UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2004,
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
(For the transition period from ___ to ___ ).
Commission File Number: 001-16171
Beacon Power Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-3372365
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Ballardvale Street
Wilmington, Massachusetts 01887-1032
(Address of principal executive offices) (Zip code)
(978) 694-9121
(Registrant's 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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes ____ No __X__
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of August 9, 2004 was 43,465,718.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Table of Contents
Page
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at June 30, 2004 and December 31, 2003. 1
Unaudited Consolidated Statements of Operations for the six months
ended June 30, 2004 and 2003 and for the Period May 8, 1997
(date of inception) to June 30, 2004. 2
Unaudited Consolidated Statements of Cash Flows for six months
ended June 30, 2004 and 2003 and for the Period May 8, 1997
(date of inception) to June 30, 2004. 3
Notes to Unaudited Consolidated Financial Statements. 5-10
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations. 11-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II. Other Information
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults on Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 24
Signatures 26
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets (Unaudited)
June 30, December 31,
2004 2003
------------- -------------
Assets
Current assets:
Cash and cash equivalents ........................................... $ 4,999,460 $ 8,909,261
Accounts receivable, trade, net ..................................... 145,592 128,133
Inventory, net (Note 3) ............................................. 809,542 238,684
Prepaid expenses and other current assets ........................... 483,303 773,226
Investments in available-for-sale securities ........................ 3,254,231 1,163,758
------------- -------------
Total current assets ............................................. 9,692,128 11,213,062
Property and equipment, net (Note 4) ................................... 326,247 357,180
Restricted cash ........................................................ 360,011 405,232
Other assets ........................................................... 54,795 91,325
------------- -------------
Total assets ........................................................... $ 10,433,181 $ 12,066,799
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................................... $ 170,125 $ 148,075
Accrued compensation and benefits ................................... 227,230 156,000
Other accrued expenses .............................................. 819,827 664,527
Restructuring reserve ............................................... 1,234,418 1,406,191
------------- -------------
Total current liabilities ........................................ 2,451,600 2,374,793
Commitments (Note 5)
Stockholders' equity:
Preferred Stock, $.01 par value; 10,000,000 shares authorized
no shares issued or outstanding ..................................... -- --
Common stock, $.01 par value; 110,000,000 shares authorized;
43,465,718 and 43,107,526 shares issued and outstanding at
June 30, 2004 and December 31, 2003, respectively ................... 434,657 431,075
Deferred stock compensation ......................................... (153,471) (832,639)
Additional paid-in-capital .......................................... 133,754,545 133,796,667
Other comprehensive income .......................................... 2,063,879 --
Deficit accumulated during the development stage .................... (128,018,369) (123,603,437)
Treasury stock, at cost ............................................. (99,660) (99,660)
------------- -------------
Total stockholders' equity ....................................... 7,981,581 9,692,006
Total liabilities and stockholders' equity ............................. $ 10,433,181 $ 12,066,799
============= =============
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)
Cumulative from
May 8, 1997
(date of
inception)
Three months ended June 30, Six months ended June 30, through June 30,
2004 2003 2004 2003 2004
------------- ------------- ------------- ------------- -------------
Revenue ................................ $ 126,484 $ -- $ 183,891 $ -- $ 735,076
Cost of goods sold ..................... 308,088 -- 383,867 -- 383,867
------------- ------------- ------------- ------------- -------------
Gross profit ........................... (181,604) -- (199,976) -- 351,209
Operating expenses:
Selling, general and administrative . 1,212,428 1,261,019 2,288,690 2,479,668 30,348,293
Research and development ............ 921,266 952,098 1,969,506 1,911,004 52,312,992
Loss on sales commitments ........... -- -- -- -- 375,974
Depreciation and amortization ....... 43,199 43,581 89,785 143,270 4,040,522
Restructuring charges ............... -- -- -- -- 2,159,280
Loss on impairment of assets ........ -- -- -- -- 4,663,916
------------- ------------- ------------- ------------- -------------
Total operating expenses ........ 2,176,893 2,256,698 4,347,981 4,533,942 93,900,977
------------- ------------- ------------- ------------- -------------
Loss from operations ................... (2,358,497) (2,256,698) (4,547,957) (4,533,942) (93,549,768)
Other income (expense):
Interest income ........................ 31,247 43,716 71,830 101,755 3,851,797
Interest expense ....................... -- (1,757) -- (5,987) (1,093,703)
Other income (expense) ................. 61,045 (4,011) 61,195 (9,951) (220,501)
------------- ------------- ------------- ------------- -------------
Total other income (expense), net ... 92,292 37,948 133,025 85,817 2,537,593
------------- ------------- ------------- ------------- -------------
Net loss ............................... (2,266,205) (2,218,750) (4,414,932) (4,448,125) (91,012,175)
Preferred stock dividends .............. -- -- -- -- (36,825,680)
Accretion of convertible preferred stock -- -- -- -- (113,014)
------------- ------------- ------------- ------------- -------------
Loss to common shareholders ............ $ (2,266,205) $ (2,218,750) $ (4,414,932) $ (4,448,125) $(127,950,869)
============= ============= ============= ============= =============
Loss per share, basic and diluted ...... $ (0.05) $ (0.05) $ (0.10) $ (0.10)
============= ============= ============= =============
Weighted-average common shares outstanding 43,273,817 42,814,929 43,197,760 42,813,918
============= ============= ============= =============
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows (Unaudited)
Cumulative from
May 8, 1997
(date of inception)
Six months ended June 30, through June
2004 2003 30, 2004
------------ ------------ ------------
Cash flows from operating activities:
Net loss .............................................. $ (4,414,932) $ (4,448,125) $(91,012,175)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ....................... 89,786 143,270 4,040,523
Loss on sale of fixed assets ........................ -- (6,276) 170,868
Impairment of assets ................................ (8,241) -- 4,655,675
Restricted cash ..................................... 45,221 -- (360,011)
(Expenses paid) restructuring charge ................ (171,773) (171,773) 1,234,418
Reserve for officers note ........................... -- 9,951 119,975
Interest expense relating to issuance of warrants ... -- -- 371,000
Non-cash charge for change in option terms .......... -- -- 346,591
Non-cash charge for settlement of lawsuit ........... -- -- 303,160
Amortization of deferred consulting expense, net .... -- -- 1,160,784
Amortization of deferred stock compensation ......... 611,652 -- 1,901,905
Warrants issued for consulting services ............. -- -- 1,569,366
Services and interest expense paid in preferred stock -- -- 11,485
Changes in operating assets and liabilities:
Accounts receivable ................................. (17,459) -- (145,592)
Inventory ........................................... (570,858) -- (809,542)
Prepaid expenses and other current assets ........... 289,923 936,919 (702,938)
Accounts payable .................................... 22,050 36,695 170,125
Accrued compensation and benefits ................... 71,230 42,444 227,230
Accrued interest .................................... -- -- 275,560
Dividend receivable ................................. (26,594) -- (90,352)
Due to related party ................................ -- -- --
Other accrued expenses and current liabilities ...... 155,300 (155,530) 828,497
------------ ------------ ------------
Net cash used in operating activities ............... (3,924,695) (3,612,425) (75,733,448)
Cash flows from investing activities:
Purchase of investments ............................... -- (1,100,000) (1,100,000)
Increase in other assets .............................. -- (194,102) (412,072)
Purchases of property and equipment ................... (14,082) (5,916) (8,435,790)
Sale of property and equipment ........................ -- 29,641 53,365
------------ ------------ ------------
Net cash used in investing activities ............... (14,082) (1,270,377) (9,894,497)
Cash flows from financing activities:
Initial public stock offering, net of expenses ........ -- -- 49,341,537
Payment of dividends .................................. -- -- (1,159,373)
Shares issued under employee stock purchase plan ...... 2,276 463 126,490
Exercise of employee stock options .................... 26,700 -- 1,436,267
Issuance of preferred stock ........................... -- -- 32,868,028
Repayment of subscription receivable .................. -- -- 5,000,000
Proceeds from capital leases .......................... -- -- 495,851
Repayment of capital leases ........................... -- (127,672) (1,031,395)
Proceeds from notes payable issued to investors ....... -- -- 3,550,000
------------ ------------ ------------
Net cash provided by (used in) financing activities . 28,976 (127,209) 90,627,405
(Decrease)increase in cash and cash equivalents .......... (3,909,801) (5,010,011) 4,999,460
Cash and cash equivalents, beginning of period ........... 8,909,261 18,221,766 --
------------ ------------ ------------
Cash and cash equivalents, end of period ................. $ 4,999,460 $ 13,211,755 $ 4,999,460
============ ============ ============
Supplemental disclosure of non-cash transactions:
Cash paid for interest ................................ $ -- $ 6,000 $ 488,126
============ ============ ============
Cash paid for taxes ................................... $ 1,956 $ 4,500 $ 32,456
============ ============ ============
Assets acquired through capital lease ................. $ -- $ -- $ 535,445
============ ============ ============
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARY
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Note 1. Nature of Business and Operations
Nature of Business. Beacon Power Corporation is a development stage company that
was incorporated on May 8, 1997. The Corporation and its subsidiary
(collectively "Beacon" or "the Company") design, develop, configure and offer
for sale, power conversion and energy storage systems that provide highly
reliable, high-quality, environmentally friendly, uninterruptible electric power
employing both proprietary and third-party technology and components for a
number of applications and potential applications. The Company has the following
products, which are in varying stages of development:
o Smart Energy(TM) Matrix - A high-power, flywheel-based system, that
continuously regulates the frequency of electricity on the power grid, and
could be used by independent system operators and regional transmission
operators to regulate electrical power;
o The Smart Energy Matrix could also continuously regulate the frequency of
electricity produced by a distributed generation facility and compensate
for temporary differences between the demand for electricity and the amount
being produced by that facility;
o Smart Power(TM) 250 - A high-power, flywheel-based system that could
provide electricity until a longer-term backup power source comes on-line;
o Smart Energy system - A high-energy flywheel-based system that stores
electricity for telecommunications, cable systems, computer networks, and
Internet markets applications; and
o Smart Power M5 inverter system - An electronic system that converts direct
current electricity produced by photovoltaic panels into alternating
current electricity for residential and commercial use.
