Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2011
Commission File Number 1-11512
SATCON TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
|
|
04-2857552
(IRS Employer Identification No.)
|
|
|
|
25 Drydock Avenue
Boston, Massachusetts
(Address of principal executive offices)
|
|
02210
(Zip Code)
|
(617) 897-2400
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
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
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
(Do not check if a smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value,
119,769,204 shares outstanding as of November 1, 2011.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
September 30,
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,141,139
|
|
$
|
30,094,162
|
|
Accounts receivable, net of allowance of $1,923,810 and $974,887 at September 30, 2011 and December 31, 2010, respectively
|
|
55,830,653
|
|
73,713,308
|
|
Unbilled contract costs and fees
|
|
174,342
|
|
174,342
|
|
Inventory
|
|
81,331,470
|
|
40,542,893
|
|
Note receivable
|
|
4,224,393
|
|
|
|
Prepaid expenses and other current assets
|
|
5,014,949
|
|
4,254,246
|
|
Total current assets
|
|
164,716,946
|
|
148,778,951
|
|
Property and equipment, net
|
|
11,100,309
|
|
7,284,285
|
|
Other long-term assets
|
|
676,990
|
|
|
|
Total assets
|
|
$
|
176,494,245
|
|
$
|
156,063,236
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Line of credit
|
|
$
|
34,675,000
|
|
$
|
15,000,000
|
|
Accounts payable
|
|
58,556,349
|
|
45,060,537
|
|
Accrued payroll and payroll related expenses
|
|
2,518,574
|
|
4,476,685
|
|
Other accrued expenses
|
|
6,094,151
|
|
6,824,388
|
|
Accrued contract loss
|
|
293,749
|
|
|
|
Accrued restructuring costs
|
|
584,947
|
|
49,203
|
|
Note payable, current portion, net of discount of $365,267 and $434,247 at September 30, 2011 and December 31, 2010, respectively
|
|
3,737,534
|
|
2,107,473
|
|
Current portion of subordinated convertible notes
|
|
8,380,952
|
|
|
|
Current portion of deferred revenue
|
|
3,330,034
|
|
8,099,852
|
|
Total current liabilities
|
|
118,171,290
|
|
81,618,138
|
|
|
|
|
|
|
|
Warrant liabilities
|
|
272,106
|
|
5,454,109
|
|
Note payable, net of current portion and discount of $184,180 and $399,589 at September 30, 2011 and December 31, 2010, respectively
|
|
6,149,378
|
|
9,058,691
|
|
Long-term subordinated convertible notes, net of current portion
|
|
6,869,048
|
|
|
|
Deferred revenue, net of current portion
|
|
20,901,778
|
|
11,622,918
|
|
Other long-term liabilities
|
|
703,205
|
|
318,151
|
|
Total liabilities
|
|
153,066,805
|
|
108,072,007
|
|
Commitments and contingencies (Note I)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Preferred stock; $0.01 par value 1,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
|
|
|
|
|
|
Common stock; $0.01 par value, 200,000,000 shares authorized; 119,769,317 and 117,911,278 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
|
|
1,197,693
|
|
1,179,113
|
|
Additional paid-in capital
|
|
302,591,358
|
|
291,717,323
|
|
Accumulated deficit
|
|
(278,932,043
|
)
|
(243,475,639
|
)
|
Accumulated other comprehensive loss
|
|
(1,429,568
|
)
|
(1,429,568
|
)
|
Total stockholders equity
|
|
23,427,440
|
|
47,991,229
|
|
Total liabilities and stockholders equity
|
|
$
|
176,494,245
|
|
$
|
156,063,236
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Table of Contents
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
2011
|
|
September 30,
2010
|
|
September 30,
2011
|
|
September 30,
2010
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
45,010,135
|
|
$
|
58,381,821
|
|
$
|
152,512,108
|
|
$
|
100,741,773
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
39,714,465
|
|
42,678,081
|
|
128,713,129
|
|
77,267,220
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
5,295,670
|
|
15,703,740
|
|
23,798,979
|
|
23,474,553
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
5,702,626
|
|
4,320,274
|
|
21,557,347
|
|
9,763,129
|
|
Selling, general and administrative
|
|
11,304,440
|
|
9,677,483
|
|
34,426,344
|
|
23,539,849
|
|
Restructuring charge
|
|
60,716
|
|
|
|
1,194,970
|
|
783,701
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses from continuing operations
|
|
17,067,782
|
|
13,997,757
|
|
57,178,661
|
|
34,086,679
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
(11,772,112
|
)
|
1,705,983
|
|
(33,379,682
|
)
|
(10,612,126
|
)
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of subordinated convertible notes and warrant liabilities
|
|
1,953,728
|
|
(1,269,118
|
)
|
3,100,911
|
|
(1,038,105
|
)
|
Other (loss) income, net
|
|
(1,037,993
|
)
|
340,387
|
|
(1,372,385
|
)
|
20,929
|
|
Interest income
|
|
141,847
|
|
|
|
325,123
|
|
185
|
|
Interest expense
|
|
(1,078,901
|
)
|
(628,255
|
)
|
(3,690,546
|
)
|
(917,651
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
(11,793,431
|
)
|
148,997
|
|
(35,016,579
|
)
|
(12,546,768
|
)
|
Provision for income taxes
|
|
296,604
|
|
|
|
439,825
|
|
|
|
Income (loss) from continuing operations, net of income taxes
|
|
(12,090,035
|
)
|
148,997
|
|
(35,456,404
|
)
|
(12,546,768
|
)
|
Gain on sale of discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
500,217
|
|
Income from discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
31,390
|
|
Net income (loss)
|
|
(12,090,035
|
)
|
148,997
|
|
(35,456,404
|
)
|
(12,015,161
|
)
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend and accretion on Series C preferred stock
|
|
|
|
(1,359,514
|
)
|
|
|
(4,167,639
|
)
|
Dividend on Series C preferred stock
|
|
|
|
(384,613
|
)
|
|
|
(1,108,370
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(12,090,035
|
)
|
$
|
(1,595,130
|
)
|
$
|
(35,456,404
|
)
|
$
|
(17,291,170
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss per weighted average share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
From loss from continuing operations net of income tax and before discontinued operations attributable to common stockholders
|
|
$
|
(0.10
|
)
|
$
|
(0.02
|
)
|
$
|
(0.30
|
)
|
$
|
(0.25
|
)
|
From income from discontinued operations
|
|
|
|
|
|
|
|
$
|
0.01
|
|
From gain on sale of discontinued operations
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders per weighted average share, basic and diluted
|
|
$
|
(0.10
|
)
|
$
|
(0.02
|
)
|
$
|
(0.30
|
)
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares, basic and diluted
|
|
119,621,318
|
|
75,467,911
|
|
118,726,322
|
|
72,633,858
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Table of Contents
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE LOSS
For the nine months ended September 30, 2011
(Unaudited)
|
|
Common
Shares
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
Stockholders
Equity
|
|
Comprehensive
Loss
|
|
Balance, December 31, 2010
|
|
117,911,278
|
|
$
|
1,179,113
|
|
$
|
291,717,323
|
|
$
|
(243,475,639
|
)
|
$
|
(1,429,568
|
)
|
$
|
47,991,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
(35,456,404
|
)
|
|
|
(35,456,404
|
)
|
(35,456,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the exercise of stock options
|
|
318,248
|
|
3,183
|
|
557,451
|
|
|
|
|
|
560,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the exercise of warrants to purchase common stock
|
|
1,063,637
|
|
10,635
|
|
4,743,535
|
|
|
|
|
|
4,754,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation
|
|
|
|
|
|
4,652,926
|
|
|
|
|
|
4,652,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modification of warrants to purchase common stock
|
|
|
|
|
|
62,919
|
|
|
|
|
|
62,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the Employee Stock Purchase Plan
|
|
476,154
|
|
4,762
|
|
857,204
|
|
|
|
|
|
861,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(35,456,404
|
)
|
Balance, September 30, 2011
|
|
119,769,317
|
|
$
|
1,197,693
|
|
$
|
302,591,358
|
|
$
|
(278,932,043
|
)
|
$
|
(1,429,568
|
)
|
$
|
23,427,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Table of Contents
SATCON TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
2011
|
|
September 30,
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(35,456,404
|
)
|
$
|
(12,015,161
|
)
|
Income from discontinued operations, net
|
|
|
|
(31,390
|
)
|
Gain on sale of discontinued operations, net
|
|
|
|
(500,217
|
)
|
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
1,310,373
|
|
1,175,679
|
|
Provision for uncollectible accounts
|
|
1,174,639
|
|
651,055
|
|
Provision for excess and obsolete inventory
|
|
1,804,051
|
|
774,237
|
|
Non-cash stock based compensation expense
|
|
4,652,926
|
|
2,795,475
|
|
Change in fair value of subordinated convertible notes and warrant liabilities
|
|
(3,100,911
|
)
|
1,038,105
|
|
Non-cash interest expense
|
|
347,308
|
|
156,374
|
|
Financing cost related to subordinated convertible notes
|
|
1,100,000
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
16,708,016
|
|
(37,773,159
|
)
|
Unbilled contract costs and fees
|
|
|
|
27,886
|
|
Prepaid expenses and other current assets
|
|
(760,703
|
)
|
(2,378,705
|
)
|
Other long-term assets
|
|
(676,990
|
)
|
|
|
Note receivable
|
|
(4,224,393
|
)
|
|
|
Inventory
|
|
(42,592,628
|
)
|
(16,836,010
|
)
|
Accounts payable
|
|
13,495,812
|
|
18,982,798
|
|
Accrued expenses and payroll
|
|
(2,688,348
|
)
|
5,035,471
|
|
Accrued restructuring
|
|
535,744
|
|
155,627
|
|
Accrued contract loss
|
|
293,749
|
|
|
|
Deferred revenue, current and long-term portion
|
|
4,509,042
|
|
8,921,886
|
|
Other liabilities
|
|
385,054
|
|
(52,130
|
)
|
Total adjustments
|
|
(7,727,259
|
)
|
(17,325,411
|
)
|
Net cash used in operating activities in continuing operations
|
|
(43,183,663
|
)
|
(29,872,179
|
)
|
Net cash used in operating activities of discontinued operations
|
|
|
|
(61,921
|
)
|
Net cash used in operating activities
|
|
(43,183,663
|
)
|
(29,934,100
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
Purchases of property and equipment
|
|
(5,126,397
|
)
|
(1,428,710
|
)
|
Net cash used in investing activities in continuing operations
|
|
(5,126,397
|
)
|
(1,428,710
|
)
|
Net cash provided by investing activities of discontinued operations
|
|
|
|
716,700
|
|
Net cash used in investing activities
|
|
(5,126,397
|
)
|
(712,010
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Net borrowings under line of credit
|
|
19,675,000
|
|
12,000,000
|
|
Proceeds from employee stock purchase plan
|
|
861,966
|
|
|
|
Proceeds from (repayment of) note payable
|
|
(1,563,641
|
)
|
11,826,500
|
|
Reduction of restricted cash
|
|
|
|
34,000
|
|
Net proceeds from issuance of subordinated convertible notes
|
|
14,900,000
|
|
|
|
Net proceeds from exercise of options to purchase common stock
|
|
560,634
|
|
1,532,885
|
|
Net proceeds from exercise of warrants to purchase common stock
|
|
1,923,078
|
|
3,149,639
|
|
Net cash provided by financing activities in continuing operations
|
|
36,357,037
|
|
28,543,024
|
|
Effects of foreign currency exchange rates on cash and cash equivalents
|
|
|
|
68,732
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(11,953,023
|
)
|
$
|
(2,034,354
|
)
|
Cash and cash equivalents at beginning of period
|
|
30,094,162
|
|
13,369,208
|
|
Cash and cash equivalents at end of period
|
|
$
|
18,141,139
|
|
$
|
11,334,854
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
Table of Contents
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
Nine Months Ended,
|
|
|
|
September 30,
2011
|
|
September 30,
2010
|
|
Non-cash Investing and Financing Activities:
|
|
|
|
|
|
Stock-based compensation (1)
|
|
$
|
4,652,926
|
|
$
|
2,777,118
|
|
Accretion of redeemable convertible preferred stock discount and dividends
|
|
|
|
5,276,009
|
|
Issuance of warrants
|
|
1,370,000
|
|
|
|
Common stock issued in lieu of dividends on redeemable convertible Series B preferred stock
|
|
|
|
15,000
|
|
Issuance of warrants and beneficial conversion feature
|
|
|
|
1,760,000
|
|
Exercise of warrant liabilities for common stock
|
|
|
|
586,442
|
|
Modification of warrants related to subordinated debt
|
|
62,919
|
|
|
|
|
|
|
|
|
|
Interest and Income Taxes Paid:
|
|
|
|
|
|
Interest
|
|
$
|
3,343,238
|
|
$
|
761,276
|
|
Income taxes
|
|
439,825
|
|
|
|
(1) Includes $(18,357) related to discontinued operations for the nine month period ended September 30, 2010.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
Table of Contents
SATCON TECHNOLOGY CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 (2011) AND SEPTEMBER 30, 2010 (2010)
(Unaudited)
Note A. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Satcon Technology Corporation and its wholly owned subsidiaries (Satcon Power Systems Canada, Ltd. and Satcon Trading (Shenzhen) Co., Ltd.) and its discontinued operating subsidiaries (Satcon Applied Technology, Satcon Electronics, Inc. and Satcon Power Systems, Inc.) (collectively, the Company) as of September 30, 2011 and for the nine months ended September 30, 2011 and 2010, 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, 2010. Operating results for the three and nine months ended September 30, 2011 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 has developed a business plan that envisions a continued increase in assets and revenue from the results experienced in the recent past. The Company believes that its existing plan will generate sufficient cash which, along with its existing cash on hand and its credit facility, as modified on June 30, 2011, will enable it to fund operations through at least September 30, 2012.
The Companys funding plans for our working capital needs and other commitments may be adversely impacted if it fails to realize its underlying assumed levels of revenues and expenses, receivables are not collected or if the Company fails to remain in compliance with the covenants of its bank line, subordinated note payable or subordinated convertible notes. If any of these events were to occur, the Company may need to raise additional funds in order to sustain operations by selling equity or taking other actions to conserve its cash position, which could include selling of certain assets, delaying capital expenditures and incurring additional indebtedness, subject to the restrictions in the credit facility with Silicon Valley Bank and the subordinated convertible notes. Such actions would likely require the consent of Silicon Valley Bank, the lender of our subordinated debt, and/or the holder of our subordinated convertible notes, and there can be no assurance that such consents would be given. Furthermore, there can be no assurance that the Company will be able to raise such funds if they are required.
Note C. Significant Accounting Policies and Basis of Consolidation
There have been no material changes from the Significant Accounting Policies and Basis of Presentation
previously disclosed in Part II, Item 8, contained within Notes to Consolidated Financial Statements of the Companys Annual Report on Form 10-K for the fiscal year ending December 31, 2010
.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period reported. Management believes the most significant estimates include the net realizable value of accounts receivable and inventory, warranty provisions, the recoverability of long-lived assets, the recoverability of deferred tax assets and the fair value of equity, financial instruments and revenue. Actual results could differ from these estimates.
8
Table of Contents
Reclassifications
Certain prior-year balances have been reclassified to conform to current-year presentations.
Basis of Consolidation
The consolidated financial statements include the accounts of Satcon Technology Corporation and its wholly owned subsidiaries (Satcon Power Systems Canada, Ltd. and Satcon Trading (Shenzhen) Co., Ltd.) and its discontinued operating subsidiaries (Satcon Applied Technology, Inc., Satcon Electronics, Inc. and Satcon Power Systems, Inc.). All intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue from product sales 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 reasonably assured. Title to the product passes upon shipment of the product, as the products are typically shipped FOB shipping point, unless otherwise agreed upon in advance with the customer. If the product requires installation to be performed by the Company, all revenue related to the product is deferred and recognized upon the completion of the installation. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied. When appropriate the Company provides for a warranty reserve at the time the product revenue is recognized. If a contract involves the provision of multiple elements and the elements qualify for separation, total estimated contract revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as described above.
Contract Losses
When the current estimates of total contract revenue for a customer order indicates a loss, a provision for the entire loss on the contract is recorded. For the nine months ended September 30, 2011, the Company recorded a contract loss on a customer order of approximately $5.1 million. At September 30, 2011, the accrued contract loss was approximately $0.3 million. The excess costs over projected revenues are recorded as a component of both cost of sales and research and development expense.
Cost of product revenue includes materials, labor, overhead, warranty and freight.
Deferred revenue primarily consists of cash received for extended product warranties, preventative maintenance plans and up-time guarantee programs. Deferred revenue also consists of payments received from customers in advance of services performed, product shipped or installation completed. When an item is deferred for revenue recognition purposes, the deferred revenue is recorded as a liability and the deferred costs are recorded as a component of inventory in the consolidated balance sheets.
Unbilled Contract Costs and Fees
Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred costs that have not been recognized as revenue or billed to the customer.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and highly-liquid investments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value. At September 30, 2011 and December 31, 2010, the Company had no restricted cash.
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.
9
Table of Contents
Inventory
Inventory is valued at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory, and costs are determined based on the first-in, first-out method of accounting and include material, labor and manufacturing overhead costs. A significant decrease in demand for the Companys products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, the industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of the inventory and reported operating results. The Company records, as a charge to cost of product revenue, any amounts required to reduce the carrying value to net realizable value.
Warranty
The Company offers warranty coverage for our products for period of 5 years after shipment. The Company estimates the anticipated costs of repairing products under warranty based on the historical or expected cost of the repairs and expected failure rates. The assumptions used to estimate warranty accruals are re-evaluated quarterly, at a minimum, in light of actual experience and, when appropriate, the accruals or the accrual percentage is adjusted based on specific estimates of project repair costs and quantity of product returns. The Companys 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. See Note J., Product Warranties.
