Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 3,
2009
Commission File Number 1-11512
SATCON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
|
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04-2857552
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(State or other
jurisdiction of
|
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(IRS Employer Identification
No.)
|
incorporation or
organization)
|
|
|
|
|
|
27
Drydock Avenue
Boston, Massachusetts
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02210
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(Address of
principal executive offices)
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|
(Zip Code)
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(617) 897-2400
(Registrants telephone number, including area code)
Indicate by check
mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
o
No
o
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
x
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|
|
|
Non-accelerated filer
o
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|
Smaller reporting
company
o
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(Do not check if a smaller
reporting company)
|
|
|
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date.
Common Stock, $0.01 Par Value,
70,289,812
shares outstanding as of October 20, 2009.
Table of Contents
PART I. FINANCIAL
INFORMATION
Item 1. Financial Statements
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
October 3,
2009
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December 31,
2008
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|
ASSETS
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|
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Current assets:
|
|
|
|
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Cash and cash equivalents
|
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$
|
16,306,546
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|
$
|
9,957,716
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|
Restricted cash and cash equivalents
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84,000
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|
84,000
|
|
Accounts receivable, net of allowance of $191,217
and $168,219 at October 3, 2009 and December 31, 2008, respectively
|
|
11,666,490
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|
11,471,671
|
|
Unbilled contract costs and fees
|
|
189,675
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|
398,707
|
|
Inventory
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|
9,608,123
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|
11,457,532
|
|
Prepaid expenses and other current assets
|
|
1,060,465
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|
1,040,441
|
|
Total current assets
|
|
$
|
38,915,299
|
|
$
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34,410,067
|
|
Property and equipment, net
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3,049,006
|
|
1,964,968
|
|
Goodwill
|
|
123,714
|
|
123,714
|
|
Intangibles, net
|
|
102,810
|
|
398,526
|
|
Total assets
|
|
$
|
42,190,829
|
|
$
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36,897,275
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|
|
|
|
|
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|
LIABILITIES
AND STOCKHOLDERS DEFICIT
|
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Current liabilities:
|
|
|
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Line of credit
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$
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3,000,000
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$
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3,000,000
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Accounts payable
|
|
10,190,033
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8,588,313
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|
Short-term secured note
payable
|
|
1,297,200
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|
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|
Accrued payroll and payroll
related expenses
|
|
1,854,718
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|
2,042,786
|
|
Other accrued expenses
|
|
3,181,529
|
|
2,825,255
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|
Accrued contract loss
|
|
|
|
1,131,370
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|
Accrued restructuring costs
|
|
216,483
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|
602,782
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|
Deferred revenue
|
|
1,658,291
|
|
4,214,389
|
|
Total current liabilities
|
|
$
|
21,398,254
|
|
$
|
22,404,895
|
|
|
|
|
|
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Warrant liabilities
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|
$
|
3,154,817
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$
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2,407,438
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|
Deferred revenue, net of current portion
|
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4,041,571
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2,512,794
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|
Redeemable convertible Series B preferred
stock (75 and 290 shares issued and outstanding at October 3, 2009 and
December 31, 2008, respectively; face value $5,000 per share;
liquidation preference $375,000 and $1,450,000 at October 3, 2009 and
December 31, 2008, respectively)
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375,000
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1,450,000
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Other long-term liabilities
|
|
34,879
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|
58,282
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|
Total liabilities
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$
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29,004,521
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$
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28,833,409
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Commitments and contingencies (Note H)
|
|
|
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Redeemable convertible Series C preferred
stock (25,000 shares issued and outstanding at October 3, 2009 and
December 31, 2008; face value $1,000 per share; liquidation preference
$27,295,206 and $26,350,000 at October 3, 2009 and December 31,
2008, respectively)
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$
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20,946,365
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$
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17,248,593
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Stockholders deficit:
|
|
|
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Common stock; $0.01 par value, 200,000,000 shares
authorized; 70,278,812 and 51,479,822 shares issued and outstanding at
October 3, 2009 and December 31, 2008, respectively
|
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$
|
702,788
|
|
$
|
514,798
|
|
Additional paid-in capital
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|
218,894,693
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|
182,222,762
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|
Accumulated deficit
|
|
(225,630,062
|
)
|
(189,962,435
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)
|
Accumulated other comprehensive loss
|
|
(1,727,476
|
)
|
(1,959,852
|
)
|
Total stockholders deficit
|
|
$
|
(7,760,057
|
)
|
$
|
(9,184,727
|
)
|
Total liabilities and stockholders deficit
|
|
$
|
42,190,829
|
|
$
|
36,897,275
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|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3
Table of Contents
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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Three Months Ended
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Nine Months Ended
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October 3,
2009
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September 27,
2008
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October 3,
2009
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September 27,
2008
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|
Revenue:
|
|
|
|
|
|
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Product revenue
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$
|
10,040,941
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$
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17,215,392
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$
|
31,048,409
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|
$
|
36,947,201
|
|
Funded research and development and other revenue
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|
1,637,668
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|
1,301,362
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4,682,466
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6,292,490
|
|
Total revenue
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|
$
|
11,678,609
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|
$
|
18,516,754
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|
$
|
35,730,875
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|
$
|
43,239,691
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|
|
|
|
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|
|
Cost of revenue:
|
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|
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Cost of product revenue
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|
$
|
10,466,120
|
|
$
|
13,869,078
|
|
$
|
30,686,604
|
|
$
|
32,509,593
|
|
Cost of funded research and development and other
revenue
|
|
1,150,805
|
|
1,145,719
|
|
3,519,056
|
|
4,828,139
|
|
Total cost of revenue
|
|
$
|
11,616,925
|
|
$
|
15,014,797
|
|
$
|
34,205,660
|
|
$
|
37,337,732
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
61,684
|
|
$
|
3,501,957
|
|
$
|
1,525,215
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|
$
|
5,901,959
|
|
|
|
|
|
|
|
|
|
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|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
2,187,554
|
|
$
|
1,642,265
|
|
$
|
6,302,978
|
|
$
|
3,619,615
|
|
Selling, general and administrative
|
|
4,884,613
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|
4,585,771
|
|
14,228,431
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|
11,830,775
|
|
Restructuring charge
|
|
211,267
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|
512,609
|
|
211,267
|
|
1,119,216
|
|
Amortization of intangibles
|
|
78,572
|
|
78,572
|
|
235,716
|
|
235,716
|
|
Total operating expenses from continuing
operations
|
|
$
|
7,362,006
|
|
$
|
6,819,217
|
|
$
|
20,978,392
|
|
$
|
16,805,322
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
$
|
(7,300,322
|
)
|
$
|
(3,317,260
|
)
|
$
|
(19,453,177
|
)
|
$
|
(10,903,363
|
)
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of warrant liabilities
|
|
(305,289
|
)
|
2,041,697
|
|
(3,899,623
|
)
|
(822,501
|
)
|
Other (loss) income, net
|
|
384,261
|
|
57,734
|
|
(241,329
|
)
|
62,047
|
|
Interest income
|
|
2,956
|
|
56,872
|
|
8,523
|
|
197,143
|
|
Interest expense
|
|
(38,919
|
)
|
(98,139
|
)
|
(259,103
|
)
|
(241,876
|
)
|
Net loss from continuing operations
|
|
$
|
(7,257,313
|
)
|
$
|
(1,259,096
|
)
|
$
|
(23,844,709
|
)
|
$
|
(11,708,550
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net
|
|
|
|
$
|
(990,434
|
)
|
|
|
$
|
(1,957,837
|
)
|
Gain on sale of discontinued operations
|
|
|
|
327,798
|
|
|
|
327,798
|
|
Net loss
|
|
$
|
(7,257,313
|
)
|
$
|
(1,921,732
|
)
|
$
|
(23,844,709
|
)
|
$
|
(13,338,589
|
)
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend and accretion on Series C preferred
stock and warrants
|
|
(961,257
|
)
|
(1,056,093
|
)
|
(2,670,277
|
)
|
$
|
(2,987,846
|
)
|
Dividend on Series C preferred stock
|
|
(320,180
|
)
|
(10,000
|
)
|
(1,028,269
|
)
|
(126,000
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(8,538,750
|
)
|
$
|
(2,987,825
|
)
|
$
|
(27,543,255
|
)
|
$
|
(16,452,435
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per weighted average share, basic and
diluted:
|
|
|
|
|
|
|
|
|
|
From loss on continuing operations attributable to
common stockholders
|
|
$
|
(0.12
|
)
|
$
|
(0.05
|
)
|
$
|
(0.47
|
)
|
$
|
(0.29
|
)
|
From loss on discontinued operations
|
|
|
|
$
|
(0.02
|
)
|
|
|
$
|
(0.04
|
)
|
From gain on sale of discontinued operations
|
|
|
|
$
|
0.01
|
|
|
|
$
|
0.01
|
|
Net loss attributable to common stockholders per
weighted average share, basic and diluted
|
|
$
|
(0.12
|
)
|
$
|
(0.06
|
)
|
$
|
(0.47
|
)
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares, basic
and diluted
|
|
70,239,878
|
|
51,013,182
|
|
58,831,835
|
|
50,454,300
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
4
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS DEFICIT
For the six months ended October 3,
2009
(Unaudited)
|
|
Common
Shares
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Stockholders
Equity (Deficit)
|
|
Comprehensive
Loss
|
|
Balance, December 31, 2008
|
|
51,479,822
|
|
$
|
514,798
|
|
$
|
182,222,762
|
|
$
|
(189,962,435
|
)
|
$
|
(1,959,852
|
)
|
$
|
(9,184,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting principle
January 1, 2009 reclassification of warrants to warrant liabilities
|
|
|
|
|
|
(10,218,623
|
)
|
(11,822,918
|
)
|
|
|
(22,041,541
|
)
|
|
|
Net loss
|
|
|
|
|
|
|
|
(23,844,709
|
)
|
|
|
(23,844,709
|
)
|
$
|
(23,844,709
|
)
|
Issuance of common stock in connection with
underwritten public offering, net of issuance costs of $1,745,525
|
|
17,891,346
|
|
178,913
|
|
21,334,312
|
|
|
|
|
|
21,513,225
|
|
|
|
Reclassification of Series C Preferred Stock
warrant liability to additional paid in capital due to warrant modification
|
|
|
|
|
|
25,193,785
|
|
|
|
|
|
25,193,785
|
|
|
|
Issuance of warrants to Series C Preferred
Stockholders
|
|
|
|
|
|
17,000
|
|
|
|
|
|
17,000
|
|
|
|
Beneficial conversion feature on Series C
preferred stock
|
|
|
|
|
|
17,000
|
|
|
|
|
|
17,000
|
|
|
|
Series C Preferred Stock deemed dividend
|
|
|
|
|
|
(17,000
|
)
|
|
|
|
|
(17,000
|
)
|
|
|
Issuance of Warrants to Series C Preferred
Stockholders for modification of anti-dilution feature
|
|
|
|
|
|
515,000
|
|
|
|
|
|
515,000
|
|
|
|
Adjustment to conversion price of Series B
Preferred Stock due to anti-dilution provisions
|
|
|
|
|
|
55,369
|
|
|
|
|
|
55,369
|
|
|
|
Issuance of common stock to 401(k) Plan
|
|
69,650
|
|
697
|
|
107,262
|
|
|
|
|
|
107,959
|
|
|
|
Issuance of common stock in connection with the
exercise of stock options and warrants to purchase common stock
|
|
72,071
|
|
721
|
|
49,238
|
|
|
|
|
|
49,959
|
|
|
|
Issuance of common stock in connection with the
conversion of Series B Preferred Stock
|
|
719,528
|
|
7,195
|
|
1,067,805
|
|
|
|
|
|
1,075,000
|
|
|
|
Issuance of common stock in lieu of six-month cash
dividend on redeemable convertible Series B Preferred Stock
|
|
46,395
|
|
464
|
|
70,906
|
|
|
|
|
|
71,370
|
|
|
|
Accretion of Series C Preferred Stock to its
redemption value
|
|
|
|
|
|
(2,662,857
|
)
|
|
|
|
|
(2,662,857
|
)
|
|
|
Dividend and accretion on Series C Preferred
Stock and accretion of Series C Preferred Stock Dividend to its
redemption value
|
|
|
|
|
|
(1,051,915
|
)
|
|
|
|
|
(1,051,915
|
)
|
|
|
Employee stock-based compensation
|
|
|
|
|
|
2,194,649
|
|
|
|
|
|
2,194,649
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
232,376
|
|
232,376
|
|
232,376
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(23,612,333
|
)
|
Balance, October 3, 2009
|
|
70,278,812
|
|
$
|
702,788
|
|
$
|
218,894,693
|
|
$
|
(225,630,062
|
)
|
$
|
(1,727,476
|
)
|
$
|
(7,760,057
|
)
|
|
|
The accompanying notes are an integral part of these
unaudited consolidated financial statements
5
Table of
Contents
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(23,844,709
|
)
|
$
|
(13,338,589
|
)
|
Net loss from discontinued operations
|
|
|
|
$
|
1,957,837
|
|
Net gain on sale of discontinued operations
|
|
|
|
$
|
(327,798
|
)
|
Adjustments to reconcile net
loss from continuing operations to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
1,208,624
|
|
$
|
879,176
|
|
Provision for uncollectible accounts
|
|
22,999
|
|
4,043
|
|
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
$2,194,649 and $1,354,064
for the nine months ended
October 3, 2009 and September 27, 2008, respectively
|
|
2,261,399
|
|
1,787,786
|
|
Non-cash expense associated with the issuance of
warrants
|
|
515,000
|
|
121,000
|
|
Change in fair value of warrant liabilities
|
|
3,899,623
|
|
822,501
|
|
Non-cash interest expense
|
|
119,906
|
|
101,444
|
|
Non-cash restructuring charge
|
|
|
|
274,552
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
1,053,687
|
|
(1,360,502
|
)
|
Unbilled contract costs and fees
|
|
209,032
|
|
(24,666
|
)
|
Prepaid expenses and other assets
|
|
47,264
|
|
388,876
|
|
Inventory
|
|
3,084,748
|
|
(3,055,035
|
)
|
Other long-term assets
|
|
|
|
31,369
|
|
Accounts payable
|
|
814,176
|
|
746,431
|
|
Accrued expenses and payroll
|
|
(307,547
|
)
|
669,732
|
|
Accrued contract losses
|
|
(1,185,818
|
)
|
99,536
|
|
Deferred revenue, current and long portion
|
|
(1,743,273
|
)
|
936,964
|
|
Other current liabilities
|
|
(23,403
|
)
|
1,573,848
|
|
Accrued restructuring
|
|
(388,388
|
)
|
(12,459
|
)
|
Total adjustments
|
|
$
|
9,588,029
|
|
$
|
3,656,798
|
|
Net cash used in operating
activities in continuing operations
|
|
$
|
(14,256,680
|
)
|
$
|
(7,723,954
|
)
|
Cash flows from investing
activities:
|
|
|
|
|
|
Purchases of property and equipment
|
|
(1,757,190
|
)
|
(1,156,505
|
)
|
Net proceeds from sale of business segments
|
|
|
|
5,292,160
|
|
Net cash provided by (used in) investing activities
in continuing operations
|
|
$
|
(1,757,190
|
)
|
$
|
4,135,655
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Net borrowings under line of credit
|
|
$
|
|
|
$
|
3,000,000
|
|
Net proceeds from short term secured note
|
|
1,297,200
|
|
|
|
Net proceeds from public sale of common stock
|
|
21,513,225
|
|
|
|
Payments related to warrant holder redemption
rights
|
|
|
|
(572,250
|
)
|
Net proceeds from exercise of options to purchase
common stock
|
|
49,959
|
|
1,182,651
|
|
Net proceeds from exercise of warrants to purchase
common stock
|
|
|
|
241,310
|
|
Net cash provided by financing activities in
continuing operations
|
|
$
|
22,860,384
|
|
$
|
3,851,711
|
|
Cash flows from discontinued
operations:
|
|
|
|
|
|
Net cash used in operating activities of
discontinued operations
|
|
$
|
|
|
$
|
(1,914,334
|
)
|
Net cash used in investing activities of
discontinued operations
|
|
$
|
|
|
$
|
(211,297
|
)
|
Net decrease in cash and cash equivalents from
discontinued operations
|
|
$
|
|
|
$
|
(2,125,631
|
)
|
Effects of foreign currency exchange rates on cash
and cash equivalents
|
|
$
|
(497,684
|
)
|
$
|
(307,818
|
)
|
Net increase (decrease) in cash and cash
equivalents
|
|
$
|
6,348,830
|
|
$
|
(2,170,037
|
)
|
Cash and cash equivalents at beginning of period
|
|
$
|
9,957,716
|
|
$
|
12,615,566
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,306,546
|
|
$
|
10,445,529
|
|
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
6
Table of
Contents
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
Nine
Months Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
Non-cash Investing and
Financing Activities:
|
|
|
|
|
|
Employee stock-based compensation (1)
|
|
$
|
2,261,399
|
|
$
|
1,628,616
|
|
Common stock issued related to
401(k) contributions
|
|
107,959
|
|
430,806
|
|
Accretion of redeemable convertible preferred stock
discount and dividends
|
|
3,714,772
|
|
2,062,300
|
|
Modification of warrants to purchase common stock
|
|
515,000
|
|
|
|
Common stock issued in lieu of dividends on
redeemable convertible Series B preferred stock
|
|
71,370
|
|
68,000
|
|
Conversion of Series B Preferred Stock into
common stock
|
|
1,075,000
|
|
250,000
|
|
Issuance of warrants and beneficial conversion
feature
|
|
|
|
252,000
|
|
Adjustment to conversion price of Series B
Preferred Stock
|
|
55,369
|
|
|
|
|
|
|
|
|
|
Interest and Income Taxes Paid:
|
|
|
|
|
|
Interest
|
|
$
|
139,197
|
|
$
|
140,432
|
|
Income Taxes
|
|
$
|
|
|
$
|
|
|
(1) Includes $0 and $27,089, related to discontinued operations,
for the nine month periods ended October 3, 2009 and September 27,
2008, respectively.
7
Table of Contents
SATCON TECHNOLOGY CORPORATION
NOTES TO
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
October 3, 2009 (2009) AND September 27,
2008 (2008)
(Unaudited)
Note A.
Basis of Presentation
The accompanying
unaudited consolidated financial statements include the accounts of Satcon
Technology Corporation and its wholly-owned subsidiaries (collectively, the Company)
as of October 3, 2009 and for the three and nine months ended October 3,
2009 and September 27, 2008 and have been prepared by the Company in
accordance with accounting principles generally accepted in the United States
of America for interim financial reporting and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All intercompany accounts and transactions have been eliminated.
These unaudited consolidated financial statements, which, in the opinion of
management, reflect all adjustments (including normal recurring adjustments)
necessary for a fair presentation, should be read in conjunction with the
financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2008. Operating results
for the three and nine months ended October 3, 2009 are not necessarily
indicative of the results that may be expected for any future interim period or
for the entire fiscal year.
Note B.
Realization of Assets and Liquidity
The Company anticipates that its current cash along
with the availability under its credit facility with Silicon Valley Bank will
be sufficient to fund its operations through at least December 31, 2009.
The Company has developed a business plan that envisions a significant increase
in revenue and significant reductions in the cost structure and the cash burn
rate from the results experienced in the recent past and allow the Company to
remain in compliance with the covenants of the credit facility. Although the Company believes it has
developed a realistic business plan, there is no assurance that it can achieve
these objectives. Accordingly, if the
Company is unable to realize its business plan or does not remain in compliance
with the covenants of the credit facility, the Company may need to raise
additional funds in the future in order to sustain operations by selling equity
or taking other actions to conserve its cash position, which could include
selling of certain assets and incurring additional indebtedness, subject to the
restrictions in the 2007 preferred stock financing. Such actions would likely require the consent
of the investors in that financing (the Investors), and there can be no
assurance that such consent would be given.
Furthermore, there can be no assurance that the Company will be able to
raise such funds if they are required.
Note C.
Significant Accounting Policies and Basis of Consolidation
There have been no
material changes from the Significant
Accounting Policies and Basis of Presentation
previously disclosed in Part II, Item 8, contained
within Notes to Consolidated Financial Statements of the Companys Annual
Report on Form 10-K for the fiscal year ending December 31, 2008
except for the adoption of the provisions described in ASC 815 (Formerly -EITF No. 07-05
Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock)
as disclosed below
.
Basis
of Consolidation
The consolidated
financial statements include the accounts of Satcon and its wholly owned
subsidiaries (Satcon Applied Technology, Inc. and Satcon Power Systems
Canada, Ltd.). The results of operations
include activity related to discontinued operations of Satcon Electronics, Inc.
and Satcon Power Systems, Inc., see Note D. All intercompany accounts and
transactions have been eliminated in consolidation.