Smart Energy Matrix
The Company has identified an application for its Smart Energy Matrix in a
well-established market with attractive pricing characteristics. This market is
frequency regulation for the power grid. Using the Company's Smart Energy
Matrix, frequency regulation can, for the first time, be provided separately
with higher performance and lower operating costs. The Smart Energy Matrix is
the first product that specifically addresses this application. The Company has
identified an additional application for its Smart Energy Matrix. That
application is providing a high-power, flywheel-based system that continuously
regulates the frequency of electricity produced by a distributed generation
facility and compensates for temporary differences between the demand for
electricity and the amount being produced.
Although the Company has finished the preliminary designs for the Smart Energy
Matrix, it will not begin significant development until the market has expressed
a more tangible interest in this product and the Company has sufficient funds to
complete development. Once begun, the development cycle for completion of this
product is expected to be 18 to 24 months, and achieving significant volume
production capability will take an additional six to 12 months. Therefore, the
Company will not receive revenues from this product for approximately two to
three years after development has commenced.
Smart Power 250
For uninterrupted power supply applications the Company has a design available
for it's Smart Power 250 flywheel system. This system would provide short (10 to
60 seconds) duration power. When grid power is interrupted, the Company's Smart
Power 250 design would provide power for a short time while a diesel generator
is activated. This application would typically be marketed to commercial and
industrial facilities, although the market for this product is not yet
significant. The Company believes that as power quality and distributed
generation become more widely used the market demand for the Smart Power 250
could grow substantially and it could be of economic benefit for the Company to
begin production as the demand increases.
Smart Energy
The Company has available for sale its Smart Energy products, which deliver a
low level of power for a long period of time (typically measured in hours).
These products include the 2kWh and 6kWh Smart Energy systems, which have
demonstrated quality performance and reliability at numerous sites. The Smart
Energy products are tailored to the telecommunications, cable systems, computer
networks, and Internet markets. The Company believes that its Smart Energy
products offer life cycle cost advantages and significant performance
improvements over conventional, battery-based back-up power sources. The
Company's Smart Energy systems have approximately 400,000 hours of operation in
customer sites without mechanical failure, which the Company believes verifies
the reliability of its technologies. The Company believes that its Smart Energy
technology is an excellent base to begin development of a higher energy 25kWh
flywheel system for renewable applications when the Company determines that the
market interest is sufficient to justify that product's development.
Smart Power M5
The Smart Power M5 inverter system for the photovoltaic energy market converts
the direct current generated by solar cells from sunlight into alternating
current required by residential and commercial users for operating electrical
devices and reducing the amount of purchased power when it is connected to a
power grid. The Company's Smart Energy M5 inverter system has the capacity to
convert direct current electricity into up to 5,000 watts of alternating
current. The Company began delivering its Underwriters Laboratory approved Smart
Power M5 inverter systems in December 2003. The Smart Power M5 has been designed
for use in North American grid-connected solar power applications. The Company
intends to develop on and off grid inverters for use throughout the world. The
Company may also develop inverters for use in low power wind turbine
applications.
Revenue
Revenues on sales of the Company's Smart Power M5 are recorded net of any
discounts and net of estimated future rebate claims. Although the Company has
begun shipment of if its Smart Power M5 product, operations have not yet reached
a level that would qualify the Company to emerge from the development stage.
Therefore it continues to be accounted for as a development stage company under
Statement of Financial Accounting Standards No. 7 "Accounting and Reporting by
Development Stage Enterprises."
In addition, the Company has secured a $98 thousand fixed-price government
contract for research and development of potential applications for its flywheel
based products. The Company accounts for its fixed price government contracts
using the percentage-of-completion method of accounting. Under this method, all
contract costs are charged to operations as incurred; and a portion of the
contract revenues, based on the estimated profits and the degree of completion
of the contract as measured by a comparison of the actual and estimated costs,
is recognized as revenues each quarter. Anticipated losses on contracts are
charged to earnings as soon as these losses are known.
Cost of goods sold
The Company costs its products at the lower of cost or market. Costs in excess
of this measurement are expensed in the period in which they are incurred. As
the Company is in the early stages of production, its actual manufacturing costs
incurred currently exceed the fair market value of its products. The Company
provides a five-year limited product warranty for its Smart Power M5 product
line and accrues for estimated future warranty costs in the period in which the
revenue is recognized.
Operations
The Company has experienced net losses since its inception and, as of June 30,
2004, had an accumulated deficit of approximately $128 million. The Company's
business strategy is to continue to create near-term revenues from the sale of
its Smart Power M5 inverter for solar power applications, while building a
reputation for excellent performance from its equipment and its sales and
service organization. The Company expects to use the relationships it is
developing to gain market access for the Company's future products for the
renewable energy industry. For the Company's current and contemplated
flywheel-based systems including its Energy Matrix, Smart Power 250 and Smart
Energy products, the Company is continuing to evaluate market size, growth
potential and competitive advantages that its products could provide and the
probable market penetration that could be achieved. If markets are identified in
which the Company believes its flywheel products will be successful, and those
markets express a tangible interest in its products, the Company will not have
sufficient cash available to complete prototype development and production of
its products unless additional equity or debt financing is obtained. The Company
does not expect to become profitable or obtain positive cash flow before 2008
and may not achieve positive cash flow even at that point or beyond.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared
using accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments, consisting of normal recurring
accruals considered necessary for a fair presentation, have been included in the
accompanying unaudited financial statements. Operating results for the six
months ended June 30, 2004 are not necessarily indicative of the results that
may be expected for the full year ending December 31, 2004. Certain information
and footnote disclosure normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these consolidated financial
statements presented herein be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K/A, for the year ended December 31, 2003.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts due from its customers. The Company's estimate is based on
limited historical collection experience and a review of the current status of
trade accounts receivable. It is reasonably possible that the Company's estimate
of the allowance for doubtful accounts will change. Accounts receivable are
presented in the Company's balance sheets net of an allowance for doubtful
accounts of $10,400 and $0 at June 30, 2004 and December 31, 2003, respectively.