Subordinated Convertible Notes
The subordinated convertible notes include features that qualify as embedded derivatives, such as (i) the holders right to convert, (ii) the Companys option to force conversion into shares of common stock of the Company, and (iii) the holders prepayment options. The Company has elected to measure the subordinated convertible notes and the embedded derivatives in their entirety at fair value with changes in fair value recognized as a change in fair value of subordinated convertible notes and warrant liabilities in the statement of operations. This election was made by the Company after concluding that several of the derivatives cannot be reliably measured nor reliably associated with another derivative that can be reliably measured and determining that the aggregate fair value of the notes to be more meaningful in the context of the Companys consolidated financial statements than if separate fair values were assigned to each of the multiple embedded instruments contained in such notes.
Foreign Currency Translation
As of April 1, 2010, the Company determined that the functional currency of its foreign subsidiary was the US dollar. As the functional currency changed from the foreign currency to the reporting currency, the translation adjustments as of April 1, 2010 remains as a component of accumulated other comprehensive income (loss). Prior to this determination, the functional currency was the local currency, assets and liabilities were translated at the rates in effect at the balance sheet dates, while stockholders equity (deficit) including the long-term portion of intercompany advances was translated at historical rates. Statements of operations and cash flow amounts were translated at the average rate for the period. Translation adjustments were included as a component of accumulated other comprehensive income (loss). The Company records the impact from foreign currency transactions as a component of other income (expense). Foreign currency gains and losses were a charge of $1.0 million and a gain of $0.4 million and a charge of $1.2 million and a gain of $24,000 for the three and nine months ended September 30, 2011 and 2010, respectively. All foreign currency transaction gains and losses were recorded as a component of other income (loss), net.
Foreign Currency Hedges
The Company uses foreign currency contracts to manage its exposure to changes in foreign currency exchange rates associated with our foreign currency denominated receivables. The Company primarily hedges foreign currency exposure to the Euro. The Company does not engage in trading, market making or speculative activities in the derivatives markets. The foreign currency contracts utilized by the Company do not qualify for hedge accounting treatment, and as a result, any fluctuations in the value of these foreign currency contracts are recognized in other loss (income) in our consolidated statements of operations as incurred. The fluctuations in the value of these foreign currency contracts do, however, largely offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. In April 2011, the Company entered into a foreign currency hedge with a bank with a notational amount of approximately $1.6 million, which matured on July 18, 2011.
At September 30, 2011 and December 31, 2010 there were no foreign currency hedges outstanding.
10
Table of Contents
The following table shows the changes in the fair value of our foreign currency contract recorded in net loss during the three and nine month periods ended September 30, 2011:
|
|
(Loss) Gain
Three Months Ended
|
|
(Loss) Gain
Nine Months Ended
|
|
|
|
September 30, 2011
|
|
September 30, 2011
|
|
Foreign currency hedges (a)
|
|
$
|
10,308
|
|
$
|
|
|
|
|
|
|
|
|
|
|
(a)
The Company recorded transaction gain (losses) associated with the re-measurement of its foreign denominated assets of ($3.306) and $108,730 in the three and nine months ended September 30, 2011, respectively. Transaction losses were included in Other (loss) income in the consolidated statements of operations. The net impact of transaction (losses) gains associated with the re-measurement of the foreign denominated assets and the losses incurred on the foreign currency hedges was a net gain of $7,002 and a net loss of $108,730 for the three and nine month period ended September 30, 2011, respectively.
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 allowed 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, 2010, the Company had federal and state net operating loss (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 2031. 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 Sections 382 or 383 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 commissioned a study to determine whether Sections 382 or 383 could limit the use of our carryforwards in this manner. After completing this study in 2010, the Company has concluded that the limitation will not have a material impact on its ability to utilize its net operating loss or credit carryforwards. In January 2011, the Companys board of directors adopted a shareholder rights agreement designed to protect the Companys ability to use the NOLs for income tax purposes. However, the adoption of the shareholder rights agreement cannot guarantee complete protection against an ownership change and it remains possible that one may occur. See Note R. Shareholders Rights Agreement.
The tax years 1996 through 2010 remain open to examination by major taxing jurisdictions to which the Company is subject, which are primarily in the United States, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. The Company is currently not under examination by the Internal Revenue Service or any other jurisdiction for any tax years. The Company did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying financial statements.
The Company would record any
11
Table of Contents
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.
The Company currently has a provision for income taxes related to state of California and its operations in China.
Accounting for Stock-based Compensation
The Company has several stock-based compensation plans, as well as stock options issued outside of such plans as an inducement to engage new executives. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the service period.
The Company uses the Black-Scholes valuation model for valuing options. This model incorporates several assumptions, including volatility, expected life and discount rate. The Company uses historical volatility as it believes it is more reflective of market conditions and a better indicator of volatility. The Company uses historical information in the calculation of expected life for its plain-vanilla option grants. If the Company determines that another method used to estimate expected volatility is more reasonable than the Companys current methods, or if another method for calculating these input assumptions is prescribed by authoritative guidance, the fair value calculated for share-based awards could change significantly. Higher volatility and longer expected lives would result in an increase to share-based compensation determined at the date of grant.
The Company recognized the full impact of its stock-based compensation plans in the consolidated financial statements for the three and nine months ended
September 30, 2011 and 2010 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 stock-based compensation expense, including amounts related to employees participation in the Employee Stock Purchase Plan (ESPP) of approximately $0.2 million and $0.7 million for the three and nine months ended September 30, 2011, respectively (See Note Q. Employee Benefit Plan), included in the Companys consolidated statement of operations:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
Cost of product revenue
|
|
$
|
119,314
|
|
$
|
55,016
|
|
$
|
347,194
|
|
$
|
167,642
|
|
Research and development
|
|
316,265
|
|
137,621
|
|
900,625
|
|
360,037
|
|
Selling, general and administrative expenses
|
|
1,165,100
|
|
711,662
|
|
3,405,107
|
|
2,178,996
|
|
Stock based compensation expense from continuing operations before tax
|
|
1,600,679
|
|
904,299
|
|
4,652,926
|
|
2,706,675
|
|
Stock based compensation expense from discontinued operations
|
|
|
|
|
|
|
|
(18,357
|
)
|
Total stock based compensation expense before tax
|
|
1,600,679
|
|
904,299
|
|
4,652,926
|
|
1,784,019
|
|
Income tax benefit
|
|
|
|
|
|
|
|
(18,357
|
)
|
Net stock-based compensation expense
|
|
$
|
1,600,679
|
|
$
|
904,299
|
|
$
|
4,652,926
|
|
$
|
2,688,318
|
|
Compensation expense associated with the granting of stock options to employees is being recognized on a straight-line basis over the service period of the option. In instances where the actual compensation expense would be greater than that calculated using the straight-line method, the actual compensation expense is recorded in that period.
The weighted average grant date fair value of options granted during the three and nine months ended September 30, 2011 and 2010 was $1.57 and $3.32, and $3.04 and $2.42, respectively, per option. The fair value of each stock option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following range of assumptions:
|
|
Three Months Ended
|
|
Nine Months Ended
|
Assumptions:
|
|
September 30, 2011
|
|
September 30, 2010
|
|
September 30, 2011
|
|
September 30, 2010
|
Expected life
|
|
5.6 years (1)
|
|
5.6 years (1)
|
|
0 to 5.6 years (1)
|
|
5.0 to 6.25 years (1)
|
Expected volatility ranging from
|
|
75.26% to 77.18% (2)
|
|
72.8% to 73.93% (2)
|
|
73.59% to 77.18% (2)
|
|
72.4% to 76.5% (2)
|
Dividends
|
|
none
|
|
none
|
|
none
|
|
none
|
Risk-free interest rate
|
|
1% (3)
|
|
1.50% (3)
|
|
1% to 2.15% (3)
|
|
1.10% to 2.50% (3)
|
Forfeiture Rate (4)
|
|
6.25%
|
|
6.25%
|
|
0% to 6.25%
|
|
0% to 6.25%
|
12
Table of Contents
(1)
The option life for the three and nine months ended September 30, 2011 and 2010 was determined using actual option experience.
(2)
The stock volatility for each grant is measured using the weighted average of historical daily price changes of the Companys common stock over the most recent period equal to the expected option life of the grant, the historical short term trend of the option and other factors, such as expected changes in volatility arising from planned changes in the Companys business operations.
(3)
The risk-free interest rate for each grant is equal to the U.S. Treasury yield curve in effect at the time of grant for instruments with a similar expected life.
(4)
The estimated forfeiture rate for each option grant is between 0% - 6.25%. The Company periodically reviews the estimated forfeiture rate, in light of actual experience.
At September 30, 2011 approximately $11.1 million in unrecognized compensation expense remains to be recognized over a weighted average period of 2.4 years. The table below summarizes compensation expense expected to be recognized associated with employee stock options over the next five years as follows:
Calendar Years Ending December 31,
|
|
Non Cash
Stock-Based
Compensation
Expense
|
|
2011
|
|
$
|
1,364,478
|
|
2012
|
|
4,082,098
|
|
2013
|
|
3,038,325
|
|
2014
|
|
2,200,591
|
|
2015
|
|
411,096
|
|
Total
|
|
$
|
11,096,588
|
|
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 Companys trade accounts receivable and unbilled contract costs and fees are primarily from sales to commercial customers. The Company does not require collateral and has not historically experienced significant credit losses related to receivables, letters of credit or unbilled contract costs and fees from individual customers or groups of customers in any particular industry or geographic area.
Significant customers are defined as those customers that account for 10% or more of total net revenue in a fiscal year or 10% or more of accounts receivable at the end of a fiscal period. The table below details out customers that were considered significant as it pertains to both revenues for the three and nine month periods ended September 30, 2011 and 2010 and accounts receivable at September 30, 2011 and December 31, 2010.
|
|
Revenue
|
|
Accounts Receivable
|
Period
|
|
Three Months ended September 30,
|
|
Nine Months ended September 30,
|
|
At September 30, 2011 and December 31, 2010
|
2011
|
|
SunPower Corporation (approximately 11.4%)
|
|
SunPower Corporation (approximately 12.0%)
|
|
GCL Solar Limited (approximately 16.2%)
SunEdison Corporation (approximately 11.8%)
|
2010
|
|
CE Solar (approximately 16.8%) Amun-Re a.s. (approximately 15.0%) SunEdison (approximately 11.9%)
|
|
CE Solar (approximately 14.8%) Amun-Re a.s. (approximately 14.1%)
|
|
CE Solar (approximately 12.8%)
GCL Solar Limited (approximately 11.4%) ** Enel Green Power (approximately 10.6%) **
|
** The accounts receivable associated with these customers were backed by irrevocable letters of credit at December 31, 2010.
13
Table of Contents
Research and Development Costs
The Company expenses research and development costs as incurred. Cost of research and development includes costs incurred in connection with both funded research and development and unfunded research and development activities.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net loss and foreign currency translation adjustments prior to the changing of the functional currency of the Companys Canadian subsidiary to the US dollar.
Fair Value of Financial Instruments
The Companys financial instruments consist of cash equivalents, accounts receivable, unbilled contract costs and fees, warrants to purchase shares of common stock, accounts payable, subordinated notes payable, subordinated convertible notes and the line of credit. The estimated fair values have been determined through information obtained from market sources and management estimates. The Companys warrant liability and subordinated convertible notes are recorded at fair value. See Fair Value Measurements below. The carrying value of the subordinated notes payable, as of September 30, 2011, is not materially different from the fair value of the notes. The estimated fair values of the remaining financial instruments approximate their carrying values at September 30, 2011 and December 31, 2010.
Fair Value Measurements
The Companys financial assets and liabilities are measured using inputs from the three levels of fair value hierarchy which are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 are as follows:
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
Balance as of
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
September 30,
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
Description
|
|
2011
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (1)
|
|
$
|
272,106
|
|
$
|
|
|
$
|
272,106
|
|
$
|
|
|
Subordinated Convertible Notes (2)
|
|
$
|
15,250,000
|
|
$
|
|
|
$
|
|
|
$
|
15,250,000
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
15,522,106
|
|
$
|
|
|
$
|
272,106
|
|
$
|
15,250,000
|
|
14
Table of Contents
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 are as follows:
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
Balance as of
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
|
December 31,
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
Description
|
|
2010
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Warrant liabilities (1)
|
|
$
|
5,454,109
|
|
$
|
|
|
$
|
5,454,109
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
5,454,109
|
|
$
|
|
|
$
|
5,454,109
|
|
$
|
|
|
(1)
The Companys Level 2 financial liabilities consist of long term investor warrant liabilities comprised of the Warrant As, Warrant Cs, the warrants issued to the investors in connection with the 2007 preferred stock financing (the 2007 Financing Warrants) and the placement agent warrants. The fair value of the Warrant As and Warrant Cs is being estimated using a binomial lattice model and the fair value of the placement agent warrants and the 2007 Financing Warrants is being estimated using the Black-Scholes option pricing model. (see Note K. Warrant Liabilities-Valuation Methodology and Significant Assumptions
;
Note L - Redeemable Convertible Series B and Series C Preferred Stock; and Warrant Liabilities below).
(2)
The Companys Level 3 financial liabilities consist of a subordinated convertible notes. (See Note I.) The valuation of this instrument utilizes a continuous-variable stochastic process in the form of a Monte-Carlo Simulation and includes unobservable inputs supported by little or no market activity such as discount rate applicable to the instruments debt-like feature, probabilities of debt-like and equity-like positions, and various probabilities of occurrences of certain future events. The analysis also includes the contractual terms of instrument in the form of interest rate, timing and extent of principal and interest payments, and time to maturity.
Warrant Liabilities
Upon issuance in 2006, the Warrant As, Warrant Bs and Warrant Cs, along with the Placement Agent Warrants (together the Warrants), did not meet the requirements for equity classification, because such warrants (a) must be settled in registered shares, (b) are subject to substantial liquidated damages if the Company is unable to maintain the effectiveness of the resale registration of the shares and (c) provide a cash-out election using a Black-Scholes valuation under various circumstances. Therefore these Warrants are required to be accounted for as freestanding derivative instruments. Changes in fair value are recognized in the statement of operations under the caption Change in fair value of warrant liabilities.
The Company determined the fair value of 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 K. Warrant Liabilities for valuation discussion.
Redeemable Convertible Series B Preferred Stock
The Company initially accounted for its issuance of Series B Preferred Stock and associated warrants by
allocating the proceeds received net of transaction costs based on the relative fair value of the Series B Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities. The Company determined the initial value of the Series B Preferred Stock and investor warrants using valuation models it considers to be appropriate. The Series B Preferred Stock was classified within the liability section of the Companys balance sheet.
15
Table of Contents
In October 2010, the holders of the remaining 75 shares of Series B Preferred Stock converted their shares into common stock, resulting in the issuance of 251,677 shares of common stock.
Redeemable Convertible Series C Preferred Stock
The Company initially accounted for its issuance of Series C Preferred Stock and associated warrants by
allocating the proceeds received net of transaction costs based on the relative fair value of the Series C Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities. The Series C Preferred Stock was classified as temporary equity on the balance sheet. The Company determined the initial value of the Series C Preferred Stock and investor warrants using valuation models it considers to be appropriate. The Company used the effective interest method to accrete the carrying value of the Series C Preferred Stock through the earliest possible redemption date (November 8, 2011), at which time the value of the Series C Preferred Stock would have been $30.0 million or 120% of its face value and dividends.
On October 27, 2010, the holders of all of the outstanding shares of Series C Preferred Stock converted their shares and accumulated dividends into common stock, resulting in the issuance of 27,526,344 shares of common stock. To induce the Series C Preferred Stock holders to convert their shares, the Company paid these holders an aggregate $1.25 million in cash upon conversion. The entitlement to a redemption of the Series C Preferred Shares was eliminated upon the holders conversion of the Series C Preferred Stock into common shares in October 2010.
Note D. Discontinued Operations
On January 10, 2010, the Company sold its Applied Technology business unit for approximately $0.7 million in cash, net of closing costs. Prior to the sale, the Applied Technology business unit was reported by the Company as its own operating segment. Operations associated with the Applied Technology business unit have been classified as discontinued operations in the accompanying consolidated statements of operations, and cash flows associated with this segment are included in cash flows from discontinued operations in the consolidated statements of cash flows. The Company evaluated the assets of the Applied Technology business unit and as of December 31, 2009 classified them as held for sale. The Company recorded a gain on the sale of the Applied Technology business unit of approximately $0.5 million in its results of operations for the nine months ended September 30, 2010.
Net sales from discontinued operations were $0.1 million for the nine months ended September 30, 2010. Net income from discontinued operations was income of approximately $31,000 for the nine months ended September 30, 2010.
The Company has not allocated interest to discontinued operations. The Company has also eliminated all intercompany activity associated with discontinued operations.
16
Table of Contents
Note E. Loss Per Share
The following is the reconciliation of the numerators and denominators of the basic and diluted loss per share computations:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
2011
|
|
September 30,
2010
|
|
September 30,
2011
|
|
September 30,
2010
|
|
Loss from continuing operations, net of income taxes, before discontinued operations
|
|
$
|
(12,090,035
|
)
|
$
|
148,997
|
|
$
|
(35,456,404
|
)
|
$
|
(12,546,786
|
)
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
31,390
|
|
Gain on sale of discontinued operations
|
|
|
|
|
|
|
|
500,217
|
|
Accretion and dividends and deemed dividends on Series C Preferred Stock
|
|
|
|
(1,744,127
|
)
|
|
|
(5,276,009
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(12,090,035
|
)
|
$
|
(1,595,130
|
)
|
$
|
(35,456,404
|
)
|
$
|
(17,291,170
|
)
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
Common shares outstanding, beginning of period
|
|
119,327,864
|
|
72,126,226
|
|
117,911,278
|
|
70,567,781
|
|
Weighted average common shares issued during the period
|
|
293,454
|
|
3,341,685
|
|
815,044
|
|
2,066,077
|
|
Weighted average shares outstandingbasic and diluted
|
|
119,621,318
|
|
75,467,911
|
|
118,726,322
|
|
72,633,858
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per weighted average share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
From loss from continuing operations, before discontinued operations, attributable to common stockholders
|
|
$
|
(0.10
|
)
|
$
|
(0.02
|
)
|
$
|
(0.30
|
)
|
$
|
(0.25
|
)
|
From income from discontinued operations
|
|
|
|
|
|
|
|
|
|
From gain on sale of discontinued operations
|
|
|
|
|
|
|
|
$
|
0.01
|
|
Net loss per weighted average share, basic and diluted
|
|
$
|
(0.10
|
)
|
$
|
(0.02
|
)
|
$
|
(0.30
|
)
|
$
|
(0.24
|
)
|
As of September 30, 2011 and 2010, 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, for the three and nine month period ended September 30, 2010, shares of common stock issuable upon the conversion of Series B Preferred Stock and Series C Preferred Stock and related dividends were excluded from the diluted weighted average common shares outstanding as their effect would also have been antidilutive. Basic earnings per share excludes dilution and is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, except when the effect would be antidilutive.