Revenue
Recognition
The Company
recognizes revenue from product sales in accordance with Staff Accounting
Bulletin (SAB) No. 104,
Revenue
Recognition
. Product revenue is recognized when there is persuasive
evidence of an arrangement, the fee is fixed or determinable, delivery of the
product to the customer has occurred and the Company has determined that
collection of the fee is probable. Title to the product passes upon shipment of
the product, as the products are typically shipped FOB shipping point, except
for certain foreign shipments. If the product requires installation to be
performed by the Company, all revenue related to the product is deferred and
recognized upon the completion of the installation. If the product requires
specific customer acceptance, revenue is deferred until customer acceptance
occurs or the acceptance provisions lapse, unless the Company can objectively
and reliably demonstrate that the criteria specified in the acceptance
provisions are satisfied. When appropriate the Company provides for a warranty
reserve at the time
8
Table
of Contents
the product revenue is
recognized. If a contract involves the
provisions of multiple elements and the elements qualify for separation, total
estimated contact revenue is allocated to each element based on the relative
fair value of each element provided. The
amount of revenue allocated to each element is limited to the amount that is
not contingent upon the delivery of another element in the future. Revenue is recognized on each element as
described above.
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 October 3, 2009 and
December 31, 2008, the Company has accrued approximately $0 and $1.1
million, respectively, for anticipated contract losses on commercial contracts.
Cost of product
revenue includes materials, labor and overhead. Costs incurred in connection
with funded research and development and other revenue arrangements are
included in cost of research and development and other revenue.
Deferred revenue
consists of payments received from customers in advance of services performed,
product shipped or installation completed.
Deferred revenue also consists of cash received for extended product
warranties.
Unbilled Contract Costs and Fees and Funded Research and Development
Costs in Excess of Billings
Unbilled contract
costs and fees represent revenue recognized in excess of amounts billed due to
contractual provisions or deferred costs that have not been recognized as
revenue or billed to the customer.
Cash
and Cash Equivalents
Cash and cash
equivalents include demand deposits, overnight repurchase agreements with
Silicon Valley Bank (the Bank) and highly liquid investments with maturities
of three months or less when acquired. Cash equivalents are stated at cost,
which approximates market value. At October 3, 2009, the Company had
approximately $10.0 million invested in a money market account with a national
bank. At October 3, 2009 and December 31, 2008, the Company had
restricted cash as indicated in the table below.
Restricted Cash
|
|
October 3, 2009
|
|
December 31, 2008
|
|
Security
deposits
|
|
$
|
34,000
|
|
$
|
34,000
|
|
Certificates
of deposit
|
|
50,000
|
|
50,000
|
|
Total
restricted cash
|
|
$
|
84,000
|
|
$
|
84,000
|
|
Accounts Receivable
Accounts
receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on a specific analysis of accounts in the receivable
portfolio and historical write-off experience. While management believes the
allowance to be adequate, if the financial condition of our customers were to
deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required.
Inventory
Inventory is
stated at the lower of cost or market and costs are determined based on the
first-in, first-out method of accounting and include material, labor and
manufacturing overhead costs. The
Company periodically reviews quantities of inventory on hand and compares these
amounts to expected usage of each particular product or product line. The
Company records, as a charge to cost of sales, any amounts required to reduce
the carrying value to net realizable value.
9
Table of Contents
Foreign
Currency Translation
The functional
currency of the Companys foreign subsidiary is its local currency. Assets and
liabilities of foreign subsidiaries are translated at the rates in effect at
the balance sheet date, while stockholders equity (deficit) including the
long-term portion of intercompany advances is translated at historical rates.
Statements of operations and cash flow amounts are translated at the average
rate for the period. Translation adjustments are included as a component of
accumulated other comprehensive income (loss). Foreign currency gains and
losses were as follows for the three and nine month periods ended October 3,
2009 and September 27, 2008:
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
|
|
(Amounts
in millions)
|
|
Other income (expense) (1)
|
|
$
|
0.4
|
|
$
|
0.1
|
|
$
|
0.4
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
All
foreign currency transaction gains and losses are recorded as a component of
other income (expense) and all periods presented have been adjusted to
reflect this classification.
|
Use of
Estimates
The preparation of
financial statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period reported.
Management believes the most significant estimates include the net realizable
value of accounts receivable and inventory, warranty provisions, the
recoverability of long-lived assets and intangible assets, the accrued contract
losses on fixed-price contracts, the recoverability of deferred tax assets and
the fair value of equity and financial instruments. Actual results could differ from these
estimates.
Income
Taxes
The Company
accounts for income taxes utilizing the asset and liability method for
accounting and reporting for income taxes. Under this method, deferred tax
assets and deferred tax liabilities are recognized based on temporary
differences between the financial reporting and income tax basis of assets and
liabilities using statutory rates. In addition, the Company is required to
establish a valuation allowance against net deferred tax assets if, based upon
the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
The
Company is required to recognize the tax benefits of uncertain tax positions
only where the position is more likely than not to be sustained assuming
examination by tax authorities. The
amount recognized is the amount that represents the largest amount of tax benefit
that is greater than 50% likely of being ultimately realized. A liability is recognized for any benefit
claimed, or expected to be claimed, in a tax return in excess of the benefit
recorded in the financial statements, along with any interest and penalties (if
applicable) on that excess. In addition,
the Company is required to provide a tabular reconciliation of the change in
the aggregate unrecognized tax benefits claimed, or expected to be claimed, in
tax returns and disclosure relating to the accrued interest and penalties for
unrecognized tax benefits. Discussion is
also required for those uncertain tax positions where it is reasonably possible
that the estimate of the tax benefit will change significantly in the next
twelve months.
As of December 31,
2008, the Company had federal and state net operating losses (NOL) carry
forwards and federal and state R&D credit carry forwards, which may be
available to offset future federal and state income tax liabilities which
expire at various dates through 2029. Utilization of the NOL and R&D credit
carry forwards may be subject to a substantial annual limitation due to
ownership change limitations that have occurred previously or that could occur
in the future provided by Section 382 of the Internal Revenue Code of
1986, as well as similar state and foreign provisions. These ownership changes
may limit the amount of NOL and R&D credit carry forwards that can be
utilized annually to offset future taxable income and tax, respectively. In
general, an ownership change, as defined by Section 382, results from
transactions increasing the ownership of certain shareholders or public groups
in the stock of a corporation by more than 50 percentage points over a rolling
three-year period. Since the Companys formation, the Company has raised
capital through the issuance of capital stock on several occasions (both pre
and post initial public offering) which, combined with the purchasing
shareholders subsequent disposition of those shares, may have resulted in a
change of control, as defined by Section 382, or could result in a change
of control in the future upon subsequent disposition. The Company has not
currently completed a study to assess whether a change of control has occurred
or whether there have been multiple changes of control since the Companys
formation due to the significant complexity and cost associated with such study
and that there could be additional changes in control in the future. If the
Company has experienced a change of control at any time since Company
10
Table
of Contents
formation, utilization of
its NOL or R&D credit carry forwards would be subject to an annual limitation
under Section 382 which is determined by first multiplying the value of
our stock at the time of the ownership change by the applicable long-term
tax-exempt rate, and then could be subject to additional adjustments, as
required. Any limitation may result in expiration of a portion of the NOL or
R&D credit carry forwards before utilization. Further, until a study is
completed and any limitation known, no amounts are being presented as an
uncertain tax position. The Company does not expect to have any taxable income
for the foreseeable future. The Company
has a full valuation allowance against the net operating losses and credits.
The
tax years 2005 through 2008 remain open to examination by major taxing
jurisdictions to which the Company is subject, which are primarily in the
United States, as carry forward attributes generated in years past may still be
adjusted upon examination by the Internal Revenue Service or state tax
authorities if they are or will be used in a future period. The Company is currently not under
examination by the Internal Revenue Service or any other jurisdiction for any
tax years. The Company did not recognize
any interest and penalties associated with unrecognized tax benefits in the accompanying
financial statements.
The Company would record any such
interest and penalties as a component of interest expense. The
Company does not expect any material changes to the unrecognized benefits
within 12 months of the reporting date.
Accounting
for Stock-based Compensation
The Company has several stock-based employee compensation plans, as
well as stock options issued outside of such plans as an inducement to engage
new executives. 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.
On March 29,
2005, the SEC issued Staff Accounting Bulletin No. 107,
Share Based Payment
(SAB 107). 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 the provisions of stock
based compensation 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, the modification of
employee share options prior to adoption, and disclosures in Managements
Discussion and Analysis of Financial Condition and Results of Operations
subsequent to adoption. 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).
The Company has
elected to adopt the alternative transition method for calculating the tax
effects (if any) of stock-based compensation expense. 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 the provisions of accounting for stock-based compensation.
The Company uses
historical volatility as it believes it is more reflective of market conditions
and a better indicator of volatility. The Company uses the simplified
calculation of expected life for its plain-vanilla option grants. The simplified method for plain-vanilla
options calculates the expected life based on a preset formula where the
expected life is equal to the sum of vesting term of the option and the
contractual term of the option divided by two. If the Company determines that
another method used to estimate expected volatility is more reasonable than the
Companys current methods, or if another method for calculating these input
assumptions is prescribed by authoritative guidance, the fair value calculated
for share-based awards could change significantly. Higher volatility and longer
expected lives result in an increase to share-based compensation determined at
the date of grant.
11
Table of Contents
The Company recognized the full impact of its share-based compensation
plans in the consolidated financial statements for the three and nine months
ended October 3, 2009 and September 27, 2008 and did not capitalize
any such costs on the consolidated balance sheets, as such costs that qualified
for capitalization were not material. The following table presents share-based
compensation expense included in the Companys consolidated statement of
operations:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
Cost of product revenue
|
|
$
|
42,027
|
|
$
|
26,622
|
|
$
|
128,789
|
|
$
|
68,737
|
|
Funded research and
development and other revenue expense
|
|
14,954
|
|
27,034
|
|
54,179
|
|
80,624
|
|
Un-funded research and
development and other revenue expenses
|
|
75,433
|
|
66,765
|
|
244,968
|
|
89,455
|
|
Selling, general and
administrative expenses
|
|
531,711
|
|
627,975
|
|
1,766,712
|
|
1,389,799
|
|
Share based compensation
expense from continuing operations before tax
|
|
$
|
664,125
|
|
$
|
748,396
|
|
$
|
2,194,649
|
|
$
|
1,628,615
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation
expense from discontinued operations
|
|
$
|
|
|
$
|
(2,337
|
)
|
$
|
|
|
$
|
27,090
|
|
|
|
|
|
|
|
|
|
|
|
Total share based
compensation expense before tax
|
|
$
|
664,125
|
|
$
|
746,059
|
|
$
|
2,194,649
|
|
$
|
1,655,705
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share-based
compensation expense
|
|
$
|
664,125
|
|
$
|
746,059
|
|
$
|
2,194,649
|
|
$
|
1,655,705
|
|
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.
As of October 3, 2009, there was approximately
$7.3 million of total unrecognized costs related to non-vested share-based
compensation arrangements. The Company
expects to recognize the cost over a weighted average period of approximately
2.5 years.
The weighted
average grant date fair value of options granted during the three and nine
months ended October 3, 2009 and September 27, 2008 were $1.83 and
$1.44 and $2.44 and $2.04, respectively, per option. The fair value of each stock option is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following range of assumptions:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Assumptions:
|
|
October 3, 2009
|
|
September 27, 2008
|
|
October 3, 2009
|
|
September 27, 2008
|
|
Expected life (1)
|
|
6.25 years
|
|
6.25 years
|
|
5.0 to 6.25 years
|
|
5.0 years 6.25 years
|
|
Expected volatility ranging from (2)
|
|
81.36% 81.84%
|
|
84.0% 84.3%
|
|
72.9% 82.96%
|
|
80.1% 89.5%
|
|
Dividends
|
|
none
|
|
none
|
|
none
|
|
none
|
|
Risk-free interest rate (3)
|
|
2.50%
|
|
3.25% 3.38%
|
|
1.50 2.50
|
|
2.70% 3.38%
|
|
Forfeiture Rate (4)
|
|
6.25%
|
|
6.25%
|
|
6.25%
|
|
6.25%
|
|
(1)
|
|
The option life was determined using the simplified
method for estimating expected option life, which qualify as plain-vanilla
options.
|
(2)
|
|
The
stock volatility for each grant is measured using the weighted average of
historical daily price changes of the Companys common stock over the most
recent period equal to the expected option life of the grant, the historical
short term trend of the option and other factors, such as expected changes in
volatility arising from planned changes in the Companys business operations.
|
(3)
|
|
The
risk-free interest rate for each grant is equal to the U.S. Treasury yield
curve in effect at the time of grant for instruments with a similar expected
life.
|
(4)
|
|
The
estimated forfeiture rate for each option grant is 6.25%.The Company
periodically reviews the estimated forfeiture rate, in light of actual
experience.
|
12
Table of Contents
Concentration
of Credit Risk
Financial
instruments that subject the Company to concentrations of credit risk
principally consist of cash equivalents, trade accounts receivable, unbilled
contract costs and deposits in bank accounts.
The Company deposits its cash and invests in short-term investments
primarily through a national commercial bank. Deposits in excess of amounts
insured by the Federal Deposit Insurance Corporation (FDIC) are exposed to
loss in the event of nonperformance by the institution. The Company has had
cash deposits in excess of the FDIC insurance coverage.
The Companys
trade accounts receivable and unbilled contract costs and fees are primarily
from sales to U.S. government agencies and commercial customers. The Company
does not require collateral and has not historically experienced significant
credit losses related to receivables, letters of credit or unbilled contract
costs and fees from individual customers or groups of customers in any
particular industry or geographic area.
Significant
customers are defined as those customers that account for 10% or more of total
net revenue in a fiscal year or 10% or more of accounts receivable and unbilled
contract costs and fees at the end of a fiscal period. For the three and nine
months ended October 3, 2009, there were three and two customers,
respectively, that were deemed significant with regards to revenue. For the three months ended October 3,
2009, these customers accounted for approximately 38%, or approximately $4.5
million, of revenue. For the nine months
ended October 3, 2009, these customers accounted for approximately 26%, or
approximately $9.5 million, of revenue.
At October 3, 2009, there are three customers that were deemed
significant with regards to trade accounts receivable. At October 3, 2009, these customers
accounted for approximately 22%, or approximately $2.6 million, of trade
accounts receivable.
Research and Development Costs
The Company
expenses research and development costs as incurred. Cost of research and
development and other revenue includes costs incurred in connection with both
funded research and development and other revenue arrangements and unfunded
research and development activities.
Comprehensive
Income (Loss)
Comprehensive
income (loss) includes net loss and foreign currency translation adjustments.
Fair
Value of Financial Instruments
The Companys
financial instruments consist of cash equivalents, accounts receivable,
unbilled contract costs and fees, warrants to purchase shares of common stock,
accounts payable and debt instruments. The estimated fair values of these
financial instruments approximate their carrying values at October 3, 2009
and December 31, 2008. The estimated fair values have been determined
through information obtained from market sources and management estimates. The Companys warrant liability is recorded
at fair value. See Fair Value
Measurement section below.
13
Table of
Contents
Fair
Value Measurements
Assets and Liabilities
Measured at Fair Value on a Recurring Basis as of October 3, 2009 are as
follows:
Fair
Value Measurements at Reporting Date Using
Description
|
|
Balance as of
October 3, 2009
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)(1)
|
|
Significant
Other
Observable
Inputs
(Level 2)(2)
|
|
Significant
Unobservable
Inputs
(Level 3)(3)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Money
market funds (5)
|
|
$
|
10,003,405
|
|
$
|
10,003,405
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
10,003,405
|
|
$
|
10,003,405
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term
warrant liability (4)
|
|
$
|
3,154,817
|
|
$
|
|
|
$
|
3,154,817
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
3,154,817
|
|
$
|
|
|
$
|
3,154,817
|
|
$
|
|
|
(1)
Level 1 - Quoted prices in active markets for
identical assets or liabilities.
(2)
Level 2 - Inputs other than Level 1 that are
observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
(3)
Level 3 - Unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of the
assets or liabilities.
(4)
Within the Companys Level 2
financial assets, which consists of long term investor warrant liabilities
comprised of the Warrant As, Warrant Cs, the Series C Preferred Warrants
and the placement agent warrants. The
Warrant As and Warrant Cs are being fair valued utilizing a binomial lattice
model and the placement agent warrants and the Series C Preferred Warrants
are being fair valued using the Black-Scholes option pricing model. (see Note
J. Convertible Debt Instruments and Warrant Liabilities-
Valuation
Methodology and Significant Assumptions
and Note K -
Redeemable
Convertible Series B and Series C Preferred Stock
and warrant
liabilities below
).
(5)
Included as a component of
cash and cash equivalents on accompanying consolidated balance sheets.
Warrant
Liabilities
Upon the Companys
adoption of ASC 815-40 on January 1, 2009, the Companys evaluation of the
Series C Preferred Stock Warrants determined that the 19,799,022 Series C
Preferred Stock Warrants did not qualify for a scope exception under ASC
815-10-15 as they were determined to not be indexed to the Companys stock as
prescribed by ASC 815-40-55. As a result, on the date of adoption the Company
reclassified these warrants from additional paid in capital to warrant
liabilities through a cumulative effect of a change in accounting
principle. The initial value of the
warrant liability at adoption was $22,041,541.
For the nine
months ended October 3, 2009, the Company recorded a charge to change in
fair value of warrants of approximately $3.2 million for the increase in the
fair value related to these warrants during the period. The warrants did not qualify for hedge
accounting, and as such, all future changes in the fair value of these warrants
were to be recognized currently in earnings until such time as the warrants
were modified in the manner described below, exercised or expired. These common stock purchase warrants do not
trade in an active securities market, and as such, we estimated the fair value
of these warrants using the Black-Scholes option pricing model using the
following assumptions:
Assumptions:
|
|
January 1,
2009
|
|
April 4,
2009
|
|
July 3,
2009
|
|
|
|
|
|
|
|
|
|
Expected
life
|
|
5.9 6.7 years
|
|
5.6 6.5 years
|
|
5.4 6.2 years
|
|
Expected
volatility
|
|
80% 85%
|
|
75% 85%
|
|
75% 80%
|
|
Dividends
|
|
none
|
|
none
|
|
none
|
|
Risk-free
interest rate
|
|
1.69% 1.83%
|
|
2.06% 2.35%
|
|
2.56% 2.87%
|
|
14
Table
of Contents
On July 3, 2009, the
Company modified certain provisions contained within the Series C
Preferred Stock Warrants. Under the
terms of the original Series C Preferred Stock Warrants (prior to their
modification), in addition to standard anti-dilution protection for stock
splits or dividends, stock combinations, mergers, liquidation or similar
events, the exercise price and number of shares issuable upon exercise of these
warrants were subject to adjustment in the event of certain dilutive issuances
(the Dilutive Issuance Provision).
Upon each adjustment of the exercise price pursuant to the Dilutive
Issuance Provision, the number of shares subject to the warrant were also to be
adjusted by multiplying the current exercise price prior to the adjustment by
the number of shares subject to the warrant and dividing the product by the
exercise price resulting from the adjustment.
The Dilutive Issuance Provision was modified to (i) limit the
instances in which a dilutive issuance will cause an adjustment to the exercise
price of the warrants and (ii) eliminate the provision that
correspondingly increased the number of shares underlying the warrants in the
event of a dilutive issuance that causes an adjustment to the exercise
price. As a result of this modification
these warrants will now accounted for as equity by the Company, as they now
qualify for the scope exemption under ASC 815-10-15. Previously the warrants, due to the adoption
of the provisions of ASC 815-40, were accounted for as a derivative
liability. In addition, as a result of
this modification, the Company will no longer be required to mark these
warrants to fair value each quarter.
(See Note J. Convertible Debt
Instruments and Warrant Liabilities)
In addition, the
Company determined the fair values of the investor warrants (the Warrant As and
Warrant Cs) and placement agent warrants using valuation models it considers to
be appropriate. The Companys stock price has the most significant influence on
the fair value of its warrants. An increase in the Companys common stock price
would cause the fair values of the warrants to increase, because the exercise
price of the warrants is fixed at $1.815 per share and result in a charge to
our statement of operations. A decrease in the Companys stock price would
likewise cause the fair value of the warrants to decrease and result in a
credit to our statement of operations. See Note J for valuation discussion.