Government Contract Revenue Recognized on the Percentage-of-Completion Method
The Company recognizes contract revenues using the percentage-of-completion
method, based primarily on contract costs incurred to date compared with total
estimated contract costs. Changes to total estimated contract costs or losses,
if any, are recognized in the period in which they are determined. Claims
against customers are recognized as revenue upon settlement. Revenues recognized
in excess of amounts billed are classified as current assets under contract
work-in-progress, and included in "Prepaid expenses and other current assets" in
the Company's balance sheets. Amounts billed to clients in excess of revenues
recognized to date are classified as current liabilities under advance billings
on contracts. Changes in project performance and conditions, estimated
profitability, and final contract settlements may result in future revisions to
construction contract costs and revenue.
Other than as described above, there have been no significant additions to or
changes in accounting policies of the Company since December 31, 2003. For a
complete description of the Company's accounting policies, see Note 2 to
Consolidated Financial Statements in the Company's 2003 Annual Report on Form
10-K/A.
Note 3. Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of raw materials, work in process and finished goods held for
resale. The Company's provisions for inventory write-downs are based on its best
estimates of product sales prices and market demand patterns, and its plans to
transition its products.
Inventory balances include the following amounts:
June 30, 2004 December 31, 2003
Raw materials ............ $ 718,735 $ 104,362
Work in progress ......... 133,666 26,001
Finished goods ........... 98,268 108,321
--------- ---------
Total inventories ........ 950,669 238,684
Less: obsolescence reserve (141,127) --
--------- ---------
Inventories, net ......... $ 809,542 $ 238,684
========= =========
Note 4. Property and Equipment
Property and equipment consist of the following:
Estimated
Useful June 30, December 31,
Lives 2004 2003
---------- ----------- -----------
Machinery and equipment .................................... 5 years $ 616,714 $ 627,406
Service vehicles ........................................... 5 years 62,327 62,327
Furniture and fixtures ..................................... 7 years 296,652 279,190
Office equipment ........................................... 3 years 1,398,835 1,398,835
Leasehold improvements ..................................... Lease term 538,428 524,347
Equipment under capital lease obligations .................. Lease term 918,284 918,284
----------- -----------
Total ................................................... $ 3,831,240 $ 3,810,389
Less accumulated depreciation and amortization ............. (3,504,993) (3,453,209)
----------- -----------
Property and equipment, net ............................. $ 326,247 $ 357,180
=========== ===========
Note 5. Commitments
The Company leases office and light manufacturing space under an operating lease
through September 30, 2007. Under the terms of this lease, the Company provided
the lessor with an irrevocable letter of credit. At June 30, 2004 the balance of
that letter of credit totaled $310,011.
The Company entered into a manufacturing agreement with a vendor for an integral
component of the Company's M5 power conversion system. The Company provided the
vendor with an irrevocable letter of credit in the amount of $50,000 that
expires on October 3, 2004.
The above letters of credit are secured by a cash deposit. The required cash
deposit is included in restricted cash in the accompanying consolidated balance
sheets.
Note 6. Investments
In 2003 the Company invested $1,000,000 in Series A Preferred Stock of Evergreen
Solar, Inc., a public company that specializes in renewable energy sources, in
order to develop a strategic relationship with that company. The Company
believes that this investment may provide significant financial returns. The
Company's investment was part of a larger financing provided by several
investors. The Company made its investment on the same terms as the other
investors in this financing, except that the Company was permitted to purchase a
three-year warrant for $100,000 that is exercisable for 2,400,000 shares of
Evergreen's common stock at $3.37 per share. Evergreen's financing was a private
placement of $29,475,000 of Series A Preferred Stock and the above warrant.
Perseus 2000, L.L.C., an affiliate of one of the Company's stockholders, Perseus
Capital, L.L.C., invested $3 million in Evergreen's Series A Preferred Stock in
this financing. Mr. Philip J. Deutch and Mr. Kenneth M. Socha, members of the
Board of Directors of the Company, are Managing Director and Senior Managing
Director, respectively, of Perseus, L.L.C., and Mr. Deutch led the Evergreen
Solar Series A Preferred financing and is one of four individuals from the
Evergreen investor group to be added to the Board of Directors of Evergreen.
Messrs. Deutch and Socha disclosed their possible conflict relating to this
transaction and abstained from voting on the matter. In addition, Mr. Deutch has
not taken part in any discussions concerning this investment. Beacon's
participation in the transaction was evaluated, debated and approved by all the
disinterested directors of the Company, after full disclosure of relevant facts
and circumstances.
During the second quarter of 2004 all of the Company's holdings in its Evergreen
Solar Series A Preferred Stock were converted to 973,528 shares of Evergreen
Solar common stock. This investment in equity securities is carried on the
Company's balance sheet at fair value and classified as "available-for-sale,"
and any unrealized gains or losses are recorded as other comprehensive income in
the equity section of the Company's balance sheets, as required by Financial
Accounting Standard 115, "Accounting for Certain Investments in Debt and Equity
Securities." On June 30, 2004 the total value of Evergreen's common stock on the
Company's balance sheet based on the then current per-share market price of
$3.24 was $3,154,231 and the warrant was valued at its purchase price of
$100,000. On August 12, 2004 the market value of the Company's investment in
Evergreen Solar common stock, based on the then current per-share market price
of $2.82 was $2,745,349.
Note 7. Common Stock
Reserved Shares. At June 30, 2004 and December 31, 2003, 11,435,059 and
11,755,157 shares of common stock were reserved for issuance under the Company's
stock option plan and for outstanding warrants, respectively.
Note 8. Related Party Transactions
Advance to Officers. During 2001, the Company advanced approximately $565,000 to
an officer of the Company, Mr. William Stanton, its former CEO and President.
This advance is interest bearing and secured by the officers' holdings of Beacon
Power Corporation common stock and was provided to the officer to allow him to
exercise stock options and to pay the related taxes. Through June 30, 2004, the
Company had collected approximately $447,000 in principal payments on these
advances. The balance of this loan is $118,000 and has been reserved, however,
it has not been cancelled. Mr. Stanton continues to serve as a director of the
Company.
Note 9. Restructuring Charges
The Company's initial products were focused on the telecom industry. As a result
of the overall economic downturn and in particular the significant decline in
capital and maintenance spending in telecom, as well as the low price of
lead-acid batteries, the Company has not been successful in selling
flywheel-based products into this market. Therefore, beginning in July 2002, in
an effort to reduce its monthly cash-spending rate, the Company implemented a
number of cost-cutting measures to ensure the availability of resources
necessary to pursue its business strategy for a reasonable period but at a
significantly lower cash expenditure rate. As a result, a substantial portion of
its long-term assets have been idled, including machinery and equipment,
tooling, office furniture and fixtures, and equipment and leasehold
improvements. The Company has evaluated all of its property and equipment as
required by Statement of Financial Accounting Standards No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" and, as a result, has taken a
restructuring and impairment charge of $6.5 million of which $4.3 million
represents impaired capital equipment and leasehold improvements, $.3 million
relates to severance costs and $1.9 million relates to a reserve against future
lease payments and related facility costs. The reserve against future lease
payments is classified as "Restructuring reserve" in the current liabilities
section of the balance sheets.
A summary of the restructuring reserves is as follows:
June 30,
--------------------------
2004 2003
----------- -----------
Beginning balance .... $ 1,406,191 $ 1,749,738
Charges for the period -- --
Payments ............. (171,773) (171,773)
----------- -----------
Ending balance ....... $ 1,234,418 $ 1,577,965
=========== ===========
Note 10. Stock-Based Compensation
The Company accounts for its stock based compensation using the recognition and
measurement principles of APB 25 "Accounting for Stock Issued to Employees", and
its related interpretations. FASB Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure" amends disclosure requirements and requires prominent disclosures on
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement is effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. SFAS 148 also
provides alternative methods of transition for a voluntary change to fair value
based methods of accounting which have not been adopted at this time.
Compensation expense associated with awards of stock or options to employees is
measured using the intrinsic-value method. Deferred compensation expense
associated with awards to non-employees is measured using the fair-value method
and is amortized over the vesting period of three years using a calculation
under FASB Interpretation No. 28, "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans."
The Company also has a long term stock incentive plan to provide employees
deferred compensation in the form of restricted stock units (or "RSUs") at no
cost to the recipient, that can be converted into shares of Company's common
stock through establishing and evaluating quarterly, or in some cases yearly,
targets for the employee and, following each quarter, determining the number of
RSUs to accrue and to be granted in four equal installments in the fiscal year
following the fiscal year with respect to which employee accrued the RSUs.
