayment of Senior Secured Convertible Notes
|
|
|
(9,477,293
|
)
|
|
|
|
|
Payments related to warrant holder redemption rights
|
|
|
(2,099,958
|
)
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
1,000,000
|
|
|
(1,000,000
|
)
|
|
Net proceeds from issuance of common stock from the exercise of warrants
|
|
|
4,688,642
|
|
|
204
|
|
|
Proceeds from exercise of stock options
|
|
|
20,692
|
|
|
317,772
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
17,865,145
|
|
|
8,103,354
|
|
|
|
|
|
|
|
Effects of foreign currency exchange rates on cash and cash equivalents
|
|
|
(853,137
|
)
|
|
(136,784
|
)
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,424,739
|
|
|
(2,003,893
|
)
|
Cash and cash equivalents at beginning of year
|
|
$
|
7,190,827
|
|
$
|
9,194,720
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
12,615,566
|
|
$
|
7,190,827
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
52
SATCON TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 and 2006
A. THE COMPANY
SatCon Technology Corporation (the "Company" or "SatCon") was organized as a Massachusetts corporation in February 1985 and reincorporated in Delaware in 1992.
The Company designs and manufactures enabling technologies and products for electrical power conversion and control for high-performance, high-efficiency applications in large,
growth markets such as alternative energy, hybrid electric vehicles, distributed power generation, power quality, semiconductor fabrication capital equipment, industrial motors and drives, and high
reliability defense electronics.
The
accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.
B. REALIZATION OF ASSETS AND LIQUIDITY
The Company anticipates that its current cash, along with the availability under its new credit facility with Silicon Valley Bank, will be sufficient to fund its
operations through at least December 31, 2008. The Company has developed a business plan that envisions a significant increase in revenue and significant reductions in the cost structure and
the cash burn rate from the results experienced in the recent past and 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 would need to raise additional funds in the near future in order to sustain operations by selling equity or taking other
actions to conserve its cash position, which could include selling of certain assets and incurring additional indebtedness, subject to the restrictions in the preferred stock financing with the
Investors. Such actions would likely require the consent of the Investors, and there can be no assurance that such consent would be given. Furthermore, there can be no assurance that the Company will
be able to raise such funds if they are required.
C. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Consolidation
The consolidated financial statements include the accounts of SatCon and its wholly-owned subsidiaries (SatCon Applied Technology, Inc., SatCon
Electronics, Inc., SatCon Power Systems, Inc. and SatCon Power Systems Canada, Ltd.). All intercompany accounts and transactions have been eliminated in consolidation.
Change in Year End
On September 19, 2006, the Company's Board of Directors approved a change in the fiscal year end from September 30 to December 31.
Revenue Recognition
The Company recognizes revenue from product sales in accordance with Staff Accounting Bulletin (SAB) No. 104,
Revenue
Recognition
. Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has
occurred and the Company has determined that collection of the fee is probable. Title to the product passes upon shipment of the product, as the products are typically shipped FOB shipping point,
except
53
for
certain foreign shipments. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the
installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and
reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate the Company provides for a warranty reserve at the time the product revenue is recognized.
If a contract involves the provisions of multiple elements and the elements qualify for separation under EITF 00-21,
Revenue Arrangements with Multiple
Deliverables
, total estimated contact revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each
element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as described above.
The
Company performs funded research and development and product development for commercial companies and government agencies under both cost reimbursement and fixed-price contracts.
Product development revenue is included in product revenue. Cost reimbursement contracts provide for the reimbursement of allowable costs and, in some situations, the payment of a fee. These contracts
may contain incentive clauses providing for increases or decreases in the fees depending on how costs compare with a budget. On fixed-price contracts, revenue is generally recognized on the percentage
of completion method based upon the proportion of costs incurred to the total estimated costs for the contract. Revenue from reimbursement contracts is recognized as the services are performed. In
each type of contract, the Company receives periodic progress payments or payments upon reaching interim milestones. All payments to the Company for work performed on contracts with agencies of the
U.S. government are subject to audit and adjustment by the Defense Contract Audit Agency. Adjustments are recognized in the period made. When the current estimates of total contract revenue for
commercial product development contracts indicate a loss, a provision for the entire loss on the contract is recorded. As of December 31, 2007 and 2006, the Company has accrued
$1.3 million and $0, respectively, for anticipated contract losses on commercial contracts.
Cost
of product revenue includes materials, labor and overhead. Costs incurred in connection with funded research and development and other revenue arrangements are included in research
and development and other revenue expenses.
Deferred
revenue consists of payments received from customers in advance of services performed, product shipped or installation completed.
Unbilled Contract Costs and Fees and Funded Research and Development Costs in Excess of Billings
Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred costs that have not been
recognized as revenue or billed to the customer.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, overnight repurchase agreements with Silicon Valley Bank and highly liquid investments with maturities of three
months or less when acquired. Cash equivalents are stated at cost, which approximates market value. At December 31, 2007 and 2006, the Company has restricted cash as indicated in the table
below. In addition, at December 31, 2007 and
54
2006,
the Company had overnight repurchase agreements with Silicon Valley Bank of $1,763,502 and $296,844, respectively.
|
|
December 31,
|
Restricted Cash
|
|
2007
|
|
2006
|
Senior Secured Notes
|
|
$
|
|
|
$
|
1,000,000
|
Security deposits
|
|
|
34,000
|
|
|
34,000
|
Certificates of deposit
|
|
|
50,000
|
|
|
50,000
|
|
|
|
|
|
Total restricted cash
|
|
$
|
84,000
|
|
$
|
1,084,000
|
|
|
|
|
|
In
addition, under the terms of the Convertible Notes, the Company was required, for so long as any Convertible Notes were outstanding, to maintain aggregate cash and cash equivalents
equal to the greater of (i) $1.0 million or (ii) $3.0 million minus 80% of eligible receivables (as defined therein). The Company was in compliance with this requirement as
of December 31, 2006. The Convertible Notes were paid off in full in November 2007.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is
based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial
condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.
Inventory
Inventory is stated at the lower of cost or market and costs are determined based on the first-in, first-out method of accounting and
include material, labor and manufacturing overhead costs. The Company periodically reviews quantities of inventory on hand and compares these amounts to expected usage of each particular product or
product line. The Company records, as a charge to cost of sales, any amounts required to reduce the carrying value to net realizable value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the asset's estimated useful
life. The estimated useful lives of property and equipment are as follows:
|
|
Estimated Lives
|
Machinery and equipment
|
|
3-10 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
|
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.
Long-lived Assets
The Company applies the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible
Assets
. This statement affects the Company's treatment of
55
goodwill
and other intangible assets. The statement requires that goodwill existing at the date of adoption be reviewed for possible impairment and that impairment tests be periodically repeated, with
impaired assets written down to fair value. Additionally, existing goodwill and intangible assets must be assessed and classified within the statement's criteria. Intangible assets with finite useful
lives will continue to be amortized over those periods.
The
Company performs a goodwill impairment test as of the beginning of its fiscal fourth quarter, as required by SFAS No. 142 on an annual basis. The Company determines the fair
value of each of the reporting units based on a discounted cash flow income approach.
The
Company performed its annual goodwill impairment test as of the beginning of its fiscal fourth quarter 2007. The Company, based on the results of these tests, determined the fair
value of each of the Applied Technology and Electronics reporting units based on a discounted cash flow income approach. Based on the results of the first step of the annual goodwill impairment test,
the Company determined that the fair value of these reporting units exceeded their carrying amounts and, therefore, no goodwill impairment existed as of December 31, 2007. As a result, the
second step of the annual goodwill impairment test was not required. The Company will continue to perform a goodwill impairment test on the Applied Technology and Electronics reporting units on an
annual basis and on an interim basis, if certain conditions exist.
The
Company has determined that all of its intangible assets have finite lives and, therefore, the Company has continued to amortize its intangible assets. The Company recorded expense
related to the amortization of its intangible assets for the periods presented below as follows:
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
Amortization expense
|
|
$
|
430,749
|
|
$
|
511,664
|
Goodwill
by reporting segment consists of the following:
|
|
December 31,
|
Reporting Unit
|
|
2007
|
|
2006
|
Applied Technology
|
|
$
|
123,714
|
|
$
|
123,714
|
Electronics
|
|
|
580,648
|
|
|
580,648
|
|
|
|
|
|
|
|
$
|
704,362
|
|
$
|
704,362
|
|
|
|
|
|
Intangible
assets consist of the following:
|
|
|
|
|
|
As of December 31, 2007
|
|
As of December 31, 2006
|
Reporting Unit
|
|
Description
|
|
Estimated
Useful Life
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
Applied Technology
|
|
Patents
|
|
15-20
|
|
$
|
744,780
|
|
$
|
540,343
|
|
$
|
744,780
|
|
$
|
460,343
|
Applied Technology
|
|
Completed Technology
|
|
10
|
|
|
3,142,882
|
|
|
2,554,505
|
|
|
3,142,882
|
|
|
2,240,217
|
Applied Technology
|
|
Favorable Lease
|
|
5
|
|
|
36,999
|
|
|
36,074
|
|
|
36,999
|
|
|
36,074
|
Electronics
|
|
Customer List
|
|
10
|
|
|
250,000
|
|
|
250,000
|
|
|
250,000
|
|
|
242,705
|
Electronics
|
|
Drawings and Documentation
|
|
10
|
|
|
300,000
|
|
|
300,000
|
|
|
300,000
|
|
|
291,250
|
Electronics
|
|
Design and Manufacturing Cert.
|
|
10
|
|
|
700,000
|
|
|
700,000
|
|
|
700,000
|
|
|
679,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,174,661
|
|
$
|
4,380,922
|
|
$
|
5,174,661
|
|
$
|
3,950,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The estimated remaining amortization expense for each of the five succeeding years:
Fiscal Years ended December 31,
|
|
|
2008
|
|
395,212
|
2009
|
|
354,090
|
2010
|
|
44,437
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the local currency. Assets and liabilities of foreign subsidiaries are translated at the rates in
effect at the balance sheet date, while stockholders' equity (deficit) including the long-term portion of intercompany advances is translated at historical rates. Statements of operations
and cash flow amounts are translated at the average rate for the period. Translation adjustments are included as a component of accumulated other comprehensive income (loss). Foreign currency gains
and losses arising from transactions that are included as a component of other income (expense) were approximately income of $0.1 million for the year ended December 31, 2007 and were
not significant during the year ended December 31, 2006. Foreign currency gains (losses) included as a component of cost of goods sold were $0.1 million and $0.1 million for the
years ended December 31, 2007 and 2006, respectively.
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, the recoverability of long lived assets and intangible assets,
product warranty accruals, the accrued contract losses on fixed price contracts, the recoverability of deferred tax assets and the fair value of equity and financial instruments. Actual results could
differ from these estimates.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
, which
is the asset and liability method for accounting and reporting for income taxes. Under SFAS No. 109, deferred tax assets and deferred tax liabilities are recognized based on temporary
differences between the financial reporting and income tax basis of assets and liabilities using statutory rates. In addition, SFAS No. 109 requires a valuation allowance against net deferred
tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
In
June 2006, the FASB issued Interpretation No. 48, "
Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109"
("FIN 48"). FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only where the position is "more likely than not"
to be sustained assuming examination by tax authorities. The amount recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately
realized. A liability is recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and
penalties (if applicable) on that excess. FIN 48 requires a tabular reconciliation of the change in the aggregate unrecognized tax benefits
57
claimed,
or expected to be claimed, in tax returns and disclosure relating to the accrued interest and penalties for unrecognized tax benefits. Discussion is also required for those uncertain tax
positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next twelve months.
The
Company adopted the provisions of FIN 48 on January 1, 2007. The Company did not recognize any change in the liability for unrecognized tax benefits as a result of the
adoption and at December 31, 2007.
As
of December 31, 2007, the Company had federal and state 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 starting in 2008 and going through 2028. Utilization of the NOL and R&D credit carry forwards may be subject to a substantial annual
limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as well as similar
state and foreign provisions. These
ownership changes may limit the amount of NOL and R&D credit carry forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as
defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a
three-year period. Since the Company's formation, the Company has raised capital through the issuance of capital stock on several occasions (both pre and post initial public offering)
which, combined with the purchasing shareholders' subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of
control in the future upon subsequent disposition. The Company has not currently completed a study to assess whether a change of control has occurred or whether there have been multiple changes of
control since the Company's formation due to the significant complexity and cost associated with such study and that there could be additional changes in control in the future. If the Company has
experienced a change of control at any time since Company formation, utilization of its NOL or R&D credit carry forwards would be subject to an annual limitation under Section 382 which is
determined by first multiplying the value of our stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional
adjustments, as required. Any limitation may result in expiration of a portion of the NOL or R&D credit carry forwards before utilization. Further, until a study is completed and any limitation known,
no amounts are being presented as an uncertain tax position under FIN 48. The Company does not expect to have any taxable income for the foreseeable future. The Company has a full valuation
allowance against the net operating losses and credits.
The
tax years 2002 through 2006 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. On October 1, 2005, the Company adopted Statement of Financial Accounting Standards
No. 123R ("SFAS 123R")
Accounting for Stock-based Compensation
, using the modified prospective method, which results in the provisions of
SFAS 123R only being applied to the consolidated financial statements on a going-forward basis (that is, the prior period results have not been restated). At the time of adoption the Company
had no
58
un-vested
outstanding options. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the value of the award
and is recognized as expense over the service period. Previously, the Company had followed Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock
Issued to Employees
, and related interpretations, which resulted in the accounting for employee share options at their intrinsic value in the consolidated financial statements.
On
March 29, 2005, the SEC issued SAB 107 which expresses the view of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations
concerning the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with
non-employees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain
redeemable financial instrument issues under shares-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of
SFAS No. 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements,
the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R,
and disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. The Company has accounted for its stock option
grants in compliance with SAB 107 and Staff Accounting Bulletin No. 110.
Year-End Help for Expensing Employee Stock Option
(SAB No. 110).
On
November 10, 2005, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position SFAS 123R-3 "
Transition Election
Related to Accounting for Tax Effects of Share-Based Payment Awards."
The Company has elected to adopt the alternative transition method provided the FASB Staff Position for
calculating the tax effects (if any) of stock-based compensation expense pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance
of the additional paid-in capital pool related to the tax effects of employee stock-based compensation, and to determine the subsequent impact to the additional paid-in capital
pool and the consolidated statements of operations and cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123R.
The
Company uses historical volatility as it believes it is more reflective of market conditions and a better indicator of volatility. The Company uses the simplified calculation of
expected life described in the SAB No. 107 and SAB No. 110. If the Company determines that another method used to estimate expected volatility was more reasonable than our current
methods, or if another method for calculating these input assumptions was prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher
volatility and longer expected lives result in an increase to share-based compensation determined at the date of grant.
59
The Company recognized the full impact of its share-based payment plans in the consolidated financial statements for the year ended December 31, 2007 and 2006 under
SFAS 123R and did not capitalize any such costs on the consolidated balance sheets, as such costs that qualified for capitalization were not material. The following table presents share-based
compensation expense included in the Company's consolidated statement of operations:
|
|
Year Ended
December 31,
|
|
|
2007
|
|
2006
|
Cost of product revenue
|
|
$
|
127,247
|
|
$
|
82,979
|
Funded research and development and other revenue expense
|
|
|
120,248
|
|
|
138,694
|
Un-funded research and development and other revenue expenses
|
|
|
68,714
|
|
|
15,817
|
Selling, general and administrative expenses(1)(2)
|
|
|
795,890
|
|
|
748,761
|
|
|
|
|
|
Share based compensation expense before tax
|
|
$
|
1,112,099
|
|
$
|
986,251
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
Net share-based compensation expense
|
|
$
|
1,112,099
|
|
$
|
986,251
|
|
|
|
|
|
-
(1)
-
Includes
non-cash compensation expense associated with restricted stock issued (see below).
-
(2)
-
Includes
non-cash compensation expense associated with the extension of time to exercise stock options previously issued to certain former members of the board of
directors on December 20, 2007 in the amount of $126,000. Board members who resigned on December 20, 2007, in appreciation for their prior service, had the time to exercise vested stock
options extended from 2 years from last date of service to 5 years (unless the option expired earlier pursuant to its original term). The non-cash charge was calculated using
the Black-Scholes option pricing model.
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 year ended December 31, 2007 and 2006 were $1.39 and $1.82, 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:
|
|
Year Ended
December 31,
|
Assumptions:
|
|
2007
|
|
2006
|
Expected life
|
|
5.0 years to 6.25 years(1)
|
|
5.0 years to 6.25 years(1)
|
Expected volatility ranging from
|
|
81.9% - 89.9%(2)
|
|
87.46% - 96.54%(2)
|
Dividends
|
|
none
|
|
none
|
Risk-free interest rate
|
|
3.23% - 4.83%(3)
|
|
4.29% - 5.30%(3)
|
-
(1)
-
The
option life was determined using the simplified method for estimating expected option life, which qualify as "plain-vanilla" options.
-
(2)
-
The
stock volatility for each grant is measured using the weighted average of historical daily price changes of the Company's 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 Company's 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.
60
-
(4)
-
The
estimated forfeiture rate for each option grant is 6.25%. At the time SFAS 123R was adopted, all outstanding stock options were vested. The Company periodically reviews the
estimated forfeiture rate, in light of actual experience.
In
December 2005, the Company granted 50,000 shares of restricted common stock to a senior executive as permitted under the 2005 Incentive Compensation Plan. This grant vested 12,500
shares per quarter over four quarters. Accordingly, 12,500 of these restricted shares vested during each of the quarters ended April 1, 2006, July 1, 2006, September 30, 2006 and
December 31, 2006. Compensation expense for the number of shares issued is recognized over the service period and is recorded in the consolidated statement of operations as a component of
selling, general and administrative expense.
For the year ended December 31, 2006, compensation expense of $69,476 was recognized related to this restricted stock award. The Company valued this restricted stock grant at $1.41 per share
using the Black-Scholes option pricing model. This amount is included in the table above that presents share-based compensation expense included in the Company's consolidated statement of operations.
The entire grant was vested as of December 31, 2006.
Net Loss per Basic and Diluted Common Share
The
Company reports net loss per basic and diluted common share in accordance with SFAS No. 128,
Earnings Per Share
, which
establishes standards for computing and presenting earnings per share. Basic earnings per share excludes dilution and is computed by dividing income attributable to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, except when the effect would be anti-dilutive. The
table below details out common stock equivalents which would have been considered dilutive at December 31, 2007 had the Company not been in a loss position:
|
|
# of
Underlying
Common
Shares
|
Employee stock options
|
|
1,492,745
|
Warrants to purchase common stock
|
|
4,640,824
|
Series B Convertible Preferred Stock
|
|
1,096,774
|
Series C Convertible Preferred Stock
|
|
24,038,461
|
|
|
|
|
Total
|
|
31,268,804
|
|
|
|
Concentration of Credit Risk
Financial instruments that subject the Company to concentrations of credit risk principally consist of cash equivalents, trade accounts receivable, unbilled
contract costs and deposits in bank accounts. The Company deposits its cash and invests in short-term investments primarily through a national commercial bank. Deposits in excess of
amounts insured by the Federal Deposit Insurance Corporation (FDIC) are exposed to loss in the event of nonperformance by the institution. The Company has had cash deposits in excess of the FDIC
insurance coverage.