Redeemable
Convertible Series B Preferred Stock
The Company accounts for its Series B Preferred Stock and associated
warrants in accordance with ASC 470-20,
allocating the proceeds received net of transaction
costs based on the relative fair value of the redeemable convertible Series B
Preferred Stock and the warrants issued to the investors, and then to any
beneficial conversion rights contained in the convertible redeemable preferred
securities. The Company determined the
initial value of the Series B Preferred Stock and investor warrants using
valuation models it considers to be appropriate. The Series B Preferred Stock is
classified within the liability section of the Companys balance sheet. To the extent that the Series B
Preferred Stock is subject to a remeasurement event pursuant to ASC 480-10
,
or is otherwise modified, the Series B Preferred Stock will be
reclassified to temporary equity.
Redeemable
Convertible Series C Preferred Stock
The Company accounted for its issuance of Convertible Series C
Preferred Stock (the Series C Preferred Stock), and associated warrants
in accordance with
in
accordance with ASC 470-20
,
allocating the proceeds received net of
transaction costs based on the relative fair value of the redeemable
convertible Series C Preferred Stock and the warrants issued to the
Investors, and then to any beneficial conversion rights contained in the
convertible redeemable preferred securities and classifying the Series C
Preferred Stock as temporary equity on the balance sheet between the captions
for liabilities and permanent shareholders equity. 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. The Company reclassified the effects of
foreign currency translation, of which a portion was previously accounted for
in cost of sales, to other income (expense) in its statement of operations for
the three and nine months ended September 27, 2008. The effect of the reclassification was
approximately $0.1 million and $0.3 million of translation related gains being
accounted for in other income for the three and nine month periods ended
September 27, 2008, respectively.
15
Table of
Contents
D. DISCONTINUED OPERATIONS
On September 26, 2008, the Company sold its
Electronics and Power Systems US business segments to two unrelated companies,
for approximately $5.6 million in cash and $0.5 million in non-cash
consideration consisting of the accounts receivable balance for the Power
Systems US division. Prior to the sale, each of these divisions were reported
by the Company as its own operating segment.
Operations associated with these discontinued segments have been
classified as loss from discontinued operations in the accompanying
consolidated statements of operations, and cash flows associated with these
segments are included in cash flows from discontinued operations in the
consolidated statements of cash flows.
There were no sales and no loss from discontinued
operations during the three and nine month periods ended October 3,
2009. Net sales from discontinued
operations were $3.9 million and $11.0 million for the three and nine months
ended September 27, 2008, respectively. Loss from discontinued operations
was $1.0 million and $3.0 million for the three and nine months ended September 27,
2008. Net sales and net loss from
discontinued operations for the three and nine months ended September 27,
2008 is broken out by division as follows:
|
|
Three Months
Ended
|
|
Nine Months
Ended
|
|
Division
|
|
September 27,
2008
|
|
September 27,
2008
|
|
|
|
|
|
|
|
Electronics
|
|
|
|
|
|
Net Sales
|
|
$
|
3,017,779
|
|
$
|
8,250,768
|
|
Net Loss
|
|
$
|
(731,719
|
)
|
$
|
(1,161,625
|
)
|
|
|
|
|
|
|
Power Systems, US
|
|
|
|
|
|
Net Sales
|
|
$
|
867,920
|
|
$
|
2,735,773
|
|
Net Loss
|
|
$
|
(258,715
|
)
|
$
|
(796,212
|
)
|
Discontinued Operations
|
|
|
|
|
|
Total Net Sales
|
|
$
|
3,885,699
|
|
$
|
10,986,541
|
|
Total Net Loss
|
|
$
|
(990,434
|
)
|
$
|
(1,957,837
|
)
|
The Company has not allocated interest to discontinued operations. The Company has also eliminated all
intercompany activity associated with discontinued operations.
The sale of the
Electronics and Power Systems US divisions resulted in a gain on sale of
discontinued operations for the period ended September 27, 2008 as
follows:
|
|
Electronics
|
|
Power
Systems, US
|
|
Total
|
|
Net current assets sold
|
|
$
|
3,417,632
|
|
$
|
404,474
|
|
$
|
3,822,106
|
|
Long-term assets sold
|
|
1,120,176
|
|
45,556
|
|
1,165,732
|
|
Total net assets sold
|
|
$
|
4,537,808
|
|
$
|
450,030
|
|
$
|
4,987,838
|
|
Consideration received, net
|
|
$
|
5,047,892
|
|
$
|
267,744
|
|
$
|
5,315,636
|
|
Gain on sale of discontinued operations
|
|
$
|
510,084
|
|
$
|
(182,286
|
)
|
$
|
327,798
|
|
There were no net
assets of the Electronics and Power Systems US divisions at October 3,
2009 and December 31, 2008.
16
Table of
Contents
Note E.
Loss per Share
The following is
the reconciliation of the numerators and denominators of the basic and diluted
loss per share computations:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(7,257,313
|
)
|
$
|
(1,259,096
|
)
|
$
|
(23,844,709
|
)
|
$
|
(11,708,550
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
|
(990,434
|
)
|
|
|
(1,957,837
|
)
|
Gain
on disposal of discontinued operations
|
|
|
|
327,798
|
|
|
|
327,798
|
|
Accretion
and dividends and deemed dividends on Series C Preferred Stock
|
|
(1,281,437
|
)
|
(1,066,093
|
)
|
(3,698,546
|
)
|
(3,113,846
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(8,538,750
|
)
|
$
|
(2,987,825
|
)
|
$
|
(27,543,255
|
)
|
$
|
(16,452,435
|
)
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
Common
shares outstanding, beginning of period
|
|
70,211,491
|
|
50,921,737
|
|
51,479,822
|
|
49,803,979
|
|
Weighted
average common shares issued during the period
|
|
28,387
|
|
91,445
|
|
7,352,013
|
|
650,321
|
|
Weighted
average shares outstandingbasic and diluted
|
|
70,239,878
|
|
51,013,182
|
|
58,831,835
|
|
50,454,300
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per weighted average share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
From
loss on continuing operations attributable to common stockholders
|
|
$
|
(0.12
|
)
|
$
|
(0.05
|
)
|
$
|
(0.47
|
)
|
$
|
(0.29
|
)
|
From
loss on discontinued operations
|
|
$
|
|
|
$
|
(0.02
|
)
|
$
|
|
|
$
|
(0.04
|
)
|
From
gain on sale of discontinued operations
|
|
$
|
|
|
$
|
0.01
|
|
$
|
|
|
$
|
0.01
|
|
Net
loss per weighted average share, basic and diluted
|
|
$
|
(0.12
|
)
|
$
|
(0.06
|
)
|
$
|
(0.47
|
)
|
$
|
(0.32
|
)
|
As of October 3,
2009 and September 27, 2008, shares of common stock issuable upon the
exercise of options and warrants were excluded from the diluted average common
shares outstanding, as their effect would have been antidilutive. In addition, shares of common stock issuable
upon the conversion of Series B Preferred Stock and Series C
Preferred Stock were excluded from the diluted weighted average common shares
outstanding as their effect would also have been anti-dilutive. Basic earnings per share excludes dilution
and is computed by dividing income attributable to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company, except when the effect would be anti-dilutive.
The table below
summarizes the option and warrants and convertible preferred stock that were
excluded from the calculation above due to their effect being antidilutive:
|
|
At
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
Common
Stock issuable upon the exercise of:
|
|
|
|
|
|
Options
|
|
10,979,370
|
|
10,478,177
|
|
Warrants
|
|
25,597,328
|
|
26,488,278
|
|
Total
Options and Warrants excluded
|
|
36,576,698
|
|
36,966,455
|
|
|
|
|
|
|
|
Common
Stock issuable upon the conversion of redeemable convertible Series B
Preferred Stock
|
|
251,678
|
|
935,484
|
|
Common
Stock issuable upon the conversion of redeemable convertible Series C
Preferred Stock
|
|
26,245,390
|
|
24,038,462
|
|
17
Table of
Contents
The table below
details out shares of common stock underlying securities for which the
securities would have been considered dilutive at October 3, 2009 and September 27,
2008, had the Company not been in a loss position:
|
|
# of Underlying Common Shares
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
Employee
stock options
|
|
3,200,706
|
|
2,370,375
|
|
Warrants
to purchase common stock
|
|
25,597,328
|
|
10,094,042
|
|
Series B
Convertible Preferred Stock
|
|
251,678
|
|
935,484
|
|
Series C
Convertible Preferred Stock
|
|
26,245,390
|
|
24,038,462
|
|
Total
|
|
55,295,102
|
|
37,438,363
|
|
Note F.
Inventory
Inventory
components at the end of each period were as follows:
|
|
October 3,
2009
|
|
December 31,
2008
|
|
Raw
material
|
|
$
|
5,358,081
|
|
$
|
4,920,780
|
|
Work-in-process
|
|
2,438,521
|
|
6,182,835
|
|
Finished
goods
|
|
1,811,521
|
|
353,917
|
|
|
|
$
|
9,608,123
|
|
$
|
11,457,532
|
|
Note G.
Legal Matters
From time to time, the
Company is a party to routine litigation and proceedings in the ordinary course
of business. 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.
Note
H. Commitments and Contingencies
Operating
Leases
The Company leases
its facilities under various operating leases that expire through 2016.
Future minimum
annual rentals under lease agreements at October 3, 2009 are as follows:
Fiscal Year
|
|
|
|
|
|
2009
|
|
|
|
$
|
335,314
|
|
2010
|
|
|
|
1,246,183
|
|
2011
|
|
|
|
907,089
|
|
2012
|
|
|
|
386,949
|
|
2013
|
|
|
|
243,525
|
|
Thereafter
|
|
|
|
662,929
|
|
Total
|
|
|
|
$
|
3,781,989
|
|
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 October 3, 2009 and December 31, 2008 were
$34,000. The Company is required to
pledge cash as collateral on these outstanding letters of credit. As of October 3,
2009 and December 31, 2008, the cash pledged as collateral for these
letters of credit was $34,000, and is included in restricted cash and cash
equivalents on the balance sheet.
18
Table of
Contents
Employment
Agreements:
The Companys employment
arrangement with its current Chief Executive Officer provides that if his
employment is terminated by the Company without cause or is constructively
terminated within one year following a change of control transaction, his
salary and medical benefits will be continued for one year thereafter subject
to his execution of a release agreement with the Company.
Line of Credit
On February 26,
2008, the Company entered into a Loan and Security Agreement (the Loan
Agreement) with Silicon Valley Bank (the Bank). Under the terms of the Loan Agreement, the
Bank agreed to provide the Company with a credit line up to $10.0 million. The Companys obligations under the Loan
Agreement are secured by substantially all of the assets of the Company and
advances under the Loan Agreement are limited to 80% of eligible receivables
and the lesser of 25% of the value of the Companys eligible inventory, as
defined, or $1.0 million. Interest on
outstanding borrowings accrues at a rate per annum equal to the Prime Rate plus
one percent (1.0%) per annum, as defined, or the LIBOR Rate plus three and
three quarter percent (3.75%) per annum.
The Loan Agreement contains certain financial covenants relating to
tangible net worth, as defined, which the Company must satisfy in order to
borrow under the agreement. In addition,
the Company agreed to pay to the Bank a collateral monitoring fee of $750 per
month and agreed to the following additional terms: (i) $50,000 commitment
fee, $25,000 to be paid at signing of the Loan Agreement and $25,000 to be paid
on the one year anniversary of the Loan Agreement; (ii) an unused line fee
in the amount of 0.5% per annum of the average unused portion of the revolving
line; and (iii) an early termination fee of 0.5% of the total credit line
if the Company terminates the Loan Agreement prior to 12 months from the Loan
Agreements effective date. The Loan
Agreement, if not sooner terminated in accordance with its terms, expires on February 25,
2010.
On September 24,
2008, the Company entered into the Second Loan Modification Agreement with the
Bank. The Second Loan Modification modified certain of the financial
covenants related to the Loan Agreement. The Company paid legal fees of
approximately $15,000 related to the Second Loan Modification Agreement.
On September 29,
2009, the Company entered into the Third Loan Modification Agreement with the
Bank. The Third Loan Modification modified
certain of the financial covenants related to the Loan Agreement. The Company paid legal fees of $10,000
related to the Third Loan Modification Agreement. As of October 3, 2009,
the Company had $3.0 million outstanding under the Loan Agreement and the Banks
prime rate was 4.0%. The rate used was the Banks prime rate of 4% plus
1% or (5% at October 3, 2009).
The Company has certain
financial covenants under the Loan Agreement. At October 3, 2009,
the Companys most restrictive covenant under the line of credit was a
tangible net worth covenant, as defined, which was set at approximately
$16.0 million. At October 3, 2009, the Companys tangible net worth,
as defined, was approximately $17.6 million, which exceeded the covenant
requirement. The Company also has a liquidity covenant, as defined, which
was set at approximately $4.0 million.
As of October 3, 2009, the Companys liquidity, as defined, was
approximately $19.4 million, which exceeded the covenant requirement. As of October 3, 2009, the Company had
availability of $3.1 million under the line of credit.
At October 3, 2009,
in addition to the amounts outstanding under it line of credit with the Bank,
the Company had a secured short term note payable to the Bank in the amount of
$1.3million. The short term note payable
was due 20 days after issuance and was secured by a letter of credit covering a
receivable from a customer. Subsequent
to the October 3, 2009 the Company has satisfied its obligation to the
Bank.
19
Table of
Contents
Note I. Product Warranties
In its Renewable Energy Solutions division the Company provides a
warranty to its customers for most of its products sold. In general the Companys warranties are for
one year after the sale of the product and five for photovoltaic inverter
product sales. The Company reviews its
warranty liability quarterly. The
Companys estimate for product warranties is based on an analysis of actual
expenses by specific product line and estimated future costs related to
warranty. Factors taken into
consideration when evaluating the Companys warranty reserve are (i) historical
claims for each product, (ii) the development stage of the product, (iii) volume
increases, (iv) life of warranty and (v) other factors. To the extent actual experience differs from
the Companys estimate, the provision for product warranties will be adjusted
in future periods. Such differences may
be significant.
The following is a summary of the Companys accrued warranty activity for
the following periods:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
Balance
at beginning of period
|
|
$
|
2,037,892
|
|
$
|
2,572,404
|
|
$
|
2,175,281
|
|
$
|
2,001,757
|
|
Provision
|
|
403,706
|
|
452,613
|
|
1,057,602
|
|
1,397,265
|
|
Usage
|
|
(308,642
|
)
|
(1,103,980
|
)
|
(1,099,927
|
)
|
(1,477,985
|
)
|
Balance
at end of period
|
|
$
|
2,132,956
|
|
$
|
1,921,037
|
|
$
|
2,132,956
|
|
$
|
1,921,037
|
|
Note
J. Convertible Debt Instruments and Warrant Liabilities
Features
of the Convertible Notes and Warrants
On July 19, 2006, the Company entered into
a Securities Purchase Agreement (the Purchase Agreement) with the purchasers
named therein (the Purchasers) in connection with the private placement (the Private
Placement) of:
·
$12,000,000
aggregate principal amount of senior secured convertible notes (the Convertible
Notes), convertible into shares of the Companys common stock at a conversion
price of $1.65 per share;
·
Warrant
As to purchase up to an aggregate of 3,636,368 shares of the Companys common
stock at a price of $1.815 per share for a period beginning six months from the
date of such warrants and ending on the seventh anniversary of the date of such
warrants; and
·
Warrant
Bs to purchase up to an aggregate of 3,636,368 shares of the Companys common
stock at a price of $1.68 per share for a period of 90 trading days beginning
the later of six months from the date of such warrants and the date the
Securities and Exchange Commission (the SEC) declares effective a shelf
registration statement covering the resale of the common stock underlying the
securities issued in the Private Placement (the Registration Statement); to
the extent the Warrant Bs are exercised, the Purchasers were entitled to
receive additional warrants (the Warrant Cs), as described below. Because the registration statement was
declared effective on September 27, 2006, these warrants were originally
exercisable for the 90 trading day period beginning six months from the date of
such warrants (i.e. until May 30, 2007). On December 20, 2006 the
Warrant Bs were amended to extend the expiration date of the Warrant Bs
issued in the Private Placement from May 30, 2007 to August 31, 2007.
The Warrant Bs were exercised in full on July 17, 2007 for $1.31 per
share. See below for a discussion
related to the exercise of the Warrant Bs and the issuance of Warrant Cs to the
holders as a result of such exercise.
On November 7, 2007, the Convertible Notes were retired by cash
redemption.
Additionally, with respect to the common stock
underlying the Warrant Cs issued in July 2007 upon exercise of the Warrant
Bs, the Company was also obligated to (i) file a registration statement
covering the resale of such common stock with the SEC within 30 days following
the issuance of the Warrant Cs (which it has satisfied), (ii) use its best
efforts to cause such registration statement to be declared effective within 60
days following the issuance of the Warrant Cs (or 90 days in the event of a
review of such registration statement by the SEC) (which it has satisfied as
such registration statement was declared effective on September 11, 2007)
and (iii) use its best efforts to keep such registration statement
effective until the earlier of (x) the fifth anniversary of the effective
date of the registration statement, (y) the date all of the securities
covered by the registration statement have been publicly sold and (z) the
date all of the securities covered by the registration statement may be sold
without restriction under SEC Rule 144.
20
Table
of Contents
Warrant As
The Warrant As originally entitled the holders
thereof to purchase up to an aggregate of 3,636,368 shares of the Companys
common stock at a price of $1.815 per share for a period beginning six months
from the date of such warrants and ending on the seventh anniversary of the
date of such warrants. The period prior
to six months from the date of the warrants is hereinafter referred to as the non-exercise
period. The exercise price and the number of shares underlying these warrants
are subject to adjustment for stock splits, stock dividends, combinations,
distributions of assets or evidence of indebtedness, mergers, consolidations,
sales of all or substantially all assets, tender offers, exchange offers,
reclassifications or compulsory share exchanges.
If a change of control of the Company occurs, as
defined, the holders may elect to require us to purchase the Warrant As for a
purchase price equal to the Black-Scholes value of the remaining unexercised
portion of each Warrant A.
For so long as any
Warrant As remain outstanding, we may not issue any common stock or common
stock equivalents at a price per share less than $1.65, subject to certain
exceptions. In the event of a breach of this provision, the holders may elect
to require us to purchase the Warrant As for a purchase price equal to the
Black-Scholes value of the remaining unexercised portion of each Warrant
A. As a result of the November 8,
2007 and December 20, 2007 preferred stock financing, as described in Note
K below, the holders were entitled for a limited period of time (45 days after
each issuance) to exercise this right.
During the fourth quarter of fiscal 2007, the Company paid approximately
$1.4 million to redeem Warrant As representing 1,242,426 shares of common
stock. During the first quarter of
fiscal 2008, the Company paid approximately $0.4 million to redeem Warrant As
representing 303,031 shares of common stock.
(See table below for assumptions used in valuing the warrants redeemed). As of October 3, 2009 and December 31,
2008, Warrant As to purchase 2,090,911 shares of common stock were outstanding,
respectively.
If following the later of (i) the effective
date of the Registration Statement and (ii) the six month anniversary of
the issuance date, the volume weighted average price per share of our common
stock for any 20 consecutive trading days exceeds 200% of the exercise price,
then, if certain conditions are satisfied, including the Equity Conditions, we
may require the holders of the Warrant As to exercise up to 50% of the unexercised
portions of such warrants. If following the 24 month anniversary of the
issuance date, the volume weighted average price per share of our common stock
for any 20 consecutive trading days exceeds 300% of the exercise price, then,
if certain equity conditions are satisfied, we may require the holders of the
Warrant As to exercise all or any part of the unexercised portions of such
warrants.
Warrant Bs
The Warrant Bs entitled the holders thereof to
purchase up to an aggregate of 3,636,368 shares of our common stock at a price
of $1.68 per share for a period of 90 trading days beginning the later of six
months from the date of such warrants and the date the SEC declares effective
the Registration Statement. As noted
above, as a result of an amendment, the expiration date of the Warrant Bs was
extended to August 31, 2007.
On July 17, 2007, the holders of the Warrant Bs exercised such
warrants in full, acquiring 3,636,638 shares of common stock at $1.31 per
share. The Company received proceeds of
approximately $4.8 million. To entice
the holders of the Warrant Bs to exercise such warrants the Company reduced the
exercise price from $1.68 to $1.31 per share.
As a result of reducing the exercise price the Company recorded a charge
to operations in its fiscal third quarter ending September 29, 2007
related to the warrant modification of approximately $0.9 million to change in
fair value of the Convertible Notes and warrants on the accompanying statement
of operations. Pursuant to the original
terms of the Warrant Bs, upon exercise of the Warrant Bs, the warrant holders
were entitled to receive additional warrants (Warrant Cs) to purchase a
number of shares of common stock equal to 50% of the number of shares of common
stock purchased upon exercise of the Warrant Bs. As a result of the full exercise of the
Warrant Bs, the holders received Warrant Cs to purchase 1,818,187 shares of
common stock at an exercise price of $1.815 per share for a period beginning
six months from the date of such warrants and ending on the seventh anniversary
of the date of such warrants.