Employees have the right to convert their RSUs into shares at any time after
such grant, subject to a quarterly vesting schedule. The Company's employees
earned 667,151 RSUs for the fiscal year ended December 31, 2003, which are not
available for exercise until satisfaction of the vesting periods during 2004.
The grants are recorded as deferred stock compensation until they are earned
over the vesting schedule, at which time, the value of the RSUs will be recorded
as compensation expense in the Company's income statement. For the six months
ending June 30, 2004 the Company recorded RSU related compensation expense in
the amount of $611,652.
No stock-based compensation is reflected in net earnings for stock options
granted to employees as all options granted under the plan had an exercise price
equal to or greater than the market price of the underlying stock at the date of
the grant. The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123 "Accounting for Stock-Based Compensation"
to stock-based employee compensation.
Three months ended June 30, Six months ended June 30,
2004 2003 2004 2003
-------------------------- --------------------------
Net loss to common shareholders as reported $(2,266,205) $(2,218,750) $(4,414,932) $(4,448,125)
Pro forma compensation expense ............ 91,520 114,330 184,387 223,000
----------- ----------- ----------- -----------
Net loss--pro forma ....................... $(2,357,725) $(2,333,080) $(4,599,319) $(4,671,125)
Loss per share--as reported ............... $ (0.05) $ (0.05) $ (0.10) $ (0.10)
Loss per share--pro forma ................. $ (0.05) $ (0.05) $ (0.11) $ (0.11)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Note Regarding Forward Looking Statements:
This Quarterly Report on Form 10-Q contains forward-looking statements
concerning, among other things, the Company's expected future revenues,
operations and expenditures and estimates of the potential markets for the
Company's services. Such statements made by the Company fall within the meaning
of the Private Securities Litigation Reform act of 1995, as amended. All such
forward-looking statements are necessarily only estimates of future results and
the actual results achieved by the Company may differ materially from these
projections due to a number of factors as discussed in the section entitled
"Certain Factors Affecting Future Operating Results" of this Form 10-Q.
Overview
When the Company recognized that its Smart Energy products as alternative backup
solutions to the telecommunications industry were not on a path to produce
meaningful revenues, the Company initiated a series of cost cutting measures
throughout 2002 and 2003. The focus of these efforts was to reduce cash usage
while preserving the Company's intellectual properties and maintaining the
integrity of its public company requirements while evaluating all potential
product markets for the Company's technologies and considering acquisitions or
mergers that could lead to increased shareholder value. Based on this
evaluation, which is ongoing, the Company (i) believes that it has identified
two promising applications for its Smart Energy Matrix product and (ii) has
introduced its Smart Energy M5 inverter system into the renewable energy market
and delivered 31 units in 2003 and an additional 41 units during the six months
ended June 30, 2004.
The Company must raise additional equity to execute its business plan. Based on
the Company's rate of expenditure of cash and the additional expenditures
expected in support of its business plan, the Company will need to obtain an
equity investment by early 2005 to fund:
o continuing as a going concern;
o ongoing research and development of inverter products;
o manufacturing capability;
o working capital requirements; and
o new business development.
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix or Smart Power 250 flywheel systems, the amount of equity
required would increase substantially.
Results of operations:
Comparison of six months ended June 30, 2004 and 2003
Six months ended June 30,
-----------------------------------
2004 2003 $ Change % Change
------ -------- -------- ----------
(in thousands)
Revenues ............................... $ 184 $ -- $ 184 n/a
Cost of goods sold ..................... 384 -- 384 n/a
Selling, general and administrative .... 2,289 2,480 191 8%
Research and development ............... 1,970 1,911 (59) 3%
Depreciation and amortization .......... 90 143 53 37%
Interest and other income (expense), net 133 86 47 55%
Revenues
The Company recorded its first revenues from the sale of its Smart Power M5
power conditioning system of $57 thousand during the first quarter of 2004. In
the second quarter of 2004, in addition to its Smart Power M5 revenue of
approximately $46 thousand, the Company recorded revenue of $81 thousand of a
contract valued at $98 thousand from a government contract under the percentage
of completion method. For its other products, the Company continues to evaluate
markets but did not recognize revenues on those products for the six months
ended June 30, 2004 or 2003.
Cost of Goods Sold
Cost of goods sold, for the six months ending June 30, 2004, include costs
associated with both Smart Power M5 inverters and a flywheel related government
contract. The costs associated with the Smart Power M5 include inventories,
valued at the lower of cost or market and direct labor. In addition to these
costs the Company recognized a reserve of approximately $141,000 during the
second quarter for inventories that had become obsolete through design changes
and product mix. On the government contract, the Company recorded all costs
incurred to date.
Selling, General and Administrative Expenses
The Company's sales and marketing expenses consist primarily of compensation and
benefits for its sales and marketing personnel and related business development
expenses. The Company's general and administrative expenses consist primarily of
compensation and benefits related to its corporate staff, professional fees,
insurance costs and travel. Selling, general and administrative expenses totaled
approximately $2,289,000 and $2,480,000 for the six months ended June 30, 2004
and 2003, respectively. The decrease of approximately $191,000 or 8% is
primarily the result of decreases in the cost of Directors and Officers
Liability Insurance premiums partially offset by higher compensation expenses
due to the Company's long term incentive stock plan and increased marketing
efforts for its Smart Power M5 and Energy Matrix Products.
Research and Development
The Company's cost of research and development consists primarily of the cost of
compensation and benefits for research and development and support staff, as
well as materials and supplies used in the engineering design process. These
costs increased for the six months ending June 30, 2004 over the same period
during 2003 due primarily to increased product development of products for the
photovoltaic market. While the Company does not expect to incur significant
additional costs for its existing flywheel products, the Company does expect to
incur costs for the design and development of additional products for renewable
energy applications. The costs of development of its flywheel systems will be
significant if the Company determines there is sufficient market validation to
initiate development of these products and it has funding to complete this work.
The Company expects its cost of research and development for the remainder of
2004 to continue to be slightly higher compared to 2003. Research and
development expenses totaled approximately $1,970,000 and $1,911,000 for the six
months ended June 30, 2004 and 2003, respectively. The increase of $59,000 or 3%
is primarily the result of higher development costs relating to the Company's
Smart Power M5.
Depreciation and Amortization
The Company's depreciation and amortization is primarily related to depreciation
on capital expenditures and the amortization of lease and leasehold costs
related to our facilities. The Company is also amortizing the Smart Power M5
intellectual property it acquired from Advanced Energy Systems in 2003.
Depreciation and amortization totaled approximately $90,000 and $143,000 for the
six months ended June 30, 2004 and 2003, respectively. The decrease of $53,000
or 37% is attributable to the decrease in the remaining net book values of the
Company's assets.
Interest and Other Income/Expense, net
The Company's non-operating income and expenses are primarily attributable to
interest income resulting from cash on hand, accrued dividends receivable and
the 7% conversion premium from the conversion of Evergreen Series A Preferred
Stock holdings, partially offset by interest expense associated with its capital
leases. Interest and dividend income for the six months ended June 30, 2004 was
approximately $72,000, compared to approximately $102,000 for the same period in
2003. The decrease in 2004 compared to the prior year is the result of lower
cash balances. Interest expense decreased to zero for the six months ended June
30, 2004 from approximately $6,000 for the same period in 2003. Interest expense
relates to assets leased under capital leases.
Other income (expense) increased to approximately $61,000 for the six months
ended June 30, 2004 compared to other expense of approximately $10,000 for the
six months ending June 30, 2003. The increase was primarily due to the 7%
conversion premium paid to the Company on the conversion of the Series A
Preferred stock of Evergreen Solar, Inc.