The
Company's trade accounts receivable and unbilled contract costs and fees are primarily from sales to U.S. government agencies and commercial customers. The Company does not require
collateral and has not historically experienced significant credit losses related to receivables or unbilled contract costs and fees from individual customers or groups of customers in any particular
industry or geographic area.
61
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 year ended December 31, 2007, there was one customer that was deemed significant with regards to revenue. For the year ended December 31,
2007, this customer accounted for approximately 12%, or approximately $6.9 million, of revenue. At December 31, 2007, one customer had a balance greater than 10%, or approximately
$2.2 million, of our outstanding gross receivable. At December 31, 2006 no single customer accounted for more than 10% of accounts receivable. In addition, for the year ended
December 31, 2006 no single customer accounting for more than 10% of total net revenue.
Management
estimates that approximately 22% and 40% of the revenue during the year ended December 31, 2007 and 2006, respectively, was derived from government contracts and
subcontracts with the U.S. government's prime contractors.
Research and Development Costs
The Company expenses research and development costs as incurred. Research and development and other revenue expenses include costs incurred in connection with
both funded research and development and other revenue arrangements and unfunded research and development activities.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net loss, change in unrealized gains and losses on marketable securities and foreign currency translation adjustments.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, accounts receivable, unbilled contract costs and fees, warrants to purchase shares of common
stock, accounts payable, debt instruments, convertible notes, Series B Preferred Stock and Series C Preferred Stock. The estimated fair values of these financial instruments approximate
their carrying values at December 31, 2007 and 2006. The estimated fair values have been determined through information obtained from market sources and management estimates.
Convertible Debt Instruments and Warrant Liabilities
The Company accounted for its senior secured convertible notes (the "Convertible Notes"), which were paid off on November 7, 2007, and continues to account
for the associated warrants in accordance with SFAS 155,
Accounting for Certain Hybrid Financial
Instruments
an amendment of FASB Statements No. 133 and 140
, and SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities,
(SFAS 155). The Convertible Notes included features that qualify as embedded
derivatives, such as (i) the holders' conversion option, (ii) the Company's option to settle the Convertible Notes at the scheduled dates in cash or shares of its common stock, and
(iii) premiums and penalties the Company would be liable to pay in the event of default. As permitted under SFAS 155, the Company has irrevocably elected, as of January 1, 2007,
to measure the Convertible Notes and embedded derivatives in their entirety at fair value with changes in fair value recognized as either gain or loss.
The
Company recorded interest expense under the Convertible Notes based on the greater of (i) 7% or (ii) the six-month LIBOR in effect at the time plus 350
basis points, as well as the amortization of the debt discount, which the Company computed using the effective interest method. The debt discount represented the difference between the Company's gross
proceeds from the sale of the Convertible Notes in July 2006 of $12.0 million and the fair value of the convertible debt upon issuance, after separately valuing the investor warrants, the
placement agent warrants and the Convertible Notes on a relative fair value basis. By amortizing the debt discount to interest expense,
62
rather
than recognizing it as a change in fair value of the convertible debt instrument and warrants, which is a separate line item in our statement of operations, the Company believes its interest
expense line item more appropriately reflects the cost of the debt associated with the Convertible Notes.
The
Company determined the fair values of the Convertible Notes, investor warrants and placement agent warrants using valuation models it considers to be appropriate. The Company's stock
price has the most significant influence on the fair value of its Convertible Notes and related warrants. An increase in the Company's common stock price would cause the fair values of both the
Convertible Notes and warrants to increase, because the conversion and exercise prices, respectively, of such instruments are fixed at $1.65 and $1.815 per share, respectively, and result in a charge
to our statement of operations. A decrease in the Company's stock price would likewise cause the fair value of the Convertible Notes and the warrants to decrease and result in a credit to our
statement of operations. If the price of the Company's common stock were to decline significantly, however, the decrease in the fair value of the Convertible Notes would be limited by the instrument's
debt characteristics. Under such circumstances, the Company's estimated cost of capital would become another significant variable affecting the fair value of the Convertible Notes.
Redeemable Convertible Series B Preferred Stock
The Company accounts for its Convertible Series B Preferred Stock (the "Series B Preferred Stock"), and associated warrants in accordance with in
accordance with EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments,
allocating the
proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series B Preferred Stock and the warrants issued to the Investors, and then to any
beneficial conversion rights contained in the convertible redeemable preferred securities. 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 Company's balance sheet. To the extent that the Series B
Preferred Stock is subject to a remeasurement event under EITF Topic D-98 or is otherwise modified, the Series B Preferred Stock will be reclassified to temporary equity.
Redeemable Convertible Series C Preferred Stock
The Company accounts for its Convertible Series C Preferred Stock (the "Series C Preferred Stock"), and associated warrants in accordance with in
accordance with EITF 00-27,
Application of Issue No. 98-5 to Certain Convertible Instruments,
allocating the
proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series C Preferred Stock and the warrants issued to the Investors, and then to any
beneficial conversion rights contained in the convertible redeemable preferred securities and in accordance with EITF Topic D-98, classifying the Series C Preferred Stock on the balance
sheet between the captions for liabilities and shareholder's equity. The Company determined the initial value of the Series C Preferred Stock and investor warrants using valuation models it
considers to be appropriate. The Company is using the effective interest method to accrete the carrying value of the Series C Preferred stock through the earliest possible redemption date
(November 8, 2011), at which time the value of the Series C Preferred Stock would be $30.0 million or 120% of its face value.
Reclassifications
Certain prior-year balances have been reclassified to conform to current-year presentations.
63
D. INVENTORY
Inventory includes material, labor and overhead and consisted of the following:
|
|
December 31,
|
|
|
2007
|
|
2006
|
Raw material
|
|
$
|
5,088,428
|
|
$
|
3,042,286
|
Work-in-process
|
|
|
10,125,641
|
|
|
2,554,871
|
Finished goods
|
|
|
1,976,355
|
|
|
2,348,717
|
|
|
|
|
|
|
|
$
|
17,190,424
|
|
$
|
7,945,874
|
|
|
|
|
|
The
provision for excess and obsolete inventory, net of usage, for the years ended December 31, 2007 and 2006 was $237,492 and $248,299, respectively.
E. PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Machinery and equipment
|
|
$
|
10,555,820
|
|
$
|
9,675,958
|
|
Furniture and fixtures
|
|
|
440,789
|
|
|
407,910
|
|
Computer software
|
|
|
1,534,876
|
|
|
1,468,078
|
|
Leasehold improvements
|
|
|
1,019,584
|
|
|
616,377
|
|
|
|
|
|
|
|
|
|
|
13,551,069
|
|
|
12,168,323
|
|
Less: accumulated depreciation and amortization
|
|
|
(10,491,418
|
)
|
|
(9,384,423
|
)
|
|
|
|
|
|
|
|
|
$
|
3,059,651
|
|
$
|
2,783,900
|
|
|
|
|
|
|
|
Depreciation
and amortization expense relating to property and equipment for the years ended December 31, 2007 and 2006 was $1.1 million and $0.9 million,
respectively.
In
September 2006 the Company commenced a restructuring in its Power Systems US division. As a result of this restructuring approximately $0.2 million of the net book value of
machinery and equipment was written-off, see Note T "Restructuring Costs" for more information.
F. RECENT ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
("SFAS No. 157"), which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to other existing
accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the application of this statement may change
the current practice for fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. However, in
February 2008, the FASB issued a final Staff Position to allow filers to defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The FASB Staff Position ("FSP") does not defer recognition and disclosure requirements for financial assets
and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. The Company is currently evaluating the impact this statement will have on its
financial position and results of operations.
64
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
, or SFAS
No. 159. The fair value option established by SFAS No. 159 permits, but does not require, all entities to choose to measure eligible items at fair value at specified election dates. An
entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007. The Company is currently assessing whether to adopt the fair value option and what the resulting impact, if any,
will be on our financial position and results of operations.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),
Business Combinations
("SFAS 141R"). SFAS 141R will
significantly change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific items, including:
-
-
Acquisition
costs will be generally expensed as incurred;
-
-
Noncontrolling
interests (formerly known as "minority interests"see SFAS 160 discussion below) will be valued at fair value at the acquisition date;
-
-
Acquired
contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined
under existing guidance for non-acquired contingencies;
-
-
In-process
research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;
-
-
Restructuring
costs associated with a business combination will be generally expensed subsequent to the acquisition date; and
-
-
Changes
in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.
SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R applies prospectively to business combinations for which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. Accordingly, since we are a calendar year-end
company we will continue to record and disclose business combinations following existing GAAP until January 1, 2009. The Company expects SFAS 141R will have an impact on accounting for
business combinations once adopted but the effect is dependent upon acquisitions at that time.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial StatementsAn Amendment of ARB
No. 51
("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate
from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160
clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Like SFAS 141R discussed above, earlier adoption is
prohibited. The Company has not completed their evaluation of the potential impact, if any, of the adoption of SFAS 160 on our consolidated financial position, results of operations and cash
flows.
65
G. CONVERTIBLE DEBT INSTRUMENTS AND WARRANT LIABILITIES
Features of the Convertible Notes and Warrants
On July 19, 2006, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with the purchasers named therein (the "Purchasers")
in connection with the private placement (the "Private Placement") of:
-
-
$12,000,000
aggregate principal amount of senior secured convertible notes (the "Convertible Notes"), convertible into shares of the Company's common stock at a conversion
price of $1.65 per share;
-
-
Warrant
As to purchase up to an aggregate of 3,636,368 shares of the Company's 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 Company's common stock at a price of $1.68 per share for a period of 90 trading days beginning the later
of six months from the date of such warrants and the date the Securities and Exchange Commission (the "SEC") declares effective a shelf registration statement covering the resale of the common stock
underlying the securities issued in the Private Placement (the "Registration Statement"); to the extent the Warrant Bs are exercised, the Purchasers were entitled to receive additional warrants (the
Warrant Cs), as described below. Because the registration statement was declared effective on September 27, 2006, these warrants were originally exercisable for the 90 trading day period
beginning six months from the date of such warrants (i.e. until May 30, 2007). On December 20, 2006 the Warrant Bs were amended to extend the expiration date of the Warrant Bs
issued in the Private Placement from May 30,
2007 to August 31, 2007. In addition, this amendment amended the definition of "Excluded Stock" set forth in the Purchase Agreement to enable the Company to issue up to 1.1 million
shares of the Company's common stock in connection with the early termination of the lease for the Company's facility located in Worcester, Massachusetts, without such shares being subject to the
Purchasers' right of participation set forth in the Purchase Agreement and certain prohibitions set forth in the Convertible Notes and related warrants (as discussed in Note T below, the
Company ultimately settled the lease for 850,000 shares). The Warrant Bs were exercised in full on July 17, 2007 for $1.31 per share. See below for a discussion related to the exercise of the
Warrant Bs and the issuance of Warrant Cs to the holders as a result of such exercise.
In
connection with the Private Placement, the Company also entered into a Security Agreement, dated July 19, 2006, with the Purchasers, pursuant to which the Company granted the
Purchasers a security interest in all of its rights, title and interest in, to and under all of the Company's personal property and other assets, including its ownership interest in the capital stock
of its subsidiaries, as security for the prompt payment in full of all amounts due and owing under the Convertible Notes. The following is a summary of the material provisions of the Purchase
Agreement, the Notes, the Warrant As, the Warrant Bs, and the Warrant Cs.
As noted above, the Purchase Agreement provided for the issuance and sale to the Purchasers of the Convertible Notes, the Warrant As and the Warrant Bs for an
aggregate purchase price of $12,000,000. Other significant provisions of the Purchase Agreement include:
-
-
the
requirement that the Company pay off all amounts outstanding under our previous credit facility with Silicon Valley Bank (see Note H);
66
-
-
for
so long as the Convertible Notes were outstanding, the obligation that the Company offer to the Purchasers the opportunity to participate in subsequent securities
offerings (up to 50% of such offerings), subject to certain exceptions for, among other things, certain underwritten public offerings and strategic alliances;
-
-
for
so long as the Convertible Notes were outstanding, the obligation that the Company not incur any indebtedness that is senior to, or on parity with, the Convertible Notes
in right of payment, subject to limited exceptions for purchase money indebtedness and capital lease obligations.
On
November 7, 2007, the Convertible Notes were retired using approximately $8.5 million of the proceeds from the sale of the New Notes. See Note B above.
Under
the Purchase Agreement, the Company was also obligated to (i) file the Registration Statement with the SEC within 30 days following the closing of the Private
Placement (which it has satisfied with respect to the securities issued in July 2006), (ii) use its best efforts to cause the Registration Statement to be declared effective within
90 days following the closing of the Private Placement, (which it has satisfied with respect to the securities issued in July 2006, as the Registration Statement was declared effective on
September 27, 2006) and (iii) use its best efforts to keep the Registration Statement effective until the earlier of (x) the fifth anniversary of the effective date of the
registration statement, (y) the date all of the securities covered by the Registration Statement have been publicly sold and (z) the date all of the securities covered by the
Registration Statement may be sold without restriction under SEC Rule 144.
Additionally,
with respect to the common stock underlying the Warrant Cs issued in July 2007 upon exercise of the Warrant Bs, the Company was also obligated to (i) file a
registration statement covering the resale of such common stock with the SEC within 30 days following the issuance of the Warrant Cs (which it has satisfied), (ii) use its best efforts
to cause such registration statement to be declared effective within 60 days following the issuance of the Warrant Cs (or 90 days in the event of a review of such registration statement
by the SEC) (which it has satisfied and was declared effective on September 11, 2007) and (iii) use its best efforts to keep such registration statement effective until the earlier of
(x) the fifth anniversary of the effective date of the registration statement, (y) the date all of the securities covered by the registration statement have been publicly sold and
(z) the date all of the securities covered by the registration statement may be sold without restriction under SEC Rule 144.
If
the Company fails to comply with these or certain other provisions, then the Company will be required to pay liquidated damages of 1% of the aggregate purchase price paid by the
Purchasers in the Private Placement for the initial occurrence of such failure and 1.5% of such amount for each subsequent 30 day period the failure continues. The total liquidated damages
under this provision are capped at 24% of the aggregate purchase price paid by the Purchasers in the Private Placement.
The Convertible Notes originally had an aggregate principal amount of $12.0 million and were convertible into shares of the Company's common stock at a
conversion price of $1.65, 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.
The
Convertible Notes bore interest at the higher of (i) 7.0% per annum or (ii) the six-month LIBOR plus 3.5% (the "Stated Rate 6-Month LIBOR
Condition"). Interest was payable quarterly, beginning on October 31, 2006, and could be paid in cash or, at the Company's option if certain equity conditions ("Equity Conditions") were
satisfied, in shares of the Company's common stock. If interest was paid in shares of common stock, the price per share was at a 10% discount to the volume weighted
67
average
price for the 20 trading days preceding the payment date. The Equity Conditions included (1) the Company had sufficient authorized shares for issuance, (2) such shares were
registered for resale or may be sold without volume restrictions pursuant to Rule 144(k) under the Securities Act, (3) the common stock was listed or quoted (and was not suspended from
trading) on an eligible exchange and such shares were approved for listing upon issuance, (4) the issuance did not violate Section 6(c) of the Convertible Note or the rules and
regulations of any trading market, (5) there had been no event of bankruptcy by the Company, (6) the Company was not in default with respect to any material obligation under any
documents associated with issuance of the Convertible Notes and Warrants, and (7) there had been no public announcement of a pending or proposed change of control that has not been consummated.
Seventy-five
percent (75%) of the original principal amount of the Convertible Notes was to be repaid in 18 equal monthly installments ($500,000 per month) beginning on
February 28, 2007. Such principal payments could be made in cash or, at the Company's option if certain equity conditions were satisfied, in shares of common stock. If principal was paid in
shares of common stock, the price per share was the lesser of (i) the conversion price or (ii) a 10% discount to the volume weighted average price for the 20 trading days preceding the
payment date. At any time following the 24-month anniversary of the issuance of the Convertible Notes, the holders had the right to elect to require the Company to redeem for cash all or
any portion of the outstanding principal on the Convertible Notes; provided, however, that on the 60 month anniversary of the issuance of the Convertible Notes, the Company would have been
required to redeem any remaining outstanding principal and unpaid interest. Notwithstanding the foregoing, at any time following the one year anniversary of the effective date of the Registration
Statement, the Company had the right, under certain circumstances, including satisfaction of the Equity Conditions with respect to the underlying shares, redeem the Convertible Notes for cash equal to
120% of the aggregate outstanding principal amount plus any accrued and unpaid interest.
The
Convertible Notes were convertible at the option of the holders into shares of the Company's common stock at any time at the conversion price. If at any time following the one year
anniversary of the effective date of the Registration Statement, the volume weighted average price per share of common stock for any 20 consecutive trading days exceeded 175% of the conversion price,
then, if certain conditions were satisfied, including the Equity Conditions, the Company could require the holders of the Convertible Notes to convert all or any part of the outstanding principal into
shares of common stock at the conversion price. The Convertible Notes contained certain limitations on optional and mandatory conversion, including that, absent stockholder approval of the
transaction, the Company could not issue shares of common stock under the Convertible Notes or the Warrant Bs, in the aggregate, in excess of 19.99% of our outstanding shares on the closing date (or
7,901,276 shares of common stock). On October 19, 2007, the Company received stockholder approval allowing for the issuance of additional shares of the Company's common stock sufficient to
allow for the full conversion of the Company's outstanding Convertible Notes, as well as the full payment of interest and principal on such notes, all in accordance with the terms of such notes.
The
Convertible Notes contained certain covenants and restrictions, including, among others, the following (for so long as any Convertible Notes remained outstanding):
-
-
the
Company was required to maintain aggregate cash and cash equivalents equal to the greater of (i) $1,000,000 or (ii) $3,000,000
minus
80% of eligible receivables (as defined in the Convertible
Notes);
-
-
if
a change of control of the Company occurred, as defined in the Convertible Notes, the holders may elect to require the Company to purchase the Notes for 115% of the
outstanding principal amount plus any accrued and unpaid interest; and
68
-
-
the
Company could not issue any common stock or common stock equivalents at a price per share less than the $1.65 conversion price.
Events
of default under the Convertible Notes included, among others, payment defaults, cross-defaults, breaches of any representation, warranty or covenant that was not cured within the
proper time periods, failure to perform certain required activities in a timely manner, the Company's common stock was no longer listed on an eligible market, the effectiveness of the Registration
Statement lapsed
beyond a specified period and certain bankruptcy-type events involving us or any significant subsidiary. Upon an event of default, the holders could elect to require us to repurchase all
or any portion of the outstanding principal amount of the Convertible Notes for a purchase price equal to the greater of (i) 115% of such outstanding principal amount, plus all accrued but
unpaid interest or (ii) 115% of the then value of the underlying common stock.
In
July 2007, $533,895 of the Convertible Notes and accrued interest were converted into shares of common stock. The Convertible Notes and accrued interest converted at $1.65 per share.
The Company issued 318,182 shares of common stock related to the conversion of the principal on the Convertible Notes and 5,391 shares of common stock related to the accrued interest due through the
date of conversion as a result of the Convertible Note holders' conversions.