Warrant
Cs
As discussed above, upon
the exercise of the Warrant Bs, the holders were entitled to receive additional
warrants (the Warrant Cs). The Warrant
Cs originally entitled the holders thereof to purchase up to an aggregate of
1,818,187 shares of our common stock at a price of $1.815 per share for a
period beginning six months from the date of such warrants and ending on the
seventh anniversary of the date of such warrants. The period prior to six months from the date
of the warrants is hereinafter referred to as the non-exercise period. The
exercise price and the number of shares underlying these warrants are subject
to adjustment for stock splits, stock dividends, combinations, distributions of
assets or evidence of indebtedness, mergers, consolidations, sales of all or
substantially all assets, tender offers, exchange offers, reclassifications or
compulsory share exchanges.
21
Table
of Contents
If a change of control of the Company occurs, as
defined, the holders may elect to require us to purchase the Warrant Cs for a
purchase price equal to the Black-Scholes value of the remaining unexercised
portion of each Warrant C.
For so long as any
Warrant Cs remain outstanding, the Company may not issue any common stock or
common stock equivalents at a price per share less $1.65, subject to certain
exceptions. In the event of a breach of this provision, the holders may elect
to require the Company to purchase the Warrant Cs for a purchase price equal to
the Black-Scholes value of the remaining unexercised portion of each Warrant C.
As a result of the November 8, 2007 and December 20, 2007 preferred
stock financing, as described in Note K below, the holders were entitled for a
limited period of time (45 days after each issuance) to exercise this
right. During the fourth quarter of
fiscal 2007, the Company paid approximately $0.7 million to redeem Warrant Cs
representing 621,215 shares of common stock.
During the quarter ended March 29, 2008, the Company paid
approximately $0.2 million to redeem Warrant Cs representing 151,516 shares of
common stock. (See table below for assumptions used in valuing the warrants
redeemed). As of October 3, 2009
and December 31, 2008, Warrant Cs to purchase 1,045,456 shares of common
stock were outstanding, respectively.
The table below summarizes Black-Scholes option pricing model range of assumptions
that were used in valuing the warrants redeemed for both the Warrant As and
Warrant Cs during the nine month period ended September 27, 2008.
Assumptions:
|
|
Warrant As
|
|
Warrant Cs
|
|
|
|
|
|
|
|
Expected
life
|
|
5.5 years
|
|
6.5 years
|
|
Expected
volatility ranging from
|
|
83.5
|
%
|
85.6
|
%
|
Dividends
|
|
none
|
|
none
|
|
Risk-free
interest rate
|
|
3.0
|
%
|
3.2
|
%
|
If following the later of (i) the effective
date of the Registration Statement and (ii) the six month anniversary of
the issuance date, the volume weighted average price per share of our common
stock for any 20 consecutive trading days exceeds 200% of the exercise price,
then, if certain conditions are satisfied, including the Equity Conditions, the
Company may require the holders of the Warrant Cs to exercise up to 50% of the
unexercised portions of such warrants. If following the 24 month anniversary of
the issuance date, the volume weighted average price per share of our common
stock for any 20 consecutive trading days exceeds 300% of the exercise price,
then, if certain equity conditions are satisfied, the Company may require the
holders of the Warrant Cs to exercise all or any part of the unexercised
portions of such warrants.
Placement Agent Warrants
First Albany Capital (FAC) acted as placement
agent in connection with the Private Placement. In addition to a cash
transaction fee, FAC or its designees were entitled to receive five-year
warrants to purchase 218,182 shares of the Companys common stock at an
exercise price of $1.87 per share. These warrants will be callable after the
second anniversary of the closing of the Private Placement if the 20-day volume
weighted average price per share of the Companys common stock exceeds 175% of
the exercise price. At the direction of FAC, these warrants were issued to
First Albany Companies Inc., the parent of FAC.
As of October 3, 2009 and December 31, 2008, warrants to
purchase 218,182 shares of common stock were outstanding, respectively.
Accounting
for the Warrants
Upon issuance, the Warrant As, Warrant Bs and Warrant Cs, along with the
Placement Agent Warrants (together the Warrants), did not meet the
requirements for equity classification, because
such warrants (a) must be settled in registered shares, (b) are
subject to substantial liquidated damages if the Company is unable to maintain
the effectiveness of the resale registration of the shares and (c) 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. Changes in fair value are recognized as
either a gain or loss in the statement of operations under the caption change
in fair value of warrant liabilities.
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 October 3, 2009 and December 31, 2008,
the remaining outstanding Warrants have been marked to fair value resulting in
a derivative liability of $3.2 million and $2.4 million, respectively.
The credit /
(charge) to Change in Fair Value of warrant liabilities, for the three and nine
months ended October 3, 2009 was ($0.3) million and $(0.7) million,
respectively and the credit / (charge) to Change in Fair Value of warrant
liabilities for the three and nine months ended September 27, 2008 was
$2.0 million and $(0.8) million, respectively, related to warrant As, Bs and Cs
and placement agent warrants. In
addition, the Company recorded a charge to Change in Fair Value of warrant
liabilities related to its
22
Table of Contents
Series C Preferred
Stock warrants of $3.2 million for the nine month period ended October 3,
2009.
A summary of the changes in the fair value of the warrant liabilities:
|
|
Fair Value
of Warrant
Liabilities
|
|
|
|
|
|
Balance at December 31,
2007
|
|
$
|
3,244,316
|
|
Fair value adjustment (2)
|
|
(104,768
|
)
|
Change in fair value of redeemed Warrant As and Cs
at redemption (1) (2)
|
|
572,250
|
|
Warrant Redemptions:
|
|
|
|
- Cash Paid for Warrant A redemption (1)
|
|
(387,591
|
)
|
- Cash paid for Warrant C redemption (1)
|
|
(184,659
|
)
|
Balance at March 29, 2008
|
|
$
|
3,139,548
|
|
Fair value adjustment (2)
|
|
$
|
2,396,716
|
|
Balance at June 28, 2008
|
|
$
|
5,536,264
|
|
Fair value adjustment (2)
|
|
$
|
(2,041,697
|
)
|
Balance at September 27,
2008
|
|
$
|
3,494,567
|
|
|
|
|
|
Balance at December 31,
2008
|
|
$
|
2,407,438
|
|
Reclassification of Series C Preferred Stock
Warrants to liabilities (3)
|
|
22,041,541
|
|
Fair value adjustment (2)
|
|
5,370,471
|
|
Balance at April 4, 2009
|
|
$
|
29,819,450
|
|
Fair value adjustment (2)
|
|
(1,776,137
|
)
|
Reclassification of Series C Preferred Stock
Warrants to equity (4)
|
|
(25,193,785
|
)
|
Balance at July 4, 2009
|
|
$
|
2,849,528
|
|
Fair value adjustment (2)
|
|
305,289
|
|
Balance at October 3, 2009
|
|
$
|
3,154,817
|
|
(1)
As a result of the Series C Preferred Stock financing, certain
holders of both Warrant As (1,242,426) and Warrant Cs (621,215), through December 31,
2007, exercised their right of redemption, resulting in the Company paying to
each redeeming warrant holder the Black-Scholes value of these warrants on the
date of notification of redemption.
During the nine months ended September 27, 2008 holders of both Warrant As (303,031) and Warrant Cs
(151,516) exercised their right of redemption, resulting in the Company paying
to each redeeming warrant holder the Black-Scholes value of these warrants on
the date of notification of redemption.
(2)
Amounts included in change in fair value of warrant liabilities on
consolidated statement of operations.
(3)
19,799,022
of
the Companys issued and outstanding common stock purchase warrants previously
treated as equity pursuant to the derivative treatment exemption were no longer
afforded equity treatment. As such,
effective January 1, 2009 the Company
reclassified the fair value of these common stock purchase warrants,
which have exercised price reset features, from equity to liability status as
if these warrants were treated as derivative liability since their date of
issuance.
(4)
On July 3, 2009, the Company modified certain provisions contained
within the common stock purchase warrants issued in connection with the Series C
Preferred Stock financing. See Note C.
Significant Accounting Policies and Basis of Consolidation Warrant
Liabilities for a description of the modifications. As a result of these modifications 19,799,022
of the Companys issued and outstanding common stock purchase warrants,
previously treated as a derivative liability on January 1, 2009 will now
be treated as equity pursuant to the derivative treatment exemptions afforded
the Company. In addition, as a result of
this modification, the Company will no longer be required to mark these
warrants to their fair value each quarter.
23
Table
of Contents
Valuation - Methodology and
Significant Assumptions
The valuation of
derivative instruments utilizes certain estimates and judgments that affect the
fair value of the instruments. Fair values for the Companys derivatives are
estimated by utilizing valuation models that consider current and expected
stock prices, volatility, dividends, forward yield curves and discount
rates. Such amounts and the recognition
of such amounts are subject to significant estimates which may change in the
future. (See Note C for valuation related to Series C Preferred Stock
Warrants).
In estimating the fair
value of the Warrants the following methods and significant input assumptions
were applied:
Methods
·
A binomial lattice model was utilized to estimate the fair value of
Warrant As at March 29, 2008, June 28, 2008, December 31, 2008, April 4,
2009, July 4, 2009 and October 3, 2009, as well as the fair value of
the Placement Agent Warrants at December 31, 2006 and the Warrant Cs at March 29,
2008, December 31, 2008, April 4, 2009, July 4, 2009 and October 3,
2009. The binomial model considers the
key features of the Warrants, and is subject to the significant assumptions
discussed below. First, a discrete
simulation of the Companys stock price was conducted at each node and
throughout the expected life of the instrument.
Second, an analysis of the higher of a holding position (
i.e
., fair value of a future node value discounted using an
applicable discount rate) or exercise position was conducted relative to each
node, which considers the non-exercise period, until a final fair value of the
instrument is concluded at the node representing the valuation date. This model requires the following key inputs
with respect to the Company and/or instrument:
Warrant As
Input
|
|
Mar. 29,
2008
|
|
June 28,
2008
|
|
Dec. 31,
2008
|
|
Apr. 4,
2009
|
|
Jul. 4
2009
|
|
Oct. 3
2009
|
|
Quoted Stock Price
|
|
$
|
1.84
|
|
$
|
3.01
|
|
$
|
1.55
|
|
$
|
1.88
|
|
$
|
1.80
|
|
$
|
2.01
|
|
Conversion Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
Time to Maturity (in years)
|
|
5.30
|
|
5.10
|
|
4.60
|
|
4.30
|
|
4.00
|
|
3.80
|
|
Stock Volatility
|
|
80
|
%
|
80
|
%
|
73
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
Risk-Free Rate
|
|
2.57
|
%
|
3.37
|
%
|
1.44
|
%
|
1.69
|
%
|
1.98
|
%
|
1.72
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
Warrant Cs (1)
Input
|
|
Mar. 29,
2008
|
|
June 28,
2008
|
|
Dec. 31,
2008
|
|
Apr. 4,
2009
|
|
Jul. 4
2009
|
|
Oct 3
2009
|
|
Quoted Stock Price
|
|
$
|
1.84
|
|
$
|
3.01
|
|
$
|
1.55
|
|
$
|
1.88
|
|
$
|
1.80
|
|
$
|
2.01
|
|
Conversion Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
Time to Maturity (in years)
|
|
6.3
|
|
6.1
|
|
5.50
|
|
5.30
|
|
5.0
|
|
4.8
|
|
Stock Volatility
|
|
85
|
%
|
85
|
%
|
80
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
Risk-Free Rate
|
|
2.77
|
%
|
3.50
|
%
|
1.63
|
%
|
1.97
|
%
|
2.43
|
%
|
2.14
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
(1) Warrant
Cs were issued on July 17, 2007 upon the exercise of the Warrant Bs.
·
A Black-Scholes option pricing model was
utilized to estimate the fair value of Placement Agent Warrants after March 29,
2008, June 28, 2008, December 31, 2008, April 4, 2009, July 4,
2009 and October 3, 2009. A change in method from the binomial to Black-Scholes
was warranted because the warrants non-exercise period ended prior to the
valuation date and all required inputs were fixed. This model requires the
following key inputs with respect to the Company and/or instrument:
Input
|
|
March 29,
2008
|
|
June 28,
2008
|
|
Dec. 31,
2008
|
|
Apr. 4,
2009
|
|
Jul. 4
2009
|
|
Oct. 3
2009
|
|
Quoted Stock Price
|
|
$
|
1.84
|
|
$
|
3.01
|
|
$
|
1.55
|
|
$
|
1.88
|
|
$
|
1.80
|
|
$
|
2.01
|
|
Conversion Price
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
Time to Maturity (in years)
|
|
3.31
|
|
3.06
|
|
2.55
|
|
2.29
|
|
2.04
|
|
1.79
|
|
Stock Volatility
|
|
70
|
%
|
75
|
%
|
80
|
%
|
75
|
%
|
85
|
%
|
80
|
%
|
Risk-Free Rate
|
|
1.91
|
%
|
2.93
|
%
|
0.89
|
%
|
1.08
|
%
|
1.00
|
%
|
0.77
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
24
Table
of Contents
Significant
Assumptions:
·
Stock
volatility was estimated by annualizing the daily volatility of the Companys
stock price during the historical period preceding the respective valuation
dates and measured over a period corresponding to the remaining life of the
instruments. Historic stock prices were
used to estimate volatility as the Company did not have traded options as of
the valuation dates;
·
The volume
weighted average price for the 20 trading days preceding a payment date was
reasonably approximated by the average of the simulated stock price at each
respective node of the binomial model;
·
Based on the
Companys historical operations and management expectations for the near
future, the Companys stock was assumed to be a non-dividend-paying stock;
·
The quoted
market price of the Companys stock was utilized in the valuations because the
derivative guidance requires the use of quoted market prices without
considerations of blockage discounts. Because the stock is thinly traded, the
quoted market price may not reflect the market value of a large block of stock;
and
·
The quoted
market price of the Companys stock as of measurement dates and expected future
stock prices were assumed to reflect the effect of dilution upon conversion of
the instruments to shares of common stock.
Note K.
Redeemable Convertible Series B and Series C Preferred Stock
Series B
Convertible Preferred Stock
On October 31,
2003, the Company completed a $7.7 million equity transaction involving
the issuance of 1,535 shares of its Series B Convertible Preferred Stock,
$0.01 par value per share (the Series B Preferred Stock), and warrants
to purchase up to 1,228,000 shares of the Companys common stock, to accredited investors (the October 2003
Financing Transaction). In connection
with the October 2003 Financing Transaction, the Company issued shares of Series B
Preferred Stock for $5,000 per share. The Series B Preferred Stock is
convertible into a number of shares of common
stock equal to $5,000 divided by the conversion price of the Series B
Preferred Stock, which was initially $2.50.
As of October 3, 2009 and December 31, 2008, the conversion
price for the Series B Preferred Stock was $1.49 and $1.55,
respectively. As of October 3, 2009
and December 31, 2008, 75 and 290 shares of Series B Preferred Stock
were outstanding, respectively. As of October 3,
2009 and December 31, 2008, the liquidation preference of the remaining 75
and 290 shares of Series B Preferred Stock was $375,000 and $1,450,000,
respectively, and these were convertible into 251,678 and 935,484 shares of
common stock, respectively.
Dividends on Series B Preferred Stock
The shares of Series B
Preferred Stock initially bore a cumulative dividend at a rate of 6% per annum;
pursuant to its terms, this was increased to a rate of rate of 8% per annum on October 1,
2005. Dividends on the Series B Preferred Stock are payable semi-annually
and, except in certain limited circumstances, may be paid by the Company, at
its option, either through the issuance of shares of common stock or in cash. If
the Company elects to pay the dividend in shares of common stock, the Company will issue a number of shares of common stock equal to the quotient of
the dividend payment divided by the greater of 80% of the average closing bid
and ask price of the common stock on
the Nasdaq Stock Market for the 15 trading days ending on the 11th trading day prior
to the date the dividend is required to be paid, and the conversion price,
which was initially $2.50, but which has since been adjusted in accordance with
the terms of the Series B Preferred Stock to $1.49 and $1.55 (as of October 3,
2009 and December 31, 2008, respectively).
The Company has paid all dividends in shares of common stock, in lieu of
cash dividends.
As part of the October 2003
Financing Transaction, the Company also issued warrants to purchase up to
1,228,000 shares of its common stock. These warrants were exercisable for a
five-year term and had an initial exercise price of $3.32 per share, which
represented 110% of the average closing price of the common stock for the five
trading days preceding October 31, 2003. The exercise price had been
adjusted due to anti-dilution provisions to $2.93 per share. These warrants were immediately exercisable
and expired on October 31, 2008. As
of December 31, 2008, none of these warrants remained outstanding. During 2008, warrants to purchase an
aggregate of 1,116,000 shares of common stock, which were outstanding at June 28,
2008, expired unexercised.
Burnham Hill
Partners, LLC, a division of Pali Capital, Inc. (BHP), served as
placement agent for this transaction. As part of its commission BHP, or its
assigns, received warrants, with an exercise price of $0.01 per share, to
purchase an aggregate of 150,430 shares of common stock. These warrants were
immediately exercisable and would expire on October 31, 2008. The Company valued
25
Table
of Contents
these warrants at
$435,166, using the Black-Scholes option-pricing model and has treated this as
a transaction cost. As of December 31,
2008, none of these warrants were outstanding as the remaining warrants to
purchase an aggregate of 5,182 shares of common stock, which were outstanding
during 2008, expired unexercised.
Liquidation
Preference on Series B Preferred Stock
In the event of a
liquidation of the Company, the holders of shares of the Series B
Preferred Stock are entitled to receive a liquidation payment prior to the
payment of any amount with respect to the shares of the common stock. The amount of this preferential liquidation payment
is $5,000 per share of Series B Preferred Stock, plus the amount of any
accrued but unpaid dividends on those shares. After payment of the full
liquidation preference amount, the holders of the Series B Preferred Stock
will not be entitled to any further participation as such in any distribution
of the Companys assets.
Optional Conversion of Series B Preferred Stock
The Series B
Preferred Stock is convertible into common
stock at any time at the option of the holder. Each outstanding share of
Series B Preferred Stock is convertible into a number of shares of common stock equal to $5,000 divided
by the conversion price of the Series B Preferred Stock, which was
initially $2.50, but which has since been adjusted in accordance with the terms
of the Series B Preferred Stock to $1.49 and $1.55 (as of October 3,
2009 and December 31, 2008, respectively). The Series B Preferred
Stock has anti-dilution protections which adjust the conversion price, in the
event of the issuance of shares of common
stock at a price less than the conversion price then in effect. If the Company issues equity securities for a
per share price less than the conversion price of the Series B Preferred
Stock, which was initially $2.50, the conversion price will be adjusted
downwards using a weighted average calculation.
Mandatory Conversion of Series B Preferred Stock
If certain conditions
described below are met, each share of Series B Preferred Stock will be
automatically converted into a number of shares of common stock equal to $5,000 divided by the conversion price of
the Series B Preferred Stock, which was initially $2.50, but which has
since been adjusted in accordance with the terms of the Series B Preferred
Stock to $1.49 and $1.55 (as of October 3, 2009 and December 31,
2008, respectively). Mandatory
conversion may only occur if the average of the closing bid and ask price of
the common stock on the Nasdaq
Stock Market exceeds $5.00 (as adjusted for stock splits, stock dividends,
combinations and similar transactions) for 20 consecutive trading days and
either the registration statement governing the underlying shares of common stock is effective or the
shares of common stock issuable
upon conversion of the Series B Preferred Stock can be sold without
restriction pursuant to Rule 144 of the Securities Act of 1933. The mandatory conversion date will be
extended for so long as the following events have occurred and are continuing:
·
the effectiveness of the registration statement covering the resale of
the shares of common stock issuable upon the conversion of the Series B
Preferred Stock lapses for 20 consecutive trading days (other than as a result
of factors solely in control of the holders of the Series B Preferred
Stock) and the shares of common stock into which the shares of Series B
Preferred Stock are convertible cannot be sold without restriction pursuant to Rule 144;
·
the common stock is
suspended from listing without subsequent listing on any one of, or is not
listed on at least one of, the Nasdaq Global Market, the Nasdaq Capital Market,
the OTC Bulletin Board, the New York Stock Exchange, Inc. or the American
Stock Exchange, Inc. for five consecutive trading days;
·
the Company provides notice to the holders of Series B Preferred
Stock that it will not or cannot comply with a proper conversion notice; or
·
the Company fails to comply with a proper conversion notice within 10
business days of receipt of that notice.