Liquidity and Capital Resources
Quarter ending June 30,
-----------------------
2004 2003
-------- --------
(in thousands)
Cash and cash equivalents ........................... $ 4,999 $ 12,807
Working capital ..................................... 7,241 11,234
Cash provided by (used in)
Operating activities ............................. (3,970) (3,612)
Investing activities ............................. 31 (1,270)
Financing activities ............................. 29 (127)
-------- --------
Net decrease in cash and cash equivalents ........... $ (3,910) $ (5,009)
======== ========
Current ratio ....................................... 4.0 5.6
======== ========
The Company's cash requirements depend on many factors, including but not
limited to research and development activities, continued efforts to
commercialize products, facilities costs, and general and administrative
expenses. The Company expects to make significant expenditures to fund its
operations, develop technologies and explore opportunities to find and develop
additional markets to sell its products. The Company has taken significant
actions to reduce its cash expenditures for product development, infrastructure
and production readiness by reducing headcount, development spending and capital
expenditures over the past three years. The Company has focused its activity on
market analysis in terms of size of markets, competitive aspects and advantages
that its products could provide. It has continued to do preliminary design of
products for markets under consideration for its flywheel systems and has
purchased intellectual properties and incurred development costs for its newest
product in the renewable energy market. The Company must raise additional equity
to execute its business plan and remain a going concern. Based on the Company's
rate of expenditure of cash and the additional expenditures expected in support
of its business plan, the Company will need to obtain an equity investment by
early 2005 to fund:
o continuing as a going concern;
o ongoing research and development of inverter products;
o manufacturing operations;
o working capital requirements; and
o new business development.
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix or Smart Power 250 flywheel systems, the amount of equity
required would increase substantially.
Net cash used in operating activities was approximately ($3,925,000) and
($3,612,000) for the six months ended June 30, 2004 and 2003, respectively. The
primary component to the negative cash flow from operations is from net losses.
For the first six months of 2004, the Company had a net loss of approximately
($4,415,000). This included employee stock compensation of approximately
$612,000, facility related cash payments charged against restructuring reserves
of approximately ($172,000), a reduction in restricted cash related to the lease
of the Company's facility of approximately $45,000, and depreciation and
amortization of approximately $90,000. Changes in operating assets and
liabilities used approximately ($76,000) of cash during the first six months of
2004. For the first six months of 2003, the Company had a net loss of
approximately ($4,448,000). This included non-cash charges of approximately
$10,000 for the reserve of interest capitalized on a reserved note due from its
former CEO, facility related cash payments charged against restructuring
reserves of approximately ($172,000), gain on the sale of assets of
approximately ($6,000) and depreciation and amortization of approximately
$143,000. Changes in operating assets and liabilities generated approximately
$861,000 of cash during the first six months of 2003. The primary components
were increases in accounts payable and accrued compensation and benefits of
approximately $37,000 and 42,000 respectively, and decreases in prepaid expenses
of approximately $937,000. These were offset by accrued expenses and other
current liabilities of approximately ($156,000).
Net cash used in investing activities was approximately ($14,000) and
($1,270,000) for the six months ended June 30, 2004 and 2003, respectively. The
principal use of cash during the first six months of 2004 was the purchase of
capital equipment of approximately ($14,000). The principal uses of cash during
the first six months of 2003 were primarily related to the investment in
Evergreen Solar of ($1,100,000), increases in other assets totaling
approximately ($194,000), purchase of capital equipment of approximately
($6,000) and the principal sources of cash were from the sale of certain
impaired machinery and equipment of the Company of approximately $30,000.
Net cash generated/(used) by financing activities was approximately $29,000 and
($127,000) for the six months ended June 30, 2004 and 2003, respectively. For
the first six months of 2004, the cash generated by financing activities of
approximately $29,000 related to the exercise of stock options in the amount of
approximately $27,000 and shares issued under the employee stock purchase plan
of approximately $2,000. For the first six months of 2003, the cash used for
financing activities related to repayment of capital leases of approximately
($128,000), offset by cash proceeds from the employee stock purchase plan of
approximately $1,000
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix or Smart Power 250 flywheel systems, the amount of equity
required would increase substantially. In as much as the Company is not
expecting to become profitable or cash flow positive until at least 2008, its
ability to continue as a going concern will depend on being able to raise
additional capital. The Company may not be able to raise this capital at all, or
if it is able to do so, it may be on terms that are adverse to shareholders. The
Company believes that it cannot use debt financing to meet its cash
requirements.
Certain Factors Affecting Future Operating Results
The following factors, as well as others mentioned in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 2003 (filed May 17, 2004),
could cause actual results to differ materially from those indicated by
forward-looking statements made in this Quarterly Report on Form 10-Q:
The Company May Not Be Able to Continue as a Going Concern, as its Cash Balances
Are Sufficient to Fund Operations Only Through Approximately April 2005.
As shown in the consolidated financial statements, the Company incurred
significant losses from continuing operations of approximately $8,618,000,
$20,839,000, and $26,146,000 and cash decreases of approximately
$8,957,000, $16,335,000 and $27,850,000, during the years ended December
31, 2003, 2002 and 2001, respectively. The Company has $4,999,000 of cash
and cash equivalents on hand at June 30, 2004. The Company has recorded
limited revenue from sales of its products. These factors, among others,
indicate that the Company may be unable to continue as a going concern.
Deloitte & Touche LLP, the Company's independent auditors, have included an
explanatory paragraph related to a going concern uncertainty in their audit
report on the Company's consolidated financial statements for the fiscal
year ended December 31, 2003, which states that "the Company's recurring
losses from operations and negative cash flows raise substantial doubt
about its ability to continue as a going concern."
The Company's financial statements have been prepared on the basis of a
going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
has not made any adjustments to its financial statements as a result of the
going concern uncertainty. If the Company cannot continue as a going
concern, it may have to liquidate its assets and may receive significantly
less than the values at which they are carried on its financial statements.
Any shortfall in the proceeds from the liquidation of the Company's assets
would directly reduce the amounts that holders of its common stock could
receive in liquidation.
The Company expects its cash position to fund operations approximately
through April 2005 according to its business plan. The Company is exploring
opportunities to raise additional capital through equity offerings,
strategic alliances and other financing vehicles, but it does not make any
assurances that sufficient funds will be available to it on terms that it
deems acceptable, if they are available at all.
The Company Needs Additional Financing.
The Company will need additional financing to execute its business plan and
continue as a going concern. The Company cannot be certain that it will be
able to raise additional funds on terms acceptable to the Company or at
all. If future financing is not available or is not available on acceptable
terms, the Company would not be able to continue as a going concern. See
"Selected Historical Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's Stockholders May be Adversely Affected if the Company Issues
Additional Equity to Obtain Financing.
If the Company raises additional funds by issuing additional equity
securities, existing stockholders may be adversely affected because new
investors may have rights superior to those of current shareholders and may
also be diluted.
The Company May Not Be Able to Reduce Its Product Cost Enough to Make The
Company's Prices Competitive and Therefore It May Not Be Able to Realize Volumes
With Margins that Allow It to Cover Its Costs of Operations.
There can be no assurance that the Company will be successful in lowering
production costs through improved product designs or volume discounts,
which may prevent widespread market acceptance of its products due to
higher pricing than those of its competitors.
The Company Has Limited Experience Manufacturing Inverter Systems or Flywheel
Energy Storage Systems on a Commercial Basis. In the Event of Significant Sales,
the Company Will Need to Develop or Obtain Manufacturing Capacity for Its
Products.
Should the Company experience significant customer demand for its inverter
or flywheel products, it will need to develop or obtain manufacturing
capacity to meet quality, profitability and delivery schedules. The Company
may need to establish additional manufacturing facilities, expand its
current facilities or expand third-party manufacturing. The Company has
limited experience in the manufacture of inverter or flywheel systems and
there can be no assurance that it will be able to accomplish these tasks,
if necessary, on a timely basis to meet customer demand or at all. The
Company has taken actions to conserve cash including idling its
manufacturing capabilities through headcount reduction, delaying the
development of its manufacturing process documentation and capital
build-out. The Company will not achieve profitability if it cannot develop
or obtain efficient, low-cost manufacturing capability, processes and
suppliers that will enable the Company to meet the quality, price,
engineering, design and production standards or production volumes required
to meet its product commercialization schedule, if any, or to satisfy the
requirements of its customers or the market generally.
It Is Difficult to Evaluate the Company and to Predict Its Future Performance
Because of Its Short Operating History and the Fact that It is a Development
Stage Company.
The Company has a limited operating history and is a development stage
company. Unless the Company can achieve significant market acceptance of
its current or future products at volumes and with margins that allow it to
cover its costs of operations, the Company may never advance beyond the
start-up phase.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The Company Has Incurred Losses Since Its Inception and Anticipates Continued
Losses Through at Least 2008.