The table below summarizes the actual number of options and warrants and convertible preferred stock that were excluded from the calculation above due to their effect being antidilutive:
|
|
September 30,
2011
|
|
September 30,
2010
|
|
Common Stock issuable upon the exercise of:
|
|
|
|
|
|
Options
|
|
14,843,783
|
|
12,337,319
|
|
Warrants
|
|
15,442,350
|
|
16,417,892
|
|
|
|
30,286,133
|
|
28,755,211
|
|
Common Stock issuable upon the conversion of redeemable convertible Series B Preferred Stock
|
|
|
|
251,677
|
|
Common Stock issuable upon the conversion of redeemable convertible Series C Preferred Stock
|
|
|
|
27,437,434
|
|
Common Stock issuable upon the conversion of subordinated convertible notes
|
|
5,479,452
|
|
|
|
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 September 30, 2011 and 2010, had the Company not been in a loss position:
|
|
# of Underlying Common Shares
|
|
|
|
September 30,
2011
|
|
September 30,
2010
|
|
Employee stock options
|
|
46,202
|
|
12,141,819
|
|
Warrants to purchase common stock
|
|
|
|
16,417,892
|
|
Series B Convertible Preferred Stock
|
|
|
|
251,677
|
|
Series C Convertible Preferred Stock
|
|
|
|
27,437,434
|
|
Total
|
|
46,202
|
|
56,248,822
|
|
Note F. Inventory
Inventory components at the end of each period were as follows:
|
|
September 30,
2011
|
|
December 31,
2010
|
|
Raw material
|
|
$
|
39,378,940
|
|
$
|
16,930,407
|
|
Work-in-process
|
|
2,369,851
|
|
2,881,150
|
|
Finished goods
|
|
39,582,679
|
|
20,731,336
|
|
|
|
$
|
81,331,470
|
|
$
|
40,542,893
|
|
Note G. Property and Equipment
Property and equipment consisted of the following:
|
|
September 30,
2011
|
|
December 31,
2010
|
|
Machinery and equipment
|
|
$
|
4,938,861
|
|
$
|
4,523,739
|
|
Assets under construction
|
|
968,847
|
|
785,152
|
|
Furniture and fixtures
|
|
1,211,574
|
|
991,493
|
|
Computer software
|
|
1,701,458
|
|
1,697,081
|
|
Leasehold improvements
|
|
8,464,176
|
|
4,226,452
|
|
|
|
17,284,916
|
|
12,223,917
|
|
Less: accumulated depreciation and amortization
|
|
(6,184,607
|
)
|
(4,939,632
|
)
|
|
|
$
|
11,100,309
|
|
$
|
7,284,285
|
|
Depreciation and amortization expense from continuing operations relating to property and equipment for the three and nine months ended September 30, 2011 and 2010 was approximately $0.4 million and $0.3 million and approximately $1.3 million and $1.2 million, respectively.
18
Table of Contents
Note H. Legal Matters
From time to time, the Company is a party to routine litigation and proceedings in the ordinary course of business. Except as described below, 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.
The Company is party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of its business.
In accordance with ASC 450-20, the Company accrues for legal proceedings when losses become probable and reasonably estimable. As of the end of each applicable reporting period, the Company reviews each of its legal proceedings to determine whether it is probable, reasonably possible or remote that a liability has been incurred and, if it is at least reasonably possible, whether a range of loss can be reasonably estimated under the provisions of ASC 450-20-25-2. In instances where the Company determines that a loss is probable and the Company can reasonably estimate a range of losses the Company may incur with respect to such a matter, the Company records an accrual for the amount within the range that constitutes its best estimate of the possible loss. If the Company is able to reasonably estimate a range but no amount within the range appears to be a better estimate than any other, the Company records an accrual in the amount that is the low end of such range. When a loss is reasonably possible but not probable, the Company will not record an accrual but will disclose its estimate of the possible range of loss where such estimate can be made in accordance with ASC 450-20-25-3. As of September 30, 2011, the Company had accrued approximately $0.4 million related to the FuelCell Arbitration noted below. There were no other accruals established related to the Companys outstanding legal proceedings at September 30, 2011.
The Company offers no prediction of the outcome of any of the proceedings or negotiations described below. The Company is vigorously defending each of these lawsuits and claims. However, there can be no guarantee the Company will prevail or that any judgments against it, if sustained on appeal, will not have a material adverse effect on our business, financial condition, results of operations or cash flows.
FuelCell Arbitration
. On February 17, 2011, FuelCell Energy, Inc. (FuelCell Energy) filed a Demand for Arbitration with the American Arbitration Association seeking recovery of damages related to allegedly defective transformers that the Company procured for them. In its Demand for Arbitration, FuelCell Energy asserts that it is entitled to recovery of approximately $2.8 million from the Company. On October 27, 2011, the Company and FuelCell Energy reached a settlement in regards to these claims. The Company, among other considerations, agreed to pay FuelCell Energy approximately $225,000. In addition, the Company guaranteed discounts on future purchases of approximately $160,000. These amounts have been included in the Companys result of operations for the three and nine month periods ended September 30, 2011.
Class Action Litigation
. In July 2011, two purported securities class action complaints were filed against us, our Chief Executive Officer and our former Chief Financial Officer by the following plaintiffs, individually and on behalf of all others similarly situated, in the U.S. District Court, District of Massachusetts: Allan Edwards (filed July 19, 2011) and Larry Ziegler (filed July 21, 2011). The virtually identical complaints are purportedly brought on behalf of persons who acquired our common stock during the period of March 4, 2010, through July 5, 2011, and allege claims against all defendants for violations under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as claims against the individual defendants for violations of Section 20(a) of the Exchange Act. Putative plaintiffs claim that the defendants caused our common stock to trade at artificially inflated prices through false and misleading statements and/or omissions related to our business. The complaints seek compensatory damages for all damages sustained as a result of the defendants actions, including reasonable costs and expenses, and other relief as the court may deem just and proper. The Company believe these allegations are baseless and the Company intends to defend against them vigorously.
Shareholder Derivative Litigation
. On August 2, 2011, a shareholder derivative action was brought by plaintiff purportedly on behalf of our company against several of our senior officers and directors, in the U.S. District Court, District of Massachusetts. The complaint alleges that the officer and director defendants breached their fiduciary duties by providing allegedly misleading and inaccurate information regarding our business. The shareholder derivative action generally seeks compensatory damages for all alleged losses sustained as a result of the individual defendants actions, including reasonable costs and expenses, and other relief as the court may deem just and proper. The Company believe that these allegations are baseless and the Company intends to defend against them vigorously.
19
Table of Contents
Note I. Commitments and Contingencies
Operating Leases
The Company leases its facilities and related furnishings under various operating leases that expire through October 2016.
Future minimum annual rentals under lease agreements at September 30, 2011 are as follows:
Fiscal Year
|
|
|
|
2011
|
|
$
|
742,126
|
|
2012
|
|
2,697,135
|
|
2013
|
|
2,237,841
|
|
2014
|
|
2,234,471
|
|
2015
|
|
1,680,105
|
|
thereafter
|
|
2,416,570
|
|
Total
|
|
$
|
12,008,248
|
|
Letters of Credit:
The Company utilized a standby letter of credit to satisfy a security deposit requirement. Outstanding standby letters of credit as of September 30, 2011 and December 31, 2010 were $0.3 million and $0, respectively. The Company is at times required to pledge cash as collateral on outstanding letters of credit. At September 30, 2011 and 2010, no cash was pledged as collateral on outstanding letters of credit.
Employment Agreements
The Companys employment arrangements with each of its current Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, Executive Vice President of Sales and Marketing, Vice President of Global Operations, Vice President of Quality and Vice President, Administration & Secretary provide that, if his employment is terminated by the Company without cause or is constructively terminated, his salary and medical benefits will be continued for one year thereafter subject to his execution of a release agreement with the Company. In May 2011, the Company terminated the employment of its then Chief Financial Officer. Accordingly the Company has recorded a severance accrual of approximately $0.3 million. As of September 30, 2011, approximately $0.2 million remains to be paid.
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, or $1.0 million. Interest on outstanding borrowings accrued at a rate per annum equal to the Prime Rate plus one percent (1.0%) per annum, as defined, or the LIBOR Rate plus three and three quarter percent (3.75%) per annum. The Loan Agreement contained certain financial covenants relating to tangible net worth, which the Company was to satisfy in order to borrow under the agreement. In addition, the Company agreed to pay to the Bank a collateral monitoring fee of $750 per month and agreed to the following additional terms: (i) $50,000 commitment fee, $25,000 to be paid at signing of the Loan Agreement and $25,000 to be paid on the one year anniversary of the Loan Agreement; (ii) an unused line fee in the amount of 0.5% per annum of the average unused portion of the revolving line; and (iii) an early termination fee of 0.5% of the total credit line if the Company terminated the Loan Agreement prior to 12 months from the Loan Agreements effective date.
During 2011 and 2010, the Company entered into several amendments to the Loan Agreement. On April 22, 2011, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (as amended to date, the Amended Loan Agreement) with the Bank, as administrative agent, issuing lender and swingline lender, and such other lenders as set forth from time to time in the Amended Loan Agreement. The Amended Loan Agreement amended and restated the Companys prior Loan Agreement, and provides for a senior secured revolving credit facility of up to $35 million. In addition, the Company may make a one-time request for an additional $15 million to increase the credit facility to an aggregate of $50 million, subject to the approval of the lending group.
Total outstanding debt under the Amended Loan Agreement may not exceed (a) the sum of (1) 80% of the book value of eligible accounts (other than those accounts payable in Euros or Canadian dollars), plus (2) 70% of the book value of eligible accounts payable in Euros or Canadian dollars, plus (3) 80% of the eligible foreign accounts, plus (4) 70% of the eligible Chinese accounts,
20
Table of Contents
plus (5) the lesser of (i) 60% of the cost of eligible inventory or (ii) the net orderly liquidation value of eligible inventory, as adjusted pursuant to the Amended Loan Agreement, less (b) the amount of any reserves established by the Bank.
The Amended Loan Agreement contains restrictions regarding the incurrence of additional indebtedness by the Company or its subsidiaries, the ability to enter into various fundamental changes (such as mergers and acquisitions), the ability to make certain payments or investments, and other limitations customary in senior secured credit facilities. In addition, the Company must comply with certain financial conditions if its liquidity (defined as cash on deposit with the Bank plus availability under the Amended Loan Agreement) is less than $15 million.
Borrowings under the Amended Loan Agreement are permitted to be used for refinancing the amounts outstanding under the existing loan agreement with the Bank, to repay certain fees and expenses, and for ongoing working capital and general corporate purposes. Interest on outstanding indebtedness under the Amended Loan Agreement will accrue at an annual rate equal to (a) the higher of (i) the prime rate and (ii) the federal funds effective rate plus one-half of one percent (0.5%) plus (b) the applicable margin. The initial applicable margin is 0.75%, and is subject to adjustment based on the Companys liquidity in each fiscal quarter such that, if the Companys liquidity is above $35 million, then the applicable margin is reduced to 0.25%.
The obligations of the Company and its subsidiaries under the Amended Loan Agreement are secured under various collateral documents by first priority liens on substantially all of the assets of the Company and certain of its subsidiaries.
The Amended Loan Agreement provides that events of default will exist in certain circumstances, including failure to make payment of principal or interest on the loans when required, failure to perform obligations under the Amended Loan Agreement and related documents, defaults on other indebtedness in excess of $200,000, the occurrence of a change of control of the Company, and certain other events. Upon an event of default, the Bank may accelerate maturity of the loans and enforce remedies under the Amended Loan Agreement and related documents.
The Amended Loan Agreement, if not sooner terminated in accordance with its terms, originally expired on April 23, 2014. On June 30, 2011, in conjunction with the Companys convertible note financing, the Amended Loan Agreement was amended to expire on April 23, 2013.
At September 30, 2011 and December 31, 2010, the Company had $34.7 million and $15.0 million, respectively, outstanding under the Amended Loan Agreement. The rate used was the Banks prime rate of 3.25% plus 0.75% (or 4.0% at September 30, 2011) and the Banks prime rate of 4.0% plus 0.50% (or 4.5% at December 31, 2010). As of September 30, 2011 the Company had $0 available under the line of credit.
21
Table of Contents
Subordinated Notes Payable
On June 16, 2010, the Company entered into a Venture Loan and Security Agreement with Compass Horizon Funding Company LLC (the Lender) pursuant to which the Lender has loaned the Company $12,000,000 (as amended to date, the Subordinated Loan). After the Lenders closing fees and expenses, the net proceeds to the Company were $11,826,500. Interest on the Subordinated Loan will accrue at a rate per annum equal to 12.58%. The Subordinated Loan is currently subordinated to up to $5,000,000 of senior indebtedness, provided that from and after August 31, 2010, the senior indebtedness cannot exceed an amount equal to 80% of the Companys accounts receivable plus 40% of its inventory. The Subordinated Loan is to be repaid over 42 months following the closing. From June 15, 2010 through April 30, 2011, the Company is only required to pay interest on the Subordinated Loan and thereafter the Subordinated Loan will be repaid in 33 substantially equal monthly installments of interest and principal. The Subordinated Loan may be prepaid by the Company by paying all accrued interest through the date of payment, the then outstanding principal balance and a prepayment premium equal to a declining percentage of the principal amount outstanding at the time of prepayment (initially 4% during the first twelve months of the subordinated Loan, decreasing to 3% for the succeeding twelve months and 2% thereafter). In connection with the Subordinated Loan, the Company has issued to the Lender five-year warrants to acquire up to an aggregate of 591,716 shares of the Companys common stock at an exercise price of $2.43 per share (which was the 20-day trailing volume weighted average price of the Companys common stock). During 2011, the warrants were amended to lower the exercise price to $2.00 per share, resulting in a charge of approximately $0.1 million. The relative fair value of the warrants at issuance was $0.9 million and will be recorded as interest expense over the term of the loan. The Company estimated the fair value of the warrants, at time of issuance and when modified, using the Black-Scholes option pricing model using the following assumptions:
Assumptions:
|
|
June 16, 2010
|
|
June 30, 2011
|
|
Expected life
|
|
5 years
|
|
4 years
|
|
Expected volatility
|
|
74.9%
|
|
75.0%
|
|
Dividends
|
|
none
|
|
none
|
|
Risk-free interest rate
|
|
2.0%
|
|
0.5%
|
|
The Subordinated Notes Payable are to be repaid over 42 months as follows:
Fiscal Year
|
|
Principal
Repayment
|
|
2011
|
|
$
|
2,541,720
|
|
2012
|
|
4,233,191
|
|
2013
|
|
4,797,531
|
|
2014
|
|
427,558
|
|
Total
|
|
$
|
12,000,000
|
|
22
Table of Contents
Subordinated Convertible Notes
On June 29, 2011, the Company entered into a Securities Purchase Agreement (the Purchase Agreement) with the purchaser named therein (the Purchaser) in connection with the private placement (the Private Placement) of $16.0 million aggregate principal amount of unsecured, subordinated convertible notes (the Convertible Notes). The shares to be issued upon conversion of the Convertible Notes, or as payment of principal or interest on the Convertible Notes in lieu of cash, have been registered under the Securities Act, as of July 27, 2011. The Private Placement closed on June 30, 2011.
Among other terms, the Purchase Agreement provides that (1) the Company will not issue, offer or sell any equity securities of the Company, including convertible securities, subject to certain exceptions, until the date that is 30 days following the earlier of (i) the effectiveness of the Registration Statement covering the shares underlying the Convertible Notes (as described below) and (ii) the six month anniversary of the closing date of the issuance and sale of the Convertible Notes and (2) the Company will not redeem or declare or pay any dividends on, any of its securities without consent of the Purchaser.
The Company also entered into a Registration Rights Agreement with the Purchasers pursuant to which the Company agreed to register the common stock issuable upon conversion of, or the payment of interest on, the Convertible Notes, as further described below. The Company agreed to file a registration statement under the Securities Act within 20 days of the closing of the Private Placement to register the resale of the shares of common stock issuable upon conversion of the Convertible Notes and as payment of interest on the Convertible Notes, which it did. The Company agreed to use its best efforts to cause the registration statement to be declared effective within 70 days following the closing of the Private Placement (or 90 days of the registration statement is reviewed by the Securities and Exchange Commission) and to keep the registration statement effective until the earlier of (1) the date all of the securities covered by the registration statement have been sold, (2) the date all of the securities covered by the registration statement may be sold without restriction under Rule 144 promulgated under the Securities Act of 1933, as amended (the Securities Act). If the Company fails to comply with these or certain other provisions, then the Company shall be required to pay liquidated damages of 1% of the aggregate outstanding principal amount of the Convertible Notes for the initial occurrence of such failure and for each subsequent 30 day period in which the failure continues. The net proceeds of the sale of the Convertible Notes were approximately $15.0 million, after deducting placement fees and other offering-related expenses. The Registration Statement was declared effective on July 27, 2011.