The Warrant As originally entitled the holders thereof to purchase up to an aggregate of 3,636,368 shares of the Company's common stock at a price of $1.815 per
share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants. The period prior to six months from the date of the warrants
is hereinafter referred to as the "non-exercise period." The exercise price and the number of shares underlying these warrants are subject to adjustment for stock splits, stock dividends,
combinations, distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory
share exchanges.
If
a change of control of the Company occurs, as defined, the holders may elect to require us to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the
remaining unexercised portion of each Warrant A.
For
so long as any Warrant As remain outstanding, we may not issue any common stock or common stock equivalents at a price per share less than $1.65. In the event of a breach of this
provision, the holders may elect to require us to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant A. As a result of
the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note B 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).
If
following the later of (i) the effective date of the Registration Statement and (ii) the six month anniversary of the issuance date, the volume weighted average price
per share of our common stock for
any 20 consecutive trading days exceeds 200% of the exercise price, then, if certain conditions are satisfied, including the Equity Conditions, we may require the holders of the Warrant As to exercise
up to 50% of the unexercised portions of such warrants. If following the 24 month anniversary of the issuance date, the volume weighted average price per share of our common stock for any
20 consecutive trading days exceeds 300% of the exercise price, then, if certain equity conditions are satisfied, we may require the holders of the Warrant As to exercise all or any part of the
unexercised portions of such warrants.
69
The Warrant Bs entitled the holders thereof to purchase up to an aggregate of 3,636,368 shares of our common stock at a price of $1.68 per share for a period of
90 trading days beginning the later of six months from the date of such warrants and the date the SEC declares effective the Registration Statement. As noted above, as a result of an amendment, the
expiration date of the Warrant Bs was extended to August 31, 2007.
On
July 17, 2007, the holders of the Warrant Bs exercised such warrants in full, acquiring 3,636,638 shares of common stock at $1.31 per share. The Company received proceeds of
approximately $4.8 million. To entice the holders of the Warrant Bs to exercise such warrants the Company reduced the exercise price from $1.68 to $1.31 per share. As a result of reducing the
exercise price the Company recorded a charge to operations in its fiscal third quarter ending September 29, 2007 related to the warrant modification of approximately $0.9 million to
change in fair value of the Convertible Notes and warrants on the accompanying statement of operations. Pursuant to the original terms of the Warrant Bs, upon exercise of the Warrant Bs, the warrant
holders were entitled to receive additional warrants ("Warrant Cs") to purchase a number of shares of common stock equal to 50% of the number of shares of common stock purchased upon exercise of the
Warrant Bs. As a result of the full exercise of the Warrant Bs, the holders received Warrant Cs to purchase 1,818,187 shares of common stock at an exercise price of $1.815 per share for a period
beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants.
As discussed above, upon the exercise of the Warrant Bs, the holders were entitled to receive additional warrants (the "Warrant Cs"). The Warrant Cs originally
entitled the holders thereof to
purchase up to an aggregate of 1,818,187 shares of our common stock at a price of $1.815 per share for a period beginning six months from the date of such warrants and ending on the seventh
anniversary of the date of such warrants. The period prior to six months from the date of the warrants is hereinafter referred to as the "non-exercise period." The exercise price and the
number of shares underlying these warrants are subject to adjustment for stock splits, stock dividends, combinations, distributions of assets or evidence of indebtedness, mergers, consolidations,
sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges
If
a change of control of the Company occurs, as defined, the holders may elect to require us to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of the
remaining unexercised portion of each Warrant C.
For
so long as any Warrant Cs remain outstanding, the Company may not issue any common stock or common stock equivalents at a price per share less $1.65. In the event of a breach of this
provision, the holders may elect to require the Company to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant C. As a
result of the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note B above, the holders were entitled for a limited period of time
(45 days after each issuance) 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 first quarter of fiscal 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).
70
The
table below summarizes Black-Scholes option pricing model range of assumptions that were used in valuing the warrants redeemed for both the Warrant As and Warrant Cs.
Assumptions:
|
|
Warrant As
|
|
Warrant Cs
|
Expected life
|
|
5.68 years to 5.69 years
|
|
6.67 years to 6.68 years
|
Expected volatility ranging from
|
|
83.0%83.0%
|
|
85.0%85.0%
|
Dividends
|
|
none
|
|
none
|
Risk-free interest rate
|
|
3.75%3.84%
|
|
3.85%3.93%
|
If
following the later of (i) the effective date of the Registration Statement and (ii) the six month anniversary of the issuance date, the volume weighted average price
per share of our common stock for any 20 consecutive trading days exceeds 200% of the exercise price, then, if certain conditions are satisfied, including the Equity Conditions, the Company may
require the holders of the Warrant Cs to exercise up to 50% of the unexercised portions of such warrants. If following the 24 month anniversary of the issuance date, the volume weighted average
price per share of our common stock for any 20 consecutive trading days exceeds 300% of the exercise price, then, if certain equity conditions are satisfied, the Company may require the holders
of the Warrant Cs to exercise all or any part of the unexercised portions of such warrants.
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 Company's common stock at an exercise price of $1.87 per share. These warrants will be callable after the second
anniversary of the closing of the Private Placement if the 20-day volume weighted average price per share of the Company's common stock exceeds 175% of the exercise price. At the direction
of FAC, these warrants were issued to First Albany Companies Inc., the parent of FAC.
Accounting for the Convertible Debt Instrument and Warrants
The Company determined that the Convertible Notes constituted a hybrid instrument that has the characteristics of a debt host contract containing several embedded
derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of SFAS 133,
Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133). The Company has identified all of the derivatives associated with the July 19, 2006 financing, and concluded that
two of the derivatives cannot be reliably measured nor reliably associated with another derivative that can be reliably measured. As such, the Company valued these derivatives as a single hybrid
contract together with the Convertible Notes. The contract was remeasured at each period at the fair value with the changes in fair value recognized in the statement of operations until settlement of
the Convertible Notes. As permitted under SFAS 155, the Company irrevocably elected, as of January 1, 2007, to continue to measure the Convertible Notes and embedded derivatives in their
entirety at fair value with changes in fair value recognized as either gain or loss. The Company determined that this election had no impact on the accounting for the Convertible Notes.
Upon
issuance, the Warrant As, Warrant Bs and Warrant Cs, along with the Placement Agent Warrants (together the "Warrants"), did not meet the requirements for equity classification set
forth in EITF Issue 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock
,
because such warrants (a) must be settled in registered shares, (b) are subject to substantial liquidated damages if the Company is unable to maintain the effectiveness of the resale
registration of the shares and (c) there is a cash-out election using a Black-Scholes valuation under various circumstances. Therefore these Warrants are required to be accounted
for as freestanding derivative instruments pursuant to the provisions of SFAS 133. Changes in fair value are recognized as either a gain or loss in the statement of operations under the caption
"change in fair value of Notes and warrants." In addition, prior to their exercise by the holders', the Warrant Bs had been classified as a current liability on the balance sheet as they are
outstanding for less than one year.
71
Upon issuance of the Convertible Notes and Warrants, the Company allocated the proceeds received from the Convertible Notes and Warrants on a relative fair value basis. As a result of
such allocation, the Company determined the initial carrying value of the Convertible Notes to be $9.4 million. The Convertible Notes were immediately marked to fair value, resulting in a
derivative liability in the amount of $16.3 million. As of December 31, 2006, the Convertible Notes were marked to fair value resulting in a derivative liability of $12.7 million.
The Convertible Notes were paid off in full in November 2007. The net credit to Change in Fair Value of Convertible Notes and Warrants, related to the Convertible Notes, for the year ended
December 31, 2007 was approximately $1.1 million. For the year ended December 31, 2006, the charge to Change in Fair Value of Convertible Notes and Warrants, related to the
Convertible Notes, was $3.9 million.
Upon
issuance, the Company allocated $2.7 million of the initial proceeds to the Warrants and immediately marked them to fair value resulting in a derivative liability of
$4.9 million and a charge to other expense of $2.2 million. As of December 31, 2006, the Warrants have been marked to fair value resulting in a derivative liability of
$2.9 million. As of December 31, 2007, the remaining outstanding Warrants have been marked to fair value resulting in a derivative liability of $3.2 million. The credit to Change
in Fair Value of Convertible Notes and Warrants, related to the Warrants, for the year ended December 31, 2007 was $0.6 million ($1.5 million and $(0.9) million, including warrant
modification, discussed above). The transaction costs were immediately expensed as part of the fair value adjustment. For the year ended December 31, 2006, the charge to Change in Fair Value of
the Convertible Notes and Warrants, related to the Warrants, was $0.1 million.
The
debt discount in the amount of $2.6 million (resulting from the allocation of proceeds) is being amortized to interest expense using the effective interest method over the
expected term of the Convertible Notes. During 2007, as a result of the payment in full of the Convertible Notes, the Company amortized the remaining balance resulting in approximately
$2.1 million and approximately $0.5 million for the year ended December 31, 2007 and 2006, respectively, which is a component of interest expense.
72
A
summary of the changes in the fair value of the Convertible Notes and the Warrants:
|
|
Fair Value
of Notes
|
|
Fair Value
of Warrant
Liabilities
|
|
Total
|
|
Allocation of initial proceeds
|
|
$
|
9,351,084
|
|
$
|
2,648,916
|
|
$
|
12,000,000
|
|
Transaction costs
|
|
|
(1,064,207
|
)
|
|
|
|
|
(1,064,207
|
)
|
Initial fair value adjustment(6)
|
|
|
8,002,518
|
|
|
2,204,950
|
|
|
10,207,468
|
|
|
|
|
|
|
|
|
|
at July 19, 2006
|
|
$
|
16,289,395
|
|
$
|
4,853,866
|
|
$
|
21,143,261
|
|
Amortization of debt discount
|
|
|
533,474
|
|
|
|
|
|
533,474
|
|
Fair value adjustment(6)
|
|
|
(4,082,387
|
)
|
|
(2,126,430
|
)
|
|
(6,208,817
|
)
|
Restructuring charge fair value adjustment(6)
|
|
|
|
|
|
193,117
|
|
|
193,117
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
$
|
12,740,482
|
|
$
|
2,920,553
|
|
$
|
15,661,035
|
|
Amortization of debt discount
|
|
|
2,115,442
|
|
|
|
|
|
2,115,442
|
|
Fair value adjustment(6)
|
|
|
(1,044,185
|
)
|
|
(1,451,903
|
)
|
|
(2,496,088
|
)
|
Redemptions:
|
|
|
|
|
|
|
|
|
|
|
|
Cash(4)
|
|
|
(8,057,852
|
)
|
|
|
|
|
(8,057,852
|
)
|
|
Cash paid related to pre-payment premium of 20%(4)
|
|
|
(1,419,440
|
)
|
|
|
|
|
(1,419,440
|
)
|
|
Stock(1)(2)(3)
|
|
|
(3,809,447
|
)
|
|
|
|
|
(3,809,447
|
)
|
Note holder conversion @ $1.65 per share
|
|
|
(525,000
|
)
|
|
|
|
|
(525,000
|
)
|
Modification charge of Warrant Bs(6)
|
|
|
|
|
|
872,728
|
|
|
872,728
|
|
Exercise of Warrant Bs and reclassification to equity
|
|
|
|
|
|
(872,728
|
)
|
|
(872,728
|
)
|
Charge related to the initial issuance of Warrant Cs(6)
|
|
|
|
|
|
1,775,666
|
|
|
1,775,666
|
|
Change in fair value of redeemed Warrant As and Cs at redemption(5)(6)
|
|
|
|
|
|
2,099,958
|
|
|
2,099,958
|
|
Warrant Redemptions:
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Warrant A redemption(5)
|
|
|
|
|
|
(1,363,622
|
)
|
|
(1,363,622
|
)
|
Cash paid for Warrant C redemption(5)
|
|
|
|
|
|
(736,336
|
)
|
|
(736,336
|
)
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
0
|
|
$
|
3,244,316
|
|
$
|
3,244,316
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
a fair value adjustment of $26,440.
-
(2)
-
Includes
a fair value adjustment of $292,284.
-
(3)
-
Includes
a fair value adjustment of $73,575.
-
(4)
-
The
Company satisfied the Convertible Notes in full on November 7, 2007. Pursuant to the terms of the Convertible Notes, the Company was required to pay a premium of 20% of the
then outstanding balance of the Convertible Notes.
-
(5)
-
As
a result of the Series C Preferred Stock financing, certain holders of both Warrant As (1,242,426) and Warrant Cs (621,215) exercised their right of redemption, resulting in
the Company paying to each redeeming warrant holder the Black-Scholes value of these warrants on the date of notification of redemption.
-
(6)
-
Amounts
included in change in fair value of Notes and warrants on consolidated statement of operations.
Under
the provisions of the Convertible Notes, the Company could elect to make principal and interest payments in shares of its common stock if the Equity Conditions were satisfied. With
the Equity Conditions satisfied the Company elected to pay the April 30, 2007 and July 31, 2007 interest
73
payments
in shares of its common stock. As a result, the Company recorded the following charges as it relates to the interest payment on the Convertible Notes (interest on the Convertible Notes was
due quarterly on the last day of January, April, July and October, respectively):
Due Date
|
|
Shares
|
|
Cash Interest
$ Value
|
|
Fair Value
of Shares
Issued
|
|
Additional
Expense
Recorded
|
|
April 30, 2007
|
|
226,746
|
|
$
|
252,824
|
|
$
|
303,941
|
|
$
|
51,117
|
|
July 31, 2007
|
|
169,776
|
|
$
|
214,858
|
|
$
|
210,059
|
|
$
|
(4,799
|
)
|
ValuationMethodology 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 Company's
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.
In
estimating the fair value of the Convertible Notes and Warrants the following methods and significant input assumptions were applied:
Methods
-
-
A
binomial model was utilized to estimate the fair value of the Convertible Notes at their inception (July 19, 2006), December 31, 2006, March 31, 2007,
June 30, 2007, September 29, 2007 and November 7, 2007 (their retirement date). A binomial model represents finite possible paths of the underlying instruments price over the life
of the instrument and is most practical in valuations involving variable inputs or when the option/conversion feature is both exercisable and exercise prior to maturity is favorable
(
i.e.
, an American option). The binomial model considers the key features of the Convertible Notes, and is subject to the significant assumptions
discussed below. First, a discrete simulation of the Company's stock price was conducted at each monthly step (node) throughout the expected life of the instrument. Second, an analysis of all future
debt repayments was conducted using an appropriate discount rate, while considering the 10% discount in the event repayments are settled with shares rather than with cash, to estimate the fair value
of the debt at each monthly date. The Stated Rate 6-Month LIBOR Condition was estimated by utilizing a 6-month LIBOR forward yield curve based on LIBOR rates and interest rate
swaps. Third, an analysis of the higher of the fair value of debt or conversion/redemption value was conducted relative to each node. Fourth, 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 the fair value result of the second step above was conducted
relative to each node until a final fair value of the instrument is concluded at initial node, representing the valuation date. This model requires the following key inputs with respect to the Company
and/or instrument:
Input
|
|
July 19,
2006
|
|
Dec. 31,
2006
|
|
March 31,
2007
|
|
June 30,
2007
|
|
Sept. 29,
2007
|
|
Nov. 7,
2007(1)
|
|
Quoted Stock Price
|
|
$
|
1.68
|
|
$
|
1.14
|
|
$
|
1.30
|
|
$
|
1.22
|
|
$
|
1.14
|
|
|
1.44
|
|
Conversion Price
|
|
$
|
1.65
|
|
$
|
1.65
|
|
$
|
1.65
|
|
$
|
1.65
|
|
$
|
1.65
|
|
$
|
1.65
|
|
Time to Maturity (in years)
|
|
|
5.00
|
|
|
4.55
|
|
|
4.30
|
|
|
4.05
|
|
|
3.80
|
|
|
3.70
|
|
Stock Volatility
|
|
|
90
|
%
|
|
90
|
%
|
|
84
|
%
|
|
82
|
%
|
|
70
|
%
|
|
70
|
%
|
Risk-Free Rate
|
|
|
5.02
|
%
|
|
4.71
|
%
|
|
4.54
|
%
|
|
4.91
|
%
|
|
4.11
|
%
|
|
3.71
|
%
|
Dividend Rate
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
-
(1)
-
The
Convertible Notes were paid off in full on November 7, 2007.
74
-
-
A
binomial lattice model was utilized to estimate the fair value of Warrant As at their inception (July 19, 2006), December 31, 2006, March 31, 2007,
June 30, 2007, September 29, 2007 and December 31, 2007, as well as the fair value of the Placement Agent Warrants at their inception and December 31, 2006 and the Warrant
Cs at their issuance (July 17, 2007), September 29, 2007, November 16, 2007 (the date of the exercise of their redemption right) and December 31, 2007. A binomial lattice
model was utilized to estimate the fair value of the Warrant Bs at their inception (July 19, 2006), December 31, 2006, March 31, 2007, June 30, 2007 and July 17,
2007 (their date of modification and exercise). 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 Company's 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
|
|
July 19,
2006
|
|
Dec. 31,
2006
|
|
March 31,
2007
|
|
June 30,
2007
|
|
Sept. 29,
2007
|
|
Dec. 31,
2007
|
Quoted Stock Price
|
|
$1.68
|
|
$1.14
|
|
$1.30
|
|
$1.22
|
|
$1.14
|
|
$1.650
|
Conversion Price
|
|
$1.815
|
|
$1.815
|
|
$1.815
|
|
$1.815
|
|
$1.815
|
|
$1.815
|
Time to Maturity (in years)
|
|
7.01
|
|
6.55
|
|
6.31
|
|
6.06
|
|
5.80
|
|
5.60
|
Stock Volatility
|
|
93%
|
|
91%
|
|
88%
|
|
86%
|
|
85%
|
|
83%
|
Risk-Free Rate
|
|
5.02%
|
|
4.70%
|
|
4.57%
|
|
4.94%
|
|
4.29%
|
|
3.53%
|
Dividend Rate
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Non-Exercise Period
|
|
Until 1/19/2007
|
|
Until 1/19/2007
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
Warrant Bs(1)
|
Input
|
|
July 19,
2006
|
|
Dec. 31,
2006
|
|
March 31,
2007
|
|
June 30,
2007
|
|
July 17,
2007
|
Quoted Stock Price
|
|
$1.68
|
|
$1.14
|
|
$1.30
|
|
$1.22
|
|
$1.55
|
Conversion Price
|
|
$1.68
|
|
$1.68
|
|
$1.68
|
|
$1.68
|
|
$1.68
|
Time to Maturity (in years)
|
|
0.75
|
|
0.67
|
|
0.42
|
|
0.17
|
|
0.17
|
Stock Volatility
|
|
72%
|
|
72%
|
|
68%
|
|
40%
|
|
40%
|
Risk-Free Rate
|
|
5.25%
|
|
5.06%
|
|
5.04%
|
|
4.56%
|
|
5.02%
|
Dividend Rate
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Non-Exercise Period
|
|
Until 1/19/2007
|
|
Until 1/19/2007
|
|
N/A
|
|
N/A
|
|
N/A
|
-
(1)
-
the
Warrant Bs were exercised in full on July 17, 2007.