The Company has incurred net losses and negative cash flows since its
inception in May 1997. The Company had net losses of approximately
($8,618,000) in 2003, ($20,839,000) in 2002, ($26,146,000) in 2001,
($53,279,000) in 2000 and ($6,630,000) in 1999. Since its inception, the
Company has had net losses totaling ($127,951,000). The Company expects to
continue to incur net losses through at least 2008. Although the Company is
looking for additional ways to economize and reduce costs, its efforts may
prove even more expensive than anticipated to successfully develop products
for potential markets. The Company's revenue must grow substantially to
offset these higher expenses and become profitable. Even if the Company
does achieve profitability, it may be unable to sustain or increase its
profitability in the future.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Because the Company Depends on Third-Party Suppliers for the Development and
Supply of Key Components for Its Products, It Could Experience Disruptions in
Supply that Could Delay or Decrease Its Revenues.
The Company's business, prospects, results of operations, or financial
condition could be harmed if it is unable to maintain satisfactory
relationships with existing suppliers or develop relationships with new
suppliers. To accelerate development time and reduce capital investment,
the Company relies on third-party suppliers for several key components of
its systems. The Company does not have contracts with all of these
suppliers. If these suppliers should fail to timely deliver components that
meet the Company's quality, quantity, or cost standards, then the Company
could experience production delays or cost increases. Because certain key
components that are complex, and difficult to manufacture and require long
lead times, the Company may have difficulty finding alternative suppliers
on a timely or cost effective basis. In addition, there are a number of
components that the Company has not purchased on a production basis and it
may be difficult for the Company to find suppliers. As a result, the
Company could experience shortages in supply or be unable to be cost
competitive in the markets it is pursuing.
The Company's Financial Performance Could Be Adversely Affected by its Need to
Hire and Retain Key Executive Officers and Skilled Technical Personnel.
Because the Company's future success depends to a large degree on the
success of its technology, the Company's competitiveness will depend
significantly on whether it can attract and retain skilled technical
personnel, especially engineers, and can retain members of its executive
team. The Company has employment agreements with Messrs. Capp, CEO and
President; Spiezio, Vice President of Finance, Chief Financial Officer,
Treasurer and Secretary; and Lazarewicz, Vice President and Chief Technical
Officer.
The Company may not be successful in attracting and retaining the personnel
or executive talent necessary to develop products and operate profitably.
The Company's Financial Performance Could be Adversely Affected by Needs to Hire
and Retain Key Sales Personnel.
Because the Company's future success depends to a large degree on the
success of its sales organization, the Company's ability to meet its
business plan will depend significantly on whether it can attract and
retain sales personnel. The sales organization has been impacted by both
health issues, and a resignation. The lead salesman for the Company's Smart
Power M5 Inverter has been on medical leave and has only recently returned
to work on a part-time basis. A salesman for both the Smart Power M5
Inverter and the Company's flywheels systems resigned to pursue business
opportunities that did not require travel. Competition for skilled sales
people is intense and the Company may not be successful in attracting and
retaining the personnel or executive talent necessary to develop markets
and operate profitably.
There May Be Only a Modest Number of Potential Customers for the Company's
Products.
There may only be a limited number of potential customers for the Company's
products, in which case the Company will be subject to the risk that the
loss of or reduced purchases by any single customer could adversely affect
its business.
If the Company is Unable to Successfully Market, Distribute and Service Its
Products Internationally it May Experience a Shortfall in Expected Revenues and
Profitability.
In addition to the risks the Company faces when operating within the U.S.,
additional risks are present if the Company operates internationally. To
develop sufficient revenue volumes for the Company to be profitable the
Company may need to market, distribute and service products internationally
through distributors. The Company has no experience developing,
manufacturing or selling products to comply with the commercial and legal
requirements of international markets. The Company's ability to properly
service its products internationally will depend on third-party
distributors to install and provide service. There is no assurance that the
Company will be able to locate service providers in every region or that
these providers will effectively service its products. Also, the Company's
success in those markets will depend, in part, on its ability to secure
foreign customers and its ability to manufacture products that meet foreign
regulatory and commercial requirements. In addition, international
operations are subject to other inherent risks, including potential
difficulties in establishing satisfactory distributor relationships and
enforcing contractual obligations and intellectual property rights in
foreign countries, and fluctuations in currency exchange rates.
Any Failure to Protect the Company's Intellectual Property Could Seriously
Impair Its Competitive Position.
The Company cannot provide assurance that it has or will be able to
maintain a significant proprietary position on the basic technologies used
in its inverter and flywheel systems. The Company's ability to compete
effectively against alternative technologies will be affected by its
ability to protect proprietary technology, systems designs and
manufacturing processes. The Company does not know whether any of its
pending or future patent applications under which it has rights will issue
or, in the case of patents issued or to be issued, that the claims allowed
are or will be sufficiently broad to protect the Company's technology or
processes, or will protect it from competitors. Even if all the Company's
patent applications are issued and are sufficiently broad, they may be
challenged or invalidated. The Company could incur substantial costs in
prosecuting or defending patent infringement suits, and such suits would
divert funds and resources that could be used in the Company's business.
The Company does not know whether it has been or will be completely
successful in safeguarding and maintaining its proprietary rights.
Further, the Company's competitors or others may independently develop or
patent technologies or processes that are substantially equivalent or
superior to those of the Company. If the Company is found to be infringing
on third-party patents, the Company does not know whether it will be able
to obtain licenses to use such patents on acceptable terms, if at all.
Failure to obtain needed licenses could delay or prevent the development,
manufacture or sale of the Company's systems.
The Company relies, in part, on contractual provisions to protect trade
secrets and proprietary knowledge. These agreements may be breached, and
the Company may not have adequate remedies for any breach. The Company's
trade secrets may also be known without breach of such agreements or may be
independently developed by competitors or others. The Company's inability
to maintain the proprietary nature of its technology and processes could
allow competitors or others to limit or eliminate any competitive
advantages the Company may have, thereby harming its business prospects.
The Share Prices of Companies in the Company's Sector have been Highly Volatile
and the Company's Share Price Could Be Subject to Extreme Price Fluctuations.
The markets for equity securities of high technology companies, including
companies in the power reliability and power quality markets, have been
highly volatile recently and the market price of the Company's common stock
has been and may continue to be subject to significant fluctuations. This
could be in response to operating results, announcements of technological
innovations or new products by the Company, or its competitors, patent or
proprietary rights developments, energy blackouts and market conditions for
high technology stocks in general. In addition, stock markets in recent
years have experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to the operating performance of
individual companies. These market fluctuations, as well as general
economic conditions, may adversely affect the market price of the Company's
common stock, which could affect its ability to attract additional capital
to fund operations.
There May be Other Technologies Under Development That Could Prevent the Company
from Achieving or Sustaining Its Ability to Sell Products or to Do So at Prices
that will Yield Profits.
There are number of technology companies in various stages of development.
The Company cannot give assurance that some or all of its target markets
and pricing plans could not be displaced by emerging technologies.
The Company Has an Investment in Another Company in Its Sector in an Effort to
Increase Shareholder Value Through Strategic Alliance or Return on Investment
Which may Not Create Gains and therefore Reduce Shareholder Value.
Given the Company's financial position, its ability to make investments in
other companies is very limited at this time. However, in the future, the
Company may make investments in other companies in its sector to gain
strategic alliances, channels to market or appreciation in stock value.
These investments may not increase shareholder value. Given the volatility
of share prices for companies in this sector, general economic conditions
and market fluctuations in general, the market price of the investments may
decrease and reduce shareholder value.
Provisions of Delaware Law and of the Company's Charter and By-laws May Inhibit
a Takeover that Stockholders Consider Favorable.