The Convertible Notes have an aggregate principal amount of $16.0 million and are convertible into shares of the Companys common stock at a conversion price of $2.92, subject to adjustment. The conversion price will be adjusted, on the eleventh trading day following the public announcement of Satcons financial results for the quarter ending September 30, 2011 (the Adjustment Date), to the lower of (i) the then effective conversion price and (ii) 110% of the arithmetic average of the volume weighted average price of the Companys common stock for the ten consecutive trading days ending on the trading day immediately preceding the Adjustment Date. The Convertible Notes are convertible at the option of the holders into shares of the Companys common stock at any time at the then applicable conversion price.
The Convertible Notes mature on July 1, 2013, and bear interest at a rate of 7.0% per annum. Interest is payable monthly, beginning on November 1, 2011. Interest and principal may be made in cash or, at the option of the Company if certain equity conditions are satisfied, in shares of its common stock. If interest or principal is paid in shares of common stock, the price per share will be at the lower of (i) the then current conversion price and (ii) 88% of the arithmetic average of the volume weighted average price of Satcons common stock for the ten consecutive trading days ending on the trading day immediately preceding the payment date.
If at any time following the Adjustment Date, the closing sale price of Company common stock exceeds 175% of the conversion price for 30 consecutive trading days, then, if certain equity conditions are satisfied, the Company may require the holders of the Convertible Notes to convert all or any part of the outstanding principal into shares of common stock at the then applicable conversion price, provided that the Company may only make a one-time election to force conversion. The Convertible Notes contain certain limitations on optional and mandatory conversion, including that, absent stockholder approval of the transaction, the Company will not issue shares of common stock under the Convertible Notes in excess of 19.99% of the Companys outstanding shares on the closing date.
The Convertible Notes contain certain covenants and restrictions, including, among others, that, for so long as the Convertible Notes are outstanding, the Company will not incur any indebtedness that is senior to, or on parity with, the Convertible Notes in right of payment, subject to limited exceptions for existing indebtedness. Events of default under the Convertible Notes include, among others, payments defaults, cross-defaults, the Companys common stock is suspended from trading for a period of time or no longer listed on an eligible trading market, and certain bankruptcy-type events involving the Company or any subsidiary. Upon an event of default, the holders may elect to require the Company to redeem all or any portion of the outstanding principal amount of the Convertible Notes for a price equal to the greater of 120% of (i) the amount to be redeemed (as calculated through the redemption
23
Table of Contents
date) and (ii) the product of (A) the conversion rate with respect to such amount in effect at such time as the holders deliver a redemption notice and (B) the greatest closing sale price of the Companys common stock on any trading day during the period starting on the date immediately preceding the event of default and ending on the trading day immediately prior to the date the Company is required to pay the redemption amount. The holders may elect to require the Company to redeem for cash all or any portion of the outstanding principal on the Convertible Notes in connection with a change of control of the Company.
In addition, at any time after the 60th day following the earlier to occur of (i) the first date on which the resale of common stock underlying the Convertible Notes is covered by one or more effective registration statements and (ii) the six month anniversary of the closing of the Private Placement, the Company may redeem all (but not less than all) of the then outstanding amount of the Convertible Notes in cash at a price equal to the greater of 125% of (i) the amount to be redeemed (as calculated through the redemption date) and (ii) the product of (A) the conversion rate with respect to such amount in effect at such time as the Company delivers a redemption notice and (B) the greatest closing sale price of the Companys common stock on any trading day during the period starting on the date notice of redemption is given and ending on the date immediately prior to the redemption, provided that the Company may only deliver one such redemption notice.
Accounting for the Subordinated Convertible Notes
The Company has elected to account for the Subordinated Convertible Notes (Convertible Notes) as an instrument that has the characteristics of a debt host contract containing several embedded derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of ASC 815. The Company has identified all of the derivatives associated with the June 30, 2011 financing; however, several of the derivatives cannot be reliably measured nor reliably associated with another derivative that can be reliably measured. As such, the Company has appropriately valued these derivatives as a single contract together with the Convertible Notes. As permitted under ASC 825-10-10, the Company has elected as of the issuance date to measure the Convertible Notes in their entirety at fair value with changes in fair value recognized as either gain or loss until the notes are settled. This election was made by the Company after determining that the aggregate fair value of the Convertible Notes to be more meaningful in the context of the Companys financial statements than if separate fair values were assigned to each of the multiple embedded instruments contained in such Convertible Notes.
Upon issuance of the Convertible Notes the Company determined the initial carrying value of the Convertible Notes to be $16.0 million. The Convertible Notes were immediately marked to fair value, resulting in a liability in the amount of $16.4 million.
The change in fair value related to the Convertible Notes was a credit to change in fair value of subordinated convertible notes and warrant liabilities in the statement of operations for the three and nine month periods ended September 30, 2011 of $1.1 million and $0.8 million, respectively. Due to the Convertible Notes being carried at fair value in accordance with ASC 825, financing costs associated with obtaining the convertible notes have been immediately expensed. The Company paid approximately $1.1 million in related transaction costs, which was recorded as interest expense in the statement of operations for the nine months ended September 30, 2011.
A summary of changes in the Convertible Notes is as follows:
|
|
Convertible
Notes
|
|
Initial gross proceeds
|
|
$
|
16,000,000
|
|
Fair value adjustment
|
|
350,000
|
(1)
|
Fair value at June 30, 2011
|
|
$
|
16,350,000
|
|
Fair value adjustment
|
|
(1,100,000
|
)(1)
|
Fair value at September 30, 2011
|
|
$
|
15,250,000
|
|
(1)
Amounts included in change in fair value of subordinated convertible notes and warrant liabilities on consolidated statement of operations.
Valuation - Methodology and Significant Assumptions
The process of analyzing/valuing financial and derivative instruments utilizes facts and circumstances as of the measurement date as well as certain inputs, assumptions, and judgment calls that may affect the estimated fair value of the instruments. The estimated fair value of the Convertible Notes is based on a utilization of certain valuation models that consider current and expected
24
Table of Contents
stock prices, expected volatility, expected interest rates, scheduled principal and interest payments, expected rate of returns and discount rates, probabilities of occurrences of certain future events, and expected liquidation horizons. Such inputs and assumptions as well as the conclusions of values are subject to significant estimates and actual results may differ.
The methods, inputs, and significant assumptions utilized in estimating the fair value of the Convertible Notes are summarized in the following sections.
Methods
A continuous-variable stochastic process in the form of a Monte-Carlo Simulation was utilized to estimate the fair value of the Convertible Notes as of the Issuance Date. Monte Carlo simulation, a process of randomly generating values for uncertain variables, is meant to imitate a real-life system especially when other analyses are too mathematically complex or too difficult to reproduce. This method was used to simulate future expected stock prices, variable strike prices, and the behavior of each of the instruments significant features, as discussed above, as well as the respective outcomes at each particular time in the future - bi-weekly time steps were utilized throughout the maturity of the Convertible Notes as well as daily time steps for purposes of estimating the adjustment to the Conversion price as discussed above. Other valuation methods were considered, such as the Black-Scholes-Merton option-pricing model and a binomial lattice model, but the simulation model was found as most appropriate in the analysis of the Convertible Notes due to the potential variability of the Conversion Price (and its path dependency on stock prices during a period of 10 consecutive trading days prior to the potential adjustment day) and the Companys ability to force conversion should certain condition are met in the future (as discussed above).
The simulation model was first utilized to continuously simulate the expected prices of the Companys common stock at each time step and throughout the remaining life of the instrument. Secondly, an analysis of each of the instruments significant features was conducted at each time step for purposes of determining the respective value of each feature and its affect on the price market participants would be willing to pay for the Convertible Notes. Based on the simulated stock prices, the value of each of the features at each time step, the greater of (or lower of in the case of the options at the Companys hands) the conversion positions, redemption positions, or holding positions (i.e. fair value as of each respective future time step discounted using the applicable effective discount rate) was conducted relative to each time step and from the perspective of the Holders, until a final fair value of the instrument is determined at the time step representing the measurement date. This model requires the following key inputs with respect to the Company and/or instrument:
Inputs
|
|
June 30,
2011
|
|
September 30,
2011
|
|
Stock Price
|
|
$
|
|
2.39
|
|
$
|
|
0.95
|
|
Strike Price (subject to certain adjustments)
|
|
$
|
|
2.92
|
|
$
|
|
2.92
|
|
Expected remaining term (in years)
|
|
2.00
|
|
1.78
|
|
Stock Volatility
|
|
65
|
%
|
85
|
%
|
Risk-Free Rate (based on 2-years life)
|
|
0.45
|
%
|
0.20
|
%
|
Forward Risk Rates (at each time step)
|
|
varies
|
|
varies
|
|
Discount Rate (applicable to instruments debt feature)
|
|
25.00
|
%
|
80.00
|
%
|
Probability of Equity-Like Positions (from Holders perspective and throughout life of instrument)
|
|
35.00
|
%
|
35.00
|
%
|
Probability of Debt-Like Positions (from Holders perspective and throughout life of instrument)
|
|
65.00
|
%
|
65
|
%
|
Effective discount rate
|
|
16.4
|
%
|
20.00
|
%
|
Dividend Rate (on Companys common stock)
|
|
0
|
%
|
0
|
%
|
Outstanding Shares of Common Stock
|
|
119,327,864
|
|
119,769,204
|
|
Probability of an event of default (as defined in the Agreement)
|
|
5.0
|
%
|
5.0
|
%
|
Probability of a change of control transaction (as defined in the Agreement)
|
|
5.0
|
%
|
5
|
%
|
Number of Trials during each simulation analysis
|
|
100,000
|
|
100,000
|
|
25
Table of Contents
Significant Assumptions:
·
The Company expects to pay on time (and in shares of the Companys common stock) all principal and accrued interests due to the Holders on each of the Installment Dates (as discussed above). The dilution effects as a result of the payment in stock vs. cash was assumed to be immaterial to the overall conclusion of the fair value of the instrument as of the valuation date;
·
The volatility of the Companys common stock was estimated by considering (i) the annualized daily volatility of the Companys stock prices during the historical period preceding the respective valuation date and measured over a period corresponding to the remaining life of the instrument and (ii) the implied volatility based on the Companys publicly-traded options to buy or sell shares of the Companys stock;
·
The quoted market price of the Companys stock was utilized in the valuations because the authoritative guidance requires the use of quoted market prices without consideration of blockage discounts. The quoted market price may not reflect the market value of a large block of stock;
·
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;
·
The volume weighted average price for the 10 trading days preceding the potential adjustment to the Conversion Price was reasonably approximated by the average of the simulated stock price at each respective time step of the simulation model;
·
The simulated stock prices at each bi-weekly time step following the date of the potential adjustment to the Conversion Price were assumed to reasonably approximate the Companys stock prices during a period of 30 consecutive trading days for purposes of determining whether the price condition underlying the Companys right to force conversion (as discussed above), has been met;
·
Based on the Companys historical operations and managements expectations for the foreseeable future, the probability of occurrence during the remaining life of the instrument was assumed diminutive (thus assigned as 5% probability in the simulation model) for events of default and change of control transactions (as defined the Convertible Notes);
·
Based on the Companys historical operations and managements expectations for the foreseeable future, equity conditions failures or fundamental transactions (as defined in the Convertible Notes) were not expected to occur during the remaining life of the instrument;
·
The date of the potential adjustment date to the conversion price, as discussed above, was assumed to be based on 45 days following the end of the third calendar quarter of the current year (November 15, 2011); and
·
Based on the Companys historical operations and managements expectations for the near future, the Companys stock was assumed to be a non-dividend-paying stock;
The following table details the principal payments on the Convertible Notes through maturity (Assuming no deferral of such payments by the Holder, as permitted by the terms of the Convertible Notes).
Calendar Years Ending December 31,
|
|
Principal
Payments on
Convertible
Notes
|
|
|
|
|
|
2011
|
|
$
|
1,523,810
|
|
2012
|
|
9,142,857
|
|
2013
|
|
5,333,333
|
|
Total
|
|
$
|
16,000,000
|
|
26
Table of Contents
Note J. Product Warranties
The Company provides a warranty to its customers for most of its products sold. In general the Companys warranties are for one year after the sale of the product and five years for photovoltaic inverter product sales. The Company reviews its warranty liability quarterly. The Companys estimate for product warranties is based on an analysis of actual expenses by specific product line and estimated future costs related to warranty. Factors taken into consideration when evaluating the Companys warranty reserve are (i) historical claims for each product, (ii) the development stage of the product, (iii) volume increases, (iv) life of warranty and (v) other factors. To the extent actual experience differs from the Companys estimate, the provision for product warranties will be adjusted in future periods. Such differences may be significant.
Accrued warranty is included in other accrued expenses on the Companys consolidated balance sheets. The following is a summary of the Companys accrued warranty activity for the following periods:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
2011
|
|
September 30,
2010
|
|
September 30,
2011
|
|
September 30,
2010
|
|
Balance at beginning of period
|
|
$
|
4,489,363
|
|
$
|
2,842,859
|
|
$
|
4,000,081
|
|
$
|
1,869,579
|
|
Provision
|
|
545,112
|
|
1,089,120
|
|
1,857,790
|
|
2,390,699
|
|
Usage
|
|
(418,819
|
)
|
(312,344
|
)
|
(1,242,215
|
)
|
(640,643
|
)
|
Balance at end of period
|
|
$
|
4,615,656
|
|
$
|
3,619,635
|
|
$
|
4,615,656
|
|
$
|
3,619,635
|
|
Note K. Warrant Liabilities
Warrants Issued in Connection with the July 2006 Financing
In connection with the July 19, 2006 private placement of $12.0 million aggregate principal amount of senior secured convertible notes (which notes were subsequently retired by cash redemption in November 2007), the Company issued the following Warrant As, Warrant Bs, Warrant Cs and Placement Agent Warrants:
Warrant As
The Warrant As originally entitled the holders thereof to purchase up to an aggregate of 3,636,368 shares of the Companys common stock at a price of $1.815 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants. The period prior to six months from the date of the warrants is hereinafter referred to as the non-exercise period. The exercise price and the number of shares underlying these warrants are subject to adjustment for stock splits, stock dividends, combinations, distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges.
If a change of control of the Company occurs, as defined, the holders may elect to require the Company to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant A.
For so long as any Warrant As remain outstanding, the Company may not issue any common stock or common stock equivalents at a price per share less than $1.65. In the event of a breach of this provision, the holders may elect to require the Company to purchase the Warrant As for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant A. As a result of the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note L below, the holders were entitled for a limited period of time (45 days after each issuance) to exercise this right. During fiscal 2007, the Company paid approximately $1.4 million to redeem Warrant As representing 1,242,426 shares of common stock. During 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). During the nine month period ended September 30, 2011, warrants to purchase 580,303 shares of common stock were exercised. As of September 30, 2011 and December 31, 2010, Warrant As to purchase 556,061 and 1,136,364 shares of common stock were outstanding, respectively.
27
Table of Contents
If the closing bid price per share of common stock for any 20 consecutive trading days exceeded 200% of the exercise price, then, if certain conditions were satisfied, including certain equity conditions, the Company had the right to require the holders of the Warrant As to exercise up to 50% of the unexercised portions of such warrants (as discussed below, this right was exercised in 2010 and 2011). If the closing bid price per share of common stock for any 20 consecutive trading days exceeds 300% of the exercise price, then, if certain equity conditions are satisfied, the Company may require the holders of the Warrant As to exercise all or any part of the unexercised portions of such warrants.
Warrant Bs
The Warrant Bs entitled the holders thereof to purchase up to an aggregate of 3,636,368 shares of the Companys common stock at a price of $1.68 per share for a period of 90 trading days beginning six months from the date of such warrants. 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 2007 related to the warrant modification of approximately $0.9 million to change in fair value of the Convertible Notes and warrants on the accompanying statement of operations. Pursuant to the original terms of the Warrant Bs, upon exercise of the Warrant Bs, the warrant holders were entitled to receive additional warrants (Warrant Cs) to purchase a number of shares of common stock equal to 50% of the number of shares of common stock purchased upon exercise of the Warrant Bs. As a result of the full exercise of the Warrant Bs, the holders received Warrant Cs to purchase 1,818,187 shares of common stock at an exercise price of $1.815 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants.
Warrant Cs
As discussed above, upon the exercise of the Warrant Bs, the holders were entitled to receive additional warrants (the Warrant Cs). The Warrant Cs originally entitled the holders thereof to purchase up to an aggregate of 1,818,187 shares of our common stock at a price of $1.815 per share for a period beginning six months from the date of such warrants and ending on the seventh anniversary of the date of such warrants. The period prior to six months from the date of the warrants is hereinafter referred to as the non-exercise period. The exercise price and the number of shares underlying these warrants are subject to adjustment for stock splits, stock dividends, combinations, distributions of assets or evidence of indebtedness, mergers, consolidations, sales of all or substantially all assets, tender offers, exchange offers, reclassifications or compulsory share exchanges. If a change of control of the Company occurs, as defined, the holders may elect to require the Company to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant C.
For so long as any Warrant Cs remain outstanding, the Company may not issue any common stock or common stock equivalents at a price per share less $1.65. In the event of a breach of this provision, the holders may elect to require the Company to purchase the Warrant Cs for a purchase price equal to the Black-Scholes value of the remaining unexercised portion of each Warrant C. As a result of the November 8, 2007 and December 20, 2007 preferred stock financing, as described in Note L below, the holders were entitled for a limited period of time (45 days after each issuance) to exercise this right. During 2007, the Company paid approximately $0.7 million to redeem Warrant Cs representing 621,215 shares of common stock. During 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). During the nine month period ended September 30, 2011, warrants to purchase 265,152 shares of common stock were exercised. As of September 30, 2011 and December 31, 2010, Warrant Cs to purchase 348,485 and 613,637 shares of common stock were outstanding, respectively.
If the volume weighted average price per share of the Companys common stock for any 20 consecutive trading days exceeded 200% of the exercise price, then, if certain conditions were satisfied, the Company had the right to require the holders of the Warrant Cs to exercise up to 50% of the unexercised portions of such warrants. If the volume weighted average price per share of the Companys 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.