75
Warrant Cs(1)
|
Input
|
|
July 17, 2007
|
|
Sept. 29, 2007
|
|
Dec. 31, 2007
|
Quoted Stock Price
|
|
$1.55
|
|
$1.14
|
|
$1.650
|
Conversion Price
|
|
$1.815
|
|
$1.815
|
|
$1.815
|
Time to Maturity (in years)
|
|
7.0
|
|
6.8
|
|
6.5
|
Stock Volatility
|
|
90%
|
|
87%
|
|
85%
|
Risk-Free Rate
|
|
5.02%
|
|
4.37%
|
|
3.64%
|
Dividend Rate
|
|
0%
|
|
0%
|
|
0%
|
Non-Exercise Period
|
|
Until 1/17/08
|
|
Until 1/17/08
|
|
Until 1/17/08
|
-
(1)
-
Warrant
Cs were issued on July 17, 2007 upon the exercise of the Warrant Bs.
Placement Agent Warrants
|
Input
|
|
July 19, 2006
|
|
Dec. 31, 2006
|
Quoted Stock Price
|
|
$1.68
|
|
$1.14
|
Conversion Price
|
|
$1.87
|
|
$1.87
|
Time to Maturity (in years)
|
|
5.00
|
|
4.55
|
Stock Volatility
|
|
89%
|
|
86%
|
Risk-Free Rate
|
|
5.02%
|
|
4.71%
|
Dividend Rate
|
|
0%
|
|
0%
|
Non-Exercise Period
|
|
Until 1/19/2007
|
|
Until 1/19/2007
|
-
-
A
Black-Scholes option pricing model was utilized to estimate the fair value of Placement Agent Warrants at March 31, 2007, June 30, 2007, September 29,
2007 and December 31, 2007. A change in method from the binomial to Black-Scholes was warranted because the warrants' non-exercise period ended prior to the valuation date and all
required inputs were fixed. This model requires the following key inputs with respect to the Company and/or instrument:
Input
|
|
March 31,
2007
|
|
June 30,
2007
|
|
Sept. 29,
2007
|
|
Dec. 31,
2007
|
|
Quoted Stock Price
|
|
$
|
1.30
|
|
$
|
1.22
|
|
$
|
1.14
|
|
$
|
1.65
|
|
Conversion Price
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
Time to Maturity (in years)
|
|
|
4.30
|
|
|
4.05
|
|
|
3.80
|
|
|
3.55
|
|
Stock Volatility
|
|
|
84
|
%
|
|
82
|
%
|
|
70
|
%
|
|
70
|
%
|
Risk-Free Rate
|
|
|
4.54
|
%
|
|
4.91
|
%
|
|
4.11
|
%
|
|
3.175
|
%
|
Dividend Rate
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Non-Exercise Period
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Significant Assumptions:
-
-
Penalties
upon an event of default and liquidated damages are fully reflected in the fair values of the Convertible Notes. These features are typical protective features in
similar convertible instruments and accordingly are fully considered in our market based inputs for volatility, interest rates, and appropriate discount rates;
-
-
The
Convertible Notes' Equity Conditions are assumed to have been met throughout the life of the instrument;
-
-
The
Company expects to settle the required future principal redemptions and interest payments, under the terms of the Convertible Notes, with shares of common stock rather
than with cash;
-
-
Stock
volatility was estimated by annualizing the daily volatility of the Company's 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;
76
-
-
The
volume weighted average price for the 20 trading days preceding a payment date is reasonably approximated by the average of the simulated stock price at each respective
node of the binomial model;
-
-
Based
on the Company's historical operations and management expectations for the near future, the Company's stock was assumed to be a non-dividend-paying stock;
-
-
The
quoted market price of the Company's stock was utilized in the valuations because SFAS 133 requires the use of quoted market prices without considerations of
blockage discounts. Because the stock is thinly traded, the quoted market price may not reflect the market value of a large block of stock; and
-
-
The
quoted market price of the Company's 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.
H. LINE OF CREDIT
Effective January 31, 2006, the Company entered into a Third Loan Modification Agreement ("Third Loan Modification Agreement") with Silicon Valley Bank
(the "Bank"), which amended the Company's then existing credit facility with the Bank. The Third Loan Modification Agreement modified the credit facility by extending the maturity date through
February 28, 2006. There were no other modifications.
Effective
February 10, 2006, the Company entered into a Fourth Loan Modification Agreement (the "Fourth Loan Modification Agreement") with the Bank, which amended its then
existing credit facility (as amended, the "Loan Agreement"). Under the terms of the Loan Agreement, the Bank agreed to provide the Company with a credit line of up to $7.0 million. The Loan
Agreement was secured by most of the assets of the Company and advances under the Loan Agreement were limited to 80% of eligible receivables and up to $1.0 million based on the levels of
eligible inventory. Interest on outstanding
borrowings accrued at the Bank's prime rate of interest plus 1.5% per annum. In addition, the Loan Agreement provided the ability to borrow up to $3,000,000 on a revolver basis paying only interest
provided that the Company remained in compliance with all financial covenants, as defined. In addition, the Company agreed to pay to the Bank a collateral handling fee of $750 per month and agreed to
the following additional fees: (i) $25,000 commitment fee; (ii) an unused line fee in the amount of 0.5% per annum; and (iii) an early termination fee of 0.5% of the total credit
line if we terminated the Loan Agreement within the first six months. The Loan Agreement contained certain financial covenants relating to tangible net worth, as defined, which we had to satisfy in
order to continue to borrow from the Bank. The Loan Agreement was set to expire on January 29, 2007.
In
connection with, and as a condition precedent to, the completion of the Convertible Note financing, on July 19, 2006, the Company paid all amounts due and owing under its
credit facility with the Bank (approximately $2 million) and terminated such facility. In doing so the Company incurred a termination fee of $17,500 and legal fees of $8,500. In addition, the
Company charged to interest expense the remaining deferred financing costs of $14,583 upon the termination of the credit facility.
On
February 26, 2008, the Company entered into a Loan and Security Agreement (the "New Loan Agreement") with the Bank. Under the terms of the New Loan Agreement, the Bank agreed
to provide the Company with a credit line up to $10.0 million. The New Loan Agreement is secured by most of the assets of the Company and advances under the New Loan Agreement are limited to
80% of eligible receivables and the lesser of 25% of the value of the Company's eligible inventory, as defined, or $1.0 million. Interest on outstanding borrowings accrues at a rate per annum
equal to the Prime Rate plus the Prime Rate Margin, as defined, or the LIBOR Rate plus the LIBOR Rate Margin, as defined. The New Loan Agreement contains certain financial covenants relating to
tangible net
77
worth,
as defined, which the Company must satisfy in order to borrow under 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 New Loan Agreement and $25,000 to be paid on the one year anniversary of the New Loan Agreement;
(ii) an unused line fee in the amount of 0.5% per annum of the average unused portion of the revolving line; and (iii) an early termination fee of 0.5% of the total credit line if the
Company terminates the New Loan Agreement prior to 12 months from the New Loan Agreement's effective date. The New Loan Agreement, if not sooner terminated in accordance with its terms, expires
on February 25, 2010.
I. REDEEMABLE CONVERTIBLE SERIES B AND SERIES C PREFERRED STOCK AND CONVERTIBLE SUBORDINATED DEBENTURES
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 Company's common stock, to accredited investors
(the "October 2003 Financing Transaction"). In connection with the October 2003 Financing Transaction, the Company issued shares of Series B Preferred Stock for $5,000 per share. The
Series B Preferred Stock is convertible into a number of shares of common stock equal to $5,000 divided by the conversion price of the Series B Preferred Stock, which was initially
$2.50. As of December 31, 2007, the conversion price for the Series B Preferred Stock was $1.55. As of December 31, 2007 and December 31, 2006, 340 and 345 shares of
Series B Preferred Stock were outstanding, respectively. On October 5, 2007, 5 shares of Series B Preferred Stock were converted into 13,020 shares of common stock at $1.92 per
share. In April 2006, upon the conversion of 80 shares of Series B Preferred Stock, the Company issued 180,995 shares of common stock. As of December 31, 2007 and 2006, the liquidation
preference of the remaining 340 and 345 shares of Series B Preferred Stock was $1,700,000 and $1,725,000, respectively, and these were convertible into 1,000,000 and 837,379 shares of common
stock, respectively.
Dividends on Series B Preferred Stock
The shares of Series B Preferred Stock initially bore a cumulative dividend at a rate of 6% per annum; pursuant to its terms, this was increased to a rate
of rate of 8% per annum on October 1, 2005. Dividends on the Series B Preferred Stock are payable semi-annually and, except in certain limited circumstances, may be paid by
the Company, at its option, either through the issuance of shares of common stock or in cash. If the Company elects to pay the dividend in shares of common stock, the Company will issue a number of
shares of common stock equal to the quotient of the dividend payment divided by the greater of 80% of the average closing bid and ask price of the common stock on the Nasdaq Stock Market for the 15
trading days ending on the 11th trading day prior to the date the dividend is required to be paid, and the conversion price, which was initially $2.50, but which has since been adjusted in
accordance with the terms of the Series B Preferred Stock to $1.55 (as of December 31, 2007). The Company has paid all dividends in shares of common stock, in lieu of cash dividends. The
table below details out the number of shares and the amount charged to interest expense during the respective periods:
Period
|
|
Shares Issued
|
|
$ Value of Dividend
|
Year ended December 31, 2006
|
|
70,792
|
|
$
|
146,444
|
Year ended December 31, 2007
|
|
70,045
|
|
$
|
137,523
|
78
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 (See Note N). These warrants are
exercisable for a five-year term and had an initial exercise price of $3.32 per share, which represented 110% of the average closing price of the common stock for the five trading days
preceding October 31, 2003. The exercise price has been adjusted due to anti-dilution provisions to $2.93 per share. These warrants were immediately exercisable and expire on
October 31, 2008. As of December 31, 2007 and 2006, warrants to purchase an aggregate of 1,116,000 shares of common stock remain outstanding. During the year ended December 31,
2006, 112,000 of the warrants were exercised in a cashless exercise, resulting in the issuance of 6,142 shares of common stock.
Burnham
Hill Partners, LLC, a division of Pali Capital, Inc. ("BHP"), served as placement agent for this transaction. As part of its commission BHP, or its assigns,
received warrants, with an exercise price of $0.01 per share, to purchase an aggregate of 150,430 shares of common stock. These warrants were immediately exercisable and expire on October 31,
2008. The Company has valued these warrants at $435,166, using the Black-Scholes option-pricing model and has treated this as a transaction cost. As of December 31, 2007 and 2006, warrants to
purchase an aggregate of 5,182 shares of common stock remain outstanding.
Liquidation Preference on Series B Preferred Stock
In the event of a liquidation of the Company, the holders of shares of the Series B Preferred Stock are entitled to receive a liquidation payment prior to
the payment of any amount with respect to the shares of the common stock. The amount of this preferential liquidation payment is $5,000 per share of Series B Preferred Stock, plus the amount of
any accrued but unpaid dividends on those shares. After payment of the full liquidation preference amount, the holders of the Series B Preferred Stock will not be entitled to any further
participation as such in any distribution of the Company's assets.
Optional Conversion of Series B Preferred Stock
The Series B Preferred Stock is convertible into common stock at any time at the option of the holder. Each outstanding share of Series B Preferred
Stock is convertible into a number of shares of common stock equal to $5,000 divided by the conversion price of the Series B Preferred Stock, which was initially
$2.50, but which has since been adjusted in accordance with the terms of the Series B Preferred Stock to $1.55 (as of December 31, 2007). The Series B Preferred Stock has
anti-dilution protections which adjust the conversion price, in the event of the issuance of shares of common stock at a price less than the conversion price then in effect. If the Company
issues equity securities for a per share price less than the conversion price of the Series B Preferred Stock, which was initially $2.50, the conversion price will be adjusted downwards using a
weighted average calculation.
Mandatory Conversion of Series B Preferred Stock
If certain conditions described below are met, each share of Series B Preferred Stock will be automatically converted into a number of shares of common
stock equal to $5,000 divided by the conversion price of the Series B Preferred Stock, which was initially $2.50, but which has since been adjusted in accordance with the terms of the
Series B Preferred Stock to $1.55 (as of December 31, 2007). Mandatory conversion may only occur if the average of the closing bid and ask price of the common stock on the Nasdaq Stock
Market exceeds $5.00 (as adjusted for stock splits, stock dividends, combinations and similar transactions) for 20 consecutive trading days and either the registration statement governing the
underlying shares of common stock is effective or the shares of common stock issuable upon conversion of the Series B Preferred Stock can be sold without restriction pursuant to
79
Rule 144
of the Securities Act of 1933. The mandatory conversion date will be extended for so long as the following events have occurred and are continuing:
-
-
the
effectiveness of the registration statement covering the resale of the shares of common stock issuable upon the conversion of the Series B Preferred Stock lapses
for 20 consecutive trading days (other than as a result of factors solely in control of the holders of the Series B Preferred Stock) and the shares of common stock into which the shares of
Series B Preferred Stock are convertible cannot be sold without restriction pursuant to Rule 144;
-
-
the
common stock is suspended from listing without subsequent listing on any one of, or is not listed on at least one of, the Nasdaq Global Market, the Nasdaq Capital
Market, the OTC Bulletin Board, the New York Stock Exchange, Inc. or the American Stock Exchange, Inc. for five consecutive trading days;
-
-
the
Company provides notice to the holders of Series B Preferred Stock that it will not or cannot comply with a proper conversion notice; or
-
-
the
Company fails to comply with a proper conversion notice within 10 business days of receipt of that notice.
If,
however, on the mandatory conversion date, a holder is prohibited from converting all of its shares of Series B Preferred Stock as a result of the restrictions described below
under "Conversion Restrictions," such shares of Series B Preferred Stock will not be converted, will remain outstanding and will not accrue any dividends.
Conversion Restrictions
Unless the Company seeks and obtains stockholder approval, the number of shares of common stock the Company may issue upon the conversion of the shares of
Series B Preferred Stock (when aggregated with the number of shares of common stock issued as dividends on the Series B Preferred Stock and upon exercise of the warrants issued to the
placement agent and its affiliates for the Series B Preferred Stock financing) is limited to 4,947,352 shares (representing 19.999% of the Company's total outstanding common stock as of
October 31, 2003 immediately prior to the issuance of the Series B Preferred Stock). In addition, no holder may convert shares of Series B Preferred Stock if conversion of those
shares would result in the holder owning more than 4.99% of the common stock then outstanding or would result in the holder beneficially owning more than 9.999% of the common stock then outstanding,
unless the holder waives this limitation at least 61 days prior to the proposed conversion.
Failure to Convert
If for any reason upon an optional or mandatory conversion the Company cannot issue shares of common stock which have been registered for resale pursuant to an
effective registration statement, then the Company will be obligated to issue as many shares of common stock as its is able to issue. If the Company does not have enough shares of common stock to
cover the conversion of all outstanding shares of Series B Preferred Stock, then with respect to the unconverted shares of Series B Preferred Stock (other than unconverted
Series B Preferred Stock resulting from the restrictions described above under "Conversion Restrictions"), the holder will have the right to (i) void its conversion notice,
(ii) require the Company to redeem the unconverted shares of Series B Preferred Stock at a price per share equal to $6,250 plus liquidated damages and any accrued but unpaid dividends or
(iii) require the Company to issue shares of common stock that have not been registered pursuant to the Securities Act. If the holder elects redemption, the Company may pay the redemption price
either in cash or in shares of common stock based on the quotient of the redemption price divided by the greater of 80% of the average of the closing bid and ask price of the common stock on the
Nasdaq Stock Market for the
80
15 trading
days ending on the 11th trading day prior to the redemption date and the conversion price, which was initially $2.50, but which has since been adjusted in accordance with the
terms of the Series B Preferred Stock to $1.55 (as of December 31, 2007).
Redemption of Series B Preferred Stock
The holders of Series B Preferred Stock are entitled to redeem their shares of Series B Preferred Stock immediately prior to the consolidation,
merger or business combination of the Company with another entity (other than pursuant to a migratory merger effected solely for the purpose of changing the jurisdiction of incorporation of the
Company or a consolidation, merger or other business combination in which holders of the Company's voting power immediately prior to the transaction continue after the transaction to hold, directly or
indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity
or entities), the sale or transfer of more than 50% of the Company's assets (other than inventory in the ordinary course of business) or the closing of a purchase, tender or exchange offer made to the
holders of more than 50% of the outstanding common stock. In such an event, the redemption price per share will equal $6,250 plus any accrued but unpaid dividends and liquidated damages. The Company
may pay the redemption price in either cash or shares of common stock based on the quotient of the redemption price divided by the greater of 80% of the average of the closing bid and ask price of the
common stock on the Nasdaq Stock Market for the 15 trading days ending on the 11th trading day prior to the redemption date and the conversion price, which was initially $2.50, but which has
since been adjusted in accordance with the terms of the Series B Preferred Stock to $1.55 (as of December 31, 2007).
In
addition, the holders of Series B Preferred Stock are entitled to redeem their shares of Series B Preferred Stock if the following events occur:
-
-
the
effectiveness of the registration statement lapses for 20 consecutive trading days (other than as a result of factors solely in control of the holders of the
Series B Preferred Stock) and the shares of common stock into which the Series B Preferred Stock are convertible cannot be sold without restriction pursuant to Rule 144;
-
-
the
common stock is suspended from listing without subsequent listing on any one of, or is not listed on at least one of, the Nasdaq Global Market, the Nasdaq Capital
Market, the OTC Bulletin Board, the New York Stock Exchange, Inc. or the American Stock Exchange, Inc. for five consecutive trading days;
-
-
the
Company provides notice to the holders of Series B Preferred Stock that it will not or cannot comply with a conversion notice that was properly executed and
delivered; or
-
-
the
Company fails to comply with a proper conversion notice within 10 business days of receipt of that notice (other than as a result of the restrictions described above
under "Conversion Restrictions").
With
respect to the events set forth in the first three bullet points above, the redemption price per share will equal $6,000 plus liquidated damages and any accrued but unpaid
dividends. With respect to the event described in the fourth bullet point above, the redemption price per share will be the greater of (i) $6,000 plus liquidated damages and any accrued but
unpaid dividends and (ii) the product of the number of shares of common stock issuable upon the relevant shares of Series B Preferred Stock multiplied by the highest closing price for
the common stock during the period beginning on the date of first occurrence of the event and ending one day prior to the date of payment of the redemption price. If the effectiveness of the
registration statement lapses, listing is suspended or the holders receive a notice that the Company will not or cannot comply with a conversion notice, the Company may choose to pay the redemption
price in shares of common stock based on the quotient of the
81
redemption
price divided by the greater of 80% of the average of the closing bid and ask price of the common stock on the Nasdaq Stock Market for the 15 trading days ending on the 11th trading
day prior to the redemption date and the conversion price, which was initially $2.50, but which has since been adjusted in accordance with the terms of the Series B Preferred Stock to $1.55 (as
of December 31, 2007).