Provisions in the Company's certificate of incorporation and by-laws and in
the Delaware corporate law, and the shareholder rights plan adopted in
September 2002, may make it difficult and expensive for a third party to
pursue a tender offer, change in control or takeover attempt that is
opposed by the Company's management and board of directors. Public
stockholders who might desire to participate in such a transaction may not
have an opportunity to do so. Beginning with the Company's annual
stockholder meeting in 2001, it implemented a staggered board of directors
that will make it difficult for stockholders to change the composition of
the board of directors in any one-year. Pursuant to a shareholder rights
plan adopted in September 2002, the Company issued rights as a dividend on
common stock on October 7, 2002 each of which entitles the holder to
purchase 1/100th of a share of newly issued preferred stock for $22.50 in
the event that any person not approved by the board of directors acquires
more than 15% (30% in the case of one large shareholder that already owned
more than 15%) of the Company's outstanding common stock, or in the event
of an acquisition by another company, $22.50 worth of the common stock of
the other company at half its market value (in each case the rights held by
the acquiring person are not exercisable and become void). The shareholder
rights plan was modified by rights plan Amendment 1 dated December 27,
2002. The amendment increased the beneficial ownership approved by the
board of directors from 30% to 35% for one large shareholder. Additionally,
the Company's board of directors may authorize issuances of "blank check"
preferred stock that could be used to increase the number of outstanding
shares and discourage a takeover attempt. These anti-takeover provisions
could substantially impede the ability of public stockholders to benefit
from a change in control or change in the Company's management and board of
directors.
Terrorist Attacks have Contributed to Economic Instability in the United States;
Continued Terrorist Attacks, War or Other Civil Disturbances Could Lead to
Further Economic Instability and Depress the Company's Stock Price.
On September 11, 2001, the United States was the target of terrorist
attacks of unprecedented scope. These attacks have caused instability in
the global financial markets, and have contributed to volatility in the
stock prices of United States publicly traded companies, such as Beacon
Power. These attacks may lead to armed hostilities or to further acts of
terrorism and civil disturbances in the United States or elsewhere, which
may further contribute to economic instability in the United States and
could have a material adverse effect on the Company's business, financial
condition and operating results.
Government Regulation May Impair the Company's Ability to Market Products.
Government regulation of the Company's products, whether at the federal,
state or local level, including any change in regulations, on tariffs,
product buy downs or tax rebates relating to purchase and installation of
its products, may increase the cost and price of its systems, and may have
a negative impact on the Company's revenue and profitability. The Company
cannot provide assurance that its products will not be subject to existing
or future federal and state regulations governing traditional electric
utilities and other regulated entities. The Company expects that its
products and their installation will be subject to oversight and regulation
at the local level in accordance with state and local ordinances relating
to building codes, safety, pipeline connections and related matters. The
Company does not know the extent to which any existing or new regulations
may impact its ability to distribute, install and service its products.
Once the Company's products reach the commercialization stage federal,
state or local government entities may seek to impose regulations.
Product Liability Claims Against the Company Could Result in Substantial
Expenses and Negative Publicity Which Could Impair Successful Marketing of its
Products.
The Company's business exposes it to potential product liability claims
that are inherent in the manufacturing, marketing and sale of
electro-mechanical products, and as such, the Company may face substantial
liability for damages resulting from the faulty design or manufacture of
products or improper use of products by end users. The Company cannot
provide assurance that its product liability insurance will provide
sufficient coverage in the event of a claim. Also, the Company cannot
predict whether it will be able to maintain such coverage on acceptable
terms, if at all, or that a product liability claim would not materially
adversely affect its business, financial condition or the price of its
common stock. In addition, negative publicity in connection with the faulty
design or manufacture of the Company's products would adversely affect its
ability to market and sell its products.
Safety Failures by the Company's Flywheel Products or Those of The Company's
Competitors Could Reduce Market Demand or Acceptance for Flywheels in General.
A serious accident involving either the Company's flywheels or competitors'
similar products could be a significant deterrent to customer acceptance
and adversely affect the Company's financial performance. There is the
possibility of accident with any form of energy storage. In particular, if
a metal flywheel fails and the stored energy is released, the flywheel
could break apart into fragments that could be ejected at a high rate of
speed. However, the Company's flywheels are based on a composite design so
that in the event of a failure, the Company's flywheel would shut down
rather than disintegrate. To date, the Company's testing validates this
design conclusion. Also, the Company believes that one of the advantages of
composite flywheels over metal flywheels is that in the event of a flywheel
failure, the flywheel tends to delaminate and shut down rather than (as in
the case of metal) to break into a number of large fragments that have a
greater possibility of bursting a containment vessel and causing injury. At
this early stage of commercialization, there are differing approaches to
containment safety with disagreement in the community on the most effective
means.
The Market for Using the Company's Smart Energy Matrix to Provide Frequency
Regulation has not been Established.
The Company believes that the use of its Smart Energy Matrix will be
successful in the frequency regulation market. However, this market is
currently being served by independent service providers that use generators
and although the Company believes its product offers greater efficiencies
than generators and could produce positive investment returns for
independent service providers, there can be no assurance that the Company
will be able to establish its product in that market.
The Value Proposition of the Company's Smart Energy Products May Not Be
Recognized.
There can be no assurance that the Company will be able to compete
successfully against batteries. To compete successfully the Company must
establish the value proposition of its products based upon their
dependability, environmental benefits, and long maintenance-free life. The
performance of batteries has improved while battery prices have declined
due to lower demand from the communications markets and others and
increased competition resulting from an increase in the number of battery
manufacturers. These changes in battery pricing and performance make it
even more difficult for the Company to establish the value proposition of
its Smart Energy products.
The Company Might Fail to Develop Successful Flywheel Products.
The successful development of the Company's flywheel products involves
significant technological and cost challenges and will require additional
financing to complete. Major risks include:
o maintaining the development schedule and achieve technical success, as
such development could take substantially longer than anticipated;
o the cost of developing key components of the Company's systems that
have significant technical risk and which may not be economically
feasible for a competitive product;
o ensuring long-life and maintenance free performance through design and
quality control;
o ensuring quality and cost control from suppliers; and
o raising the necessary financing.
The Company's Sales Efforts may be Adversely Affected by the Reputation of the
Bankrupt Company from which The Company Acquired the Intellectual Properties for
the Smart Power M5 Inverter System.
The Company purchased the intellectual property that its Smart Power M5
inverter systems are based on from Advanced Energy Systems, Inc., a company
in bankruptcy, which had sold units that are not supported by warranties.
And in some cases these units are not functioning as expected. Although the
Company will provide warranties for its products and it has made
engineering changes to provide reliable performance, there can be no
assurance that the Company's sales efforts will not be adversely affected
by the performance of the unwarranted products in the field.
The Value Proposition of the Company's Inverter Systems May Not Be Recognized.
There can be no assurance that the Company will be able to compete
successfully and gain market share in the renewable energy market. To
compete successfully the Company must establish its value proposition as
cost effective for end users based upon its product's price, dependability,
operational benefits, and long life.
The Company May Not be Able to Establish a Distribution Channel to Sell Its
Inverter Systems.
The Company expects to market its Smart Power M5 inverter system as well as
future inverter products through distributor channels. The Company does not
have experience in these distribution channels or in the photovoltaic
markets, and may not be successful in establishing adequate market volume
through this distribution strategy. Even if the Company were able to
establish sufficient sales volumes, there can be no assurance that these
channels will continue to provide adequate volumes for the Company's
products in the future.
The Channels to Market for Photovoltaic Products are Not Stable and have Changed
Substantially in the Last Year.
The photovoltaic market is growing rapidly, but the sales and distribution
channels are not stable. In the last year, the cross section of these
distributors has changed as some of the larger photovoltaic module
manufacturers have left the market for integrated solutions to focus only
on module manufacture. As a result, success of products such as the
Company's Smart Power M5 inverter system will be dependent on smaller
distributors, who have less financial resources and, therefore, reduced
ability to influence the acceptance of new products as a result of lower
advertising abilities and lower consumer recognition. When these types of
changes take place, it often results in a period of uncertainty in the
sales and distribution channels, leading to fewer and smaller orders being
placed. The Company is using a strategy of selling through full-service,
wholesale distributors, and there can be no assurance that this strategy
will be successful in the channel configuration that continues to be
restructured.
If Market Acceptance Does Not Increase, Inverter Sales May Not be Sufficient as
a Viable Business.
If the value proposition that the Company offers to the market is not
accepted, or if the market does not continue to grow, or if the sales
channels to market continue to be in a state of change, or if the purchase
volume of the Company's products does not increase substantially, then the
Company may not achieve the level of sales of inverters to make this a
viable business. If sufficient sales are not achieved, then profits will
not be realized, resulting in further need for additional investor funding
which may not be available on acceptable terms, or at all.