During 2010, the Company notified the holders of the outstanding Warrant As and Warrant Cs that the holders were required to exercise 50% of their un-exercised warrants. As a result of this notification by the Company holders of Warrant As exercised warrants to purchase 469,699 shares of common stock and holders of Warrant Cs exercised warrants to purchase 234,849 shares of
28
Table of Contents
common stock. During the nine month period ended September 30, 2011, an additional 580,303 Warrant As and 265,152 Warrant Cs were exercised, as noted above, as a result of notification sent out to the remaining holders of the Warrant As and Warrant Cs.
The table below summarizes Black-Scholes option pricing model range of assumptions that were used in valuing the warrants redeemed for both the Warrant As and Warrant Cs.
Assumptions:
|
|
Warrant As
|
|
Warrant Cs
|
|
|
|
|
|
|
|
Expected life
|
|
5.68 years to 5.69 years
|
|
6.67 years to 6.68 years
|
|
Expected volatility ranging from
|
|
83.0%
|
|
85.0%
|
|
Dividends
|
|
none
|
|
none
|
|
Risk-free interest rate
|
|
3.75% - 3.84%
|
|
3.85% - 3.93%
|
|
Placement Agent Warrants
First Albany Capital (FAC) acted as placement agent in connection with the July 19, 2006 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. During the nine month period ended September 30, 2011, the Placement Agent Warrants were exercised in full, resulting in the issuance of 218,182 shares of common stock. As of September 30, 2011 and December 31, 2010, Placement Agent warrants to purchase 0 and 218,182 shares of common stock were outstanding, respectively.
Accounting for the Warrants
Upon issuance and through their date of conversion, the Warrant As, Warrant Bs and Warrant Cs, along with the Placement Agent Warrants (together the Warrants), did not meet the requirements for equity classification, because such warrants (a) must be settled in registered shares, (b) are subject to substantial liquidated damages if the Company is unable to maintain the effectiveness of the resale registration of the shares and (c) provide a cash-out election using a Black-Scholes valuation under various circumstances. Therefore these Warrants are required to be accounted for as freestanding derivative instruments. Changes in fair value are recognized 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 September 30, 2011 and December 31, 2010, the remaining outstanding warrants have been marked to fair value resulting in a derivative liability of $0.3 million and $5.5 million, respectively.
The credit to change in fair value of warrant liabilities, for the three and nine months ended September 30, 2011 was $0.9 million and $2.4 million, respectively, and a charge of $1.3 million and a charge of $1.0 million for the three and nine months ended September 30, 2010, respectively, related to Warrant As, Bs and Cs and placement agent warrants.
A summary of the changes in the fair value of the warrant liabilities:
Balance at December 31, 2009
|
|
$
|
4,976,774
|
|
Warrants exercised
|
|
(175,328
|
)
|
Fair value adjustment (1)
|
|
(1,088,978
|
)
|
Balance at March 31, 2010
|
|
$
|
3,712,468
|
|
Warrants exercised
|
|
(123,691
|
)
|
Fair value adjustment (1)
|
|
857,965
|
|
Balance at June 30, 2010
|
|
$
|
4,446,742
|
|
Warrants exercised
|
|
(287,423
|
)
|
Fair value adjustment (1)
|
|
1,269,118
|
|
Balance at September 30, 2010
|
|
$
|
5,428,437
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
5,454,109
|
|
Fair value adjustment (1)
|
|
(123,561
|
)
|
Warrants exercised
|
|
(2,786,274
|
)
|
Balance at March 31, 2011
|
|
$
|
2,544,274
|
|
Fair value adjustment (1)
|
|
(1,373,622
|
)
|
Balance at June 30, 2011
|
|
$
|
1,170,652
|
|
Fair value adjustment (1)
|
|
(853,728
|
)
|
Warrants exercised
|
|
(44,818
|
)
|
Balance at September 30, 2011
|
|
$
|
272,106
|
|
29
Table of Contents
(1)
Amounts included in change in fair value of note and warrant liabilities on consolidated statement of operations
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. Significant Accounting Policies and Basis of Consolidation for valuation related the Warrants).
In estimating the fair value of the Warrants the following methods and significant input assumptions were applied:
Methods
·
An intrinsic value was utilized to estimate the fair value of Warrant As and Warrant Cs upon their respective exercise dates during 2010 and 2011. According to options theory, the value of an option equals the sum of its intrinsic value and time value and as it approaches exercise/expiration date, time value approaches zero. On the date of the exercise/expiration, time value of a warrant becomes zero and the value of the option equals its intrinsic value. Intrinsic value, for in-the-money options, represents the difference between the strike price and the price of the underlying asset as of expiration/exercise date. Gain/(loss) as of exercise date is determined based on the difference between the options intrinsic value and its fair value as of last measurement/reporting date, with any decrease (increase) in value representing a gain (loss).
·
A binomial lattice model was utilized to estimate the fair value of Warrant As and Warrant Cs on the dates in the corresponding table below, as well as the fair value of the Placement Agent Warrants on the dates in the corresponding table below. The binomial model considers the key features of the Warrants, and is subject to the significant assumptions discussed below. First, a discrete simulation of the Companys stock price was conducted at each node and throughout the expected life of the instrument. Second, an analysis of the higher of a holding position (
i.e
., fair value of a future node value discounted using an applicable discount rate) or exercise position was conducted relative to each node, which considers the non-exercise period, until a final fair value of the instrument is concluded at the node representing the valuation date. This model requires the following key inputs with respect to the Company and/or instrument:
|
|
Warrant As
|
|
Input
|
|
Dec. 31,
2009
|
|
Mar. 31,
2010
|
|
June 30,
2010
|
|
Sept. 30,
2010
|
|
Dec. 31,
2010
|
|
Mar. 31,
2011
|
|
June 30,
2011
|
|
Sept. 30,
2011
|
|
Quoted Stock Price
|
|
$
|
2.82
|
|
$
|
2.42
|
|
$
|
2.86
|
|
$
|
3.76
|
|
$
|
4.50
|
|
$
|
3.86
|
|
$
|
2.39
|
|
$
|
0.95
|
|
Exercise Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
Time to Maturity (in years)
|
|
3.6
|
|
3.3
|
|
3.0
|
|
2.8
|
|
2.6
|
|
2.3
|
|
2.0
|
|
1.8
|
|
Stock Volatility
|
|
75
|
%
|
75
|
%
|
75
|
%
|
75
|
%
|
70
|
%
|
80
|
%
|
75
|
%
|
90
|
%
|
Risk-Free Rate
|
|
2.00
|
%
|
1.74
|
%
|
1.0
|
%
|
0.60
|
%
|
0.84
|
%
|
0.95
|
%
|
0.47
|
%
|
0.23
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
Warrant Cs
|
|
Input
|
|
Dec. 31,
2009
|
|
Mar. 31,
2010
|
|
June 30,
2010
|
|
Sept. 30,
2010
|
|
Dec. 31,
2010
|
|
Mar. 31,
2011
|
|
June 30,
2011
|
|
Sept. 30,
2011
|
|
Quoted Stock Price
|
|
$
|
2.82
|
|
$
|
2.42
|
|
$
|
2.86
|
|
$
|
3.76
|
|
$
|
4.50
|
|
$
|
3.86
|
|
$
|
2.39
|
|
$
|
0.95
|
|
Exercise Price
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
$
|
1.815
|
|
Time to Maturity (in years)
|
|
4.5
|
|
4.3
|
|
4.1
|
|
3.8
|
|
3.6
|
|
3.3
|
|
3.0
|
|
2.8
|
|
Stock Volatility
|
|
75
|
%
|
75
|
%
|
70
|
%
|
75
|
%
|
70
|
%
|
85
|
%
|
80
|
%
|
85
|
%
|
Risk-Free Rate
|
|
2.44
|
%
|
2.22
|
%
|
1,41
|
%
|
0.89
|
%
|
1.29
|
%
|
1.43
|
%
|
0.83
|
%
|
0.39
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
30
Table of Contents
·
A Black-Scholes option pricing model was utilized to estimate the fair value of Placement Agent Warrants on the dates in the corresponding table shown below. A change in method from the binomial to Black-Scholes was warranted because the warrants non-exercise period ended prior to the valuation date and all required inputs were fixed. This model requires the following key inputs with respect to the Company and/or instrument:
Input
|
|
Dec. 31,
2009
|
|
Mar. 31,
2010
|
|
June 30,
2010
|
|
Sept. 30,
2010
|
|
Dec. 31,
2010
|
|
Mar. 31,
2011
|
|
June 30,
2011
|
|
July 14,
2011 (1)
|
|
Quoted Stock Price
|
|
$
|
2.82
|
|
$
|
2.42
|
|
$
|
2.86
|
|
$
|
3.76
|
|
$
|
4.50
|
|
$
|
3.86
|
|
$
|
2.39
|
|
$
|
2.00
|
|
Exercise Price
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
$
|
1.87
|
|
Time to Maturity (in years)
|
|
1.55
|
|
1.30
|
|
1.05
|
|
.80
|
|
0.55
|
|
0.30
|
|
0.05
|
|
0.01
|
|
Stock Volatility
|
|
75
|
%
|
75
|
%
|
60
|
%
|
60
|
%
|
60
|
%
|
90
|
%
|
80
|
%
|
116
|
%
|
Risk-Free Rate
|
|
0.84
|
%
|
0.59
|
%
|
0.34
|
%
|
0.24
|
%
|
0.20
|
%
|
0.11
|
%
|
0.01
|
%
|
0
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
Non-Exercise Period
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
(1)
The placement Agent Warrants were exercised in full on July 14, 2011.
Significant Assumptions:
·
Stock volatility was estimated by annualizing the daily volatility of the Companys stock price during the historical period preceding the respective valuation dates and measured over a period corresponding to the remaining life of the instruments. Historic stock prices were used to estimate volatility as the Company did not have traded options as of the valuation dates;
·
The volume weighted average price for the 20 trading days preceding a payment date was reasonably approximated by the average of the simulated stock price at each respective node of the binomial model;
·
Based on the Companys historical operations and management expectations for the near future, the Companys stock was assumed to be a non-dividend-paying stock;
·
The quoted market price of the Companys stock was utilized in the valuations because the authoritative guidance requires the use of quoted market prices without consideration of blockage discounts. The quoted market price may not reflect the market value of a large block of stock; and
·
The quoted market price of the Companys stock as of measurement dates and expected future stock prices were assumed to reflect the effect of dilution upon conversion of the instruments to shares of common stock.
31
Table of Contents
Note L. Redeemable Convertible Series B and Series C Preferred Stock
On October 31, 2003, the Company completed a $7.7 million equity transaction involving the issuance of 1,535 shares of its Series B Convertible Preferred Stock, $0.01 par value per share (the Series B Preferred Stock), and warrants to purchase up to 1,228,000 shares of the Companys common stock, to accredited investors (the October 2003 Financing Transaction). In connection with the October 2003 Financing Transaction, the Company issued shares of Series B Preferred Stock for $5,000 per share. The Series B Preferred Stock was convertible into a number of shares of common stock equal to $5,000 divided by the conversion price of the Series B Preferred Stock, which was initially $2.50. As of June 30, 2010, the conversion price for the Series B Preferred Stock was $1.49 (as a result of adjustments to the conversion price following issuance in accordance with the terms of the Series B Preferred Stock). During 2010, the remaining 75 shares of Series B Preferred Stock were converted by their holders resulting in the Company issuing 251,678 shares of common stock. As of September 30, 2011 and 2010, 0 and 75 shares of Series B Preferred Stock were outstanding, respectively. As of June 30, 2010, the liquidation preference of the remaining 75 shares of Series B Preferred Stock was $375,000, and these were convertible into 251,678 shares of common stock.
Dividends on Series B Preferred Stock
The shares of Series B Preferred Stock initially bore a cumulative dividend at a rate of 6% per annum; pursuant to its terms, this was increased to a rate of rate of 8% per annum on October 1, 2005. Dividends on the Series B Preferred Stock were payable semi-annually and, except in certain limited circumstances, were entitled to be paid by the Company, at its option, either through the issuance of shares of common stock or in cash. The Company elected to pay the dividend in shares of common stock, and issued a number of shares of common stock equal to the quotient of the dividend payment divided by the greater of 80% of the average closing bid and ask price of the common stock on the Nasdaq Stock Market for the 15 trading days ending on the 11th trading day prior to the date the dividend is required to be paid, and the conversion price, which was initially $2.50, but which had subsequently been adjusted in accordance with the terms of the Series B Preferred Stock to $1.49 (as of June 30, 2010).
Liquidation Preference on Series B Preferred Stock
In the event of a liquidation of the Company, the holders of shares of the Series B Preferred Stock would have been entitled to receive a liquidation payment prior to the payment of any amount with respect to the shares of the common stock. The amount of this preferential liquidation payment would have been $5,000 per share of Series B Preferred Stock, plus the amount of any accrued but unpaid dividends on those shares. This entitlement to a liquidation preference was eliminated upon the holders conversion of the Series B Preferred Stock into shares common stock in October 2010.
Accounting for the Series B Preferred Stock
The Company accounted for the transaction by allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series B Preferred Stock and the related warrants issued to the investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities as follows:
Security
|
|
Face
Value
|
|
Fair
Value
|
|
Allocation of
Proceeds, Net of
Transaction Costs
|
|
Beneficial
Conversion
Feature
|
|
Discount
|
|
Redeemable convertible Series B Preferred Stock
|
|
$
|
7,675,000
|
|
$
|
12,398,195
|
|
$
|
5,247,393
|
|
$
|
3,655,607
|
|
$
|
6,083,214
|
|
Warrants
|
|
|
|
$
|
2,935,558
|
|
$
|
1,242,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C Convertible Preferred Stock and Related Warrants
On November 8, 2007, the Company entered into a Stock and Warrant Purchase agreement with Rockport Capital Partners II, L.P. and NGP Energy Technology Partners, L.P. (the Investors). Under this purchase agreement, the Investors agreed to purchase in a private placement 25,000 shares of the Companys Series C convertible preferred stock (the Series C Preferred Stock) and warrants to purchase up to 19,711,539 shares of common stock, for an aggregate gross purchase price of $25.0 million. Each share of Series C Preferred Stock, with a face value of $1,000 per share, plus accumulated dividends, was initially convertible into common stock at a price equal to $1.04 per share.
On October 27, 2010, the holders of all of the outstanding shares of Series C Preferred Stock converted their shares, including accumulated dividends, into common stock, resulting in the issuance of 27,526,244 shares of common stock. To induce the Series C Preferred Stockholders to convert their shares, the Company paid them an aggregate $1.25 million in cash upon conversion. On October 27, 2010, the date the Series C Preferred Stock was converted to common shares, the company accelerated the accretion of
32
Table of Contents
$1,587,755 to account for the difference between the carrying value of the Series C Preferred Shares on that date and their conversion value.
The private placement occurred in two closings. The first closing occurred on November 8, 2007. At the first closing, the Company issued 10,000 shares of Series C Preferred Stock at $1,000 per share for an aggregate gross purchase price of $10.0 million. The Company also issued warrants to purchase an aggregate of 15,262,072 shares of common stock (the Tranche I Warrants). These warrants are exercisable for a seven-year term and had an initial exercise price of $1.44 per share and were not exercisable until May 8, 2008. As a result of stockholder approval of the second closing and related matters on December 20, 2007, as described below, the exercise price of these warrants was reduced to $1.25 per share. The Company considered this a cancellation and reissuance of new warrants and accounted for the change in the fair value of the warrants in the allocation of net proceeds associated with the second closing and treated it as a deemed dividend to the Series C Preferred Stock holders. See Accounting for the Series C Preferred Stock below. During the year ended December 31, 2010, Tranche I Warrants to purchase 7,631,036 shares of common stock were exercised via a cashless exercise, resulting in the issuance of 5,038,970 shares of common stock. As of September 30, 2011 and 2010, Tranche I Warrants to purchase 7,631,036 shares of common stock were outstanding.
At the second closing, which occurred on December 20, 2007, following stockholder approval, the Company issued 15,000 shares of Series C Preferred Stock for an aggregate gross purchase price of $15.0 million, of which $10.0 million was paid through the cancellation of the promissory notes previously issued to the Investors on November 7, 2007. At this closing, the Company also issued warrants (the Tranche II Warrants) to purchase an aggregate of 4,449,467 shares of common stock at an exercise price of $1.25 per share. These warrants are exercisable for a seven-year term and are exercisable immediately. During the year ended December 31, 2010, Tranche II Warrants to purchase 253,580 shares of common stock were exercised via a cashless exercise, resulting in the issuance of 167,445 shares of common stock. As of September 30, 2011 and 2010, Tranche II Warrants to purchase 4,195,887 shares of common stock were outstanding.
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 the three and nine months ended September 30, 2011, as a result of warrant exercises, the Company issued warrants to purchase an aggregate of 109,090 and 531,817 shares of common stock to the Investors; these warrants expire on March 31, 2018 and September 30, 2018. The Company valued the warrants issued in March 2011 and September 2011 using a Black-Scholes option pricing model with the assumptions detailed below with fair values of approximately $1.3 million and $60,000, respectively.
During the three and nine months ended September 30, 2010, as a result of warrant exercises, the Company issued warrants to purchase an aggregate of 413,303 and 816,863 shares of common stock, respectively, to the Investors; these warrants expire on September 30, 2017, June 30, 2017 and March 31, 2017, respectively. The Company valued the warrants issued using a Black-Scholes option pricing model with the assumptions detailed below with the value of approximately $0.8 million and $1.3 million, respectively. After valuing the 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 $0.5 million and $0.2 million, for the three and nine month periods ended September 30, 2010, respectively, in the aggregate to the second closing of the Series C Preferred Stock. For the three and nine month periods ended September 30, 2010, the Company recorded a deemed dividends on the Series C Preferred Stock of $1.0 million, related to the beneficial conversion feature. See Accounting for the Series C Preferred Stock below.