Commencing
October 31, 2006 (and so long as a registration statement covering the resale of the shares of common stock underlying the Series B Preferred Stock and related
warrants is effective and none of the events listed in the four bullet points above has occurred and is continuing), the Company may redeem all or any portion of the outstanding Series B
Preferred Stock upon five days prior written notice at a price per share of $7,500, plus liquidated damages and any accrued but unpaid dividends. However, if a holder has delivered a conversion notice
to the Company within three trading days of receipt of the Company's redemption notice for all or a portion of the shares of Series B Preferred Stock, such shares of Series B Preferred
Shares which the Company has designated for redemption may be converted by the holder. In addition, if during the period between the date of the Company's redemption notice and the redemption date a
holder becomes entitled to redeem the Series B Preferred Stock as a result of a consolidation, merger or business combination of the Company with another entity, the sale or transfer of more
than 50% of the Company's assets (other than inventory in the ordinary course of business) or the closing of a purchase, tender or exchange offer made to the holders of more than 50% of the common
stock, the right of the holder with respect to the conversion will take precedence over the Company's redemption notice. If a holder delivers a conversion notice but is prohibited from converting all
of its shares of Series B Preferred Stock as a result of the restrictions described above under "Conversion Restrictions," such shares of Series B Preferred Stock will not be converted,
will remain outstanding and will not accrue any dividends.
Accounting for the Series B Preferred Stock and Adjustments to the Conversion Price.
The Company accounted for the transaction in accordance with EITF 00-27,
Application of Issue
No. 98-5 to Certain Convertible Instruments,
allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable
convertible Series B Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities as
follows:
Security
|
|
Face
Value
|
|
Fair
Value
|
|
Allocation of
Proceeds, Net of
Transaction Costs
|
|
Beneficial
Conversion
Feature
|
|
Discount
|
Redeemable convertible Series B Preferred Stock
|
|
$
|
7,675,000
|
|
$
|
12,398,195
|
|
$
|
5,247,393
|
|
$
|
3,655,607
|
|
$
|
6,083,214
|
Warrants
|
|
|
|
|
$
|
2,935,558
|
|
$
|
1,242,441
|
|
|
|
|
|
|
As
a result of the July 19, 2006 Private Placement (as described in Note G) and the issuance of 369,159 shares of common stock in lieu of cash for the interest payments due
on the Convertible Notes in accordance with the anti-dilution provisions of the Company's Series B Convertible Preferred Stock, the Company was required to adjust the conversion
price of the remaining shares of Series B Preferred Stock outstanding at that time. These shares of Series B Preferred Stock have a liquidation preference of $5,000 per share and are
convertible into a number of shares of Common Stock equal to $5,000 divided by the conversion price of the Series B Preferred Stock. The Company recorded the following
82
non-cash
charges as interest expense in its Statement of Operations during the year ended December 31, 2006 and adjusted the conversion price on the Series B Preferred Stock
as follows:
Date
|
|
Security
|
|
Conversion/
Exercise Price
|
|
Adjusted
Conversion/
Exercise Price(1)
|
|
Interest
Expense
|
July 19, 2006
|
|
Redeemable convertible Series B Preferred Stock
|
|
$
|
2.21
|
|
$
|
2.07
|
|
$
|
116,667
|
October 31, 2006
|
|
Redeemable convertible Series B Preferred Stock
|
|
$
|
2.07
|
|
$
|
2.06
|
|
$
|
8,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
125,014
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
After
the adjustments made to the conversion price in during the year ended December 31, 2006, the 345 outstanding shares of Series B Preferred Stock were convertible
into 837,379 shares of common stock.
As
a result of the issuance of shares of common stock in lieu of cash for the principal and interest payments due on the Convertible Notes (see Note G. Convertible Debt
Instruments and Warrant Liabilities), the issuance of common stock to the landlord (see Note T. Restructuring Costs), conversion of a portion of the Convertible Notes by the Note holders, the
exercise of the Warrant Bs, the issuance of 749,999 shares of common stock to the Note holders as an inducement, as described in Note B, and the closing of the private placement of
Series C Preferred Stock and warrants in November 2007, the Company recorded the following non-cash charges as interest expense in its Statement of Operations
83
during
the year ended December 31, 2007 and adjusted the conversion price on the Series B Preferred Stock as follows:
Date
|
|
Type of Payment
|
|
Conversion/
Exercise
Price
|
|
Adjusted
Conversion/
Exercise Price(1)
|
|
Interest
Expense
|
1/3/2007
|
|
Lease settlement issuing 850,000 shares
|
|
$
|
2.06
|
|
$
|
2.04
|
|
$
|
16,912
|
2/28/07
|
|
Principal payment issuing 445,899 shares
|
|
$
|
2.04
|
|
$
|
2.03
|
|
$
|
8,498
|
4/30/07
|
|
Interest payment issuing 226,746 shares
|
|
$
|
2.03
|
|
$
|
2.03
|
|
|
|
5/1/07
|
|
Principal payment issuing 444,361 shares
|
|
$
|
2.03
|
|
$
|
2.02
|
|
$
|
8,112
|
6/1/07
|
|
Principal payment issuing 452,343 shares
|
|
$
|
2.02
|
|
$
|
2.01
|
|
$
|
8,208
|
7/1/07
|
|
Principal payment issuing 480,753 shares
|
|
$
|
2.01
|
|
$
|
2.00
|
|
$
|
9,296
|
7/10/07
|
|
Conversion of Convertible Notes and accrued interest at $1.65 per shares, issuing 323,573 shares
|
|
$
|
2.00
|
|
$
|
2.00
|
|
$
|
2,232
|
7/17/07
|
|
Warrant Exercise issuing 3,636,368 shares
|
|
$
|
2.00
|
|
$
|
1.94
|
|
$
|
46,774
|
7/31/07
|
|
Interest payment issuing 174,662 shares
|
|
$
|
1.94
|
|
$
|
1.94
|
|
$
|
2,281
|
8/01/07
|
|
Principal payment issuing 379,716 shares
|
|
$
|
1.94
|
|
$
|
1.94
|
|
$
|
4,870
|
9/01/07
|
|
Principal payment issuing 381,220 shares
|
|
$
|
1.94
|
|
$
|
1.93
|
|
$
|
8,938
|
9/28/2007
|
|
Principal Payment issuing 492,559 shares
|
|
$
|
1.93
|
|
$
|
1.92
|
|
$
|
8,984
|
10/16/2007
|
|
Inducement to Convertible Note holders issuing 749,999 shares
|
|
$
|
1.92
|
|
$
|
1.91
|
|
$
|
9,535
|
11/7/2007
|
|
Issuance of 10,000 shares of Series C Preferred Stock and related warrants (see Series C Convertible Preferred Stock below)
|
|
$
|
1.91
|
|
$
|
1.70
|
|
$
|
207,884
|
12/20/2007
|
|
Issuance of 15,000 shares of Series C Preferred Stock and related warrants (see Series C Convertible Preferred Stock below)
|
|
$
|
1.70
|
|
$
|
1.55
|
|
$
|
186,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash interest expense for the year ended December 31, 2007
|
|
|
|
|
|
|
|
$
|
529,479
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
After
the adjustments made to the conversion price in during the year ended December 31, 2007, the 340 outstanding shares of Series B Preferred Stock are convertible
into 1,096,774 shares of common stock.
Series C Convertible Preferred Stock
On November 8, 2007, the Company entered into a Stock and Warrant Purchase agreement with Rockport Capital Partners II, L.P. and NGP Energy
Technology Partners, L.P. (the "Investors"). Under this purchase agreement, the Investors agreed to purchase in a private placement up to 25,000 shares of the Company's newly created
Series C convertible preferred stock (the "Series C Preferred Stock") and warrants to purchase up to 19,711,539 shares of common stock, for an aggregate gross purchase price of
$25.0 million. Each share of Series C Preferred Stock initially converts into common stock at a price equal to $1.04 per share, subject to adjustment.
This
private placement occurred in two closings. The first closing occurred on November 8, 2007. At the first closing, the Company issued 10,000 shares of Series C
Preferred Stock at $1,000 per share for an aggregate gross purchase price of $10.0 million. These shares are currently convertible into 9,615,384 shares of common stock. The Company also issued
warrants to purchase an aggregate of 15,262,072 shares of common stock. These warrants are exercisable for a seven-year term and had an initial exercise price of $1.44 per share and may
not be exercised until May 8, 2008. As a result of stockholder approval of the second closing and related matters on December 20, 2007, as described below, the exercise price of these
warrants was reduced to $1.25 per share. The Company considered
84
this
a cancellation and reissuance of new warrants and accounted for the change in the fair value of the warrants in the allocation of net proceeds associated with the second closing and treated it as
a deemed dividend to the Series C Preferred Stock holders. (See Accounting for the Series C Preferred Stock below).
At
the second closing, which occurred on December 20, 2007, following stockholder approval, the Company issued 15,000 shares of Series C Preferred Stock for an aggregate
gross purchase price of $15.0 million, of which $10.0 million was paid through the cancellation of the New Notes previously issued to the Investors on November 7, 2007. These
shares are currently convertible into 14,423,076 shares of common stock. At this closing, the Company also issued warrants to purchase an aggregate of 4,449,467 shares of common stock at an exercise
price of $1.25 per share. These warrants are exercisable for a seven-year term and are exercisable immediately.
In
the purchase agreement, the Company also agreed to issue the Investors additional warrants in the event that the holders of certain existing warrants (none of whom are affiliated with
the Investors) exercise those warrants in the future. Upon such exercises, the Company will issue to the Investors additional warrants to purchase common stock equal to one-half of the
number of shares of common stock issued upon exercise of these existing warrants. The exercise price of these warrants will be $1.25 per share. As of March 1, 2008, if all of these existing
warrants are exercised, the Company would need to issue warrants to purchase an additional 3,455,258 shares of common stock to the Investors.
Dividends on Series C Preferred Stock
The shares of Series C Preferred Stock accrue a cumulative dividend at a rate of 5% per annum of the Stated Liquidation Preference Amount, as defined
below. Dividends on the Series C Preferred Stock shall be cumulative, shall accrue, whether or not declared, and be payable quarterly in cash or, at the Company's option, added to the Stated
Liquidation Preference Amount. So long as any shares of Series C Preferred Stock are outstanding, the Company shall not declare, pay or set apart for payment any dividend or make any
distribution on any Series B Preferred Stock (other than dividends or
distributions paid on the Series B Preferred Stock in Common Stock in accordance with the terms of the Series B Preferred Stock) or junior stock (other than dividends or distributions on
common stock payable solely in shares of common stock), unless at the time of such dividend or distribution the Company shall have paid all accrued and unpaid dividends on the outstanding shares of
Series C Preferred Stock. In addition, so long as any shares of Series C Preferred Stock are outstanding, the Company shall not declare, pay or set apart for payment any dividend or make
any distribution on any common stock (other than dividends or distributions on common stock payable solely in shares of common stock), unless at the time of such dividend or distribution the Company
simultaneously pays a dividend or distribution on each outstanding share of Series C Preferred Stock in an amount equal to the product of (i) the dividend or distribution payable on each
share of common stock and (ii) the number of shares of common stock issuable upon conversion of a share of Series C Preferred Stock, calculated on the record date for determination of
holders entitled to receive such dividend or distribution.
Voting Rights
The holders of Series C Preferred Stock shall be entitled to notice of all meetings of stockholders in accordance with the Company's bylaws. On any matter
presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), each holder of
outstanding shares of Series C Preferred Stock shall be entitled to cast the number of votes equal to quotient determined by dividing (i) the Series C Original Issue Price ($1,000
per share) of the shares of Series C Preferred Stock held by such holder as of the record date for determining stockholders entitled to vote on such matter by (ii) $1.44 (as adjusted for
any stock dividends, combinations, splits and the like with respect to shares
85
of
common stock). Except as provided by law or as described below, holders of Series C Preferred Stock shall vote together with the holders of common stock as a single class.
The
Company is not permitted, without the affirmative vote or written consent of the holders of at least 67% of the outstanding Series C Preferred Stock (50% of the outstanding
Series C Preferred Stock with respect to items (4), (5) and (8) below), directly or indirectly, to take any of the following actions or agree to take any of the following
actions:
(1) authorize,
create or issue any shares of preferred stock or other equity securities ranking senior to or on a parity with the Series C Preferred Stock;
(2) increase
or decrease the total number of authorized shares of Series C Preferred Stock;
(3) amend
or modify the Company's certificate of incorporation (including the Certificate of Designation governing the Series C Preferred Stock) or bylaws that would
adversely affect the rights, preferences, powers and privileges of the Series C Preferred Stock;
(4) repurchase
or redeem any shares of Series B Preferred Stock (except pursuant to the existing terms of the Series B Preferred Stock) or any equity
securities ranking junior to the Series C Preferred Stock, subject to certain exceptions;
(5) effect
any distribution or declare, pay or set aside any dividend with respect to any equity securities ranking junior to the Series C Preferred Stock;
(6) incur
any form of indebtedness for borrowed money in excess of $5,000,000 in the aggregate (other than indebtedness existing at November 8, 2007);
(7) effect
a liquidation, consummate a reorganization event or dispose, transfer or license any material assets, technology or intellectual property, other than
non-exclusive licenses in connection with sales of the Company's products in the ordinary course of business;
(8) consummate
any transaction that results in the transfer or issuance of securities, or options, warrants or other rights to receive securities of a subsidiary or any
other transaction following which a subsidiary no longer remains wholly-owned by the Company or pursuant to which any third party has a right to purchase securities of a subsidiary;
(9) change
the size of the Company's board of directors;
(10) encumber
or grant a security interest in all or substantially all or a material part of the Company's assets except to secure indebtedness permitted above that is
approved by the Company's board of directors;
(11) acquire
a material amount of assets of another entity, through a merger, purchase of assets or purchase of capital stock or otherwise; or
(12) enter
into any agreement to do or cause to be done any of the foregoing.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of
shares of the Series C Preferred Stock then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders before any payment shall be
made to the holders of junior stock by reason of their ownership thereof, an amount per share equal to the greater of:
(i) the
Series C Original Issue Price ($1,000 per share) plus any dividends accrued but unpaid thereon (the "Stated Liquidation Preference Amount"); or
86
(ii) such
amount per share as would have been payable had all shares of Series C Preferred Stock been converted into common stock immediately prior to such
Liquidation (the amount payable to the holders of Series C Preferred Stock pursuant to clause (i) or (ii) of this sentence is hereinafter referred to as the "Series C
Liquidation Amount").
If
upon any such Liquidation, the assets of the Company available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series C Preferred
Stock the full amount to which they shall be entitled and the holders of shares of parity stock the full amount to which they shall be entitled pursuant to the terms of such Parity Stock, the holders
of shares of Series C Preferred Stock and the holders of shares of parity stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective
amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. The liquidation
payment with respect to each outstanding fractional share of Series C Preferred Stock shall be equal to a ratably proportionate amount of the liquidation payment with respect to each
outstanding share of Series C Preferred Stock. All payments shall be in cash, property (valued at its fair market value as determined by an independent appraiser reasonably acceptable to the
holders of a majority of the shares of Series C Preferred Stock then outstanding) or a combination thereof; provided, however, that no cash shall be paid to holders of junior stock unless each
holder of the outstanding shares of Series C Preferred Stock has been paid in cash the full amount to which such holder shall be entitled. After payment of the full Series C Liquidation
Amount, such holders of shares of Series C Preferred Stock will not be entitled to any further participation as such in any distribution of the assets of the Company.
Conversion
The holder of Series C Preferred Stock shall have the following conversion rights:
At any time the holder of any such shares of Series C Preferred Stock may, at such holder's option, elect to convert all or any portion of the shares of
Series C Preferred Stock held by such person into a number of fully paid and nonassessable shares of common stock equal to the quotient of (i) the Stated Liquidation Preference Amount of
the shares of Series C Preferred Stock being converted divided by (ii) the Conversion Price then in effect as of the date of the delivery by such holder of its notice of election to
convert. The initial conversion price of the Series C Preferred Stock is $1.04 per share. The Series C Preferred Stock will receive weighted average anti-dilution protection
in the event of a dilutive issuance in accordance with a formula set forth in the Certificate of Designation, subject to certain exceptions.
At any time on or after November 8, 2009, if the average closing price of the Company's common stock for any immediately preceding 180-day
period exceeds $7.00 (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the common stock), the Company
will have the right, but not the obligation, to convert each outstanding share of Series C Preferred Stock into a number of fully paid and nonassessable shares of common stock equal to the
quotient of (i) the Stated Liquidation Preference Amount divided by (ii) the Conversion Price in effect as of the Company Conversion Date.
87
Redemption
At any time and from time to time on or after November 8, 2011 (the "Redemption Date"), the holders of at least 66.7% of the then outstanding shares of
Series C Preferred Stock may elect to have all or any portion of the outstanding shares of Series C Preferred Stock redeemed. The Company shall effect the redemption on a redemption date
by paying cash or, at the Company's election, shares of common stock (valued in the manner described below).
If
such redemption shall be for cash, the Company shall effect the redemption, out of funds legally available therefor, by paying in cash in exchange for each share of Series C
Preferred Stock to be redeemed a sum equal to the product of (i) 1.2 multiplied by (ii) the Stated Liquidation Preference Amount.
If
such redemption shall be for shares of common stock, the Company shall effect the redemption by issuing, in exchange for each share of Series C Preferred Stock to be redeemed,
that number of shares of common stock equal to (A) the product of (i) 1.4 multiplied by (ii) the Stated Liquidation Preference Amount divided by (B) the fair market value
of the common stock, based on a 10 day volume weighted average, as of the redemption date.
Accounting for the Series C Preferred Stock
The Company accounted for the transaction in accordance with EITF 00-27,
Application of Issue
No. 98-5 to Certain Convertible Instruments,
allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable
convertible Series C Preferred Stock and the warrants issued to the Investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities as
follows:
Security
|
|
Face
Value
|
|
Fair
Value
|
|
Allocation of
Proceeds, Net of
Transaction Costs
|
|
Beneficial
Conversion
Feature
|
|
Initial
Carrying
Value
|
Redeemable convertible Series C Preferred Stock
|
|
$
|
25,000,000
|
|
$
|
18,193,950
|
|
$
|
12,991,097
|
|
$
|
11,762,887
|
|
$
|
1,228,210
|
Warrants
|
|
|
|
|
$
|
18,352,179
|
|
$
|
10,092,623
|
|
|
|
|
|
|
The
re-pricing of the exercise price of the Tranche I warrants from $1.44 to $1.25, as described above, was treated as a cancellation of the original warrants issued
on November 8, 2007 and a re-issuance of new warrants on December 20, 2007. The difference in fair value of the warrant was included in the allocation of net proceeds
associated with the second closing of the Series C Preferred Stock on December 20, 2007. The Company treated this as a deemed dividend on the Series C Preferred Stock. The Company
recorded a discount, including the re-pricing and beneficial conversion feature of $11,762,887 and recorded a deemed dividend of $11,947,881 to the holders of the Series C Preferred
Stock, which included the initial allocation of the discount of $11,762,887 and $184,994 related to the accretion of the Series C Preferred Stock to its redemption value through the date that
holders of the Series C Preferred Stock may first exercise their redemption right. The Company is using the effective interest method to accrete the carrying value of the Series C
Preferred stock through the earliest possible redemption date (November 8, 2011), at which time the value of the Series C Preferred Stock would be $30.0 million or 120% of its
face value. The components of the carrying
88
value
of the Series C Preferred Stock from inception on November 8, 2007, the second closing on December 20, 2007 and at December 31, 2007 is as follows:
|
|
First
Closing
|
|
Second
Closing
|
|
Total
|
Initial carrying value
|
|
$
|
1,228,210
|
|
|
|
|
$
|
1,228,210
|
Deemed dividend
|
|
$
|
2,425,069
|
|
|
9,337,818
|
|
$
|
11,762,887
|
Accretion of original issue discount to redemption value
|
|
$
|
145,072
|
|
$
|
39,921
|
|
$
|
184,994
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,798,351
|
|
$
|
9,377,739
|
|
$
|
13,176,091
|
Dividend through December 31, 2007(1)
|
|
|
|
|
|
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
|
$
|
13,276,091
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The
Company recorded $0.1 million during the year ended December 31, 2007 as a dividend on the Series C Preferred Stock. Dividends on the Series C
Preferred Stock accrue at a rate of 5% and are payable quarterly. 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 Series C Preferred Stockholders.