The Company Faces Intense Competition in the Inverter Markets.
There are a number of companies located in the United States, Canada, and
abroad that are offering electronic inverters into the photovoltaic market
and the number of products being offered is increasing. Many of these
companies have more substantial manufacturing, marketing, sales
capabilities, and greater financial resources, as well as brand recognition
and established market positions. They may also have greater research,
development and commercialization capabilities. There can be no assurance
that the Company will be able to compete or be able to adapt as quickly to
changing customer needs.
The Company Might Fail to Develop Successful Additional Inverter Products.
The successful development of additional inverter products involves
technological and cost challenges and will require additional financing to
complete. Major risks include:
o maintaining the development schedule for these products, as such
development could take substantially longer than anticipated;
o the cost of developing key components of the Company's systems that
have technical risk and which may not be economically feasible for a
competitive product in the renewable energy market;
o reducing manufacturing and assembly costs to increase the Company's
chances of achieving profitability;
o ensuring minimal warranty expenses through design and quality control;
o ensuring quality and cost control from suppliers;
o raising the necessary financing; and
o extending each product design into as many applications and markets as
possible.
The Photovoltaic Energy Market May Not Grow as Anticipated.
Although photovoltaic installations have continued to grow at solid
compound annual growth rates of greater than 20%, there can be no assurance
that these rates of growth will continue.
The Company's High-Energy Flywheels Face Intensified Competition from Batteries
Due to Batteries' Declining Prices and Improved Life. As a Consequence Customers
are Less Likely to Accept the Value Proposition of the Company's High-Energy
Flywheel Products.
The performance of batteries has improved while battery prices have
declined due to lower demand from the communications markets and others and
increased competition resulting from an increase in the number of battery
manufacturers. These changes in battery pricing and performance have made
it very difficult for the Company to establish the value proposition of its
high-energy flywheel products.
The Telecommunications Industry Continues to Experience Lower Rates of Build-Out
and Maintenance Spending.
The Company initially targeted the communications markets for the sale of
its high-energy products. However, this industry, which had previously
sustained high rates of infrastructure build-out, has experienced a sharp
decline in build-out as well as maintenance spending which began in 2000
and has continued and there can be no certainty of when or if this market
will recover. Significant reductions in both maintenance budgets and
capital build-out budgets at telecommunications companies caused these
potential customers to be more conservative with their spending and
expenditure analysis and less willing to try new technology solutions, such
as the Company's flywheel systems.
The Company Might Fail to Develop Successful Additional High-Energy Flywheel
Products.
The successful development of additional high-energy flywheel products
involves significant technological and cost challenges and will require
additional financing to complete. Major risks include:
o maintaining the development schedule for these products, as such
development could take substantially longer than anticipated;
o the cost of developing key components of the Company's systems that
have significant technical risk and which may not be economically
feasible for a competitive product in the high-energy market;
o reducing manufacturing costs for the flywheel's shaft, hub and rim,
bearings and related electronics to increase the Company's chances of
achieving profitability;
o ensuring minimal warranty expenses through design and quality control;
o ensuring quality and cost control from suppliers;
o raising the necessary financing; and
o extending the product to new applications.
The Company Faces Intense Competition and May Be Unable to Compete Successfully
in the High-Energy Flywheel Markets.
The markets for uninterruptible electric power are intensely competitive.
There are a number of companies located in the United States, Canada, and
abroad that are offering battery based energy storage options. The Company
also competes with companies that are developing applications using other
types of alternative energy storage. In addition, if large established
companies decide to focus on the development of competing or other
alternative energy products for sale to the Company's potential customers,
they may have the manufacturing, marketing, and sales capabilities to
complete research, development and commercialization of commercially viable
alternative energy storage systems that could be more competitive than the
Company's systems and could be brought to market more quickly. To the
extent they already have name recognition, their products may enjoy greater
initial market acceptance among potential customers. These competitors may
also be better able than the Company to adapt quickly to customers'
changing demands and to changes in technology.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's cash equivalents and investments, all of which have maturities of
less than one year, may expose the Company to interest rate risk. At June 30,
2004, the Company had approximately $60,000 of cash equivalents that were held
in non-interest bearing accounts. Also at June 30, 2004, the Company had
approximately $172,000 of cash equivalents that were held in interest bearing
checking accounts and $4,767,000 invested in interest-bearing money market
accounts. A 10% change in interest rates would change the investment income
realized on an annual basis by approximately $8,000, which the Company does not
believe is material.
Item 4. Controls and Procedures
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of its disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this Report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective in
enabling the Company to record, process, summarize, and report information
required to be included in its periodic SEC filings within the required time
period.
In addition, the Company's management, with the participation of its Chief
Executive Officer and Chief Financial Officer, has evaluated whether any change
in the Company's internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) occurred during the period
covered by this Report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that there has been no change in the
Company's internal control over financial reporting during the period covered by
this Report that has materially affected, or is reasonably likely to materially
affect, its internal control over financial reporting.
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On November 16, 2000, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File No. 333-43386) effective. In
the Company's initial public offering during the fourth quarter of 2000, it sold
9,200,000 shares of its common stock, inclusive of the underwriters' over
allotment, at an initial public offering price of $6.00 per share. The Company
received net proceeds from its initial public offering of approximately $49.3
million, reflecting gross proceeds of $55.2 million net of underwriter
commissions of approximately $3.9 million and other offering costs payable to
persons, other than directors or officers, of approximately $2.0 million.
From November 16, 2000 to June 30, 2004, the Company spent approximately $10.8
million for inventory and materials used in research and development and $7.2
million for property and equipment, including the build-out of its facility at
234 Ballardvale Street in Wilmington, MA. In addition, the Company spent
approximately $1.2 million to pay dividends on its preferred stock that accrued
through the date of its initial public offering. The Company has spent
approximately $42.5 million for other working capital needs and equity
investments.
In addition to the above, the Company advanced funds totaling approximately
$785,000 to three officers of the Company to exercise options to purchase common
stock in the Company. Through June 30, 2004, the Company has collected
approximately $667,000 in payments on these advances and two of the three loans
have been paid in full. The remaining loan is to Mr. William Stanton, who serves
on the board of directors for the Company and was its former CEO and president.
The outstanding balance on Mr. Stanton's loan at June 30, 2004 was approximately
$118,000. In June 2002, due to the current market value of the pledged
securities and the uncertainty of collection of the advance, the Company took a
charge in the amount of approximately $426,000 to reserve the remaining balance
of this advance. In August 2003, Mr. Stanton sold all of the stock that secured
the loan and in the fourth quarter of 2003, he reduced the loan balance by
$323,000. The remaining loan balance of $118,000 has not been forgiven and
remains outstanding, even though all stock held as security under the loan
agreement has been sold.
Other than as disclosed above, none of these amounts were direct or indirect
payments to directors or officers of the issuer or their associates or to
persons owning 10% or more of the Company's common stock or to any of its
affiliates.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer required by 13a-14(a)
31.2 Certification of Chief Financial Officer required by 13a-14(a)
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K
On March 31, 2004, the Company filed a current report on Form 8-K reporting that
it had issued a press release announcing its financial results for fiscal
quarter and year ended December 2003.
On May 18, 2004, the Company filed a current report on Form 8-K reporting that
it had issued a press release announcing its financial results for fiscal
quarter ended March 31, 2004 and that it had filed a Form 10-K/A for the quarter
and year ended December 2003.
On May 20, 2004, the Company filed a current report on Form 8-K reporting that
it had issued a press release disclosing that it had received a staff
determination letter from the Nasdaq Listing Qualifications panel stating that
the Company has not met the minimum $1.00 per share bid price requirement for 30
consecutive days.
SIGNATURES
Pursuant to the requirements of Section 13 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.
BEACON POWER CORPORATION
Date: August 16, 2004 By: /s/ F. William Capp
-------------------
F. William Capp
President and Chief Executive
Officer
August 16, 2004 By: /s/ James M. Spiezio
-------------------
James M. Spiezio
Vice President of Finance,
Chief Financial Officer,
Treasurer and Secretary
Principal Financial Officer