Input
|
|
March 31,
2010
|
|
June 30,
2010
|
|
Sept. 30,
2010
|
|
March 31,
2011
|
|
Sept. 30,
2011
|
|
Quoted Stock Price
|
|
$
|
2.42
|
|
$
|
2.86
|
|
$
|
3.76
|
|
$
|
3.86
|
|
$
|
0.95
|
|
Exercise Price
|
|
$
|
1.66
|
|
$
|
1.66
|
|
$
|
1.66
|
|
$
|
1.66
|
|
$
|
1.66
|
|
Time to Maturity (in years)
|
|
7.00
|
|
7.00
|
|
7.00
|
|
7.00
|
|
7.00
|
|
Stock Volatility
|
|
80.8
|
%
|
79.13
|
%
|
73.44
|
%
|
72.0
|
%
|
75.0
|
%
|
Risk-Free Rate
|
|
2.4
|
%
|
2.5
|
%
|
1.75
|
%
|
2.0
|
%
|
1.0
|
%
|
Dividend Rate
|
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
0
|
%
|
As of September 30, 2011, if all of the remaining existing warrants are exercised, the Company would need to issue warrants to purchase an additional 452,273 shares of common stock to the Investors.
33
Table of Contents
Dividends on Series C Preferred Stock
Until their conversion in October 2010, the shares of Series C Preferred Stock accrued a dividend at a rate of 5% per annum of the face value. Dividends on the Series C Preferred Stock were accrued, whether or not declared, and were payable quarterly in cash or, at the Companys option, added to the Stated Liquidation Preference Amount.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary (a Liquidation), the holders of shares of the Series C Preferred Stock then outstanding would have been entitled to receive, out of the assets of the Company available for distribution to its stockholders before any payment was made to the holders of junior stock by reason of their ownership thereof, an amount per share equal to the greater of:
(i) the Series C Original Issue Price ($1,000 per share) plus any dividends accrued but unpaid thereon (the Stated Liquidation Preference Amount); or
(ii) such amount per share as would have been payable had all shares of Series C Preferred Stock been converted into common stock immediately prior to such Liquidation. The entitlement to dividends and a liquidation preference were eliminated upon the holders conversion of the Series C Preferred Stock into common stock on October 27, 2010.
Accounting for the Series C Preferred Stock
Initially, based on the accounting guidance in effect at the time of the closing of the Series C Preferred Stock transaction, the Company accounted for the transaction by allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series C Preferred Stock and the warrants issued to the Investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities as follows:
Security
|
|
Face
Value
|
|
Fair
Value
|
|
Allocation of
Proceeds, Net of
Transaction
Costs
|
|
Beneficial
Conversion
Feature
|
|
Initial
Carrying
Value
|
|
Redeemable convertible Series C Preferred Stock
|
|
$
|
25,000,000
|
|
$
|
18,193,950
|
|
$
|
12,991,097
|
|
$
|
11,762,887
|
|
$
|
1,228,210
|
|
Warrants
|
|
|
|
$
|
18,352,179
|
|
$
|
10,092,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Series C Preferred Stock was classified as temporary equity on the balance sheet.
The re-pricing of the exercise price of the Tranche I warrants from $1.44 to $1.25, as described above, was treated as a cancellation of the original warrants issued on November 8, 2007 and a re-issuance of new warrants on December 20, 2007. The difference in fair value of the warrant was included in the allocation of net proceeds associated with the second closing of the Series C Preferred Stock on December 20, 2007. The Company treated this as a deemed dividend on the Series C Preferred Stock. The Company recorded a discount, including the re-pricing and beneficial conversion feature of $11,762,887 and recorded a deemed dividend of $11,947,881 to the holders of the Series C Preferred Stock, which included the initial allocation of the discount of $11,762,887 and $184,994 related to the accretion of the Series C Preferred Stock to its redemption value through the date that holders of the Series C Preferred Stock may first exercise their redemption right. Prior to the conversion of the Series C Preferred Stock in October 2010, the Company used the effective interest method to accrete the carrying value of the Series C Preferred Stock through the earliest possible redemption date (November 8, 2011), at which time the value of the Series C Preferred Stock would have been $30.0 million or 120% of its face value and dividends.
The components of the carrying value of the Series C Preferred Stock from December 31, 2009 to September 30, 2010, are as follows:
|
|
Total
|
|
Balance at December 31, 2009
|
|
$
|
22,257,423
|
|
Accretion of original issue discount to redemption value
|
|
3,652,639
|
|
Dividend for the nine months ending September 30, 2010 (1)
|
|
1,108,370
|
|
Additional discount from issuance of warrants and beneficial conversion feature
|
|
(515,000
|
)
|
Balance at September 30, 2010 (2)
|
|
$
|
26,503,432
|
|
34
Table of Contents
(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.
|
(2)
|
The Series C Preferred Stock was converted in full during 2010.
|
The Company
designated the warrants issued in connection with the Series C Preferred Stock as equity instruments. As stated above, the holders of the Series C Preferred Stock converted their shares of Series C Preferred Stock into common stock on October 27, 2010.
Note M. Stock Option Plans
Stock Option Plans
Under the Companys 2002 and 2005 Stock Option Plans (collectively, the Plans), both qualified and non-qualified stock options may be granted to certain officers, employees, directors and consultants to purchase shares of the Companys common stock. At September 30, 2011, 3,963,922 shares were available for future grants under the Plans.
The Plans are subject to the following provisions:
·
The aggregate fair market value (determined as of the date the option is granted) of the Companys common stock that any employee may purchase in any calendar year pursuant to the exercise of qualified options may not exceed $100,000. No person who owns, directly or indirectly, at the time of grant of a qualified option to him or her, more than 10% of the total combined voting power of all classes of stock of the Company shall be eligible to receive any qualified options under the Plans unless the exercise price is at least 110% of the fair market value of the Companys common stock subject to the option, determined on the date of grant. Non-qualified options are not subject to this limitation.
·
Qualified options are issued only to employees of the Company, while non-qualified options may be issued to non-employee directors, consultants and others, as well as to employees of the Company. Options granted under the Plans cannot exceed 500,000 shares in any year and may not be granted with an exercise price less than 100% of the 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.
35
Table of Contents
The following table summarizes the Companys stock option activity (both under the Plans and outside of the Plans) since December 31, 2010:
|
|
Options Outstanding
|
|
|
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Term
(years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2010
|
|
13,426,968
|
|
$
|
2.33
|
|
7.74
|
|
$
|
29,712,186
|
|
Grants
|
|
453,500
|
|
$
|
4.40
|
|
|
|
|
|
Exercises
|
|
(152,873
|
)
|
$
|
1.93
|
|
|
|
|
|
Cancellations
|
|
(14,875
|
)
|
$
|
2.70
|
|
|
|
|
|
Outstanding at March 31, 2011
|
|
13,712,720
|
|
$
|
2.40
|
|
7.60
|
|
$
|
21,491,780
|
|
Grants
|
|
2,225,000
|
|
$
|
2.98
|
|
|
|
|
|
Exercises
|
|
(165,375
|
)
|
$
|
1.61
|
|
|
|
|
|
Cancellations
|
|
(1,031,123
|
)
|
$
|
3.18
|
|
|
|
|
|
Outstanding at June 30, 2011
|
|
14,741,222
|
|
$
|
2.44
|
|
7.56
|
|
$
|
4,492,398
|
|
Grants
|
|
326,500
|
|
$
|
1.57
|
|
|
|
|
|
Exercises
|
|
|
|
|
|
|
|
|
|
Cancellations
|
|
(223,939
|
)
|
$
|
3.03
|
|
|
|
|
|
Outstanding at September 30, 2011
|
|
14,843,783
|
|
$
|
2.41
|
|
7.19
|
|
$
|
14,984
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at September 30, 2011
|
|
14,352,623
|
|
$
|
2.39
|
|
7.13
|
|
$
|
14,984
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2011
|
|
7,900,264
|
|
$
|
2.01
|
|
6.21
|
|
$
|
14,984
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
6,000,134
|
|
$
|
2.06
|
|
6.59
|
|
$
|
15,147,062
|
|
Information relating to stock options vested and expected to vest (both under the Plans and outside of the Plans) as of September 30, 2011 is as follows:
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number of
Shares
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
Weighted Average
Exercise Price
|
|
Exercisable
Number of
Shares
|
|
Exercisable
Weighted
Average
Exercise Price
|
|
$0.62 to $1.89
|
|
2,059,763
|
|
6.56
|
|
$
|
1.35
|
|
1,369,390
|
|
$
|
1.31
|
|
$1.90 to $1.90
|
|
4,802,770
|
|
6.58
|
|
$
|
1.90
|
|
3,901,329
|
|
$
|
1.90
|
|
$1.91 to $2.35
|
|
2,284,125
|
|
7.10
|
|
$
|
2.28
|
|
1,184,882
|
|
$
|
2.25
|
|
$2.39 to $2.99
|
|
3,638,125
|
|
7.77
|
|
$
|
2.78
|
|
1,314,475
|
|
$
|
2.57
|
|
$3.08 to $4.98
|
|
1,974,000
|
|
8.61
|
|
$
|
4.12
|
|
50,188
|
|
$
|
3.44
|
|
$5.13 to $5.13
|
|
5,000
|
|
9.30
|
|
$
|
5.13
|
|
0
|
|
$
|
0.00
|
|
$5.26 to $5.26
|
|
80,000
|
|
0.30
|
|
$
|
5.26
|
|
80,000
|
|
$
|
5.26
|
|
$0.62 to $5.26
|
|
14,843,783
|
|
7.19
|
|
$
|
2.41
|
|
7,900,264
|
|
$
|
2.01
|
|
36
Table of Contents
Options to purchase 318,248 shares were exercised during the nine month period ended September 30, 2011, and these options had an intrinsic value of approximately $0.6 million on the date of exercise. Options to purchase 238,377 and 946,786 shares were exercised during the three and nine month period ended September 30, 2010, respectively, and these options had an intrinsic value of approximately $0.8 million and $2.7 million on the date of exercise, respectively.
During 2010, as an inducement to his joining the Company, the Company granted its then Chief Financial Officer options to acquire 1,000,000 shares of common stock at a price per share equal to $2.33, the closing price of the common stock on March 15, 2010, the date his employment commenced. The option vests over four years, with the first 25% vesting on March 15, 2011 and the balance vesting in equal quarterly installments over the following three years. Of these options, one option to purchase 500,000 shares was issued under the Companys 2005 Plan and one option to purchase 500,000 shares was issued outside of the 2005 Plan. In May 2011 the Company terminated the employment of its then Chief Financial Officer, at which time options to purchase 250,000 shares of common stock had vested. Pursuant to the terms of the former Chief Financial Officers employment agreement, these vested options will remain exercisable for one year from the date of his termination.
Note N. Warrants
A summary of the status of the Companys warrants as of September 30, 2011 and 2010 and the changes for these periods are presented below. The Company received proceeds of $1.9 million and $3.2 million related to the 2011 and 2010 exercises, respectively.
|
|
Nine Months Ended
September 30,
2011
|
|
Nine Months
Ended September 30,
2010
|
|
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
|
Number of
Shares
|
|
Weighted
Average
Price
|
|
Outstanding at beginning of period
|
|
15,974,171
|
|
$
|
1.57
|
(2)
|
24,857,329
|
|
$
|
1.48
|
(2)
|
Granted (1)
|
|
531,816
|
|
1.66
|
|
1,408,579
|
|
1.99
|
|
Exercised
|
|
(1,063,637
|
)
|
1.82
|
|
(9,831,852
|
)
|
1.38
|
|
Outstanding at end of period
|
|
15,442,350
|
|
$
|
1.38
|
|
16,434,056
|
|
$
|
1.42
|
|
(1)
|
The Company issued warrants to purchase 531,817 and 816,863 shares of common stock during 2011 and 2010, respectively, at $1.66 per share to the Investors as a result of warrant exercises during the nine months ended September 30, 2011 and 2010. These warrants are immediately exercisable upon their issuance and have a 7 year life.
|
(2)
|
During 2011, the Company modified the terms of warrants to purchase 591,716 shares of common stock issued to its subordinated debt holders to lower the exercise price from $2.43 to $2.00 per share.
|
37
Table of Contents
Note O. Segment Disclosures
Following the sale in 2008 of its Electronics and Power Systems US segments and the classification in 2009 of its Applied Technology segment as part of discontinued operations, and subsequent sale during the quarter ended March 31, 2010, the Company believes it operates in one business segment, Renewable Energy Solutions.
The Company operates and markets its services and products on a worldwide basis with its principal markets as follows:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
Sept. 30,
2011
|
|
Sept. 30,
2010
|
|
Sept. 30,
2011
|
|
Sept. 30,
2010
|
|
Revenue by geographic region based on location of customer (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
36,228,184
|
|
$
|
22,024,172
|
|
$
|
107,575,965
|
|
$
|
41,971,093
|
|
China
|
|
70,950
|
|
4,421,741
|
|
9,423,274
|
|
8,076,062
|
|
Taiwan
|
|
79,799
|
|
|
|
3,621,187
|
|
|
|
India
|
|
725,911
|
|
|
|
6,629,911
|
|
|
|
Czech Republic
|
|
8,029
|
|
19,189,294
|
|
305,078
|
|
30,595,894
|
|
Canada
|
|
4,666,132
|
|
8,750,445
|
|
16,690,954
|
|
11,891,347
|
|
Germany
|
|
2,155
|
|
162,434
|
|
318,481
|
|
2,187,579
|
|
Belgium
|
|
|
|
72,823
|
|
58,080
|
|
1,781,647
|
|
Italy
|
|
1,669,905
|
|
|
|
2,443,531
|
|
|
|
France
|
|
49,319
|
|
2,878,950
|
|
610,182
|
|
2,878,950
|
|
Australia
|
|
|
|
|
|
250,896
|
|
|
|
Greece
|
|
1,506,058
|
|
369,174
|
|
4,517,556
|
|
806,969
|
|
Rest of World
|
|
3,693
|
|
512,788
|
|
67,013
|
|
552,232
|
|
Total Revenue
|
|
$
|
45,010,135
|
|
$
|
58,381,821
|
|
$
|
152,512,108
|
|
$
|
100,741,773
|
|
(1)
Does not include revenue from discontinued operations for all periods presented.
|
|
September 30,
2011
|
|
December 31,
2010
|
|
Long-lived assets by geographic region based on location of operations (2):
|
|
|
|
|
|
United States
|
|
$
|
9,443,333
|
|
$
|
5,421,764
|
|
Canada
|
|
1,946,135
|
|
1,862,521
|
|
China
|
|
387,831
|
|
|
|
Total long-lived assets
|
|
$
|
11,777,299
|
|
$
|
7,284,285
|
|
(2) Does not include assets from discontinued operations for all periods presented.
38
Table of Contents
Note P. Restructuring Costs
On June 30, 2011, the Company completed a plan of reorganization approved by management. As a result of the restructuring, the Company recorded approximately $1.1 million in payroll-related costs relating to an approximately 15% reduction in the Companys workforce. None of the terminated employees were required to provide any service to the Company subsequent to their receiving notification of termination. As of September 30, 2011, approximately $0.6 million remains to be paid.
During the quarter ended March 31, 2010, the Company completed the final steps of its reorganization efforts in accordance with a plan of reorganization approved by the Board of Directors. As a result of the March 2010 restructuring, the Company recorded approximately $0.8 million in payroll-related costs. As of September 30, 2011, all amounts have been paid to the terminated employees. None of the terminated employees were required to provide any service to the Company subsequent to their receiving notification of termination.
Note Q. Employee Benefit Plan
During 2010, the Company implemented its employee stock purchase plan (ESPP) and reserved 2,000,000 shares of common stock for this purpose. Under the ESPP, qualified employees may purchase shares of common stock by payroll deduction at a 15% discount from the market price. During the three and nine months ended September 30, 2011, 223,271 and 476,154 shares of common stock were issued under the ESPP, respectively. As of September 30, 2011, 1,443,951 shares of common stock were available for distribution under the ESPP. The Company recorded non-cash stock-based compensation expense of approximately $249,000 and $673,000 for the three and nine month periods ended September 30, 2011, respectively.
Note R. Shareholders Rights Agreement
On January 6, 2011, the Company entered into a stockholder rights agreement (the Rights Agreement). The Rights Agreement provides for a dividend distribution of one preferred stock purchase right for each outstanding share of the Companys common stock. Each right entitles the registered holder to purchase from the Company one-thousandth of a share of the Companys Series A Junior Participating Preferred Stock. The Companys board of directors adopted the Rights Agreement to protect the Companys ability to use its net operating losses and certain other tax attributes (NOLs) for federal and state income tax purposes. Under the Internal Revenue Code of 1986, as amended (the Code), the Company may utilize the NOLs in certain circumstances to offset current and future earnings and thus reduce its federal income tax liability, subject to certain requirements and restrictions. If the Company experiences an ownership change, as defined in Section 382 of the Code, its ability to use the NOLs could be substantially limited or lost altogether. In general terms, the Rights Agreement is intended to act as a deterrent to any person or group that acquires 4.99% or more of the Companys common stock without approval of the Companys board of directors by allowing other stockholders to acquire equity securities of the Company at half of their fair value. The Rights Plan will continue in effect until January 6, 2014, unless it is terminated or redeemed earlier by the Companys board of directors.
Note S. Subsequent Events
The Company has evaluated all events or transactions through the date of this filing. During this period the Company did not have any material subsequent events that impacted its consolidated financial statements or disclosures.
39
Table of Contents
I
tem 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
You should read the following discussion and analysis in conjunction with our unaudited 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, 2010.
This report contains or incorporates by reference forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this report regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words anticipates, believes, estimates, expects, intends, may, plans, projects, will, would and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include statements concerning our expected financial results; the competitive nature of the markets in which we compete; the demand for our products; our ability to introduce new products and technologies; our ability to effectively manage growth; and our ability to obtain sufficient capital to expand our business. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated by these forward-looking statements. These important factors include the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 and in Part II, Item 1A of our Quarterly Reports, including this Quarterly Report, which identify certain risks and uncertainties that may have an impact on our future earnings and the direction of our Company.