In
valuing the warrants associated with the Series C Preferred Stock the Company used the Black-Scholes option pricing model with the following range of assumptions:
|
|
November 8, 2007
|
|
December 31, 2007
|
|
Assumptions:
|
|
|
|
|
|
Expected life
|
|
4.0 years
|
|
5.2 years
|
|
Expected volatility
|
|
70
|
%
|
70
|
%
|
Dividends
|
|
none
|
|
none
|
|
Risk-free interest rate
|
|
3.64
|
%
|
3.48
|
%
|
The
Company has designated the warrants as equity instruments in accordance with EITF 00-19.
J. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
Long Term Debt
|
|
$
|
|
|
$
|
12,740,482
|
|
Capital lease obligations
|
|
$
|
|
|
$
|
123,219
|
|
Less: Current portion
|
|
$
|
(
|
)
|
|
(5,623,219
|
)
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
7,240,482
|
|
|
|
|
|
|
|
At
December 31, 2007 the Company did not have any capital leases or other long-term debt outstanding.
K. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities under various operating leases that expire through October 2011.
89
Future
minimum annual rentals under lease agreements at December 31, 2007 are as follows:
Fiscal Year
|
|
|
2008
|
|
$
|
1,442,770
|
2009
|
|
$
|
1.058,346
|
2010
|
|
$
|
523,797
|
2011
|
|
$
|
159,408
|
2012
|
|
$
|
|
Thereafter
|
|
$
|
|
|
|
|
Total
|
|
$
|
3,184,321
|
|
|
|
Total
rental expense including operating expenses and real estate taxes for operating leases amounted to $1,621,555 and $1,682,232, for the years ended December 31, 2007 and 2006,
respectively.
Certain
of the facility leases contain escalation clauses, and rental expense has been recognized on a straight-line basis over the remaining lease term. At
December 31, 2007 deferred rent expense amounted to approximately $0.2 million, respectively.
Letters of Credit
The Company utilizes a standby letter of credit to satisfy a security deposit requirement and in some instances to satisfy warranty commitments. Outstanding
standby letters of credit as of December 31, 2007 and 2006 were $34,000, respectively. The Company is required to pledge cash as collateral on these outstanding letters of credit. As
December 31, 2007 and 2006, the cash pledged as collateral for these letters of credit was $34,000, respectively, and is included in restricted cash and cash equivalents on the balance sheet.
Purchase Commitments
In the ordinary course of business the Company enters into agreements with vendors for the purchase of goods and services through the issuance of purchase orders.
In general the majority of these purchases do not represent commitments of the Company until the goods or services are received. In the third quarter of fiscal 2003 the company provided for
approximately $900,000 related to outstanding purchase commitments that were related to its Shaker and UPS product lines (see Note DInventory). At December 31, 2007 and 2006
the balance outstanding on these purchase commitments was $0 and $0.2 million. These amounts are included in other accrued expenses in the Company's consolidated balance sheet.
Employment Agreements
The Company has employment agreements with certain employees that provide severance payments and accelerated vesting of options upon termination of employment
under certain circumstances or a change of control, as defined. As of December 31, 2007 and 2006, the Company's potential obligation to these employees was approximately $500,000, and $300,000,
respectively. During the year ended December 31, 2006, the Company severed the employment of an employee that had an employment agreement that provided for severance. The Company recorded a
charge to operations of approximately $250,000 related to this severance agreement as selling, general and administrative expense in its results of operations for the year ended December 31,
2006. At December 31, 2006, approximately $0.2 million was accrued; all amounts were paid out prior to December 31, 2007.
90
Litigation
From time to time, the Company is a party to routine litigation and proceedings in the ordinary course of business. On May 19, 2006, the Company filed a
suit in U.S. district court, District of Massachusetts, against one of its customers. The suit demands full payment of all outstanding amounts due to the Company from its customer. The customer filed
a counterclaim that the Company believed was without merit. The suit was settled on March 9, 2007. The settlement did not have a material effect on the Company's financial position or
operations.
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 or net cash flows.
L. EMPLOYEE BENEFIT PLAN
The Company offers a 401(k) Employee Benefit Plan (the "Plan"). Under the Plan, any regular employee of the Company or its wholly owned US subsidiaries, as
defined by the Plan, who has attained the age of 21 years is eligible to participate. The Plan allows an employee to defer up to 100% of his or her compensation, as limited under IRC
Section 402(g), through contributions to the Plan. The Company matches 100% in the Company's common stock up to the first 6% of an employee's pay that he or she contributes to the Plan.
Participants are vested immediately in the matches of the Company common stock. The match contribution will be determined and accrued in dollars and converted to shares of the Company's common stock
using the share price of the last business day of each calendar quarter. The stock will be issued as soon as practical in the following period. The table below details out the Company's matching
contributions made under the Plan, the number of shares of the Company's common stock issued under the Plan and the value of the common stock issued by the Company as matching contributions to the
Plan for the years ended December 31, 2007 and 2006, as follows:
|
|
Matching
Contribution $'s
|
|
Shares of
Common
Stock
Issued
|
|
Value of
Common
Stock
Issued $'s
|
Year ended December 31, 2006
|
|
$
|
602,303
|
|
391,431
|
|
$
|
604,740
|
Year ended December 31, 2007
|
|
$
|
559,144
|
|
474,379
|
|
$
|
567,161
|
The
value of the common stock issued as matching contributions is based on the closing price of the Company's common stock on the Nasdaq Market for the last day of the calendar quarter
in which the contributions were earned. Shares of common stock are transferred the first practical day following the end of the quarter in which the shares were earned.
91
M. INCOME TAXES
The provision for income taxes consists of the following:
|
|
Year Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
Loss before income taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(11,572,861
|
)
|
$
|
(17,229,899
|
)
|
|
Foreign
|
|
|
(6,192,916
|
)
|
|
(2,548,112
|
)
|
|
|
|
|
|
|
|
|
$
|
(17,765,777
|
)
|
$
|
(19,778,011
|
)
|
Current payable:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
State
|
|
|
|
|
|
3,000
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
3,000
|
|
Deferred income tax benefit/(provision)
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(471,823
|
)
|
$
|
5,424,853
|
|
Foreign
|
|
|
5,536,261
|
|
|
|
|
State
|
|
|
(511,877
|
)
|
|
923,202
|
|
|
|
|
|
|
|
|
|
$
|
4,552,561
|
|
$
|
6,348,055
|
|
|
|
|
|
|
|
Adjustment of beginning of period valuation allowance for deferred tax assets
|
|
$
|
(4,552,561
|
)
|
$
|
(6,348,055
|
)
|
|
|
|
|
|
|
Income tax expense, net, reported in the accompanying statement of operations
|
|
$
|
|
|
$
|
3,000
|
|
|
|
|
|
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. As of December 31, 2006 and 2007, the components of the net deferred tax assets/ (liabilities) are as follows:
|
|
Year Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
Federal net operating loss carryforwards
|
|
$
|
36,632,951
|
|
$
|
36,740,414
|
|
Foreign net operating loss carryforwards
|
|
|
5,536,261
|
|
|
|
|
Tax credits
|
|
|
1,227,281
|
|
|
1,237,518
|
|
Depreciation and amortization
|
|
|
1,349,238
|
|
|
1,437,445
|
|
Other
|
|
|
3,327,126
|
|
|
3,661,275
|
|
State net operating loss carryforwards, net of federal benefit
|
|
|
3,849,367
|
|
|
4,293,010
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,922,224
|
|
$
|
47,369,662
|
|
Valuation allowance
|
|
|
(51,922,224
|
)
|
|
(47,369,662
|
)
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
|
|
$
|
|
|
92
As of December 31, 2007, the Company had U.S. federal and state net operating loss carry forwards of approximately $108.0 million and $57.0 million, respectively,
which may be available to offset future federal and state income tax liabilities. The federal net operating loss carryforwards expire beginning in 2008 through 2028 and the state net operating loss
carryforwards expire beginning in 2008 through 2017. The Company has foreign net operating loss carryforwards of approximately $16.0 million, which expire beginning in 2008 through 2015. The
Company has federal and state tax credits of approximately $880,000 and $347,000, respectively. The federal research and development credits begin to expire in 2022, and the state credits begin to
expire in 2016.
As
required by SFAS No. 109,
Accounting for Income Taxes
, management has evaluated the positive and negative evidence bearing upon
the realizability of the Company's deferred tax assets. Management has determined that it is more likely than not that the Company will not realize the benefits of federal deferred tax assets, and as
a result, a full valuation allowance has been established.
Of
the changes in the valuation allowance described above for the period ended December 31, 2007, an immaterial amount relates to tax return deductions attributable to the
exercise of non-qualifying stock options or disqualifying dispositions of incentive stock options, and are not benefited through income.
Under
the Internal Revenue Code, certain substantial changes in the Company's ownership may result in an annual limitation on the amount of net operating loss and tax credit
carryforwards, which may be utilized in future periods.
The
provision for income taxes differs from the federal statutory rate due to the following:
|
|
Year Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
Federal and foreign tax at statutory rate
|
|
(34.0
|
)%
|
(34.0
|
)%
|
State taxes, net of federal benefit
|
|
(6.7
|
)%
|
(6.7
|
)%
|
Permanent items
|
|
13.7
|
%
|
|
|
Other
|
|
1.1
|
%
|
2.0
|
%
|
Change in valuation allowance
|
|
25.9
|
%
|
38.7
|
%
|
|
|
|
|
|
|
Effective tax rate
|
|
|
%
|
|
%
|
|
|
|
|
|
|
N. STOCKHOLDERS' EQUITY
As of December 31, 2007, the Company has reserved 32,319,636 shares of common stock for issuance upon exercise of stock options and warrants, 12,287,327
shares for future issuances under its stock plans and 1,012,100 shares for future issuances as matching contributions under its 401(k) plan. The Company has also reserved 1,096,774 shares of common
stock for issuance upon conversion of the outstanding Series B Preferred Stock, which can be converted at any time and 24,038,462 shares of common stock for the issuance upon conversion of the
outstanding Series C Preferred Stock, which can be converted at any time. As of December 31, 2007, holders of warrants to purchase an aggregate of 11,849,190 shares of the Company's
common stock may exercise. As of December 31, 2007 there are 27,111,262 warrants to purchase common stock outstanding and 5,208,374 options to purchase common stock outstanding.
Stock Option Plans
Under the Company's 1998, 1999, 2000, 2002 and 2005 Stock Option Plans (collectively, the "Plans"), both qualified and non-qualified stock options may
be granted to certain officers, employees, directors and consultants to purchase up to 17,250,000 shares of the Company's common stock. At
93
December 31,
2007, 5,208,374 of the 17,250,000 stock options available for grant under the Plans have been granted.
The
Plans are subject to the following provisions:
-
-
The
aggregate fair market value (determined as of the date the option is granted) of the Company's 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 the granting 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 option price is at least 110% of the fair market value of the
Company's common stock subject to the option, determined on the date of grant. Non-qualified options are not subject to this limitation.
-
-
Qualified
options are issued only to employees of the Company, while non-qualified options may be issued to non-employee directors, consultants and
others, as well as to employees of the Company. Options granted under the Plans may not be granted with an exercise price less than 100% of fair value of the Company's 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 Company's common stock subject to options that expire without being exercised or that are canceled as a result of the cessation of employment are available for
future grants.
The
following table summarizes activity of the Company's stock plans since December 31, 2005:
|
|
Options Outstanding
|
|
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2005
|
|
3,778,095
|
|
$
|
3.89
|
|
7.00
|
|
|
|
|
Grants
|
|
1,000,500
|
|
$
|
2.48
|
|
|
|
|
|
|
Exercises
|
|
(229,850
|
)
|
$
|
1.37
|
|
|
|
|
|
|
Cancellations
|
|
(92,000
|
)
|
$
|
2.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
4,456,745
|
|
$
|
3.73
|
|
6.71
|
|
|
|
|
Grants
|
|
1,228,500
|
|
$
|
1.41
|
|
|
|
|
|
|
Exercises
|
|
(27,205
|
)
|
$
|
0.90
|
|
|
|
|
|
|
Cancellations
|
|
(449,666
|
)
|
$
|
3.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
5,208,374
|
|
$
|
3.25
|
|
6.65
|
|
$
|
701,797
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
4,171,624
|
|
$
|
3.61
|
|
6.01
|
|
$
|
535,148
|
|
|
|
|
|
|
|
|
|
94
Information
related to stock options outstanding as of December 31, 2007 is as follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number of
Shares
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
Weighted
Average
Exercise
Price
|
|
Exercisable
Number of
Shares
|
|
Exercisable
Weighted
Average
Exercise
Price
|
$0.41 to $1.37
|
|
780,745
|
|
7.53
|
|
$
|
1.09
|
|
708,120
|
|
$
|
1.07
|
$1.38 to $1.49
|
|
1,173,000
|
|
9.47
|
|
$
|
1.45
|
|
478,250
|
|
$
|
1.43
|
$1.51 to $1.76
|
|
806,000
|
|
7.26
|
|
$
|
1.68
|
|
794,375
|
|
$
|
1.68
|
$1.78 to $2.10
|
|
832,467
|
|
5.19
|
|
$
|
2.02
|
|
813,717
|
|
$
|
2.02
|
$2.23 to $5.26
|
|
823,500
|
|
7.08
|
|
$
|
3.41
|
|
584,500
|
|
$
|
3.62
|
$5.69 to $17.56
|
|
785,162
|
|
2.04
|
|
$
|
10.70
|
|
785,162
|
|
$
|
10.70
|
$17.75
|
|
7,500
|
|
2.86
|
|
$
|
17.75
|
|
7,500
|
|
$
|
17.75
|
|
|
|
|
|
|
|
|
|
|
|
$0.41 to $17.75
|
|
5,208,374
|
|
6.65
|
|
$
|
3.25
|
|
4,171,624
|
|
$
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
Options
for the purchase of 3,786,745 shares were exercisable at December 31, 2006 with a weighted average exercise price of $3.95 per share.
The
following table summarizes the status of the Company's non-vested restricted share activity:
|
|
Non-vested Restricted Stock Awards
|
|
|
Number
of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Non-vested At December 31, 2005
|
|
50,000
|
|
$
|
1.41
|
|
Granted
|
|
|
|
$
|
|
|
Vested
|
|
(50,000
|
)
|
$
|
1.41
|
|
Forfeited
|
|
|
|
$
|
|
|
|
|
|
|
Non-vested At December 31, 2006
|
|
|
|
$
|
|
|
|
|
|
|
|
Granted
|
|
|
|
$
|
|
|
Vested
|
|
|
|
$
|
|
|
Forfeited
|
|
|
|
$
|
|
|
|
|
|
|
Non-vested At December 31, 2007
|
|
|
|
$
|
|
|
|
|
|
|
As
of December 31, 2007, there was approximately $1.0 million of total unrecognized costs related to non-vested share-based compensation arrangements granted
under the Plans. That cost is expected to be recognized over a weighted average period of approximately 1.4 years, with approximately $0.5 million and $0.3 million being
recognized in 2008 and 2009. Options to purchase 27,205 shares were exercised during the year ended December 31, 2007; these options had an intrinsic value of approximately $16,000 on their
date of exercise. Options to purchase 229,850 shares were exercised during the year ended December 31, 2006; these options had an intrinsic value of approximately $0.2 million on their
date of exercise.
During
2000, the Company granted 216,000 non-qualified stock options to employees at an exercise price of $17.56 per share outside of the Board approved Plans. As of
December 31, 2007 and 2006, there were 21,000 options outstanding, respectively, which are included in the above table.
95
Warrants
On December 19, 2002, the Company issued to Silicon Valley Bank (the "Bank"), in connection with entering into a forbearance agreement with Silicon Valley
Bank, a warrant exercisable for 15,763 shares
of the Company's common stock, at an exercise price of $1.586 per share. The warrant expired on December 18, 2007. The Company valued this warrant at $20,100 using the Black-Scholes
option-pricing model and has designated the warrant as an equity instrument in accordance with EITF 00-19.
HCW
served as placement agent for the February 2003 Series A financing transaction and on February 18, 2003 received as part of its commission warrants to purchase an
aggregate of 163,145 shares of common stock at an exercise price of $0.01 per share. These warrants were immediately exercisable and expired on February 18, 2008. In connection with the closing
of the transactions contemplated by the note and warrant purchase agreement, HCW received additional warrants from the Company to purchase an aggregate of 42,920 shares of common stock at an exercise
price of $0.01. These warrants are exercisable from the closing of the transactions contemplated by the note and warrant purchase agreement and expired on February 18, 2008. In addition, HCW
agreed to receive warrants to purchase an aggregate of 100,148 shares of common stock at an exercise price of $0.01 per share in lieu of the cash placement fee in connection with the closing of the
transactions contemplated by the Note and Warrant Purchase Agreement. These warrants were issued on February 18, 2003 and were exercisable from the closing of the transactions contemplated by
the note and warrant purchase agreement and expired on February 18, 2008 unexercised. The Company had valued these warrants at $267,147, using the Black-Scholes option-pricing model and has
designated the warrant as an equity instrument in accordance with EITF 00-19.
As
of December 31, 2007, the table below details the balance of the warrants issued to HCW by the Company:
Date of Issuance
|
|
Initial
Warrant to
Purchase
Shares of
Common Stock
|
|
Exercise
Price $
|
|
Shares of
Common
Stock issued
|
|
Remaining
Shares of
Common Stock
Underlying
the Warrant
|
|
Date of Warrant
Expiration
|
February 18, 2003
|
|
163,145
|
|
$
|
0.01
|
|
152,948
|
|
10,197
|
|
February 18, 2008
|
February 18, 2003
|
|
42,920
|
|
$
|
0.01
|
|
38,321
|
|
4,599
|
|
February 18, 2008
|
February 18, 2003
|
|
100,148
|
|
$
|
0.01
|
|
80,284
|
|
19,864
|
|
February 18, 2008
|
On
December 12, 2003, the Company amended its loan agreement with the Bank. In connection with the amended loan, the Company issued to the Bank a warrant to purchase up to 16,164
shares of its common stock, at an exercise price of $2.32 per share. This warrant was immediately exercisable and expires on December 11, 2010. The Company has valued this warrant at $32,087,
using the Black-Scholes option-pricing model and treated this as a deferred financing cost and amortized this value on a straight line basis through December 9, 2004. As of December 31,
2007, none of these warrants have been exercised.