If, however, on the
mandatory conversion date, a holder is prohibited from converting all of its
shares of Series B Preferred Stock as a result of the restrictions
described below under Conversion Restrictions, such shares of Series B
Preferred Stock will not be converted, will remain outstanding and will not
accrue any dividends.
Conversion Restrictions
Unless the Company seeks
and obtains stockholder approval, the number of shares of common stock the Company may issue
upon the conversion of the shares of Series B Preferred Stock (when
aggregated with the number of shares of common
stock issued as dividends on the Series B Preferred Stock and upon
exercise of the warrants issued to the placement agent and its affiliates for
the Series B Preferred Stock financing) is limited to 4,947,352 shares
(representing 19.999% of the Companys total outstanding common stock as of October 31,
2003 immediately prior to the issuance of the Series B Preferred Stock). In addition, no holder may
26
Table
of Contents
convert shares of Series B
Preferred Stock if conversion of those shares would result in the holder owning
more than 4.99% of the common stock then
outstanding or would result in the holder beneficially owning more than 9.999%
of the common stock then
outstanding, unless the holder waives this limitation at least 61 days
prior to the proposed conversion.
Failure to Convert
If for any reason upon an
optional or mandatory conversion the Company cannot issue shares of common stock which have been
registered for resale pursuant to an effective registration statement, then the
Company will be obligated to issue as many shares of common stock as its is able to issue. If the Company does not have enough shares of
common stock to cover the
conversion of all outstanding shares of Series B Preferred Stock, then
with respect to the unconverted shares of Series B Preferred Stock (other
than unconverted Series B Preferred Stock resulting from the restrictions
described above under Conversion Restrictions), the holder will have the
right to (i) void its conversion notice, (ii) require the Company to
redeem the unconverted shares of Series B Preferred Stock at a price per
share equal to $6,250 plus liquidated damages and any accrued but unpaid
dividends or (iii) require the Company to issue shares of common stock that have not been
registered pursuant to the Securities Act.
If the holder elects redemption, the Company may pay the redemption
price either in cash or in shares of common
stock based on the quotient of the redemption price divided by the
greater of 80% of the average of the closing bid and ask price of the common stock on the Nasdaq Stock
Market for the 15 trading days ending on the 11th trading day prior to the
redemption date and the conversion price, which was initially $2.50, but which
has since been adjusted in accordance with the terms of the Series B
Preferred Stock to $1.49 and $1.55 (as of October 3, 2009 and December 31,
2008, respectively).
Redemption of Series B Preferred Stock
The holders of Series B
Preferred Stock are entitled to redeem their shares of Series B Preferred
Stock immediately prior to the consolidation, merger or business combination of
the Company with another entity (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of incorporation
of the Company or a consolidation, merger or other business combination in
which holders of the Companys voting power immediately prior to the
transaction continue after the transaction to hold, directly or indirectly, the
voting power of the surviving entity or entities necessary to elect a majority
of the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities), the sale or transfer of more than 50%
of the Companys assets (other than inventory in the ordinary course of business)
or the closing of a purchase, tender or exchange offer made to the holders of
more than 50% of the outstanding common
stock. In such an event, the
redemption price per share will equal $6,250 plus any accrued but unpaid
dividends and liquidated damages. The Company may pay the redemption price in
either cash or shares of common stock based
on the quotient of the redemption price divided by the greater of 80% of the
average of the closing bid and ask price of the common stock on the Nasdaq Stock Market for the 15 trading days
ending on the 11th trading day prior to the redemption date and the conversion
price, which was initially $2.50, but which has since been adjusted in
accordance with the terms of the Series B Preferred Stock to $1.49 and
$1.55 (as of October 3, 2009 and December 31, 2008, respectively).
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
27
Table of Contents
or the holders receive a
notice that the Company will not or cannot comply with a conversion notice, the
Company may choose to pay the redemption price in shares of common stock based on the quotient of
the redemption price divided by the greater of 80% of the average of the
closing bid and ask price of the common
stock on the Nasdaq Stock Market for the 15 trading days ending on the
11th trading day prior to the redemption date and the conversion price, which
was initially $2.50, but which has since been adjusted in accordance with the
terms of the Series B Preferred Stock to $1.49 and $1.55 (as of October 3,
2009 and December 31, 2008, respectively).
Commencing October 31,
2006 (and so long as a registration statement covering the resale of the shares
of common stock underlying the Series B
Preferred Stock and related warrants is effective and none of the events listed
in the four bullet points above has occurred and is continuing), the Company
may redeem all or any portion of the outstanding Series B Preferred Stock
upon five days prior written notice at a price per share of $7,500, plus
liquidated damages and any accrued but unpaid dividends. However, if a holder has delivered a
conversion notice to the Company within three trading days of receipt of the
Companys redemption notice for all or a portion of the shares of Series B
Preferred Stock, such shares of Series B Preferred Shares which the
Company has designated for redemption may be converted by the holder. In addition, if during the period between the
date of the Companys redemption notice and the redemption date a holder
becomes entitled to redeem the Series B Preferred Stock as a result of a
consolidation, merger or business combination of the Company with another
entity, the sale or transfer of more than 50% of the Companys assets (other
than inventory in the ordinary course of business) or the closing of a
purchase, tender or exchange offer made to the holders of more than 50% of the common stock, the right of the holder
with respect to the conversion will take precedence over the Companys
redemption notice. If a holder delivers
a conversion notice but is prohibited from converting all of its shares of Series B
Preferred Stock as a result of the restrictions described above under Conversion
Restrictions, such shares of Series B Preferred Stock will not be
converted, will remain outstanding and will not accrue any dividends.
Accounting
for the Series B Preferred Stock and Adjustments to the Conversion Price
The Company
accounted for the transaction by allocating the proceeds received net of
transaction costs based on the relative fair value of the redeemable
convertible Series B Preferred Stock and the warrants issued to the
investors, and then to any beneficial conversion rights contained in the
convertible redeemable preferred securities as follows:
Security
|
|
Face
Value
|
|
Fair
Value
|
|
Allocation of
Proceeds, Net of
Transaction Costs
|
|
Beneficial
Conversion
Feature
|
|
Discount
|
|
Redeemable
convertible Series B Preferred Stock
|
|
$
|
7,675,000
|
|
$
|
12,398,195
|
|
$
|
5,247,393
|
|
$
|
3,655,607
|
|
$
|
6,083,214
|
|
Warrants
|
|
|
|
$
|
2,935,558
|
|
$
|
1,242,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the
issuance of shares of common stock in
lieu of cash for the principal and interest payments due on the Convertible
Notes, the issuance of 850,000 shares of common stock related to the early
termination of a lease, conversion of a portion of the Convertible Notes by the
note holders, the exercise of the Warrant Bs, the issuance of 749,999 shares of
common stock to the note holders as an inducement and the closing of the
private placement of Series C Preferred Stock and warrants in the fourth
quarter of 2007 and the issuance of approximately 17.9 million shares of common
stock during the period ended October 3, 2009, the Company adjusted the
initial $2.50 conversion price on the Series B Preferred Stock to $1.49.
Series C Convertible Preferred Stock
On November 8, 2007,
the Company entered into a Stock and Warrant Purchase agreement with Rockport
Capital Partners II, L.P. and NGP Energy Technology Partners, L.P. (the Investors). Under this purchase agreement, the Investors
agreed to purchase in a private placement up to 25,000 shares of the Companys
newly created Series C convertible preferred stock (the Series C
Preferred Stock) and warrants to purchase up to 19,711,539 shares of common
stock, for an aggregate gross purchase price of $25.0 million. Each share of Series C Preferred Stock
initially converts into common stock at a price equal to $1.04 per share,
subject to adjustment.
This private placement
occurred in two closings. The first
closing occurred on November 8, 2007.
At the first closing, the Company issued 10,000 shares of Series C
Preferred Stock at $1,000 per share for an aggregate gross purchase price of
$10.0 million. These shares are
currently convertible into 9,615,384 shares of common stock. The Company also issued warrants to purchase
an aggregate of 15,262,072 shares of common stock. These warrants are exercisable for a
seven-year term and had an initial exercise price of $1.44 per share and may
not be exercised until May 8, 2008.
As a result of stockholder approval of the second closing and related
matters on December 20, 2007, as described below, the exercise price of
these warrants was reduced to $1.25 per share.
The Company considered this a cancellation and reissuance of new
warrants and accounted for the change in the fair value of the warrants in the
allocation of net proceeds associated with the second closing and treated it as
a deemed dividend to the Series C Preferred Stock holders. (See Accounting
for the Series C Preferred Stock below).
28
Table
of Contents
At the second closing,
which occurred on December 20, 2007, following stockholder approval, the
Company issued 15,000 shares of Series C Preferred Stock for an aggregate
gross purchase price of $15.0 million, of which $10.0 million was paid through
the cancellation of the promissory notes previously issued to the Investors on November 7,
2007. These shares are currently
convertible into 14,423,076 shares of common stock. At this closing, the Company also issued
warrants to purchase an aggregate of 4,449,467 shares of common stock at an
exercise price of $1.25 per share. These
warrants are exercisable for a seven-year term and are exercisable immediately.
In the purchase
agreement, the Company also agreed to issue the Investors additional warrants
in the event that the holders of certain existing warrants (none of whom are
affiliated with the Investors) exercise those warrants in the future. Upon such exercises, the Company will issue
to the Investors additional warrants to purchase common stock equal to one-half
of the number of shares of common stock issued upon exercise of these existing
warrants. The exercise price of these
warrants will be $1.66 per share (during 2008, prior to the issuance of any
such warrants, the warrant holders agreed to change the exercise price to $1.66
per share from $1.25 per share). During
2008, the Company issued warrants to purchase an aggregate of 87,484 shares of
common stock to the Investors as a result of warrant exercises during
2008. During 2009, the Company issued
warrants to purchase an aggregate of 17,911 shares of common stock to the
Investors as a result of warrant exercises during the three and nine month
period ended October 3, 2009. On October 3, 2009, the date of
issuance, the Company valued these warrants using a Black-Scholes option
pricing model with the assumptions detailed below. After valuing these warrants the Company
allocated the calculated value to the relative fair value of each tranche of
preferred stock. As a result, the
Company recorded the allocated value of the warrant and the beneficial
conversion feature of $34,000 in the aggregate to the second closing of the Series C
Preferred Stock. The Company recorded a
deemed dividend on the Series C Preferred Stock of $17,000 related to the
beneficial conversion feature. See
Accounting for the Series C Preferred Stock
below.
Input
|
|
October 3, 2009
|
|
Quoted
Stock Price
|
|
$
|
2.01
|
|
Exercise
Price
|
|
$
|
1.66
|
|
Time
to Maturity (in years)
|
|
7.00
|
|
Stock
Volatility
|
|
82.66
|
%
|
Risk-Free
Rate
|
|
2.5
|
%
|
Dividend
Rate
|
|
0
|
%
|
As of October 3,
2009, if all of the remaining existing warrants are exercised, the Company
would need to issue warrants to purchase an additional 2,650,197 shares of
common stock to the Investors.
Dividends on Series C
Preferred Stock
The shares of Series C
Preferred Stock accrue a cumulative dividend at a rate of 5% per annum of the
Stated Liquidation Preference Amount, as defined below. Dividends on the Series C Preferred
Stock shall be cumulative, shall accrue, whether or not declared, and be
payable quarterly in cash or, at the Companys option, added to the Stated
Liquidation Preference Amount. So long as any shares of Series C Preferred
Stock are outstanding, the Company shall not declare, pay or set apart for
payment any dividend or make any distribution on any Series B Preferred
Stock (other than dividends or distributions paid on the Series B
Preferred Stock in common stock in accordance with the terms of the Series B
Preferred Stock) or junior stock (other than dividends or distributions on
common stock payable solely in shares of common stock), unless at the time of
such dividend or distribution the Company shall have paid all accrued and
unpaid dividends on the outstanding shares of Series C Preferred
Stock. In addition, so long as any
shares of Series C Preferred Stock are outstanding, the Company shall not
declare, pay or set apart for payment any dividend or make any distribution on
any common stock (other than dividends or distributions on common stock payable
solely in shares of common stock), unless at the time of such dividend or
distribution the Company simultaneously pays a dividend or distribution on each
outstanding share of Series C Preferred Stock in an amount equal to the
product of (i) the dividend or distribution payable on each share of
common stock and (ii) the number of shares of common stock issuable upon
conversion of a share of Series C Preferred Stock, calculated on the
record date for determination of holders entitled to receive such dividend or
distribution.
Voting Rights
The holders of Series C Preferred Stock shall be entitled to notice
of all meetings of stockholders in accordance with the Companys bylaws. On any matter presented to the stockholders of the
Company for their action or consideration at any meeting of stockholders of the
Company (or by written consent of stockholders in lieu of meeting), each holder
of outstanding shares of Series C Preferred Stock shall be entitled to cast
the number of votes equal to quotient determined by dividing (i) the Series C
Original Issue Price ($1,000 per share) of the shares of Series C
Preferred Stock held by such holder as of the record date for determining
stockholders
29
Table
of Contents
entitled to vote on such matter by (ii) $1.44 (as
adjusted for any stock dividends, combinations,
splits and the like with respect to shares of common stock). Except as
provided by law or as described below, holders of Series C Preferred Stock
shall vote together with the holders of common stock as a single class.
The Company is not
permitted, without the affirmative vote or written consent of the holders of at
least 67% of the outstanding Series C Preferred Stock (50% of the
outstanding Series C Preferred Stock with respect to items (4), (5) and
(8) below), directly or indirectly, to take any of the following actions
or agree to take any of the following actions:
(1) authorize, create or issue any shares
of preferred stock or other equity securities ranking senior to or on a parity
with the Series C Preferred Stock;
(2) increase or decrease the total number
of authorized shares of Series C Preferred Stock;
(3) amend or modify the Companys
certificate of incorporation (including the Certificate of Designation
governing the Series C Preferred Stock) or bylaws that would adversely
affect the rights, preferences, powers and privileges of the Series C
Preferred Stock;
(4) repurchase or redeem any shares of Series B
Preferred Stock (except pursuant to the existing terms of the Series B
Preferred Stock) or any equity securities ranking junior to the Series C
Preferred Stock, subject to certain exceptions;
(5) effect any distribution or declare,
pay or set aside any dividend with respect to any equity securities ranking
junior to the Series C Preferred Stock;
(6) incur any form of indebtedness for
borrowed money in excess of $5,000,000 in the aggregate (other than
indebtedness existing at November 8, 2007);
(7) effect a liquidation, consummate a
reorganization event or dispose, transfer or license any material assets,
technology or intellectual property, other than non-exclusive licenses in
connection with sales of the Companys products in the ordinary course of
business;
(8) consummate any transaction that
results in the transfer or issuance of securities, or options, warrants or
other rights to receive securities of a subsidiary or any other transaction
following which a subsidiary no longer remains wholly-owned by the Company or
pursuant to which any third party has a right to purchase securities of a
subsidiary;
(9) change the size of the Companys
board of directors;
(10) encumber or grant a security interest
in all or substantially all or a material part of the Companys assets except
to secure indebtedness permitted above that is approved by the Companys board
of directors;
(11) acquire a material amount of assets of
another entity, through a merger, purchase of assets or purchase of capital
stock or otherwise; or
(12) enter into any agreement to do or cause
to be done any of the foregoing.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the affairs
of the Company, whether voluntary or involuntary (a Liquidation), the holders
of shares of the Series C Preferred Stock then outstanding shall be
entitled to receive, out of the assets of the Company available for
distribution to its stockholders before any payment shall be made to the
holders of junior stock by reason of their ownership thereof, an amount per
share equal to the greater of:
(i) the Series C Original Issue Price ($1,000 per share) plus
any dividends accrued but unpaid thereon (the Stated Liquidation Preference
Amount); or
(ii) such amount per share as would have been payable had all shares
of Series C Preferred Stock been converted into common stock immediately
prior to such Liquidation (the amount payable to the holders of Series C
Preferred Stock pursuant to clause (i) or (ii) of this sentence is
hereinafter referred to as the
Series C
Liquidation Amoun
t).
If upon any such Liquidation, the assets of the Company available for
distribution to its stockholders shall be insufficient to pay
30
Table
of Contents
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:
Holders Right to Convert
.
At any time the holder of
any such shares of Series C Preferred Stock may, at such holders option,
elect to convert all or any portion of the shares of Series C Preferred
Stock held by such person into a number of fully paid and nonassessable shares
of common stock equal to the quotient of (i) the Stated Liquidation
Preference Amount of the shares of Series C Preferred Stock being
converted divided by (ii) the conversion price then in effect as of the
date of the delivery by such holder of its notice of election to convert. The initial conversion price of the Series C
Preferred Stock is $1.04 per share. The Series C
Preferred Stock will receive weighted average anti-dilution protection in the
event of a dilutive issuance (i.e. stock splits, stock dividends or other
issuances deemed to be dilutive to the investor) in accordance with a formula
set forth in the Certificate of Designation, subject to certain exceptions.
Companys Right to Convert
.
At any time on or after November 8,
2009, if the average closing price of the Companys common stock for any
immediately preceding 180-day period exceeds $7.00 (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or
other similar recapitalization with respect to the common stock), the Company
will have the right, but not the obligation, to convert each outstanding share
of Series C Preferred Stock into a number of fully paid and nonassessable
shares of common stock equal to the quotient of (i) the Stated Liquidation
Preference Amount divided by (ii) the conversion price in effect as of the
Company conversion date.
Redemption
At any time and
from time to time on or after November 8, 2011 the holders of at least
66.7% of the then outstanding shares of Series C Preferred Stock may elect
to have all or any portion of the outstanding shares of Series C Preferred
Stock redeemed. The Company shall effect
the redemption on a redemption date by paying cash or, at the Companys
election, shares of common stock (valued in the manner described below).
If such redemption
shall be for cash, the Company shall effect the redemption, out of funds
legally available therefor, by paying in cash in exchange for each share of Series C
Preferred Stock to be redeemed a sum equal to the
product of (i) 1.2 multiplied by (ii) the Stated Liquidation
Preference Amount.
If such redemption shall
be for shares of common stock, the Company shall effect the redemption by
issuing, in exchange for each share of Series C Preferred Stock to be
redeemed, that number of shares of common stock equal to (A) the product of (i) 1.4 multiplied by (ii) the
Stated Liquidation Preference Amount divided by (B) the fair market
value of the common stock, based on a 10 day volume weighted average, as of the
redemption date.
31
Table
of Contents
Accounting
for the Series C Preferred Stock
Initially, based
on the accounting guidance available at the closing of the Series C
Preferred Stock transaction (see Note
J. Convertible Debt Instruments and Warrant Liabilities -
Change in Accounting Principle
), the Company accounted for
the transaction by allocating the proceeds received net of transaction costs
based on the relative fair value of the redeemable convertible Series C
Preferred Stock and the warrants issued to the Investors, and then to any
beneficial conversion rights contained in the convertible redeemable preferred
securities as follows:
Security
|
|
Face
Value
|
|
Fair
Value
|
|
Allocation of
Proceeds, Net of
Transaction
Costs
|
|
Beneficial
Conversion
Feature
|
|
Initial
Carrying
Value
|
|
Redeemable
convertible Series C Preferred Stock
|
|
$
|
25,000,000
|
|
$
|
18,193,950
|
|
$
|
12,991,097
|
|
$
|
11,762,887
|
|
$
|
1,228,210
|
|
Warrants
|
|
|
|
$
|
18,352,179
|
|
$
|
10,092,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The re-pricing of
the exercise price of the Tranche I warrants from $1.44 to $1.25, as described
above, was treated as a cancellation of the original warrants issued on November 8,
2007 and a re-issuance of new warrants on December 20, 2007. The difference in fair value of the warrant
was included in the allocation of net proceeds associated with the second
closing of the Series C Preferred Stock on December 20, 2007. The Company treated this as a deemed dividend
on the Series C Preferred Stock.