These risks include, among others, the following: our history of operating losses; our ability to meet our debt obligations; our ability to maintain compliance with Nasdaq Marketplace Rules for continued listing on Nasdaq; the demand for our products; the availability of third-party financing arrangements for our customers; our ability to maintain our technological expertise in design and manufacturing processes; our ability to protect our intellectual property; our ability to attract and retain highly qualified personnel; our success against our competitors; our dependence on third-party suppliers; our exposure to losses from fixed price engineering contracts; our ability to manage our growth; perceived demand for alternative energy solutions; risks associated with international operations; the credit risks associated with some of our customers; and the availability of sufficient funds for our corporate needs.
Forward-looking statements contained in this quarterly report speak only as of the date of this report. Subsequent events or circumstances occurring after such date may render these statements incomplete or out of date. We undertake no obligation and expressly disclaim any duty to update such statements.
Overview
We are a leading clean energy technology provider of utility-grade power conversion solutions for the renewable energy market. We design and deliver advanced power conversion solutions that enable large-scale producers of renewable energy to convert clean energy into grid-connected, efficient and reliable electrical power.
Our power conversion solutions boost total system power production through systems intelligence, advanced command and control capabilities, industrial-grade engineering and total lifecycle performance optimization. Our power conversion solutions feature the widest range of power ratings in the solar industry. We also offer
system design services and solutions for management, monitoring, and performance measurement to maximize capital investment and improve overall quality and performance over the entire lifespan of an installation.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of our operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, receivable reserves, inventory reserves, intangible assets, contract losses, warranty reserves 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
40
Table of Contents
carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting estimates were discussed with our Audit Committee.
The significant accounting policies that management believes are most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
We recognize revenue from product sales 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 provision of multiple elements and the elements qualify for separation, total estimated contract revenue is allocated to each element based on the relative fair value of each element provided. The amount of revenue allocated to each element is limited to the amount that is not contingent upon the delivery of another element in the future. Revenue is recognized on each element as described above.
Contract Losses
When the current estimates of total contract revenue for a customer order indicates a loss, a provision for the entire loss on the contract is recorded. For the three and nine months ended September 30, 2011 we recorded a contract loss on a customer order of approximately $5.1 million. At September 30, 2011 our accrued contract loss was approximately $0.3 million. The excess costs over projected revenues are recorded as a component of both cost of sales and research and development expense.
Cost of product revenue includes material, labor and overhead.
Deferred revenue consists of payments received from customers in advance of services performed, product shipped or installation completed. When an item is deferred for revenue recognition purposes, the deferred revenue is recorded as a liability and the deferred costs are recorded as a component of inventory in our consolidated balance sheets. Deferred revenue also consists of cash received for extended product warranties.
Unbilled contract costs and fees represent revenue recognized in excess of amounts billed due to contractual provisions or deferred costs that have not yet been recognized as revenue or billed to the customer.
Accounts Receivable
Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The estimated allowance for uncollectible amounts is based primarily on a specific analysis of accounts in the receivable portfolio and historical write-off experience. While management believes the allowance to be adequate, if the financial condition of our customers were to deteriorate, resulting in impairment of their ability to make payments, additional allowances may be required.
Inventory
We value our inventory at the lower of actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory, and costs are determined based on the first-in, first-out method of accounting and include material, labor and manufacturing overhead costs. We periodically review inventory quantities on hand and record a provision for excess and/or obsolete inventory within cost of product revenue based primarily on our historical usage, as well as based on estimated forecast of product demand. A significant decrease in demand for our products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
41
Table of Contents
Warranty
We offer warranty coverage for our products for period of 5 years after shipment. We estimate the anticipated costs of repairing products under warranty based on the historical or expected cost of the repairs and expected failure rates. The assumptions used to estimate warranty accruals are re-evaluated quarterly, at a minimum, in light of actual experience and, when appropriate, the accruals or the accrual percentage is adjusted based on specific estimates of project repair costs and quantity of product returns. Our determination of the appropriate level of warranty accrual is based on estimates of the percentage of units affected and the repair costs. Estimated warranty costs are recorded at the time of sale of the related product, and are recorded within cost of sales in the consolidated statements of operations.
Fair Value of Financial Instruments
Our financial instruments consist of cash equivalents, accounts receivable, unbilled contract costs and fees, warrants to purchase shares of common stock, accounts payable, subordinated notes payable, subordinated convertible notes and the line of credit. The estimated fair values have been determined through information obtained from market sources and management estimates. Our warrant liability and subordinated convertible notes are recorded at fair value. The carrying value of the subordinated notes payable, as of September 30, 2011, is not materially different from the fair value of the notes. The estimated fair values of the remaining financial instruments approximate their carrying values at September 30, 2011 and December 31, 2010.
Warrant Liabilities
We determined the fair values of the investor warrants and placement agent warrants using valuation models we consider to be appropriate. Our stock price has the most significant influence on the fair value of the warrants. An increase in our common stock price would cause the fair values of warrants to increase, because the exercise prices of such instruments are fixed at $1.815 per share, and result in a charge to our statement of operations. A decrease in our stock price would likewise cause the fair value of the warrants to decrease and result in a credit to our statement of operations.
Income Taxes
The preparation of our consolidated financial statements requires us to estimate our income taxes in each of the jurisdictions in which we operate, including those outside the United States, which may be subject to certain risks that ordinarily would not be expected in the United States. The income tax accounting process involves estimating our actual current exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. We must then record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. We have recorded a full valuation allowance against our deferred tax assets of approximately $59.8 million as of December 31, 2010, 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 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, we are required to establish a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The tax years 1996 through 2010 remain open to examination by major taxing jurisdictions to which we are subject, which are primarily in the United States, as carry forward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service or state tax authorities if they are or will be used in a future period. We are currently not under examination by the Internal Revenue Service or any other jurisdiction for any tax years. We did not recognize any interest and penalties associated with unrecognized tax benefits in the accompanying financial statements.
We would record any such interest and penalties as a component of interest expense. We do not expect any material changes to the unrecognized benefits within 12 months of the reporting date.
42
Table of Contents
Subordinated Convertible Notes
The subordinated convertible notes include features that qualify as embedded derivatives, such as (i) the holders right to convert, (ii) our option to force conversion into shares of common stock of the Company, and (iii) the holders prepayment options. We have elected to measure the subordinated convertible notes and the embedded derivatives in their entirety at fair value with changes in fair value recognized as either gain or loss. This election was made by us after concluding that several of the derivatives cannot be reliably measured nor reliably associated with another derivative that can be reliably measured and determining that the aggregate fair value of the notes to be more meaningful in the context of our financial statements than if separate fair values were assigned to each of the multiple embedded instruments contained such notes.
Redeemable Convertible Series B Preferred Stock
We initially accounted for our Series B Preferred Stock and associated warrants by
allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series B Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities. We determined the initial value of the Series B Preferred Stock and investor warrants using valuation models we consider to be appropriate. Prior to its conversion in October 2010, the Series B Preferred Stock had been classified within the liability section of our balance sheet.
Redeemable Convertible Series C Preferred Stock
Prior to the conversion of all the outstanding shares of the Series C Preferred Stock in October 2010, we initially accounted for the issuance of our Series C Preferred Stock and associated warrants by
allocating the proceeds received net of transaction costs based on the relative fair value of the redeemable convertible Series C Preferred Stock and the warrants issued to the investors, and then to any beneficial conversion rights contained in the convertible redeemable preferred securities and classifying the Series C Preferred Stock as temporary equity on the balance sheet between the captions for liabilities and permanent shareholders equity. We determined the initial value of the Series C Preferred Stock and investor warrants using valuation models we consider to be appropriate.
The re-pricing of the exercise price of the warrants issued in the first closing of the Series C Preferred Stock financing from $1.44 to $1.25, as described in Note L to our Notes to the Consolidated Financial Statements, was treated as a cancellation of the original warrants issued on November 8, 2007 and a re-issuance or new warrants on December 21, 2007. The difference in fair value of the warrant was included in the allocation of net proceeds associated with the second closing of the Series C Preferred Stock on December 21, 2007. We treated this as a deemed dividend on the Series C Preferred Stock. Prior to the conversion of the Series C Preferred Stock in October 2010, we were using the effective interest method to accrete the carrying value of the Series C Preferred stock through November 8, 2011 (the earliest possible redemption date), at which time the value of the Series C Preferred Stock would have been $30.0 million, 120% of its face value.
Recent Accounting Pronouncements
See Note U of our Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011 for information regarding recently issued accounting pronouncements.
43
Table of Contents
Results of Operations
Three Months Ended September 30, 2011 (2011) Compared to Three Months Ended September 30, 2010 (2010)
Revenue.
Total revenue for 2011 decreased approximately $13.4 million, or 22.9%, from $58.4 million in 2010 to $45.0 million in 2011.
|
|
Three Months Ended
|
|
|
|
|
|
|
|
Sept. 30,
|
|
Sept. 30,
|
|
|
|
|
|
(Amounts in Millions)
|
|
2011
|
|
2010
|
|
Change $
|
|
% Change
|
|
Product Revenue
|
|
|
|
|
|
|
|
|
|
Renewable Energy Solutions
|
|
$
|
45.0
|
|
$
|
58.4
|
|
$
|
(13.4
|
)
|
(22.9
|
)%
|
Total Revenue
|
|
$
|
45.0
|
|
$
|
58.4
|
|
$
|
(13.4
|
)
|
(22.9
|
)%
|
Renewable Energy Solutions revenue decreased by approximately $13.4 million, or 22.9%, from approximately $58.4 million in 2010 to approximately $45.0 million in 2011. The decrease in revenues is due to lower international sales in 2011 as compared to 2010. International sales for 2010 represented approximately 61% of our total revenue for the period, for 2011 international sales accounted for approximately 20% of our total revenue. Domestic revenue increased $14.2 million to $36.2 million in 2011 from $22.0 million in 2010. The majority of our international product revenue in 2011, approximately $4.7 million, was from Canada. The decline in international product revenues is a direct result of macroeconomic conditions in Europe.
Gross Margin.
Gross margin declined from 26.9% in 2010 to 11.8% in 2011. The decline in gross margin over the period of a year ago was primarily due to a continued reduction in market pricing of our products in all geographies along with the lower revenue levels of products sold during the period compared to 2010.
Research and development expenses.
We expended approximately $5.7 million on research and development in 2011 compared with $4.3 million spent in 2010. The increase in spending during 2011 continues to be driven by a planned increase in costs associated with certification of our new products and increases to 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.
Selling, general and administrative expenses.
Selling, general and administrative expenses increased by approximately $1.6 million, or 16.8%, from $9.7 million in 2010 to $11.3 million in 2011. 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. Approximately $1.6 million of the increase was associated with increased corporate costs, including approximately $0.5 million related to the FuelCell Energy litigation settlement, offset by a decrease of approximately $0.5 million of sales and marketing costs.
Restructuring costs
. In 2011, we eliminated certain positions across the organization in accordance with a plan of reorganization approved by management. As a result we recorded approximately $61,000 in payroll and related costs for 2011. As of September 30, 2011, approximately $0.6 million remains outstanding to be paid. None of the terminated employees were required to provide services subsequent to their receiving notification of termination. In 2010, we eliminated certain positions within our operations and sales organizations in accordance with a plan of reorganization approved by the Board of Directors. As a result we recorded approximately $0.8 million in payroll and related costs for 2010. As of September 30, 2011 all amounts have been paid to the employees terminated in 2010, and none of the terminated employees were required to provide any services subsequent to their receiving notification of termination.
Change in fair value of subordinated notes and warrant liabilities
. The change in fair value of subordinated convertible notes and warrants for 2011 was a credit of approximately $2.0 million. The change in fair value of the subordinated convertible notes and warrants consists primarily of a credit related to the change in valuation of our Warrant As, Warrant Cs and placement agent warrants of $0.9 million and a credit of $1.1 million related to our Subordinated Convertible Notes. The change in fair value of the warrants for 2010 was a charge of approximately $1.3 million. This charge related to the change in valuation of our Warrant As and Warrant Cs and placement agent warrants in 2010.
Other income (expense).
Other expense was approximately $1.0 million for 2011 compared to other income of approximately $0.3 million for 2010. Other expense for 2011 consists primarily of $1.0 million of foreign currency translation losses, as well as other expenses not related to ongoing operations offset by other income not related to operations. Other income for 2010 consists primarily of $0.3 million of foreign currency translation losses as well as other expenses not related to ongoing operations offset by other income not related to operations.
44
Table of Contents
Interest expense.
Interest expense increased in 2011 to $1.1 million as compared to $0.6 million for 2010. Interest expense for 2011 includes approximately $0.7 million related to our subordinated debt and $0.4 million related to our line of credit. Interest expense for 2010 includes approximately $0.5 million related to our subordinated debt, $0.1 million related to our line of credit, and an immaterial amount of non-cash dividends on our Series B Preferred Stock, which we have paid in shares of our common stock.
Provision for income taxes
. Provision for income taxes was approximately $0.3 million for 2011 as compared to $0 for 2010. The provision for income taxes relates to taxes in both China and California.
Deferred Revenue
. Deferred revenue was approximately $24.2 million at September 30, 2011 as compared to $19.7 million at December 31, 2010, an increase of approximately $4.5 million. We record deferred revenue (i) when a customer is invoiced or pays in advance or (ii) when provisions for revenue recognition on items shipped have not been achieved or the items have not yet been received by the customer due to shipping terms such as FOB destination.
When an item is deferred for revenue recognition purposes, the deferred revenue is recorded as a liability and the deferred costs are recorded as a component of inventory in our consolidated balance sheets. Deferred revenue also consists of cash received for extended product warranties. Currently deferred revenue is composed of approximately $3.3 million related to pre-payments on orders currently being manufactured and $20.9 million on deferred revenue related to extended warranties sold to customers that purchased our products.
Nine Months Ended September 30, 2011 (2011 Period) Compared to Nine Months Ended September 30, 2010 (2010 Period)
Revenue.
Total revenue for 2011 was $152.5 million, an increase of approximately $51.8 million, or 51.4%, from $100.7 million in 2010.
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
Sept. 30,
|
|
Sept. 30,
|
|
|
|
|
|
(Amounts in Millions)
|
|
2011
|
|
2010
|
|
$ Change
|
|
% Change
|
|
Product Revenue
|
|
|
|
|
|
|
|
|
|
Renewable Energy Solutions
|
|
$
|
152.5
|
|
$
|
100.6
|
|
$
|
51.9
|
|
51.5
|
%
|
Other Legacy
|
|
|
|
0.1
|
|
(0.1
|
)
|
-100
|
%
|
Total Product Revenue
|
|
$
|
152.5
|
|
$
|
100.7
|
|
$
|
51.8
|
|
51.4
|
%
|
Renewable Energy Solutions revenue increased by approximately $51.9 million, or 51.5%, from approximately $100.6 million in 2010 to approximately $152.5 million in 2011. The increase in Renewable Energy Solutions revenue was primarily attributable to sales in the United States. Sales in the United States accounted for approximately $107.6 million, or 71% of our product revenue for the period compared to approximately $42.0, or million, or 58% for the same period in 2010. International product revenues declined from approximately $58.8 million, or 58% in 2010 to approximately $45.0 million, or 29% in 2011. The decline in international product revenues is a direct result of macroeconomic conditions in Europe.
Gross Margin.
Gross margin declined from 23.3% in 2010 to 15.6% in 2011. The decline in gross margin was primarily due to the continued reduction in market pricing, cost overruns related to a significant project, the mix of products sold as compared to 2010 and a $1.8 million charge for excess inventories. This decrease is partially offset by our continued material cost reduction programs, and the continued transfer of a significant portion of our inverter manufacturing to our contract manufacturer.
Research and development expenses.
We expended approximately $21.6 million on research and development in 2011 compared with $9.8 million spent in 2010. The increase in spending during 2011 was largely attributable to a $4.1 million one-time expense for research and development and charges associated with a new product line. The balance of the increase 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.
Selling, general and administrative expenses.
Selling, general and administrative expenses increased by approximately $10.9 million, or 46.2%, from $23.5 million in 2010 to $34.4 million in 2011. Approximately $1.2 million of the increase is directly attributable to compensation costs related to the issuance of stock options to our employees and directors. Approximately $3.6 million of the increase was related to higher legal and general corporate costs in 2011 as compared to 2010. In addition, approximately $6.1 million of the increase was due to the higher sales and marketing costs directly related to international business development and sales expansion
45
Table of Contents
in Europe and Asia, company branding, increased outbound marketing efforts and increased provisions for potentially uncollectible accounts in 2011 compared to 2010.
Restructuring costs
. In 2011, we eliminated certain positions across the organization in accordance with a plan of reorganization approved by management. As a result we recorded approximately $1.2 million in payroll and related costs. As of September 30, 2011, approximately $0.6 million remains outstanding to be paid. None of the terminated employees were required to provide services subsequent to their receiving notification of termination. In 2010, we eliminated certain positions within our operations and sales organizations in accordance with a plan of reorganization approved by the Board of Directors. As a result we recorded approximately $0.8 million in payroll and related costs for 2010. As of September 30, 2011 all amounts have been paid to the employees terminated in 2010, and none of the terminated employees were required to provide any services subsequent to their receiving notification of termination.
Change in fair value of subordinated convertible
notes and warrant liabilities
. The change in fair value of the subordinated convertible notes and warrants for 2011 was a credit of approximately $3.1 million. The change in fair value of the subordinated convertible notes and warrants consists primarily of a credit related to the change in valuation of our Warrant As, Warrant Cs and placement agent warrants in of $2.3 million and a credit of $0.8 million related to our Subordinated Convertible Notes. The change in fair value of the warrants for 2010 was a charge of approximately $1.0 million. This credit related to the change in valuation of our Warrant As, Warrant Cs and placement agent warrants in 2010.
Other Income (expense).