On
December 22, 2004, the Company sold 4,848,485 shares of common stock under its universal shelf registration statement to a group of investors for proceeds of $7,470,000, net of
transaction costs. As part of the December 2004 financing the Company also issued warrants to purchase up to 2,181,818 shares of common stock. These warrants have an exercise price of $2.00 per share
and may only be exercised on a "cashless" basis. These warrants were immediately exercisable and expire on December 21, 2009. During the year ended December 31, 2006, 1,227,272 of these
warrants were exercised on a "cashless" basis, resulting in the Company issuing 403,600 shares of common stock. As of December 31, 2007, 954,546 warrants were outstanding.
On
March 21, 2005, the Company entered into an agreement with Ardour to serve as the Company's financial advisor. As part of this agreement the Company issued to Ardour a
3-year warrant
96
to
purchase 50,000 shares of the Company's common stock at an exercise price of $2.75 per share. The Company valued these warrants at $20,490, using the Black-Scholes option-pricing model and
designated the warrant as an equity instrument in accordance with EITF 00-19. At December 31, 2007, none of these warrants have been exercised.
On
June 29, 2005, the Company's then existing credit facility with the Bank was modified pursuant to a Loan Modification Agreement (the "Modification Agreement") between the
Company and the Bank. The Modification Agreement had an effective date of May 31, 2005. In connection with the Modification Agreement, the Company issued to the Bank a 10-year
warrant to purchase 151,515 shares of the Company's common stock at an exercise price of $1.386 per share. The Company valued these warrants at $119,427 using the Black-Scholes option pricing and has
treated this as a deferred financing cost and was amortizing this value on a straight line basis through the remaining term of the credit facility. At December 31, 2007 none of these warrants
have been exercised.
On
August 15, 2005, the Company sold 4,676,151 shares of common stock to accredited investors for proceeds of approximately $5.4 million, net of transaction costs. As part
of this financing the Company also issued warrants to purchase up to 1,169,038 shares of common stock. These warrants have an exercise price of $1.99 per share, were immediately exercisable and expire
on August 12, 2010. In addition, the Company agreed to pay Ardour a fee of 6% of the net proceeds from the August 2005 financing, approximately $347,000, and warrants equal to 2% of the common
stock issued in the August 2005 financing. The Company issued to Ardour a warrant to purchase 93,523 shares of common stock at an exercise price of $1.84. These warrants were immediately exercisable
and have an expiration date of August 14, 2010. As of December 31, 2007, none of these warrants have been exercised.
97
A summary of the Company's warrants currently outstanding as of December 31, 2007 by issuance date is summarized below:
Date of
Warrant Issuance
|
|
Holder of Warrant
|
|
Original
Warrant to
Purchase
Shares of
Common Stock
|
|
Exercise
Price $
|
|
Warrants
Exercised
|
|
Remaining
Shares of
Common
Stock
underlying
the warrant
|
|
Term
(Years)
|
February 18, 2003
|
|
H.C. Wainwright(3)
|
|
163,145
|
|
$
|
0.01
|
|
152,948
|
|
10,197
|
|
5
|
February 18, 2003
|
|
H.C. Wainwright(3)
|
|
42,920
|
|
$
|
0.01
|
|
38,321
|
|
4,599
|
|
5
|
February 18, 2003
|
|
H.C. Wainwright(3)
|
|
100,148
|
|
$
|
0.01
|
|
80,284
|
|
19,864
|
|
5
|
October 31, 2003
|
|
Series B Preferred Investors
|
|
1,228,000
|
|
$
|
2.93
|
|
112,000
|
|
1,116,000
|
|
5
|
October 31, 2003
|
|
Burnham Hill Partners, LLC
|
|
150,430
|
|
$
|
0.01
|
|
145,248
|
|
5,182
|
|
5
|
December 12, 2004
|
|
Silicon Valley Bank
|
|
16,164
|
|
$
|
2.32
|
|
|
|
16,164
|
|
5
|
December 22, 2004
|
|
December 2004 Financing Investors
|
|
2,181,818
|
|
$
|
2.00
|
|
|
|
954,544
|
|
5
|
March 21, 2005
|
|
Ardour Capital Investment, LLC
|
|
50,000
|
|
$
|
2.75
|
|
|
|
50,000
|
|
3
|
May 31, 2005
|
|
Silicon Valley Bank
|
|
151,515
|
|
$
|
1.39
|
|
|
|
151,515
|
|
10
|
August 12, 2005
|
|
August 2005 Financing Investors
|
|
1,169,038
|
|
$
|
1.99
|
|
|
|
1,169,038
|
|
5
|
August 12, 2005
|
|
Ardour Capital Investment, LLC
|
|
93,523
|
|
$
|
1.84
|
|
|
|
93,523
|
|
5
|
July 19, 2006
|
|
Warrant A, July 2006 Private Placement
|
|
3,636,368
|
|
$
|
1.82
|
|
1,242,426
|
(2)
|
2,393,942
|
|
7
|
July 19, 2006
|
|
Warrant B, July 2006 Private Placement
|
|
3,636,368
|
|
$
|
1.68
|
|
3,636,368
|
|
|
|
0.5
|
July 19, 2006
|
|
First Albany Warrants
|
|
218,183
|
|
$
|
1.87
|
|
|
|
218,183
|
|
5
|
July 17, 2007
|
|
Warrant C, July 2006 Private Placement
|
|
1,818,187
|
|
$
|
1.82
|
|
621,215
|
(2)
|
1,196,972
|
|
7
|
November 8, 2007
|
|
Series C Preferred Warrants
|
|
15,262,072
|
|
$
|
1.25
|
(1)
|
|
|
15,262,072
|
|
7
|
December 20, 2007
|
|
Series C Preferred Warrants
|
|
4,449,467
|
|
$
|
1.25
|
|
|
|
4,449,467
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrants outstanding as of December 31, 2007
|
|
|
|
|
|
|
27,111,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
These
warrants originally had an exercise price of $1.44. Upon the second closing of the Series C Preferred Stock financing, these warrants were repriced to $1.25.
-
(2)
-
Upon
the closing of the Series C Preferred Stock financing, the holders of Warrant As and Warrant Cs, related to the July 19, 2006 financing transaction, were able to
exercise their redemption rights as it related to these warrants. In the fourth quarter of 2007 Warrants As and Warrant Cs representing 1,242,426 and 621,215 shares of common stock, respectively, were
redeemed resulting in the Company paying to the redeeming warrant holders approximately $2.1 million cash in the aggregate.
-
(3)
-
These
warrants expired unexercised on February 18, 2008.
A summary of the status of the Company's warrants as of the year ended December 31, 2007 and 2006 and the changes for these periods are
presented below. The actual common stock issued on warrants exercises in 2007 and 2006 is less than the table presented below due to the redemption rights exercised by the Warrant A and Warrant C
holders in 2007 (see foot notes to the warrant table above) and cashless exercises of warrants in 2006. The actual common stock issued under warrant exercises for 2007 and 2006 was 0 and 430,135,
respectively and the Company received proceeds of $204 related to
the 2006 exercises. The table below reflects the change in warrant price due to the anti-dilutive provisions of the warrants issued in connection with the Series B Preferred Stock
financing as a result of capital transactions since their issuance.
|
|
Year Ended
December 31, 2007
|
|
Year Ended
December 31, 2006
|
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
Outstanding at beginning of year
|
|
11,097,308
|
|
$
|
1.91
|
|
4,966,056
|
|
$
|
2.19
|
|
Granted
|
|
21,529,726
|
|
|
1.30
|
|
7,490,917
|
|
|
1.75
|
|
Exercised
|
|
(5,500,009
|
)
|
|
1.25
|
|
(1,359,665
|
)
|
|
2.05
|
|
Canceled /Expired
|
|
(15,763
|
)
|
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
27,111,262
|
|
$
|
1.56
|
|
11,097,308
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
98
O. PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred Stock, $0.01 par value per share. The Preferred Stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of Directors, without further action by stockholders, and may include voting rights (including the right to vote as a series
on particular matters), preferences as to dividends and liquidation, conversion and redemption rights and sinking fund provisions. See Note I for a discussion of Series B Preferred Stock
issued in October 2003 and Series C Preferred Stock issued in November and December 2007.
P. SHORT-TERM NOTES
On October 19, 2007, the Company entered into a Note Purchase Agreement with Rockport Capital Partners II, L.P. and NGP Energy Technology
Partners, L.P. (the "Investors") to lend the Company up to $10.0 million to provide funds to repurchase the Convertible Notes, among other things. Pursuant to the Note Purchase
Agreement, on November 7, 2007, the Investors purchased from the Company promissory notes (the "New Notes") in an aggregate principal amount of $10.0 million. The New Notes bore interest
at 17% per annum. All unpaid principal, together with accrued but unpaid interest, was to be due and payable in full on February 19, 2008, unless prepaid earlier.
On
December 20, 2007, upon the second closing of the Series C Preferred Stock financing transaction the Company paid $10.2 million to settle the outstanding amount
on the New Notes along with accrued interest. Payment was made by offsetting the amounts otherwise owed by the Investors in the Series C Preferred Stock financing transaction.
Q. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-Cash Investing and Financing Activities
|
|
Year Ended
December 31.
|
|
|
2007
|
|
2006
|
Employee stock-based compensation
|
|
$
|
1,122,099
|
|
$
|
986,251
|
Common Stock issued in lieu of interest on redeemable convertible Series B Preferred Stock
|
|
|
137,856
|
|
|
151,778
|
Common Stock issued in lieu of interest on Senior Secured Convertible Notes
|
|
|
518,165
|
|
|
314,860
|
Amortization of debt discount associated with the valuation of the July 19, 2006 Senior Secured Convertible Notes
|
|
|
2,115,442
|
|
|
533,474
|
Common stock issued related to 401(K) contributions
|
|
|
567,161
|
|
|
604,740
|
Conversion of Series B Preferred Stock for common stock
|
|
|
25,000
|
|
|
400,000
|
Common Stock issued to Note holders as incentive to accelerate pay off
|
|
|
914,999
|
|
|
|
Valuation adjustment to the redeemable convertible Series B Preferred Stock as a result of its anti-dilution provisions
|
|
|
529,479
|
|
|
125,041
|
Accretion of redeemable convertible Preferred Stock discount
|
|
|
184,994
|
|
|
|
Stock issued related to cancellation of Worcester Lease
|
|
$
|
1,122,000
|
|
|
|
Conversion of Notes to Common Stock
|
|
$
|
525,000
|
|
|
|
Issuance of Common Stock in lieu of principal payments on the Notes
|
|
$
|
3,809,446
|
|
|
|
Non-cash restructuring charges due to issuance of Common Stock to settle future lease obligations, impairments and fair value adjustment of Investor Warrants
|
|
|
|
|
$
|
1,532,231
|
99
Interest and Income Taxes Paid
Cash paid for interest and income taxes was as follows:
|
|
Year Ended
December 31,
|
|
|
2007
|
|
2006
|
Interest
|
|
$
|
308,093
|
|
$
|
130,019
|
Income taxes
|
|
|
|
|
|
|
R. LOSS PER SHARE
The following is the reconciliation of the numerators and denominators of the basic and diluted loss per share computations:
|
|
Year Ended
December 31,
2007
|
|
Year Ended
December 31,
2006
|
|
Net loss attributable to common shareholders
|
|
$
|
(29,813,658
|
)
|
$
|
(19,778,011
|
)
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
Common shares outstanding, beginning of period
|
|
|
40,105,073
|
|
|
38,382,706
|
|
Weighted average common shares issued during the period
|
|
|
5,328,175
|
|
|
907,461
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic and diluted
|
|
|
45,433,248
|
|
|
39,290,167
|
|
|
|
|
|
|
|
Net loss attributable to common shareholder per weighted average share, basic and diluted
|
|
$
|
(0.66
|
)
|
$
|
(0.50
|
)
|
|
|
|
|
|
|
As
of the year ended December 31, 2007 and 2006, 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 redeemable convertible Preferred Stock and Convertible Notes were
excluded from the diluted weighted average common shares outstanding as their effect would also have been dilutive. The table below summarizes the option, warrants, convertible Preferred Stock and
Convertible Notes that were excluded from the calculation above due to their effect being antidilutive:
|
|
Year Ended
Dec. 31,
|
|
|
2007
|
|
2006
|
Common Stock issuable upon the exercise of:
|
|
|
|
|
|
Options
|
|
5,208,374
|
|
3,786,745
|
|
Warrants
|
|
27,111,262
|
|
11,097,308
|
|
|
|
|
|
Total Options and Warrants excluded
|
|
32,319,636
|
|
14,884,053
|
|
|
|
|
|
Common stock issuable upon the conversion of senior secured Convertible Notes, at conversion price of $1.65 per share
|
|
|
|
7,272,727
|
Common Stock issuable upon the conversion of redeemable convertible Series B Preferred Stock
|
|
1,096,774
|
|
837,839
|
Common Stock issuable upon the conversion of redeemable convertible Series C Preferred Stock
|
|
24,038,461
|
|
837,839
|
100
S. SEGMENT DISCLOSURES
The Company's organizational structure is based on strategic business units that perform services and offer various products to the principal markets in which the
Company's products are sold. These business units equate to four reportable segments: Applied Technology, Power Systems, US, Power Systems, Canada and Electronics.
SatCon
Applied Technology, Inc. performs research and development services in collaboration with third parties. SatCon Power Systems, Canada, Ltd. specializes in the
engineering and manufacturing of power systems. Satcon Power Systems, US specializes in the engineering and manufacturing of electric motors and hybrid electric automobile systems. SatCon
Electronics, Inc. designs and manufactures electronic products. The Company's principal operations and markets are located in the United States.
The
accounting policies of each of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on revenue and
profit and loss from operations, including amortization of intangibles. Common costs not directly attributable to a particular segment are included in the corporate segment. These costs include
corporate costs such as executive officer compensation, facility costs, legal, audit and tax and other professional fees.
The
following is a summary of the Company's operations by operating segment:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Applied Technology:
|
|
|
|
|
|
|
|
|
Funded research and development and other revenue
|
|
$
|
8,994,582
|
|
$
|
4,990,022
|
|
|
|
|
|
|
|
|
Loss from operations, including amortization of intangibles of $314,289, $305,960 for the year ended December 31, 2007 and 2006, respectively
|
|
$
|
(393,672
|
)
|
$
|
(1,389,022
|
)
|
|
|
|
|
|
|
Power Systems, US
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
4,962,172
|
|
$
|
4,361,322
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
(652,611
|
)
|
$
|
(6,105,481
|
)
|
|
|
|
|
|
|
Power Systems, Canada:
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
33,032,641
|
|
$
|
14,163,897
|
|
|
|
|
|
|
|
|
Loss from operations, including gain on sale of assets held for sale of $0, $406,364, for the years ended December 31, 2007 and 2006, respectively
|
|
$
|
(6,344,192
|
)
|
$
|
(2,530,615
|
)
|
|
|
|
|
|
|
Electronics:
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
9,581,788
|
|
$
|
10,241,428
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
(628,418
|
)
|
$
|
(677,217
|
)
|
|
|
|
|
|
|
Corporate:
|
|
|
|
|
|
|
|
Loss from operations, including share- based compensation expense of $0.5 million and $0.5 million for the years ended December 31, 2007 and 2006, respectively
|
|
$
|
(3,008,383
|
)
|
$
|
(3,864,624
|
)
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
47,576,601
|
|
$
|
28,766,647
|
|
|
Funded research and development and other revenue
|
|
$
|
8,994,582
|
|
$
|
4,990,022
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
56,571,183
|
|
$
|
33,756,669
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(11,027,276
|
)
|
$
|
(14,566,959
|
)
|
|
Change in fair value of Convertible Notes and Warrants
|
|
$
|
(2,252,264
|
)
|
$
|
(4,191,768
|
)
|
|
Other (loss) income
|
|
$
|
(976,776
|
)
|
$
|
41,086
|
|
|
Interest income
|
|
$
|
280,392
|
|
$
|
384,394
|
|
|
Interest expense
|
|
$
|
(3,789,853
|
)
|
$
|
(1,444,764
|
)
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,765,777
|
)
|
$
|
(19,778,011
|
)
|
|
|
|
|
|
|
101
Common assets not directly attributable to a particular segment are included in the Corporate segment. These assets include cash and cash
equivalents, prepaid and other corporate assets. The following is a summary of the Company's assets by operating segment:
|
|
December 31,
|
|
|
2007
|
|
2006
|
Applied Technology:
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
4,498,602
|
|
$
|
2,995,181
|
Power Systems, US:
|
|
|
|
|
|
|
|
Segment assets
|
|
|
2,697,828
|
|
|
4,196,821
|
Power Systems, Canada
|
|
|
|
|
|
|
|
Segment assets
|
|
|
20,897,103
|
|
|
8,594,046
|
Electronics:
|
|
|
|
|
|
|
|
Segment assets
|
|
|
6,070,848
|
|
|
5,883,674
|
Corporate:
|
|
|
|
|
|
|
|
Segment assets
|
|
|
12,444,296
|
|
|
8,907,565
|
|
|
|
|
|
Total assets
|
|
$
|
46,608,677
|
|
$
|
30,577,287
|
|
|
|
|
|
The
Company operates and markets its services and products on a worldwide basis with its principal markets as follows:
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
Revenue by geographic region based on location of customer:
|
|
|
|
|
|
|
|
United States
|
|
$
|
47,000,868
|
|
$
|
30,475,297
|
|
Rest of World
|
|
|
9,570,315
|
|
|
3,281,372
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
56,571,183
|
|
$
|
33,756,669
|
|
|
|
|
|
|
|
December 31,
2007
|
|
December 31,
2006
|
Long-lived assets (including goodwill and intangible assets) by geographic region based on location of operations:
|
|
|
|
|
|
|
|
United States
|
|
$
|
3,258,009
|
|
$
|
4,406,166
|
|
Rest of world
|
|
|
1,299,743
|
|
|
306,584
|
|
|
|
|
|
|
Total long-lived assets (including goodwill and intangible assets)
|
|
$
|
4,557,752
|
|
$
|
4,712,750
|
|
|
|
|
|
T. RESTRUCTURING COSTS
On September 19, 2006, the Board of Directors approved a plan to close the Company's Worcester, Massachusetts manufacturing facility by approximately
December 31, 2006 in furtherance of the Company's continuing efforts to streamline operations and reduce its operating costs. As of December 31, 2006, approximately $1.6 million
had been incurred by the Company related to the restructuring. This charge represents approximately $42,000 related to employee severance, $45,000 related to employee retention payments and
$0.2 million in impairment charges related to property, plant and equipment. In addition, on December 22, 2006 the Company came to an agreement with the landlord of the Worcester
facility, whereby the Company would issue 850,000 shares of common stock in exchange for allowing the Company to terminate the lease early. The stock was issued to the landlord on January 3,
2007. The Company recorded a restructuring charge in the period ended December 31, 2006 in the amount of $1.1 million related to this agreement and approximately
102
$0.2 million
related to the revaluation of investor warrants and accounted for this as a change in fair value of the Notes and warrants at December 31, 2006. The Company incurred
approximately $0.1 million of additional costs related to the restructuring in 2007.