The Company recorded a discount, including the re-pricing and beneficial
conversion feature of $11,762,887 and recorded a deemed dividend of $11,947,881
to the holders of the Series C Preferred Stock, which included the initial
allocation of the discount of $11,762,887 and $184,994 related to the accretion
of the Series C Preferred Stock to its redemption value through the date
that holders of the Series C Preferred Stock may first exercise their
redemption right. The Company is using
the effective interest method to accrete the carrying value of the Series C
Preferred Stock through the earliest possible redemption date (November 8,
2011), at which time the value of the Series C Preferred Stock would be
$30.0 million or 120% of its face value and accrued dividends. The components of the carrying value of the Series C
Preferred Stock from inception on November 8, 2007, the year ended December 31,
2007, September 27, 2008, December 31, 2008 and October 3, 2009,
is as follows:
|
|
Total
|
|
Initial
carrying value November 8, 2007
|
|
$
|
1,228,210
|
|
Deemed
dividend through December 31, 2007
|
|
$
|
11,762,887
|
|
Accretion
of original issue discount to redemption value through December 31, 2007
|
|
$
|
184,994
|
|
Total
|
|
$
|
13,176,091
|
|
Dividend
through December 31, 2007 (1)
|
|
$
|
100,000
|
|
Balance
at December 31, 2007
|
|
$
|
13,276,091
|
|
Accretion
of original issue discount to redemption value for the three months ended
March 29, 2008, June 28, 2008 and September 27, 2008
|
|
2,062,299
|
|
Dividend
for the three months ending March 29, 2008 , June 28, 2008 and
September 27, 2008(1)
|
|
925,547
|
|
Additional
discount from issuance of warrants and beneficial conversion feature
|
|
(126,000
|
)
|
Balance
at September 27, 2008
|
|
$
|
16,137,937
|
|
|
|
|
|
Balance at December 31,
2008
|
|
$
|
17,248,593
|
|
Accretion of
original issue discount to redemption value for the three months ended
April 4, 2009, July 4, 2009 and October 3, 2009
|
|
2,662,857
|
|
Dividend
and accretion of the Series C Preferred dividends for the three months
ending April 4, 2009 (1), July 4, 2009 (1) and October 3,
2009 (1)
|
|
1,051,915
|
|
Additional
discount from issuance of warrants and beneficial conversion feature
|
|
(17,000
|
)
|
Balance
at October 3, 2009
|
|
$
|
20,946,365
|
|
(1)
The Company elected to add the dividend to the liquidation preference of
the Series C Preferred Stock and it was recorded as a dividend to the
holders of the Series C Preferred Stock.
32
Table of Contents
In valuing the warrants, at issuance, associated with the Series C
Preferred Stock the Company used the Black-Scholes option pricing model with
the following range of assumptions:
Assumptions:
|
|
November 8, 2007
|
|
December 20, 2007
|
|
|
|
|
|
|
|
Expected life
|
|
4.0years
|
|
5.2years
|
|
Expected volatility
|
|
70
|
%
|
70
|
%
|
Dividends
|
|
none
|
|
none
|
|
Risk-free interest rate
|
|
3.64
|
%
|
3.48
|
%
|
The Company currently
designates these warrants as equity instruments; see warrant
liabilities in Note C.
Note
L. Stock Option Plans
Stock
Option Plans
Under the Companys
1998, 1999, 2000, 2002 and 2005 Stock Option Plans (collectively, the Plans),
both qualified and non-qualified stock options may be granted to certain
officers, employees, directors and consultants to purchase shares of the
Companys common stock. At October 3, 2009, 9,517,331 shares are available
for future grants (as stock options or other equity awards) under the Plans.
The Plans are
subject to the following provisions:
·
The aggregate fair market value
(determined as of the date the option is granted) of the Companys common stock
that any employee may purchase in any calendar year pursuant to the exercise of
qualified options may not exceed $100,000. No person who owns, directly or
indirectly, at the time of grant of a qualified option to him or her, more than
10% of the total combined voting power of all classes of stock of the Company
shall be eligible to receive any qualified options under the Plans unless the
exercise price is at least 110% of the fair market value of the Companys
common stock subject to the option, determined on the date of grant. Non-qualified options are not subject to this
limitation.
·
Qualified options are issued only to
employees of the Company, while non-qualified options may be issued to
non-employee directors, consultants and others, as well as to employees of the
Company. Options granted under the Plans may not be granted with an exercise
price less than 100% of fair value of the Companys common stock, as determined
by the Board of Directors on the grant date.
·
Options under the Plans must be granted
within 10 years from the effective date of the Plan. Qualified options
granted under the Plans cannot be exercised more than 10 years from the
date of grant, except that qualified options issued to 10% or greater
stockholders are limited to five-year terms.
·
Generally, the options vest and become
exercisable ratably over a four-year period.
·
The Plans contain antidilutive provisions
authorizing appropriate adjustments in certain circumstances.
·
Shares of the Companys common stock
subject to options that expire without being exercised or that are canceled as
a result of the cessation of employment are available for future grants.
33
Table
of Contents
The following table
summarizes activity of the Companys stock plans since December 31, 2008:
|
|
Options
Outstanding
|
|
|
|
|
|
Number
of
|
|
Weighted
Average
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
|
|
|
|
Shares
|
|
Exercise
Price
|
|
(years)
|
|
Value
|
|
Outstanding
at December 31, 2008
|
|
10,147,996
|
|
$
|
2.39
|
|
8.09
|
|
$
|
382,951
|
|
Grants
|
|
1,038,000
|
|
$
|
1.22
|
|
|
|
|
|
Exercises
|
|
|
|
$
|
|
|
|
|
|
|
Cancellations
|
|
(334,626
|
)
|
$
|
6.28
|
|
|
|
|
|
Outstanding at April 4,
2009
|
|
10,851,370
|
|
$
|
2.16
|
|
8.20
|
|
$
|
1,676,828
|
|
Grants
|
|
366,000
|
|
$
|
1.93
|
|
|
|
|
|
Exercises
|
|
(4,750
|
)
|
$
|
1.50
|
|
|
|
|
|
Cancellations
|
|
(84,250
|
)
|
$
|
1.94
|
|
|
|
|
|
Outstanding at July 4,
2009
|
|
11,124,370
|
|
$
|
2.15
|
|
8.01
|
|
$
|
1,416,772
|
|
Grants
|
|
109,000
|
|
$
|
1.83
|
|
|
|
|
|
Exercises
|
|
(31,500
|
)
|
$
|
1.36
|
|
|
|
|
|
Cancellations
|
|
(222,500
|
)
|
$
|
2.95
|
|
|
|
|
|
Outstanding at October 3,
2009
|
|
10,979,370
|
|
$
|
2.14
|
|
7.84
|
|
$
|
2,593,316
|
|
Exercisable
at October 3, 2009
|
|
5,043,607
|
|
$
|
2.48
|
|
6.71
|
|
$
|
1,209,472
|
|
Information
relating to stock options outstanding as of October 3, 2009 is as follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number of
Shares
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
Weighted
Average
Exercise
Price
|
|
Exercisable
Number of
Shares
|
|
Exercisable
Weighted
Average
Exercise
Price
|
|
$0.4100
|
|
to
|
|
$1.3900
|
|
1,644,950
|
|
7.86
|
|
$
|
1.1505
|
|
787,450
|
|
$
|
1.1465
|
|
$1.4100
|
|
to
|
|
$1.8300
|
|
1,572,250
|
|
7.96
|
|
$
|
1.6080
|
|
761,250
|
|
$
|
1.5451
|
|
$1.8400
|
|
to
|
|
$1.8900
|
|
40,000
|
|
9.15
|
|
$
|
1.8813
|
|
7,500
|
|
$
|
1.8800
|
|
$1.9000
|
|
to
|
|
$1.9000
|
|
4,857,520
|
|
8.57
|
|
$
|
1.9000
|
|
1,528,756
|
|
$
|
1.9000
|
|
$1.9100
|
|
to
|
|
$2.4600
|
|
1,603,650
|
|
7.11
|
|
$
|
2.2588
|
|
965,151
|
|
$
|
2.1558
|
|
$2.5000
|
|
to
|
|
$17.5630
|
|
1,253,500
|
|
5.79
|
|
$
|
4.7585
|
|
986,000
|
|
$
|
5.3531
|
|
$17.7500
|
|
to
|
|
$17.7500
|
|
7,500
|
|
1.10
|
|
$
|
1.1505
|
|
7,500
|
|
$
|
17.7500
|
|
$0.4100
|
|
to
|
|
$17.7500
|
|
10,979,370
|
|
7.84
|
|
$
|
2.1354
|
|
5,043,607
|
|
$
|
2.4763
|
|
Options for the
purchase of 3,249,976 shares were exercisable at December 31, 2008, with a
weighted average exercise price of $3.22.
As of October 3,
2009, the Company had 92,135 shares of restricted stock outstanding of which
all were vested. Restricted stock is
comprised of restricted stock awards to non-employee consultants of the Company
for services to be rendered in fiscal 2009.
The Company valued the restricted stock grants at $165,000, the price of
the Companys stock on the day of the grant ($1.78 per share). In connection with these restricted stock
grants the Company recognized an expense of $0 and $75,000 in its general and
administrative department for the three and nine months ended October 3,
2009, respectively, and $22,250 and
$66,750 in its cost of product sales line item for the three and nine months
ended October 3, 2009, respectively.
The Company had no unvested shares of restricted stock outstanding as of
September 27, 2008.
34
Table
of Contents
As of October 3,
2009, there was approximately $7.3 million of total unrecognized costs related
to non-vested share-based compensation arrangements. The Company expects to recognize the cost
over a weighted average period of approximately 2.5 years. There were options to purchase 31,500 and
36,250 shares exercised during the three and nine months ended October 3,
2009, respectively, and these options had an intrinsic value of approximately
$60,000 and $69,000 on their date of exercise, respectively. Options to
purchase 15,000 and 694,920 shares were exercised during the three and nine
months ended September 27, 2008, respectively, and these options had an
intrinsic value of approximately $33,400 and $1.6 million, respectively, on
their date of exercise.
During 2000, the
Company granted 216,000 non-qualified stock options to non-executive employees
at an exercise price of $17.56 per share outside of the Board-approved Plans.
As of December 31, 2008 and October 3, 2009, 21,000 of these options
remained outstanding, respectively, which are included in the above table.
During 2008, as an
inducement to his joining the Company, the Company granted the new CEO an
option to acquire 4,796,020 shares of common stock at a price per share equal
to $1.90, the closing price of the common stock on May 1, 2008, the date
his employment commenced. The option vests over four years, with the first 25%
vesting on May 1, 2009 and the balance vesting in equal quarterly installments
over the following three years. The option was issued outside of the Companys
2005 Incentive Compensation Plan. As of December 31,
2008 and October 3, 2009, this option was outstanding and is included in
the above table.
Note M. Warrants
The table below summarizes the Companys warrants currently outstanding
as of October 3, 2009:
|
|
|
|
Original
Warrant to
|
|
|
|
|
|
Remaining
Shares of
|
|
|
|
Date of
Warrant Issuance
|
|
Holder
of Warrant
|
|
Purchase
Shares of
Common
Stock
|
|
Exercise
Price $
|
|
2009 Activity
|
|
Common
Stock
underlying
the warrant
|
|
Term
(Years)
|
|
Warrant
Issued
|
|
Warrants
Exercised or
Redeemed
|
|
Warrants
Expired
|
|
December 22,
2004
|
|
December 2004
Financing Investors
|
|
2,181,818
|
|
$
|
2.00
|
|
|
|
|
|
|
|
804,546
|
|
5
|
|
May 31,
2005
|
|
Silicon Valley Bank
|
|
151,515
|
|
$
|
1.39
|
|
|
|
(151,515
|
)(7)
|
|
|
|
|
10
|
|
August 12,
2005
|
|
August 2005
Financing Investors
|
|
1,169,038
|
|
$
|
1.99
|
|
|
|
|
|
|
|
1,047,777
|
|
5
|
|
August 12,
2005
|
|
Ardour Capital
Investment, LLC
|
|
93,523
|
|
$
|
1.84
|
|
|
|
|
|
|
|
93,523
|
|
5
|
|
July 19,
2006
|
|
First Albany Warrants
|
|
218,182
|
|
$
|
1.87
|
|
|
|
|
|
|
|
218,182
|
|
5
|
|
July 19,
2006
|
|
Warrant A,
July 2006 Private Placement
|
|
3,636,368
|
(2)
|
$
|
1.82
|
|
|
|
|
|
|
|
2,090,911
|
|
7
|
|
July 17,
2007
|
|
Warrant C,
July 2006 Private Placement
|
|
1,818,187
|
(2)
|
$
|
1.82
|
|
|
|
|
|
|
|
1,045,456
|
|
7
|
|
November 8,
2007
|
|
Series C Preferred
Warrants (3)
|
|
15,262,072
|
|
$
|
1.25
|
(1)
|
|
|
|
|
|
|
15,262,072
|
|
7
|
|
December 20,
2007
|
|
Series C Preferred
Warrants
|
|
4,449,467
|
|
$
|
1.25
|
|
|
|
|
|
|
|
4,449,467
|
|
7
|
|
April 7,
2008
|
|
International Master
Technologies (4)
|
|
100,000
|
|
$
|
1.84
|
|
|
|
|
|
|
|
100,000
|
|
5
|
|
June 28,
2008
|
|
Series C Preferred
Warrant (5)
|
|
77,378
|
|
$
|
1.66
|
|
|
|
|
|
|
|
77,378
|
|
7
|
|
September 27,
2008
|
|
Series C Preferred
Warrant (5)
|
|
10,105
|
|
$
|
1.66
|
|
|
|
|
|
|
|
10,105
|
|
7
|
|
July 3,
2009
|
|
Series C Preferred
Warrants (6)
|
|
|
|
$
|
1.80
|
|
380,000
|
|
|
|
|
|
380,000
|
|
7
|
|
October 3,
2009
|
|
Series C Preferred
Warrants (5)
|
|
|
|
$
|
1.66
|
|
17,911
|
|
|
|
|
|
17,911
|
|
7
|
|
Total
Warrants outstanding as of October 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
25,597,328
|
|
|
|
(1)
These warrants
originally had an exercise price of $1.44. Upon the second closing of the
Series C Preferred Stock financing on December 20, 2007, these
warrants were repriced to $1.25.
(2)
During the
quarter ended March 29, 2008 Warrant As and Warrant Cs representing
303,031 and 151,516 shares of common stock, respectively, were redeemed resulting
in the Company paying to the redeeming warrant holders approximately $0.6
million cash in the aggregate.
(3)
These warrants
vested in full on May 7, 2008, six months from their date of inception.
35
Table
of Contents
(4)
On April 7,
2008, the Company issued a warrant to purchase 100,000 shares of common stock
at a price of $1.84 per share, the closing price on the date of issuance, in
connection with a sales and marketing agreement. The Company recorded a charge
to operations of approximately $121,000 related to the issuance of this warrant
to the contractor. This warrant is immediately exercisable and had no vesting
provisions. The Company used a Black-Scholes Option pricing model to value this
warrant with key inputs as follows:
Input
|
|
April 7,
2008
|
|
Quoted Stock Price
|
|
$
|
1.84
|
|
Exercise Price
|
|
$
|
1.84
|
|
Time to Maturity (in years)
|
|
5.0
|
|
Stock Volatility
|
|
80.6
|
%
|
Risk-Free Rate
|
|
2.80
|
%
|
Dividend Rate
|
|
0
|
%
|
(5)
As described above in Note K,
the Company issued warrants to purchase 17,911 and 87,484 (77,379 and 10,105)
shares of common stock at $1.66 per share to the Investors as a result of
warrant exercises during the nine months ended October 3, 2009 and the
year ended December 31, 2008, respectively. These warrants are immediately
exercisable at their respective times of issuance and have a 7 year life.
(6)
On July 3, 2009, the
Company issued warrants to purchase 380,000 shares of common stock at a price
of $1.80 per share, the closing price on the date of issuance, in connection
with the modification of the anti-dilution provisions of the Investors
existing, and future, warrants to purchase common stock of the Company. The warrants
were immediately exercisable and had no vesting provisions. The Company
recorded a charge to other income of approximately $0.5 million related to the
issuance of these warrants to the Investors. The Company used a Black-Scholes
Option pricing model to value this warrant with key inputs as follows:
Input
|
|
July 3,
2009
|
|
Quoted Stock Price
|
|
$
|
1.80
|
|
Exercise Price
|
|
$
|
1.80
|
|
Time to Maturity (in years)
|
|
7.0
|
|
Stock Volatility
|
|
84
|
%
|
Risk-Free Rate
|
|
2.0
|
%
|
Dividend Rate
|
|
0
|
%
|
(7)
On September 29,
2009, Silicon Valley Bank exercised 151,515 warrants to purchase common stock
via a cashless exercise resulting in the Company issuing 35,821 shares of
common stock.
36
Table
of Contents
Note N.
Segment Disclosures
The Companys
organizational structure is based on strategic business units that perform
services and offer various products to the principal markets in which the
Companys products are sold. These business units equate to two reportable
segments: Applied Technology and Renewable Energy Solutions. Applied Technology
is run through the Companys subsidiary, Satcon Applied Technology, Inc.,
and Renewable Energy Solutions is run through the Companys subsidiary, Satcon
Power Systems, Canada, Ltd. The summary of continuing operations by operating
segment below has been adjusted due to the sale of the Power Systems US and
Electronics divisions, each of which was previously reported as its own
reportable segment, and no longer reflects the information for either of these
two segments.
Applied Technology
performs research and development services in collaboration with third parties.
Renewable Energy Solutions specializes in the engineering and manufacturing of
power systems. The Companys principal operations and markets are located in
the United States.
The accounting
policies of each of the segments are the same as those described in the summary
of significant accounting policies. The Company evaluates performance based on
revenue and profit and loss from operations, including amortization of
intangibles. Common costs not directly attributable to a particular segment are
included in the corporate segment. These costs include corporate costs such as
executive officer compensation, engineering, facility costs, legal, audit and
tax and other professional fees.
The following is a
summary of the Companys operations by operating segment:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
Applied Technology:
|
|
|
|
|
|
|
|
|
|
Funded research and development and other revenue
|
|
$
|
1,637,668
|
|
$
|
1,301,362
|
|
$
|
4,682,466
|
|
$
|
6,292,490
|
|
Income (loss) from operations
|
|
$
|
45,303
|
|
$
|
(605,743
|
)
|
$
|
(192,890
|
)
|
$
|
(1,092,007
|
)
|
|
|
|
|
|
|
|
|
|
|
Renewable Energy Solutions:
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
10,040,941
|
|
$
|
17,215,392
|
|
$
|
31,048,409
|
|
$
|
36,947,201
|
|
Loss from operations
|
|
$
|
(4,123,495
|
)
|
$
|
(167,869
|
)
|
$
|
(9,849,242
|
)
|
$
|
(4,375,326
|
)
|
|
|
|
|
|
|
|
|
|
|
Corporate:
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(3,222,130
|
)
|
$
|
(2,543,648
|
)
|
$
|
(9,411,045
|
)
|
$
|
(5,436,030
|
)
|
Consolidated:
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
10,040,941
|
|
$
|
17,215,392
|
|
$
|
31,048,409
|
|
$
|
36,947,201
|
|
Funded research and development and other revenue
|
|
$
|
1,637,668
|
|
1,301,362
|
|
4,682,466
|
|
6,292,490
|
|
Total revenue
|
|
$
|
11,678,609
|
|
$
|
18,516,754
|
|
$
|
35,730,875
|
|
$
|
43,239,691
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
$
|
(7,300,322
|
)
|
$
|
(3,317,260
|
)
|
$
|
(19,453,177
|
)
|
$
|
(10,903,363
|
)
|
Change in fair value of warrants liabilities
|
|
(305,289
|
)
|
2,041,697
|
|
(3,899,623
|
)
|
(822,501
|
)
|
Other (loss) income
|
|
384,261
|
|
57,734
|
|
(241,329
|
)
|
62,047
|
|
Interest income
|
|
2,956
|
|
56,872
|
|
8,523
|
|
197,143
|
|
Interest expense
|
|
(38,919
|
)
|
(98,139
|
)
|
(259,103
|
)
|
(241,876
|
)
|
Net loss from continuing operations
|
|
$
|
(7,257,313
|
)
|
$
|
(1,259,096
|
)
|
$
|
(23,844,709
|
)
|
$
|
(11,708,550
|
)
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net
|
|
$
|
|
|
$
|
(990,434
|
)
|
$
|
|
|
$
|
(1,957,837
|
)
|
Gain
on sale of discontinued operations
|
|
$
|
|
|
327,798
|
|
$
|
|
|
327,798
|
|
Net loss
|
|
$
|
(7,257,313
|
)
|
$
|
(1,921,732
|
)
|
$
|
(23,844,709
|
)
|
$
|
(13,338,589
|
)
|
37
Table of Contents
Common assets not
directly attributable to a particular segment are included in the Corporate
segment. These assets include cash and cash equivalents, prepaid and other
corporate assets. The following is a
summary of the Companys assets by operating segment:
|
|
October 3,
2009
|
|
December 31,
2008
|
|
Applied
Technology:
|
|
|
|
|
|
Segment
assets
|
|
$
|
2,260,238
|
|
$
|
2,622,534
|
|
Renewable
Energy Solutions
|
|
|
|
|
|
Segment
assets
|
|
22,722,218
|
|
24,462,978
|
|
Corporate:
|
|
|
|
|
|
Segment
assets
|
|
17,208,373
|
|
9,811,763
|
|
Total
assets
|
|
$
|
42,190,829
|
|
$
|
36,897,275
|
|
The Company
operates and markets its services and products on a worldwide basis with its
principal markets as follows:
Revenue by geographic region based on location of customer:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
October 3,
2009
|
|
September 27,
2008
|
|
October 3,
2009
|
|
September 27,
2008
|
|
United States
|
|
$
|
11,029,431
|
|
$
|
14,325,248
|
|
$
|
30,132,981
|
|
$
|
37,124,871
|
|
Rest of world
|
|
649,178
|
|
4,191,506
|
|
5,597,894
|
|
6,114,820
|
|
Total revenue
|
|
$
|
11,678,609
|
|
$
|
18,516,754
|
|
$
|
35,730,875
|
|
$
|
43,239,691
|
|
|
|
October 3,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
Long-lived
assets by geographic region based on location of operations:
|
|
|
|
|
|
United
States
|
|
$
|
819,515
|
|
$
|
383,969
|
|
Rest
of world
|
|
2,229,491
|
|
1,580,999
|
|
Total
long-lived assets
|
|
$
|
3,049,006
|
|
$
|
1,964,968
|
|
O.