Other expense was approximately $1.4 million for 2011 compared to other income of approximately $21,000 for 2010. Other expense for 2011 consists primarily of $1.2 million of foreign currency translation as well as $0.2 million in expenses not related to ongoing operations. Other expense for 2010 consisted primarily of approximately $25,000 of foreign currency translation gains.
Interest expense.
Interest expense increased approximately $2.8 million in 2011 to approximately $3.7 million as compared to approximately $0.9 million in 2010. Interest expense for 2011 includes approximately $1.1 million in transaction costs related to our subordinated convertible Notes, $0.9 million related to our line of credit during the period, approximately $1.7 million of interest and amortization of the deferred financing costs related to our subordinated debt, and to a lesser extent fees for professional services for the valuation of our warrant instruments as well as other expenses not related to ongoing operations. Interest expense for 2010 includes approximately $23,000 of non-cash dividends on our Series B Preferred Stock, which we have elected to pay in shares of our common stock, approximately $0.3 million related to our line of credit during the period, approximately $0.6 million of interest and amortization of the deferred financing costs related to our subordinated debt, and to a lesser extent fees for professional services for the valuation of our warrant instruments as well as other expenses not related to ongoing operations.
Provision for income taxes
. Provision for income taxes was approximately $0.4 million for 2011 as compared to $0 for 2010. The provision for income taxes relates to taxes in both China and California.
Income from discontinued operations
. Income from discontinued operations was approximately $31,000 for the nine months ended September 30, 2010. The income from discontinued operations is a result of the sale of our Applied Technology division.
See Note D. Discontinued Operations for more information related to the sale of this division.
Gain on sale of discontinued operations
. As a result of the sale of our Applied Technology division, we recorded income of approximately $0.5 million during 2010. See Note D. Discontinued Operations for more information related to the sale of this division and the composition of the gain calculated.
46
Table of Contents
Liquidity and Capital Resources
As of September 30, 2011, we had approximately $18.1 million of cash.
Based upon our current working capital position, current operating plans and expected business conditions, we believe that our current cash and our asset based financing options will be adequate to fund our operations through September 30, 2012. Beyond 2011, 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 our unit volumes continue to grow. We also expect to use our credit facility to fund a portion of our capital needs and other commitments. We have availability under our line of credit of $14.6 million as of October 31, 2011.
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, subordinated debt or subordinated convertible notes. If any of these events were to occur, we may need to raise additional funds in order to sustain operations by selling equity or taking other actions to conserve our cash position, which could include selling of certain assets, delaying capital expenditures and incurring additional indebtedness, subject to the restrictions in the credit facility with Silicon Valley Bank, our subordinated debt and the subordinated convertible notes. Such actions would likely require the consent of Silicon Valley Bank, the lender of our subordinated debt and/or the holder of our subordinated convertible notes, and there can be no assurance that such consents would be given. Furthermore, there can be no assurance that we will be able to raise such funds if they are required.
If additional funds are raised in the future through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and our stockholders will experience additional dilution. The terms of additional funding may also limit our operating and financial flexibility. There can be no assurance that additional financing of any kind will be available to us on terms acceptable to us, or at all. Failure to obtain future funding when needed or on acceptable terms would materially, adversely affect our results of operations.
We have incurred significant costs to develop our technologies and products. These costs have exceeded total revenue. As a result, we have incurred losses in each of the past five years. As of September 30, 2011, we had an accumulated deficit of approximately $278.9 million. Since inception, we have financed our operations and met our capital expenditure requirements primarily through the sale of private equity securities and convertible debt, public security offerings, borrowings under our lines of credit and capital equipment leases.
As of September 30, 2011, our cash and cash equivalents were $18.1 million; this represents a decrease in our cash and cash equivalents of approximately $12.0 million from the $30.1 million on hand at December 31, 2010.
Cash used in operating activities from continuing operations for the nine months ended September 30, 2011 was $43.1 million as compared to $29.8 million for the nine months ended September 30, 2010. Cash used in operating activities from continuing operations during the nine months ended September 30, 2011 was primarily attributable to the net loss of approximately $35.5 million, a general increase in working capital, offset by non-cash items such as the change in the fair value of our warrants, depreciation and amortization, deferred revenue, increases in allowances for uncollectible accounts and excess and obsolete inventory, non-cash compensation and consulting expense, accrued contract losses and non-cash interest expense.
Cash used in investing activities from continuing operations during the nine months ended September 30, 2011 was $5.1 million as compared to cash used in investing activities from continuing operations of $1.4 million for the nine months ended September 30, 2010. Cash used in investing activities for 2011 and 2010 was for capital expenditures.
Cash provided by financing activities from continuing operations for the nine months ended September 30, 2011 was approximately $36.3 million as compared to cash provided by financing activities from continuing operations of $28.5 million for the nine months ended September 30, 2010. Net cash provided by financing activities from continuing operations during 2011 primarily related to the proceeds of our borrowings under our line of credit of $20.0 million, approximately $14.9 million in net proceeds from the June 2011 subordinated debt, approximately $1.4 million from the exercise of employee stock options and employee participation in the employee stock purchase plan, and approximately $1.9 million related to the exercise of warrants. Net cash provided by financing activities during 2010 was primarily related to the proceeds of our borrowings under our line of credit of $12.0 million, approximately $11.8 million in proceeds from the June 2010 subordinated debt, approximately $1.5 million from the exercise of employee stock options and approximately $3.2 million related to the exercise of warrants.
Cash used in operating activities from discontinued operations was approximately $62,000 for 2010. Cash provided by investing activities from discontinued operations for 2010 was $0.7 million. Cash provided by investing activities for 2010 was from
47
Table of Contents
net proceeds of the sale of the Applied Technology division. There was no cash provided by or used in operating activities from discontinued operations or investing activities from discontinued operations for 2011.
Payments Due Under Contractual Obligations
The following table summarizes the payments due under our contractual obligations at September 30, 2011, and the effect such obligations are expected to have on liquidity and cash flow in future periods:
Calendar Years Ending December 31,
|
|
Principal
Payments on
Subordinated
Debt
|
|
Interest
Payments on
Subordinated
Debt
|
|
Operating
Leases
|
|
Principal
Payments on
Convertible
Notes
|
|
Interest
Payments on
Convertible
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
978,078
|
|
$
|
318,041
|
|
$
|
742,126
|
|
$
|
1,523,810
|
|
$
|
546,667
|
|
2012
|
|
4,233,192
|
|
951,287
|
|
2,697,135
|
|
9,142,857
|
|
666,667
|
|
2013
|
|
4,797,531
|
|
386,947
|
|
2,237,841
|
|
5,333,333
|
|
93,333
|
|
2014
|
|
427,557
|
|
4,482
|
|
2,234,471
|
|
|
|
|
|
2015
|
|
|
|
|
|
1,680,105
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
2,416,570
|
|
|
|
|
|
Total
|
|
$
|
10,436,358
|
|
$
|
1,660,757
|
|
$
|
12,008,248
|
|
$
|
16,000,000
|
|
$
|
1,306,667
|
|
We lease equipment and office space under non-cancelable capital and operating leases. In 2010 we entered into a $12.0 million subordinated debt agreement. In addition, in June 2011 we entered into a $16.0 million convertible note agreement. The future minimum principal and interest payments under the subordinated debt agreement, the convertible notes and the future minimum rental payments as of September 30, 2011 are included in the table above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those discussed in the forward-looking statements. See Forward-Looking Statements above in Managements Discussion and Analysis of Financial Condition and Results of Operations. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate Risk
We are exposed to market risk from changes in interest rates primarily through our investing and financing activities. In addition, our ability to fund working capital requirements may be impacted if we are not able to obtain appropriate financing at acceptable rates.
To manage interest rage exposure our strategy is to invest in short-term, highly liquid investments. Our investment policy also requires investment in approved instruments with an initial maximum allowable maturity of twelve months. Currently, our short-term investments are in money market funds with original maturities of 90 days or less. At September 30, 2011, our short-term investments approximated market value.
At September 30, 2011 we had a revolving line-of-credit available to us of up to $35.0 million, of which $34.7 million was outstanding and $0 was available under the line. Our revolving line-of-credit bears an interest rate of the Banks prime rate plus 0.75% per annum, which resulted in a rate of 4.0% at September 30, 2011.
The effect of interest rate fluctuations on outstanding borrowings as of September 30, 2011 over the next twelve months is quantified and summarized as follows:
|
|
Interest Expense
|
|
|
|
Increase
|
|
Interest rates increase by 100 basis points
|
|
$
|
346,750
|
|
Interest rates increase by 200 basis points
|
|
$
|
693,500
|
|
48
Table of Contents
Foreign Currency Risk
We face exposure to movements in foreign currency exchange rates whenever we, or any of our subsidiaries, enter into transactions with third parties that are denominated in currencies other than ours, or its, functional currency. Intercompany transactions between entities that use different functional currencies also expose us to foreign currency risk. During the period ended September 30, 2011, the net impact of foreign currency changes on transactions was a loss of $1.2 million. We have not historically used a significant amount of derivative financial instruments or other financial instruments to hedge such economic exposures.
The Company uses foreign currency contracts to manage its exposure to changes in foreign currency exchange rates associated with our foreign currency denominated receivables. The Company primarily hedges foreign currency exposure to the Euro. The Company does not engage in trading, market making or speculative activities in the derivatives markets. The foreign currency contracts utilized by the Company do not qualify for hedge accounting treatment, and as a result, any fluctuations in the value of these foreign currency contracts are recognized in other loss (income) in our consolidated statements of operations as incurred. The fluctuations in the value of these foreign currency contracts do, however, largely offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of April 18, 2011, the Company entered into a foreign currency hedge with a bank with a notational amount of approximately $1.6 million, which matured on July 18, 2011. There were no foreign currency hedges outstanding at September 30, 2011.
Item 4. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, we conducted an evaluation, with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2011. The conclusions of the Chief Executive Officer and Chief Financial Officer from this evaluation were communicated to the Audit Committee. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
(b)
Changes in Internal Control Over Financial Reporting
.
There was no change in our internal control over financial reporting that occurred during the second quarter of fiscal year 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
49
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no material changes or additions to the legal proceedings disclosed in Part I, Item 3.
Legal Proceedings
, of our Annual Report on Form 10-K for the fiscal year ending December 31, 2010 except as follows:
Class Action Litigation
. In July 2011, two purported securities class action complaints were filed against us, our Chief Executive Officer and our former Chief Financial Officer by the following plaintiffs, individually and on behalf of all others similarly situated, in the U.S. District Court, District of Massachusetts: Allan Edwards (filed July 19, 2011) and Larry Ziegler (filed July 21, 2011). The virtually identical complaints are purportedly brought on behalf of persons who acquired our common stock during the period of March 4, 2010, through July 5, 2011, and allege claims against all defendants for violations under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, as well as claims against the individual defendants for violations of Section 20(a) of the Exchange Act. Putative plaintiffs claim that the defendants caused our common stock to trade at artificially inflated prices through false and misleading statements and/or omissions related to our business. The complaints seek compensatory damages for all damages sustained as a result of the defendants actions, including reasonable costs and expenses, and other relief as the court may deem just and proper. We believe these allegations are baseless and we intend to defend against them vigorously.
Shareholder Derivative Litigation
. On August 2, 2011, a shareholder derivative action was brought by plaintiff purportedly on behalf of our company against several of our senior officers and directors, in the U.S. District Court, District of Massachusetts. The complaint alleges that the officer and director defendants breached their fiduciary duties by providing allegedly misleading and inaccurate information regarding our business. The shareholder derivative action generally seeks compensatory damages for all alleged losses sustained as a result of the individual defendants actions, including reasonable costs and expenses, and other relief as the court may deem just and proper. We believe that these allegations are baseless and we intend to defend against them vigorously.
FuelCell Energy Matter
. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, on February 17, 2011, FuelCell Energy, Inc. (FuelCell Energy) filed a Demand for Arbitration with the American Arbitration Association seeking recovery of damages related to allegedly defective transformers that we procured for them. In its Demand for Arbitration, FuelCell Energy asserts that it is entitled to recovery of approximately $2.8 million from us. On October 27, 2011 we reached a settlement in regards to these claims. Among other considerations, we agreed to pay FuelCell Energy approximately $225,000. In addition, we guaranteed discounts on future purchases of approximately $160,000.
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, 2010, except for the following:
Substantial leverage and debt service obligations may adversely affect our cash flows.
In connection with the sale of our subordinated convertible notes in June 2011, we incurred new indebtedness of $16 million. As a result, as of September 30, 2011, we had an aggregate of approximately $61.4 million of outstanding debt under our existing senior credit facility, existing subordinated loan and the June 2011 subordinated convertible notes. The degree to which we are leveraged could, among other things:
·
require us to dedicate a substantial portion of our future cash flows from operations and other capital resources to debt service, to the extent we are unable to make payments of principal or interest on the subordinated convertible notes in common stock, due to, among other things failure to satisfy the equity conditions that must be met to enable us to do so;
·
make it difficult for us to obtain necessary financing in the future for working capital, acquisitions or other purposes on favorable terms, if at all;
·
make it more difficult for us to be acquired;
·
make us more vulnerable to industry downturns and competitive pressures; and
·
limit our flexibility in planning for, or reacting to changes in, our business.
50
Table of Contents
Our ability to meet our debt service obligations will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.
We could be required to make substantial cash payments upon an event of default or change of control under our subordinated convertible notes.
Our subordinated convertible notes provide for events of default including, among others, payment defaults, cross-defaults, breaches of any representation, warranty or covenant that is not cured within the proper time periods, failure to perform certain required activities in a timely manner, our common stock no longer being listed on an eligible market and certain bankruptcy-type events involving us or any significant subsidiary. Upon an event of default, the holders of the subordinated convertible notes may elect to require us to redeem all or any portion of the outstanding principal amount of such notes at a price equal to the greater of 120% of (i) such outstanding principal amount, plus all accrued but unpaid interest or (ii) the then value of the underlying common stock.
In addition, under the terms of the subordinated convertible notes, upon a change of control of our company, the holders of such notes may elect to require us to redeem the notes at a price equal to the greater of 120% of (i) such outstanding principal amount, plus all accrued but unpaid interest or (ii) the then value of the consideration to be received in connection with the change of control.
If either an event of default or change of control occurs, our available cash could be seriously depleted and our ability to fund operations could be materially harmed.
We are responsible for maintaining the registration of the resale of shares of common stock underlying the subordinated convertible notes issued in our June 2011 private placement and will incur liquidated damages if we do not fulfill this obligation.
Pursuant to our agreement with the investor in the June 2011 private placement, we were obligated to file a registration statement covering the resale of the common stock underlying the securities issued in the private placement with the SEC and to use our reasonable best efforts to cause the registration statement to be declared effective, which we completed. We are also obligated to keep the registration statement effective until the earlier of (i) the date all of the securities covered by the registration statement may be sold without restriction under Rule 144 promulgated under the Securities Act and (ii) the date all of the securities covered by the registration statement have been sold. If we fail to comply with these or certain other provisions, then we will be required to pay liquidated damages of 1% of the then outstanding principal amount of the subordinated convertible notes held by the investor for the initial occurrence of such failure and for each subsequent 30 day period the failure continues. Any such payments could materially affect our ability to fund operations.
The agreements governing the subordinated convertible notes contain various covenants and restrictions which may limit our ability to operate our business.
The agreements governing the subordinated convertible notes contain various covenants and restrictions, including, among others that (i) until the date that is 30 days following the earlier of (x) the effectiveness of this registration statement covering the shares underlying the Notes and (y) the six month anniversary of the closing date of the issuance and sale of the Notes, we will not issue, offer or sell any equity securities of the Company, including convertible securities, subject to certain exceptions; and (ii) for so long as the Notes are outstanding, we will not incur any indebtedness that is senior to, or on parity with, the Notes in right of payment, subject to limited exceptions for existing indebtedness. These restrictions could limit our ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities, any of which could have a material adverse impact on our business.
We have been named as a party to purported class action lawsuits and a purported shareholder derivative action, and we may be named in additional litigation, all of which could require significant management time and attention and result in significant legal expenses. An unfavorable outcome in one or more of these lawsuits could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As described in Item 1. Legal Proceedings of Part II of this report, purported class action complaints were filed in the U.S. District Court, District of Massachusetts, in July 2011, alleging, among other things, that our company and certain of our officers violated the federal securities laws by issuing materially false and misleading statements. In addition, a purported shareholder derivative complaint was filed in the U.S. District Court, District of Massachusetts, in August 2011 against certain of our officers and directors based on allegations substantially similar to those set forth in the purported class actions. Regardless of the merits, the expense of defending such litigation may have a substantial impact if our insurance carriers fail to cover the cost of the litigation, and the time required to defend the actions could divert managements attention from the day-to-day operations of our business, which
51
Table of Contents
could adversely affect our business, results of operations and cash flows. In addition, an unfavorable outcome in such litigation could have a material adverse effect on our business, results of operations and cash flows.
52
Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 5. Other Information
.
Not applicable.
Item 6. Exhibits.
The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report on Form 10-Q.
53
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 9, 2011
|
|
By:
|
|
|
|
|
|
|
|
|
/s/ AARON M. GOMOLAK
|
|
|
|
Aaron M. Gomolak
|
|
|
|
Chief Financial Officer and Treasurer
|
54
Table of Contents
EXHIBIT INDEX
Exhibit
Number
|
|
Exhibit
|
|
|
|
31.1
|
|
Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
101 *
|
|
The following materials from Satcon Technology Corporations Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and September 30, 2010; (iii) Consolidated Statement of Changes in Stockholders Equity and Comprehensive Loss for the nine months ended September 30, 2011, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and September 30, 2010 and (v) Notes to Interim Consolidated Financial Statements.
|
*
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
55
Satcon Technology Corp. (MM) (NASDAQ:SATC)
Historical Stock Chart
From Jun 2024 to Jul 2024
Satcon Technology Corp. (MM) (NASDAQ:SATC)
Historical Stock Chart
From Jul 2023 to Jul 2024