The
following is a summary of the Company's accrued restructuring costs at December 31, 2007 and 2006:
|
|
December 31,
|
|
|
2007
|
|
2006
|
Severance costs and payroll-related costs
|
|
$
|
|
|
$
|
78,326
|
Facility costs
|
|
$
|
|
|
$
|
1,122,000
|
|
|
|
|
|
Accrued restructuring costs
|
|
$
|
|
|
$
|
1,200,326
|
|
|
|
|
|
U. PRODUCT WARRANTIES
In its Power Systems divisions the Company provides a warranty to its customers for most of its products sold. In general the Company's warranties are for one
year after the sale of the product, and in five years for photovoltaic inverters. The Company reviews its warranty liability quarterly. Factors taken into consideration when evaluating the Company's
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 Company's estimates the provision for product warranties will be adjusted in future periods. Such differences may be significant.
The
following is a summary of the Company's accrued warranty activity for the following periods:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Balance at beginning of year
|
|
$
|
679,747
|
|
$
|
556,314
|
|
|
Provision(1)
|
|
|
1,984,819
|
|
|
748,595
|
|
|
Usage
|
|
|
(633,288
|
)
|
|
(625,162
|
)
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
2,031,278
|
|
$
|
679,747
|
|
|
|
|
|
|
|
-
(1)
-
The
warranty provision increased over that of 2006 due to the increase in photovoltaic inverter sales, which carry a five year warranty and currently is provided for at 5% of product
revenue.
103
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
SUPPLEMENTAL SCHEDULE
To
the Board of Directors and
Stockholders of SatCon Technology Corporation:
We
have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of SatCon Technology Corporation
and its subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and cash flows for the years ended December 31, 2007 and December 31, 2006,
included in this Form 10-K, and have issued our report thereon dated March 25, 2008. Our audits were made for the purpose of forming an opinion on those consolidated
financial statements taken as a whole. The schedule listed in the financial statement schedule index is the responsibility of the Company's management and is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic consolidated financial statements. The schedule for the years ended December 31, 2007 and 2006 has been subjected
to auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states, in all material aspects, the financial data required to be set forth
therein in relation to the basic consolidated financial statements taken as a whole.
/s/
Vitale Caturano & Company, Ltd.
VITALE,
CATURANO & COMPANY, LTD.
March 25,
2008
Boston, Massachusetts
104
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
Balance at
beginning
of period
|
|
Additions
charged to
costs and
expenses
|
|
Settlement
Amounts
|
|
Balance
at end
of period
|
Year Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts
|
|
$
|
800,654
|
|
$
|
271,195
|
|
$
|
(265,604
|
)
|
$
|
792,245
|
|
Reserve for product warranty expense
|
|
$
|
556,314
|
|
$
|
748,595
|
|
$
|
(625,161
|
)
|
$
|
679,747
|
|
Accrued restructuring costs
|
|
$
|
|
|
$
|
1,612,045
|
|
$
|
(411,719
|
)
|
$
|
1,200,326
|
Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for uncollectible accounts
|
|
$
|
792,245
|
|
$
|
70,295
|
|
$
|
(651,277
|
)
|
$
|
211,263
|
|
Reserve for product warranty expense
|
|
$
|
679,747
|
|
$
|
1,984,819
|
|
$
|
(633,289
|
)
|
$
|
2,031,277
|
|
Accrued restructuring costs
|
|
$
|
1,200,326
|
|
$
|
81,644
|
|
$
|
(1,281,970
|
)
|
$
|
|
105
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A (T). CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we carried out an
evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Vice President of Finance, of the effectiveness of our disclosure controls and
procedures as of December 31, 2007. Based upon that evaluation, the Chief Executive Officer and Vice President of Finance concluded that our disclosure controls and procedures are effective as
of December 31, 2007 to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and forms.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended. Our company's internal control over financial reporting is a process designed under the supervision of the Chief Executive Officer and Vice
President of Finance to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
-
(i)
-
pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
-
(ii)
-
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and
-
(iii)
-
provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on
the financial statements.
There
are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even
effective internal controls can provide only reasonable assurances with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of our company's internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria
established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on management's assessment and those criteria, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2007.
106
This
annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not
subject to attestation by our registered public accounting firm pursuant to the temporary rules of the Security and Exchange Commission that permit us to provide only management's report in this
annual report.
There was no change in our internal control over financial reporting that occurred during the fourth quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
Item 9B. OTHER INFORMATION.
Not applicable
107
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required under this item is incorporated herein by reference to the information regarding directors, executive officers and corporate governance
included in our proxy statement for our 2008 Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to information regarding executive compensation included in our 2008 proxy statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated herein by reference to the information regarding security ownership of certain beneficial owner and
management and related stockholder matters included in our 2008 proxy statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this item is incorporated herein by reference to the information regarding certain relationships and related transactions, and
director independence included in our 2008 proxy statement.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required under this item is incorporated herein by reference to the information regarding principal accounting fees and services included in our
2008 proxy statement.
108
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
-
1.
-
Consolidated Financial Statements of SatCon Technology Corporation and its Subsidiaries:
-
-
Consolidated
Balance Sheets as of December 31, 2007 and December 31, 2006
-
-
Consolidated
Statements of Operations for the Calendar Years Ended December 31, 2007 and 2006
-
-
Consolidated
Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Loss for the Calendar Years Ended December 31, 2007 and 2006
-
-
Consolidated
Statements of Cash Flows for the Calendar Years Ended December 31, 2007 and 2006
-
-
Notes
to Consolidated Financial Statements
-
2.
-
Financial Statement Schedule of SatCon Technology Corporation and its Subsidiaries:
-
-
Schedule II:
Valuation and Qualifying Accounts for the Calendar Years Ended December 31, 2007 and 2006
-
-
All
other financial statement schedules not listed have been omitted because they are either not required, not applicable, or the information has been included elsewhere
in the consolidated financial statements or notes thereto.
-
3.
-
Exhibits:
-
-
The
exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Annual Report on Form 10-K.
109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts on March 31, 2008.
|
|
SATCON TECHNOLOGY CORPORATION
|
|
|
By:
|
|
/s/
DAVID B. EISENHAURE
David B. Eisenhaure
President and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
DAVID B. EISENHAURE
David B. Eisenhaure
|
|
Chief Executive Officer, President and Director (Principal Executive Officer)
|
|
March 31, 2008
|
/s/
DAVID E. O'NEIL
David E. O'Neil
|
|
Vice President, Finance and Treasurer (Principal Financial Officer)
|
|
March 31, 2008
|
/s/
JOHN W. PEACOCK
John W. Peacock
|
|
Controller and Chief Accounting Officer (Principal Accounting Officer)
|
|
March 31, 2008
|
/s/
JAMES L. KIRTLEY, JR.
James L. Kirtley, Jr.
|
|
Director
|
|
March 31, 2008
|
/s/
DAVID J. PREND
David J. Prend
|
|
Director
|
|
March 31, 2008
|
/s/
JOHN M. CARROLL
John M. Carroll
|
|
Chairman of the Board
|
|
March 31, 2008
|
/s/
DANIEL R. DWIGHT
Daniel R. Dwight
|
|
Director
|
|
March 31, 2008
|
/s/
PHILIP J. DEUTCH
Philip J. Deutch
|
|
Director
|
|
March 31, 2008
|
/s/
ROBERT G. SCHOENBERGER
Robert G. Schoenberger
|
|
Director
|
|
March 31, 2008
|
110
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
3.1
|
|
Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).
|
3.2
|
|
Bylaws of the Registrant is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).
|
3.3
|
|
Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on May 12, 1997, is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 1-11512).
|
3.4
|
|
Bylaws Amendment of the Registrant is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 1-11512).
|
3.5
|
|
Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on March 17, 1999, is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated August 25, 1999 (File No. 1-11512).
|
3.6
|
|
Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on March 15, 2000 is incorporated by reference to Exhibits to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (File No. 1-11512).
|
3.7
|
|
Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on May 4, 2001, is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2001 (File No. 1-11512).
|
3.8
|
|
Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible Preferred Stock of the Registrant, dated as of February 14, 2003, is incorporated herein by reference to Exhibits to
the Registrant's Current Report on Form 8-K dated February 18, 2003 (File No. 1-11512).
|
3.9
|
|
Certificate of Designation of the Relative Rights and Preferences of the Series B Convertible Preferred Stock of the Registrant, dated as of October 31, 2003, is incorporated herein by reference to Exhibits to
the Registrant's Current Report on Form 8-K, as amended, dated October 31, 2003 (File No. 1-11512).
|
3.10
|
|
Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Secretary of State of the State of Delaware on March 23, 2006, is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended April 1, 2006 (File No. 1-11512).
|
3.11
|
|
Amendment to Bylaws of the Registrant (Adopted by the Board of Directors on February 27, 2007) is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
February 27, 2007 (File No. 1-11512).
|
3.12
|
|
Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on November 8, 2007, is incorporated
herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 7, 2007 (File No. 11512).
|
3.13
|
|
Certificate of Amendment of Certificate of Incorporation of the Company, as filed with the Secretary of State of the State of Delaware on December 20, 2007, is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated December 19, 2007 (File No. 1-11512).
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111
3.14
|
|
Certificate of Elimination of Series A Convertible Preferred Stock, as filed with the Secretary of State of the State of Delaware on December 20, 2007, is incorporated herein by reference to Exhibits to the
Registrant's Current Report on Form 8-K dated December 19, 2007 (File No. 1-11512).
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4.1
|
|
Specimen Certificate of Common Stock, $.01 par value, is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File No. 33-49286).
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10.1
|
|
Key Employee Agreement, dated July 1, 1992, between the Registrant and David B. Eisenhaure is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File
No. 33-49286).
|
10.2
|
|
Amendment to Employment Agreement, dated March 31, 2004, between the Registrant and David B. Eisenhaure.
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10.3
|
|
Amendment to Employee Agreement, dated January 15, 2008, between the Registrant and David B. Eisenhaure.
|
10.4
|
|
Employment Agreement, dated July 1, 1992, between the Registrant and Michael C. Turmelle is incorporated herein by reference to Exhibits to the Registrant's Registration Statement on Form S-1 (File
No. 33-49286).
|
10.5
|
|
Key Employee Agreement, dated September 13, 2007, between the Registrant and David E. O'Neil is herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated September 13, 2007 (File
No. 1-11512).
|
10.6
|
|
1999 Stock Incentive Plan is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1999 (File No. 1-11512).
|
10.7
|
|
2000 Stock Incentive Plan is incorporated herein by reference to Exhibit C to the Registrant's Preliminary Schedule 14A filed March 19, 2001 (File No. 1-11512).
|
10.8
|
|
2002 Stock Incentive Plan is incorporated herein by reference to Exhibit A to the Registrant's Definitive Schedule 14A filed January 28, 2002 (File No. 1-11512).
|
10.9
|
|
2005 Incentive Compensation Plan is incorporated herein by reference to Exhibit A to the Registrant's Definitive Schedule 14A filed April 14, 2005 (File No. 1-11512).
|
10.10
|
|
Amendment No. 1 to the Registrant's 2005 Incentive Compensation Plan is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 2007
(File No. 1-11512).
|
10.11
|
|
Amendment No. 2 to the Registrant's 2005 Incentive Compensation Plan.
|
10.12
|
|
Series B Convertible Preferred Stock Purchase Agreement, dated as of October 31, 2003, by and among the Registrant and the purchasers set forth on Exhibit A thereto is incorporated herein by reference to
Exhibits to the Registrant's Current Report on Form 8-K/A dated October 31, 2003 (File No. 1-11512).
|
10.13
|
|
Registration Rights Agreement, dated as of October 31, 2003, by and among the Registrant and the purchasers listed on Schedule I thereto is incorporated herein by reference to Exhibits to the Registrant's
Current Report on Form 8-K/A dated October 31, 2003 (File No. 1-11512).
|
10.14
|
|
Form of Warrant to purchase shares of Common Stock of the Registrant issued on October 31, 2003 in connection with the sale of the Series B Convertible Preferred Stock thereto is incorporated herein by reference
to Exhibits to the Registrant's Current Report on Form 8-K dated October 31, 2003 (File No. 1-11512).
|
10.15
|
|
Facilities Lease, dated May 12, 2004, between the Registrant and Zoom Group, LLC is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended
September 30, 2004 (File No. 1-11512).
|
112
10.16
|
|
Loan and Security Agreement, dated January 28, 2005, by and among the Registrant, SatCon Power Systems, Inc., SatCon Electronics, Inc., SatCon Applied Technology, Inc., SatCon Power Systems
Canada LTD. and Silicon Valley Bank is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended April 2, 2005 (File No. 1-11512).
|
10.17
|
|
Loan Modification Agreement, dated June 29, 2005, with and effective date of May 31, 2005, by and among the Registrant, SatCon Power Systems, Inc., SatCon Electronics, Inc., SatCon Applied Technology,
Inc., SatCon Power Systems Canada Ltd. and Silicon Valley Bank is incorporated herein by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended July 2, 2005 (File
No. 1-11512).
|
10.18
|
|
Second Loan Modification Agreement, dated as of November 8, 2005, by and between Silicon Valley Bank, and the Registrant, SatCon Power Systems, Inc., SatCon Applied Technology, Inc., SatCon Electronics,
Inc. and SatCon Power Systems Canada Ltd. is incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 21, 2005 (File No. 1-11512).
|
10.19
|
|
Third Loan Modification Agreement, dated as of January 31, 2006, by and between Silicon Valley Bank, and the Registrant, SatCon Power Systems, Inc., SatCon Applied Technology, Inc., SatCon Electronics,
Inc. and SatCon Power Systems Canada Ltd. is incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended December 31, 2005 (File No. 1-11512).
|
10.20
|
|
Fourth Loan Modification Agreement, dated as of February 10, 2006, by and between Silicon Valley Bank, and the Registrant, SatCon Power Systems, Inc., SatCon Applied Technology, Inc., SatCon Electronics,
Inc. and SatCon Power Systems Canada Ltd. is incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the period ended April 1, 2006 (File No. 1-11512).
|
10.21
|
|
Form of Satcon Technology Corporation 2005 Incentive Compensation Plan, Incentive Stock Option agreement for Directors and Officer's of the Registrant is incorporated herein by reference to Exhibits to the Registrant's
Quarterly Report on Form 10-Q for the period ended July 2, 2005 (File No. 1-11512).
|
10.22
|
|
Form of Satcon Technology Corporation 2005 Incentive Compensation Plan, Non-Qualified Stock Option agreement for Directors and Officer's of the Registrant is incorporated herein by reference to Exhibits to the
Registrant's Quarterly Report on Form 10-Q for the period ended July 2, 2005 (File No. 1-11512).
|
10.23
|
|
Form of Warrant to purchase shares of Common Stock of the Registrant issued on December 22, 2004 is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
December 22, 2004 (File No. 1-11512).
|
10.24
|
|
Form of Warrant to purchase shares of Common Stock of the Registrant issued on August 11, 2005 is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated August 11,
2005 (File No. 1-11512).
|
10.25
|
|
Securities Purchase Agreement dated as of July 19, 2006, by and among the Registrant and the Purchasers identified on the signature pages thereto is incorporated herein by reference to Exhibits to the Registrant's
Current Report on Form 8-K dated July 19, 2006 (File No. 1-11512).
|
10.26
|
|
Form of Senior Secured Convertible Note Due July 19, 2011 is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated July 19, 2006 (File
No. 1-11512).
|
10.27
|
|
Form of Warrant A is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated July 19, 2006 (File No. 1-11512).
|
113
10.28
|
|
Form of Warrant B is incorporated herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated July 19, 2006 (File No. 1-11512).
|
10.29
|
|
Security Agreement, dated as of July 19, 2006, by and among the Registrant, the Purchasers identified on the signature pages thereto and Iroquois Master Fund Ltd., as agent for the Purchaser, is incorporated
herein by reference to Exhibits to the Registrant's Current Report on Form 8-K dated July 19, 2006 (File No. 1-11512).
|
10.30
|
|
First Amendment to Securities Purchase Agreement dated as of December 20, 2006, by and among the Registrant and the entities identified on the signature pages thereto is incorporated herein by reference to Exhibits
to the Registrant's Current Report on Form 8-K dated December 20, 2006 (File No. 1-11512).
|
10.31
|
|
Modification, Termination and Release of Lease, dated as of December 22, 2006, between the Company and Paul E. Hanlon, Trustee of C&M Realty Trust is incorporated herein by reference to Exhibits to the
Registrants Current Report on Form 8-K dated December 20, 2006 (File No. 1-11512).
|
10.32
|
|
Amendment and Exercise Agreement, dated as of July 17, 2007, by and among the Registrant and the entities identified on the signature pages thereto is incorporated by reference to Exhibits to the Registrant's Current
Report on Form 8-K dated July 17, 2007 (File No. 1-11512).
|
10.33
|
|
Form of Warrant C is incorporated herein by reference to Exhibits to the Registrants Current Report on Form 8-K dated July 17, 2007 (File No. 1-11512).
|
10.34
|
|
Offer to Sell Notes, dated as of October 19, 2007 by and among the Registrant and the entities identified on the signature pages thereto is herein incorporated by reference to the Registrant's Current Report on
Form 8-K dated October 19, 2007 and filed on October 22, 2007 (File No. 1-11512).
|
10.35
|
|
Note Purchase Agreement, dated as of October 19, 2007, by and among the Registrant and the Purchasers named therein is herein incorporated by reference to the Registrant's Current Report on Form 8-K dated
October 19, 2007 and filed on October 25, 2007 (File No. 1-11512).
|
10.36
|
|
Form of Note issued pursuant to Note Purchase Agreement, dated as of October 19, 2007, by and among the Registrant and the Purchasers named therein is herein incorporated by reference to Exhibit B of Exhibits to
the Registrant's Current Report on Form 8-K dated October 19, 2007 and filed on October 25, 2007 (File No. 1-11512).
|
10.37
|
|
Stock and Warrant Purchase Agreement, dated as of November 8, 2007, by and among the Registrant and the Purchasers named therein is herein incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated November 7, 2007 (File No. 1-11512).
|
10.38
|
|
Form of Tranche 1 Warrant to Purchase Common Stock, dated as of November 8, 2007 is herein incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 7, 2007
(File No. 1-11512).
|
10.39
|
|
Form of Tranche 2 Warrant and Additional Warrant to Purchase Common Stock is herein incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated November 7, 2007 (File
No. 1-11512).
|
10.40
|
|
Registration Rights Agreement dated as of November 8, 2007, by and among the Company and the Purchasers is herein incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated
November 7, 2007 (File No. 1-11512).
|
10.41
|
|
First Amendment to Registration Rights Agreement, dated as of January 24, 2008, by and among the Registrant and the Purchasers is incorporated by reference to Exhibits to the Registrant's Current Report on
Form 8-K dated January 24, 2008 (File No. 1-11512).
|
114
14.1
|
|
Code of Ethics is incorporated herein by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2004 (File No. 1-11512).
|
21.1
|
|
Subsidiaries of the Registrant.
|
23.1
|
|
Consent of Vitale, Caturano & Company, Ltd.
|
31.1
|
|
Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification by Chief 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.
|
115
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