RESTRUCTURING COSTS
In June 2008, the Company began its restructuring efforts by
eliminating the position of divisional presidents in its Applied Technology and
Renewable Energy Solutions divisions and recorded a restructuring charge of
approximately $0.6 million. During the
third quarter of 2008, the Company consolidated its Applied Technology division
into one facility. As a result, the Company
recorded an additional restructuring charge of approximately $0.5 million. These restructuring charges are comprised of
approximately $0.8 million in employee severance, which will be paid out over
the term of each specific employee agreement and $0.3 million in non-cash stock
based compensation charges associated with the acceleration of certain unvested
stock options and extensions of time to exercise certain stock options from 90
days to 2 years. In addition, during the
fourth quarter of 2008, as part of its restructuring efforts, the Company
elected to terminate the employment contract of its former president. As a result of this election, the Company
recorded a restructuring charge of approximately $0.3 million, which will be
paid in twenty six equal bi-weekly installments beginning after March 1,
2009. As of October 3, 2009 and December 31,
2008, the accrued restructuring balance related to this restructuring was
approximately $0.2 million and $0.6 million, respectively.
In August 2009, the Company eliminated certain positions within its
operations and sales organizations in accordance with a plan of reorganization
approved by the Board of Directors. As a
result of the 2009 restructuring the Company recorded approximately $0.2
million in payroll and related costs for the three and nine months ended October 3,
2009. As of October 3, 2009
approximately $0.2 million remains to be paid to the terminated employees. None of the terminated employees were
required to provide any services to the Company subsequent to their receiving
notification.
38
Table
of Contents
Note P. Recent Accounting Pronouncements
Fair Value Measurements
and Disclosures
.
The Companys nonfinancial assets and liabilities measured at fair value on a
nonrecurring basis include assets and liabilities acquired in connection with a
business combination, goodwill, intangible assets and asset retirement obligations
recognized in connection with final capping, closure and post-closure landfill
obligations. The Company adopted the fair value measurement guidance as
it relates to these assets and liabilities on January 1, 2009. See
Note 12 for disclosures related to fair value measurement of these assets
and liabilities in periods subsequent to their initial measurement.
In April 2009, the
FASB issued additional guidance on fair value measurements and
disclosures. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants under current market conditions. The new guidance
requires an evaluation of whether there has been a significant decrease in the
volume and level of activity for the asset or liability in relation to normal
market activity for the asset or liability. If there has been a
significant decrease in activity, transactions or quoted prices may not be
indicative of fair value and a significant adjustment may need to be made to
those prices to estimate fair value. Additionally, an entity must
consider whether the observed transaction was orderly (that is, not distressed
or forced). If the transaction was orderly, the obtained price can be
considered a relevant, observable input for determining fair value. If
the transaction is not orderly, other valuation techniques must be used when
estimating fair value. This guidance, which was applied by the Company
prospectively as of June 30, 2009, did not impact the Companys results of
operations, cash flows or financial position for the three and nine month
periods ended October 3, 2009.
In August 2009, the
FASB issued additional guidance on the fair value measurement of
liabilities. The new guidance provides clarification on the measurement
and reporting of a liability in circumstances in which a quoted price in an
active market for the identical liability is not available. This guidance
is effective for the first reporting period beginning after August 2009.
Intangible Assets
. In April 2008, the FASB
issued guidance on determining
the
useful life of intangible assets. The intent of the guidance is to
improve the consistency between the useful life of a recognized intangible
asset and the period of expected cash flows used to measure the fair value of
the asset. This guidance requires an entity to disclose information for a
recognized intangible asset that enables users of the financial statements to
assess the extent to which the expected future cash flows associated with the
asset are affected by the entitys intent and/or ability to renew or extend the
arrangement. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company adopted this guidance on January 1,
2009. The adoption of this guidance did not have a material impact on the
Companys financial position or results of operations.
Financial Instruments
.
In April 2009, the FASB issued
guidance to require disclosures about fair value of financial instruments in
interim financial statements, in addition to the annual financial statements as
already required. This guidance, which was applied by the Company
prospectively as of June 30, 2009, did not have a material impact on the
Companys results of operations, cash flows or financial position. For financial assets and liabilities adopted
see Note C Significant Accounting
Policies and Basis of Presentation, Fair Value Measurements.
In April 2009, the FASB issued guidance to
required disclosure about fair value of financial instruments, which amends
previous guidance to require disclosures about fair value of financial
instruments in interim as well as annual financial statements. This guidance is
effective for periods ending after June 15, 2009. Accordingly, the Company
adopted this guidance on March 29, 2009. The adoption of this guidance did
not have a material impact on our consolidated financial position, results of
operations or cash flows. However, the adoption of the guidance resulted in additional disclosures with
respect to the fair value of the Companys financial instruments. See Note C Significant Accounting Policies and Basis of Presentation, Fair Value
Measurements.
Derivatives and
Hedging
. On
Jamuary 1, 2009, the Company adopted new disclosure requirements for derivative
instruments and hedging
activities. The new disclosure requirements will provide users of
financial statements with an enhanced understanding of: (1) how and
why an entity uses derivative instruments; (2) how derivative instruments
and related hedged items are accounted for; and (3) how derivative
instruments and related hedged items affect an entitys financial position,
financial performance and cash flows. This guidance requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative instruments. This statement applies to all entities and all
derivative instruments. This guidance is effective for financial
statements issued for fiscal years and interim periods beginning after November 15,
2008.
Subsequent Events
. In May 2009, the FASB issued
guidance on subsequent events which establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. This
guidance is based on the same principles as currently exist in auditing
standards and was issued by the FASB to include accounting guidance that
originated as auditing standards into the body of authoritative literature
issued by the FASB. The standard addresses the period after the balance
sheet date during which management of a reporting entity should evaluate
39
Table
of Contents
events or transactions
that may occur for potential recognition or disclosure in the financial
statements, the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements
and the disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. The Company adopted this
guidance during the quarterly period ended June 30, 2009. For the
quarter ended September 30, 2009, the Company evaluated subsequent events
through November 3, 2009, which was
the
date the accompanying financial statements were available to be issued.
Item
2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statement
You should read the
following discussion and analysis in conjunction with our consolidated
financial statements and notes in Item 1 of this report and with our audited
consolidated financial statements and notes included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2008.
In addition to the
historical information contained in this report, this report contains or
incorporates by reference forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. You can identify
these forward-looking statements by our use of the words believes, anticipates,
plans, expects, may, will, intends, estimates, and similar expressions,
whether in the negative or in the affirmative.
Such forward-looking statements includes those related to expected
revenue growth, our ability to continue to make interest and principal payments
on our Notes in shares of our common stock, our ability to achieve our business
plan, and our ability to reduce costs in the future. Although we believe that these
forward-looking statements reasonably reflect our plans, intentions and
expectations, these forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially. We caution that these statements are
qualified by various factors that may affect future results, including the
following: business conditions within the distributed power, power quality,
aerospace, transportation, industrial, utility, telecommunications, silicon
wafer manufacturing, factory automation, aircraft and automotive industries and
the world economies as a whole; technology developments and contract research
and development for both the government and commercial sectors; the ability of
our new products in penetrating the distributed power, power quality,
aerospace, transportation, industrial, utility, telecommunications, silicon
wafer manufacturing, factory automation, aircraft and automotive markets. This report should be read in conjunction
with our Annual Report on Form 10-K for the fiscal year ended December 31,
2008, including particularly Part I, Item 1A, Risk Factors.
Forward-looking
statements contained in this Quarterly Report speak only as of the date of this
report. Subsequent events or
circumstances occurring after such date may render these statements incomplete
or out of date. We undertake no obligation
and express disclaim any duty to update such statements.
Overview
(Executive Summary)
Satcon Technology
Corporation (Satcon or Company) is a leading clean energy technology
provider of utility grade power solutions for the renewable and distributed
energy markets. We deliver power
conversion solutions and system design services for large-scale renewable
energy plants. Our products are utilized by businesses and utility companies to
efficiently convert renewable energy sources into stable and reliable
electrical power.
Our PowerGate® Plus suite of photovoltaic and fuel cell
power inverters, which are sold through the Companys Renewable Energy
Solutions division, offer rugged and
reliable solutions that enhance the total output and power production of the
solar installation. We also offer
system design services and solutions for
management, monitoring, and performance measurement to maximize capital
investment and improve overall quality and performance over the entire lifespan
of the installation.
In addition to our core power conditioning solutions,
we also develop,
design
and build power conversion electronics, power management and distribution
systems for a variety of defense and commercial applications
through our Applied Technology division.
Critical
Accounting Policies and Significant Judgments and Estimates
Our discussion and
analysis of our financial condition and results of our operations are based on
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these consolidated financial statements requires management
to make significant estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported revenue
and expenses during the reporting periods. On an ongoing basis, management
evaluates its estimates and
40
Table
of Contents
judgments, including
those related to revenue recognition, receivable reserves, inventory reserves,
goodwill and intangible assets, contract losses and income taxes. Management
bases its estimates on historical experience and on various other factors that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. Our
critical accounting estimates were discussed with our Audit Committee. There have been no material changes from the Critical
Accounting Policies and Significant Judgments and Estimates previously
disclosed in Part II, Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations
of our Annual Report on Form 10-K for the fiscal year ending December 31,
2008.
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, total estimated contact revenue is allocated to each element based
on the relative fair value of each element provided. The amount of revenue allocated to each
element is limited to the amount that is not contingent upon the delivery of
another element in the future. Revenue
is recognized on each element as described above.
We perform funded
research and development and product development for commercial companies and
government agencies under both cost reimbursement and fixed price contracts.
Cost reimbursement contracts provide for the reimbursement of allowable costs
and, in some situations, the payment of a fee. These contracts may contain
incentive clauses providing for increases or decreases in the fee depending on
how costs compare with a budget. On fixed price contracts, revenue is generally
recognized on the percentage of completion method based upon the proportion of
costs incurred to the total estimated costs for the contract. Revenue from
reimbursement contracts is recognized as services are performed. In each type
of contract, we receive periodic progress payments or payment upon reaching
interim milestones and retain the rights to the intellectual property developed
in government contracts. All payments to us for work performed on contracts
with agencies of the U.S. government are subject to audit and adjustment by the
Defense Contract Audit Agency. Adjustments are recognized in the period made.
The Defense Contract Audit Agency has agreed-upon the final indirect cost rates
for the fiscal year ended December 31, 2005. When the current estimates of
total contract revenue and contract costs for product development contracts
indicate a loss, a provision for the entire loss on the contract is recorded.
As of October 3, 2009 and December 31, 2008, we have accrued
approximately $0 and $1.1 million, respectively, for anticipated contract
losses on commercial contracts.
Cost of product
revenue includes material, labor and overhead. Costs incurred in connection
with funded research and development and other revenue arrangements are
included in funded research and development and other revenue expenses.
Deferred revenue
consists of payments received from customers in advance of services performed,
product shipped or installation completed.
Unbilled contract
costs and fees represent revenue recognized in excess of amounts billed due to
contractual provisions or deferred costs that have not yet been recognized as
revenue or billed to the customer.
Accounts Receivable
Accounts
receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on a specific analysis of accounts in the receivable
portfolio and historical write-off experience. While management believes the
allowance to be adequate, if the financial condition of our customers were to
deteriorate, resulting in impairment of their ability to make payments,
additional allowances may be required.
41
Table
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Inventory
We value our
inventory at the lower of actual cost to purchase and/or manufacture the
inventory or the current estimated market value of the inventory. We
periodically review inventory quantities on hand and record a provision for
excess and/or obsolete inventory based primarily on our estimated forecast of
product demand, as well as based on historical usage. Due to the custom and
specific nature of certain of our products, demand and usage for products and
materials can fluctuate significantly. A significant decrease in demand for our
products could result in a short-term increase in the cost of inventory
purchases and an increase of excess inventory quantities on hand. In addition,
our industry is characterized by rapid technological change, frequent new
product development, and rapid product obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand. Therefore,
although we make every effort to ensure the accuracy of our forecasts of future
product demand, any significant unanticipated changes in demand or
technological developments could have a significant impact on the value of our
inventory and our reported operating results.
Warranty
We offer warranty
coverage for our products for periods typically ranging from 1 to 5 years after
shipment. We estimate the anticipated costs of repairing products under
warranty based on the historical or expected cost of the repairs and expected
failure rates. The assumptions used to estimate warranty accruals are
reevaluated quarterly, at a minimum, in light of actual experience and, when
appropriate, the accruals or the accrual percentage is adjusted based on
specific estimates of project repair costs and quantity of product returns. Our
determination of the appropriate level of warranty accrual is based on
estimates of the percentage of units affected and the repair costs. Estimated
warranty costs are recorded at the time of sale of the related product, and are
recorded within cost of sales in the consolidated statements of operations.
Warrant
Liabilities
We determined the
fair values of our warrant liabilities using valuation models we consider to be
appropriate. Our stock price has the most significant influence on the fair
value of the warrants. An increase in our common stock price would cause the
fair values of warrants to increase, because the exercise prices of such
instruments are fixed and result in a charge to our statement of operations. A
decrease in our stock price would likewise cause the fair value of the warrants
to decrease and result in a credit to our statement of operations. As a result of the modification made to
certain provisions of the warrants issued in connection with the Series C
Preferred Stock financing, we will no longer be required to mark such warrants
to fair value each quarter. See Note C.
Significant Accounting Policies and Basis of Consolidation Warrant Liabilities
for a description of the modifications made to such warrants.
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 $48.9 million as of December 31,
2008, due to uncertainties related to our ability to utilize these assets. The
valuation allowance is based on our estimates of taxable income by jurisdiction
in which we operate and the period over which our deferred tax assets will be
recoverable. In the event that actual results differ from these estimates or we
adjust these estimates in future periods we may need to adjust our valuation
allowance which could materially impact our financial position and results of
operations.
We account for
income taxes utilizing asset and liability method for accounting and reporting
for income taxes. Under this method, deferred tax assets and deferred tax
liabilities are recognized based on temporary differences between the financial
reporting and income tax basis of assets and liabilities using statutory rates.
In addition, the Company is required to establish a valuation allowance against
net deferred tax assets if, based upon the available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
The
tax years 2003 through 2008 remain open to examination by major taxing
jurisdictions to which we are subject, which are primarily in the United
States, as carry forward attributes generated in years past may still be
adjusted upon examination by the
42
Table
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Internal
Revenue Service or state tax authorities if they are or will be used in a
future period. We are currently not
under examination by the Internal Revenue Service or any other jurisdiction for
any tax years. We did not recognize any
interest and penalties associated with unrecognized tax benefits in the
accompanying financial statements.
We would record any such interest and
penalties as a component of interest expense.
We do not expect any material
changes to the unrecognized benefits within 12 months of the reporting date.
Redeemable
Convertible Series B Preferred Stock
We account for our Series B Preferred Stock and associated warrants
in accordance with
in
accordance with ASC 470-20-30,
allocating the proceeds received net of transaction costs based on the
relative fair value of the redeemable convertible Series B Preferred Stock
and the warrants issued to the Investors, and then to any beneficial conversion
rights contained in the convertible redeemable preferred securities. We determined the initial value of the Series B
Preferred Stock and investor warrants using valuation models we consider to be
appropriate. The Series B Preferred
Stock is classified within the liability section of our balance sheet. To the extent that the Series B
Preferred Stock is subject to a remeasurement event, or is otherwise modified,
the Series B Preferred Stock will be reclassified to temporary equity.
Redeemable
Convertible Series C Preferred Stock
We
account for our issuance of Series C Preferred Stock and associated
warrants in accordance with
in accordance with ASC 470-20-30
,
allocating the proceeds received net of transaction costs based on the relative
fair value of the redeemable convertible Series C Preferred Stock and the
warrants issued to the Investors, and then to any beneficial conversion rights
contained in the convertible redeemable preferred securities and classifying
the Series C Preferred Stock as temporary equity on the balance sheet
between the captions for liabilities and permanent shareholders equity. We determined the initial value of the Series C
Preferred Stock and investor warrants using valuation models we consider to be
appropriate.
The re-pricing of
the exercise price of the first tranche warrants from $1.44 to $1.25, as
described in the footnotes to the financial statements, was treated as a
cancellation of the original warrants issued on November 8, 2007 and a
re-issuance of new warrants on December 20, 2007. The difference in fair value of the warrant
was included in the allocation of net proceeds associated with the second
closing of the Series C Preferred Stock on December 20, 2007. We treated this as a deemed dividend on the Series C
Preferred Stock. We are using the
effective interest method to accrete the carrying value of the Series C
Preferred stock through the earliest possible redemption date (November 8,
2011), at which time the value of the Series C Preferred Stock would be
$30.0 million, 120% of its face value.
Recent Accounting Pronouncements
See
Note P of our Notes to Consolidated Financial Statements for information
regarding recently issued accounting pronouncements.
43
Table
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Results of Operations
Three Months Ended October 3,
2009 (2009) Compared to Three Months Ended September 27, 2008 (2008)
Revenue.
Total revenue for 2009 decreased approximately $6.8 million, or 37%,
from $18.5 million in 2008 to $11.7 million in 2009.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
October 3,
|
|
September 27,
|
|
|
|
|
|
(Amounts
in Millions)
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Product Revenue
|
|
|
|
|
|
|
|
|
|
Alternative Energy Products
|
|
$
|
9.9
|
|
$
|
16.4
|
|
$
|
(6.5
|
)
|
(39
|
)%
|
Other Legacy
|
|
0.1
|
|
0.8
|
|
(0.7
|
)
|
(84
|
)%
|
Total Product Revenue
|
|
$
|
10.0
|
|
$
|
17.2
|
|
$
|
(7.2
|
)
|
(42
|
)%
|
Funded Research and Development and Other Revenue
|
|
$
|
1.6
|
|
$
|
1.3
|
|
$
|
0.3
|
|
25
|
%
|
Total Revenue
|
|
$
|
11.7
|
|
$
|
18.5
|
|
$
|
(6.8
|
)
|
(37
|
)%
|
Alternative Energy
Product revenue decreased by $6.4 million, or 39%, from $16.4 million in
2008 to $10.0 million in 2009 due to the challenging macroeconomic market
conditions and tough credit markets which affect our customers ability to fund
large scale renewable energy projects.
Funded research and
development and other revenue increased approximately $0.3 million, or 25%,
from approximately $1.3 million in 2008 to approximately $1.6 million in
2009. The increase is due to increases in revenue from government contracts
during the period as compared to 2008.
Gross
Margin.
Total
Company gross margin decreased from approximately 19% in 2008 to 1% in
2009. The decrease in gross margin over
the period of a year ago is due to lower volumes during the period and
transition costs associated with expanding our manufacturing and supply chain
internationally while maintaining existing capacity in North America. These cost reduction efforts are crucial to
our long term competitiveness, and were partially offset by material cost
reductions and labor efficiency improvements in both factories.
Gross margins on
funded research and development and other revenue increased from approximately
12% in 2008 to approximately 30% in 2009 due to a favorable product mix and
higher labor efficiency as compared to that of 2008.
Research
and development expenses.
We expended approximately $2.2
million on research and development in 2009 compared with $1.6
million spent in 2008. The increase
in spending during 2009 was driven by a planned increase in costs associated with
certification of our new products and continued new product development,
including increases in our technical staffing.
These additional resources are developing the new products, features and
customer solutions which we believe will allow us to take advantage of both
short-term and long-term market opportunities.
This investment in research and development is critical to both our
current and future success and we anticipate this level of investment to
continue.
Selling,
general and administrative expenses.
Selling, general and administrative
expenses increased by approximately $0.3 million, or 6.5%, from
$4.6 million in 2008 to $4.9 million in 2009. The increase was associated with a $0.6
million increase in sales and marketing costs directly related to international
business development expansion into Europe and Asia along with increased
outbound marketing efforts in 2009 compared to 2008, offset by decreased
corporate costs of $0.3 million which included lower legal costs.
Restructuring
costs.
In August 2009,
we eliminated certain positions within our operations and sales organizations
in accordance with a plan of reorganization approved by the Board of
Directors. As a result of the 2009
restructuring we recorded approximately $0.2 million in payroll and related
costs for the three months ended October 3, 2009. As of October 3, 2009 approximately $0
.
2 million
remains to be paid to the terminated employees.
None of the terminated employees were required to provide any services
subsequent to their receiving notification.
In 2008, we
formalized the release of our Vice President of Finance and initiated and
completed the sale of the Electronics and
44
Table
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Power Systems US
operating divisions. As a result of
these changes and the sale of the divisions in 2008, we accrued approximately
$0.5 million in salary-related costs, costs associated with the modification of
existing options held by certain of the severed employees and relocation
costs. Other costs associated with the
restructuring that are related to the Electronics and Power Systems US
divisions were recorded in their respective divisions and are included in the
loss from discontinued operations for the periods presented, as discussed
below, in loss from discontinued operations.
Amortization
of intangibles.
Amortization of intangibles remained flat at
$0.1 million in 2009 and 2008.
Change in
fair value of warrant liabilities
. The change in
fair value of the warrants for 2009 was a charge of approximately $0.3 million
related to the change in valuation of our Warrant As and Warrant Cs. The change in fair value of the warrants for
2008 was a credit of approximately $2.0 million.
Other
income (expense).
Other income
was approximately $0.4 million for 2009 compared to other income of
approximately $0.1 million for 2008.
Other expense for 2009 consists primarily of
foreign currency transaction gains and fees paid related to consulting services for
the valuation of our warrant instruments as well as other expenses not related
to ongoing operations. Other expense for
2008 consists primarily of foreign currency transaction gains and fees paid related to consulting services for
the valuation of our warrant instruments as well as other expenses not related
to ongoing operations.
Interest
income
. Interest income decreased from
$0.1 million in
2008 to $0 in 2009.
Interest
expense.
Interest expense remained flat at $0.1
million in 2009 and 2008. Interest
expense for 2009 includes approximately $8,000 of non-cash dividends on our Series B
Preferred Stock, which we have elected to pay in shares of our common stock,
and $31,000 in interest related our line of credit during the period. Interest expense for 2008 includes charges
related to non-cash dividends on our Series B Preferred Stock, which we
have elected to pay in shares of our common stock and interest on outstanding
amounts under our line of credit during the period.
Loss from
discontinued operations
. Loss from discontinued
operations represents the results of operations of our Power Systems US and
Electronics divisions which were sold as of September 26, 2008. The loss from discontinued operations for 2008
was approximately $1.0 million. See Note
D Discontinued Operations for more information related to the sale of these
divisions.
Gain on
sale of discontinued operations
. As a result
of the sale of the Power Systems US and Electronics divisions in 2008, we
recorded a gain of approximately $0.3 million. See Note D Discontinued
Operations for more information related to the sale of these divisions and the
composition of the net gain calculated for each division.
45
Table
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Nine Months Ended October 3,
2009 (2009) Compared to Nine Months Ended September 27, 2008 (2008)
Revenue.
Total revenue for 2009 decreased approximately $7.5 million, or 17%,
from $43.2 million in 2008 to $35.7 million in 2009.
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
October 3,
|
|
September 27,
|
|
|
|
|
|
(Amounts
in Millions)
|
|
2009
|
|
2008
|
|
$ Change
|
|
% Change
|
|
Product Revenue
|
|
|
|
|
|
|
|
|
|
Alternative Energy Products
|
|
$
|
26.4
|
|
$
|
34.9
|
|
$
|
(8.5
|
)
|
(24
|
)%
|
Other Legacy
|
|
4.6
|
|
2.0
|
|
2.6
|
|
126
|
%
|
Total Product Revenue
|
|
$
|
31.0
|
|
$
|
36.9
|
|
$
|
5.9
|
|
(16
|
)%
|
Funded Research and Development and other revenue
|
|
$
|
4.7
|
|
$
|
6.3
|
|
$
|
(1.6
|
)
|
(26
|
)%
|
Total Revenue
|
|
$
|
35.7
|
|
$
|
43.2
|
|
$
|
(7.5
|
)
|
(17
|
)%
|
Alternative Energy
Product revenue decreased by $8.5 million, or 24%, from $34.9 million in
2008 to $26.4 million in 2009 due to the overall continuing macroeconomic
market conditions. The decrease in Alternative Energy Products was offset by
the recognition of approximately $4.6 million related to the sale of frequency
converters, classified as Other Legacy product revenue, in 2009, for which
the recognition of revenue had been deferred until the product was accepted by
the customer, which was obtained during 2009.
Funded research and
development and other revenue decreased $1.6 million, or 26%, from
$6.3 million in 2008 to $4.7 million in 2009. The decrease is due to the
delivery of several Rotary Ride Through devices in 2008 which accounted for
approximately $2.7 million of the funded research and development and other
revenue for 2008 offset by increases in revenue from commercial customers of
$0.1 million and an increase in government contracts during the period of
approximately $1.0 million.
Gross Margin.
Total Company
gross margin decreased from 13.6% in 2008 to 4.3% in 2009. The decrease in gross margin over the period
of a year ago is due to lower volumes in 2009,
and increased transition costs associated with expanding our
manufacturing capacity and supply chain capabilities. In addition, the $4.2 million of deferred
frequency converter revenues recognized during 2009 had no gross margin as the
amount recognized as revenue equaled the related costs recognized for the
period.
Gross margins on funded
research and development and other revenue increased from approximately 23% in
2008 to approximately 25% in 2009. The
increase is due to a favorable mix of business during the period.
Research
and development expenses.
We expended approximately $6.3
million on research and development in 2009 compared with $3.6
million spent in 2008. The increase
in spending during 2009 was driven by a planned increase in costs associated
with certification of our new products and continued new product development,
including increases in our technical staffing.
These additional resources are developing the new products, features and
customer solutions which we believe will allow us to take advantage of both
short-term and long-term market opportunities.
This investment in research and development is critical to both our
current and future success and we anticipate this level of investment to
continue.
Selling,
general and administrative expenses.
Selling, general and administrative
expenses increased by approximately $2.4 million, or 20%, from
$11.8 million in 2008 to $14.2 million in 2009. Approximately $0.5 million of the increase is
directly attributable to compensation costs related to the issuance of stock
options to our employees and directors charged to operations. Approximately
$2.6 million of the increase was due to the higher sales and marketing
costs related to international business
development expansion into Europe and Asia, company re-branding and our increased
outbound marketing efforts in 2009 compared to 2008. This was partially offset by a $0.7 million
decrease in general corporate costs.
Restructuring
costs.
In August 2009,
we eliminated certain positions within our operations and sales organizations
in accordance with a plan of reorganization approved by the Board of
Directors. As a result of the 2009
restructuring we recorded approximately $0.2 million in payroll and related
costs for the nine months ended October 3, 2009. As of October 3, 2009 approximately $0.2
million remains to be paid to the terminated employees. None of the terminated employees were
required to provide any services subsequent to their receiving notification.
In 2008, we
formalized the release of our Vice President of Finance and initiated and
completed the sale of the Electronics and
46
Table
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Power Systems US
operating divisions. As a result of
these changes and the sale of the divisions in 2008, we accrued approximately
$0.5 million in salary-related costs, costs associated with the modification of
existing options held by certain of the severed employees and relocation
costs. Other costs associated with the
restructuring that are related to the Electronics and Power Systems US
divisions were recorded in their respective divisions and are included in the
loss from discontinued operations for the periods presented, as discussed
below, in loss from discontinued operations.
Amortization
of intangibles.
Amortization of intangibles remained flat at
$0.2 million in 2009 and 2008.
Change in
fair value of warrant liabilities
. The change in
fair value of the warrants for 2009 was a charge of approximately $3.9 million.
Approximately $0.7 million related to the change in valuation of our Warrant As
and Warrant Cs. The remaining $3.2
million charge related to our Series C Preferred Stock warrants and their
change in fair value which was due to our adoption during the period of ASC 815-10-15
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys
Own Stock
. As
a result of this adoption, warrants to purchase 19,799,022 shares of our common
stock, originally classified as equity, were reclassified to warrant
liabilities and were required to be fair valued moving forward. The change in fair value of the warrants for
2008 was a charge of approximately $0.8 million related solely to the Warrant
As and Warrant Cs. In July 2009
warrants to purchase 19,799,022 shares of our common stock were modified
resulting in these warrants being classified as equity and therefore not
requiring any fair value adjustments in the future. See Note C. Significant Accounting Policies
and Basis of Consolidation Warrant Liabilities for a description of the
modifications made to such warrants.
Other
income (expense).
Other expense
was approximately $0.2 million for 2009 compared to other income of
approximately $0.1 million for 2008.
Other expense for 2009 consists primarily of approximately $0.5 million
related to the issuance of warrants to purchase 380,000 shares of common stock
to our Series C Preferred Stock holders for modifying the anti-dilution
provisions of their existing warrants along with $0.1 million in fees paid related
to consulting services for the valuation of our warrant instruments as well as
other expenses not related to ongoing operations, offset by approximately $0.4
million related to foreign exchange impact on inter-company balances. Other income, net for 2008 consists primarily
of approximately $0.2 million related to foreign exchange impact on
inter-company balances offset by consulting services related to the valuation
of our Convertible Notes and other expenses not related to ongoing operations.
Interest
income
. Interest income decreased from
$0.2 million in
2008 to $0 in 2009. This is due to lower
interest rates as compared to the prior period.
Interest
expense.
Interest expense remained consistent at
approximately $0.2 million in 2009 as compared to approximately $0.2 million in
2008. Interest expense for 2009 includes
approximately $0.1 million of non-cash dividends on our Series B Preferred
Stock, which we have elected to pay in shares of our common stock, and
approximately $110,000 in interest related our line of credit during the period
and $55,000 of expense related to the reduction in conversion price related to
our Series B Preferred stock.
Interest expense in 2008 includes approximately $0.1 million of non-cash
dividends on our Series B Preferred Stock, which we have elected to pay in
shares of our common stock, and interest on outstanding amounts under our line
of credit during the period.
Loss from
discontinued operations
. Loss from discontinued
operations represents the results of operations of our Power Systems US and
Electronics divisions which were sold as of September 26, 2008. The loss from discontinued operations for
2008 was approximately $2.0 million. See
Note D Discontinued Operations for more information related to the sale of
these divisions.
Gain on
sale of discontinued operations
. As a result
of the sale of the Power Systems US and Electronics divisions, we recorded a
gain of approximately $0.3 million. See Note D Discontinued Operations for
more information related to the sale of these divisions and the composition of
the net gain calculated for each division.
Deferred Revenue
.
Deferred revenue was approximately $5.7 million at October 3, 2009
as compared to $6.7 million at December 31, 2008, a decrease of approximately
$1.0 million. We record deferred revenue
(i) when a customer pays in advance or (ii) when provisions for
revenue recognition on items shipped have not been achieved or the items have
not yet been received by the customer due to shipping terms such as FOB
destination.
Currently deferred revenue is composed of $1.7 million of current
deferred product revenue and $4.0 million of long-term deferred warranty
revenue. During 2009 we recognized
approximately $4.1 million upon the completion of a contract related to a
project with the Navy for which all units had been delivered during the first
quarter of 2008. For items that have
shipped and are awaiting recognition of revenue their costs are included in our
finished goods inventory value at the end of the period.
47
Table
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Liquidity
and Capital Resources
As of October 3,
2009, we had approximately $16.3 million of cash, of which approximately
$0.1 million was restricted.
Based upon our current
working capital position, current operating plans and expected business
conditions, we believe that our current cash, as well as the availability
from our line of credit with Silicon Valley Bank, will be adequate to fund
our operations through December 31, 2009. Beyond 2009, we
expect to fund our working capital needs and other commitments primarily
through our operating cash flow, which we expect to improve as our product
costs continue to decrease and as our unit volumes grow. We also expect to rely
on our credit facility to fund a portion of our capital needs and other
commitments. In addition, on June 15,
2009 we closed a public offering of 17,891,346 shares of our common stock, and
we received proceeds, net of underwriters fees and other costs, of
approximately $21.5 million.
Our funding plans for our
working capital needs and other commitments may be adversely impacted if we
fail to realize our underlying assumed levels of revenues and expenses, or
if we fail to remain in compliance with the covenants of our bank line.
If either of those events occur, we may need to raise
additional funds in order to sustain operations by selling equity or taking
other actions to conserve our cash position, which could include selling of
certain assets, delaying capital expenditures and incurring additional
indebtedness, subject to the restrictions in the preferred stock financing with
the Investors and in the credit facility with Silicon Valley Bank. Such actions
would likely require the consent of the Investors and/or Silicon Valley Bank,
and there can be no assurance that such consents would be given. Furthermore,
there can be no assurance that we will be able to raise such funds if they are
required.
If additional
funds are raised in the future through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders will be reduced
and our stockholders will experience additional dilution. The terms of
additional funding may also limit our operating and financial flexibility.
There can be no assurance that additional financing of any kind will be
available to us on terms acceptable to us, or at all. Failure to obtain future
funding when needed or on acceptable terms would materially, adversely affect
our results of operations.
We have incurred
significant costs to develop our technologies and products. These costs have
exceeded total revenue. As a result, we have incurred losses in each of the
past five years. As of October 3, 2009, we had an accumulated deficit of
approximately $225.6 million. Since
inception, we have financed our operations and met our capital expenditure
requirements primarily through the sale of private equity securities and
convertible debt, public security offerings, borrowings under our lines of
credit and capital equipment leases.
As of October 3,
2009, our cash and cash equivalents were $16.3 million, including restricted
cash and cash equivalents of $0.1 million; this represents an increase in
our cash and cash equivalents of approximately $6.3 million from the $10.0
million on hand at December 31, 2008. Cash used in operating activities
for the nine months ended October 3, 2009 was $14.3 million as compared to
$7.7 million for the nine months ended September 27, 2008. Cash used
in operating activities during the nine months ended October 3, 2009 was
primarily attributable to the net loss of approximately $23.8 million offset by
non-cash items such as the change in the fair value of our warrants,
depreciation and amortization, deferred revenue, non-cash compensation and
consulting expense, non-cash interest expense and decreases in working capital.
Cash used in
investing activities during the nine months ended October 3, 2009 was $1.8
million as compared to cash provided by investing activities of $4.1 million
for the nine months ended September 27, 2008. Cash provided by investing activities from
continuing operations during 2008 was a result of the sale of our Electronics
and Power System US divisions in September 2008, and capital expenditures
during each of the respective periods.
Cash provided by
financing activities for the nine months ended October 3, 2009 was
approximately $22.9 million as compared to cash provided by financing
activities of $3.9 million for the nine months ended September 27,
2008. Net cash provided by financing
activities during 2009 related to the sale of common stock resulting in net
proceeds to us of approximately $21.5 million.
Net cash provided by financing activities during 2008 primarily related
to borrowings under our line of credit of $3.0 million and approximately $1.2
million from the exercise employee stock options and $0.2 million from the
exercise of warrants, offset in part by approximately $0.6 million paid to
warrant holders exercising their redemption right during the period and
payments on our capital lease obligations.
Cash used in
discontinued operations was $0.0 for 2009 as compared to $2.1 million for
2008. Net cash used in operating
activities from discontinued operations was $0 in 2009 compared to $1.9 million
in 2008. Net cash used in investing
activities from discontinued operations was $0 in 2009 compared to $0.2 million
in 2008. Net cash used in financing activities
from discontinued operations was $0 in 2009 and 2008.
48
Table
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Payments
Due Under Contractual Obligations
We lease equipment
and office space under non-cancelable capital and operating leases. The future
minimum rental payments as of October 3, 2009 under the capital and
operating leases with non-cancelable terms are included in the table below:
Calendar Years Ending
December 31,
|
|
Capital Leases
|
|
Operating Leases
|
|
|
|
|
|
|
|
2009
|
|
$
|
|
|
$
|
335,314
|
|
2010
|
|
|
|
1,246,183
|
|
2011
|
|
|
|
907,089
|
|
2012
|
|
|
|
386,949
|
|
2013
|
|
|
|
243,525
|
|
Thereafter
|
|
|
|
662,929
|
|
Total
|
|
$
|
|
|
$
|
3,781,989
|
|
Effects
of Inflation
We believe that
inflation and changing prices over the past three years have not had a significant
impact on our net revenue or on our income from continuing operations.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
The following discussion
about our market risks disclosures involves forward-looking statements. Actual
results could differ materially from those discussed in the forward-looking
statements. We are exposed to market risk related to changes in interest rates
and foreign currency exchange rates. We do not use derivative financial
instruments for speculative or trading purposes.
Interest
Rate Risk
We are exposed to market
risk from changes in interest rates primarily through our investing and
financing activities. Interest on outstanding balances under our credit
facility with Silicon Valley Bank accrues at a rate equal to the Banks prime
rate of interest plus 1.0% per annum. Our ability to carry out our business
plan or our ability to finance future working capital requirements may be
impacted if the cost of carrying debt fluctuates to the point where it becomes
a burden on our resources. We invest our
available cash in highly liquid investments, currently in money market funds
with maturities of 90 days or less when acquired.
Foreign
Currency Risk
Nearly all of our sales
outside the United States are priced in US Dollars. If the US Dollar
strengthens versus local currencies, it may result in our products becoming
more expensive in foreign markets. In addition, a significant amount of our
current costs are incurred in foreign currencies, especially the Canadian Dollar.
If the US Dollar weakens versus these local currencies, it may result in an
increase in our cost structure.
49
Table
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Item 4. Controls and
Procedures
(a)
Evaluation of Disclosure Controls and Procedures
.
As required by Rule 13a-15
under the Securities Exchange Act of 1934, as of the end of the period covered
by this report, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer (who is
also currently our interim principal financial officer) of the effectiveness of
our disclosure controls and procedures as of October 3, 2009. Based upon
that evaluation, the Chief Executive Officer, acting as both the principal
executive officer and interim principal financial officer, concluded that our
disclosure controls and procedures are effective as of October 3, 2009.
(b)
Changes in Internal Control Over Financial Reporting
.
There was no
change in our internal control over financial reporting that occurred during
the third quarter of fiscal year 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are
a party to routine litigation and proceedings in the ordinary course of
business. We are not aware of any
current or pending litigation to which we are or may be a party that we believe
could materially adversely affect our results of operations or financial
condition or net cash flows.
Item 1A. Risk Factors.
There have been no
material changes from the risk factors previously disclosed in Part I,
Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal
year ending December 31, 2008, as supplemented by any material changes or
additions to such risk factors disclosed in Part II, Item 1A, Risk
Factors, of any Quarterly Report on Form 10-Q filed subsequent to the
Annual Report on Form 10-K.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
On
September 29, 2009, we issued 35,821 shares of common stock upon the
cashless exercise of warrants to purchase 151,515 shares of common stock, pursuant to Section 3(a)(9) of
the Securities Act of 1933, as amended (the Securities Act).
On
October 3, 2009, as a result of the warrant exercise during the third
quarter and in accordance with a pre-existing contractual agreement with the
investors in our Series C Preferred Stock financing, we issued warrants to
purchase an aggregate 17,911 shares of common stock with an exercise price of
$1.66 per share to such investors, pursuant to an exemption from registration
afforded by Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of
Security Holders
.
Not applicable.
Item 5. Other Information
.
Not applicable.
Item 6. Exhibits.
The exhibits
listed in the Exhibit Index immediately preceding the exhibits are filed
as part of this Quarterly Report on Form 10-Q.
50
Table
of Contents
SIGNATURE
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
|
|
SATCON TECHNOLOGY
CORPORATION
|
Date: November 12,
2009
|
By:
|
|
|
|
|
|
|
/s/ CHARLES S.
RHOADES
|
|
|
Charles S.
Rhoades
|
|
|
President, Chief
Executive Officer and Interim Principal Financial Officer
|
51
Table
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EXHIBIT INDEX
Exhibit
Number
|
|
Exhibit
|
|
|
|
10.1
|
|
Third Loan Modification
Agreement, dated as of September 29, 2009, between Silicon Valley Bank
and the Registrant, Satcon Power Systems, Inc., Satcon Applied
Technology, Inc., Satcon Electronics, Inc., and Satcon Power
Systems Canada Ltd.
|
31.1
|
|
Certification by
Principal Executive Officer and Interim Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1
|
|
Certification Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
52
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