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 March 31, 2005
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 May 6, 2005 was 43,665,143.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Table of Contents
Page
PART I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets at March 31, 2005 (unaudited) and December 31, 2004 (audited) 1
Unaudited Consolidated Statements of Operations for the three months ended
March 31, 2005 and 2004 and for the period from May 8, 1997 (date of inception) to
March 31, 2005 ...................................................................... 2
Unaudited Consolidated Statements of Cash Flows for three months ended
March 31, 2005 and 2004 and for the period from May 8, 1997 (date of
inception) to March 31, 2005 ........................................................... 3
Notes to Unaudited Consolidated Financial Statements ..................................... 5-14
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations .................................................................. 15-27
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................... 28
Item 4. Controls and Procedures ............................................................. 28
PART II. Other Information
Item 1. Legal Proceedings ................................................................... 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......................... 29
Item 3. Defaults upon Senior Securities ..................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders ................................. 29
Item 5. Other Information ................................................................... 29
Item 6. Exhibits ............................................................................ 30
Signatures ........................................................................................ 32
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
March 31, December 31,
2005 2004
(unaudited) (audited)
------------- -------------
Assets
Current assets:
Cash and cash equivalents ........................................ $ 3,334,595 $ 5,097,188
Accounts receivable, trade, net .................................. 895 52,105
Inventory ........................................................ -- 222,593
Unbilled costs on government contracts ........................... 416,705 --
Prepaid expenses and other current assets ........................ 599,658 817,396
------------- -------------
Total current assets ......................................... 4,351,853 6,189,282
Property and equipment, net ........................................... 277,316 258,647
Restricted cash ....................................................... 310,011 310,011
Other assets and prepaid financing costs .............................. 354,484 327,646
------------- -------------
Total assets .......................................................... $ 5,293,664 $ 7,085,586
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ................................................. $ 184,947 $ 389,189
Accrued compensation and benefits ................................ 196,699 130,609
Other accrued expenses ........................................... 466,196 393,569
Accrued contract loss ............................................ 320,646 --
Restructuring reserve ............................................ 976,758 1,062,644
------------- -------------
Total current liabilities .................................... 2,145,246 1,976,011
------------- -------------
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;
43,797,143 and 43,788,810 shares issued and outstanding at
March 31, 2005 and December 31, 2004, respectively ............... 437,971 437,888
Deferred stock compensation ...................................... (435,712) (707,167)
Additional paid-in-capital ....................................... 134,424,216 134,411,911
Deficit accumulated during the development stage ................. (131,178,397) (128,933,397)
Treasury stock, 132,000 shares at cost ........................... (99,660) (99,660)
------------- -------------
Total stockholders' equity ................................... 3,148,418 5,109,575
------------- -------------
Total liabilities and stockholders' equity ............................ $ 5,293,664 $ 7,085,586
============= =============
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)
Cumulative from
May 8, 1997
(date of inception)
Three months ended March 31, through March 31,
2005 2004 2005
------------- ------------- -------------
Revenue ................................... $ 636,134 $ 57,408 $ 1,512,012
Cost of goods sold ........................ 670,507 75,779 2,128,376
------------- ------------- -------------
Gross profit .............................. (34,373) (18,371) (616,364)
Operating expenses:
Selling, general and administrative .. 1,172,379 1,076,262 33,428,353
Research and development ............. 486,238 1,048,240 54,361,783
Loss on sales and contract commitments 547,707 -- 923,681
Depreciation and amortization ........ 18,191 46,587 4,156,157
Restructuring charges ................ -- -- 2,159,280
Loss on impairment of assets ......... -- -- 4,663,916
------------- ------------- -------------
Total operating expenses ....... 2,224,515 2,171,089 99,693,170
------------- ------------- -------------
Loss from operations ...................... (2,258,888) (2,189,460) (100,309,534)
Other income (expense):
Interest income ........................... 14,888 40,583 3,897,763
Interest expense .......................... -- -- (1,093,703)
Gain on sale of investment ................ -- -- 3,562,582
Other income (expense) .................... (1,000) 150 (229,311)
------------- ------------- -------------
Total other income (expense), net .... 13,888 40,733 6,137,331
------------- ------------- -------------
Net loss .................................. (2,245,000) (2,148,727) (94,172,203)
Preferred stock dividends ................. -- -- (36,825,680)
Accretion of convertible preferred stock .. -- -- (113,014)
------------- ------------- -------------
Loss to common shareholders ............... $ (2,245,000) $ (2,148,727) $(131,110,897)
============= ============= =============
Loss per share, basic and diluted ......... $ (0.05) $ (0.05)
============= =============
Weighted-average common shares outstanding 43,792,791 43,121,702
============= =============
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows (Unaudited)
Cumulative from
May 8, 1997
(date of inception)
Three months ended March 31, through March
2005 2004 31, 2005
------------ ------------ ------------
Cash flows from operating activities:
Net loss ............................................. $ (2,245,000) $ (2,148,727) $(94,172,203)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ..................... 18,191 46,587 4,156,158
Loss on sale of fixed assets ...................... -- -- 196,169
Impairment of assets .............................. -- -- 4,654,213
Restricted cash ................................... -- -- (310,011)
(Expenses paid) restructuring charge .............. (85,886) (85,886) 976,758
Reserve for officers note ......................... -- -- 102,044
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 ....... 278,010 349,401 2,268,868
Options and warrants issued for consulting services -- -- 1,585,654
Services and interest expense paid in preferred
stock ............................................. -- -- 11,485
Gain on sale of investments ....................... -- -- (3,562,582)
Changes in operating assets and liabilities:
Accounts receivable ............................... 51,210 30,161 (895)
Inventory ......................................... 222,593 (368,102) --
Unbilled costs under government contracts ......... (416,705) -- (416,705)
Prepaid expenses and other current assets ......... 217,738 178,887 (801,362)
Accounts payable .................................. (204,242) 217,084 184,947
Accrued compensation and benefits ................. 66,090 60,563 196,699
Accrued interest .................................. -- -- 275,560
Dividend receivable ............................... -- (23,742) --
Accrued contract loss ............................. 320,646 -- 320,646
Other accrued expenses and current liabilities .... 72,627 (81,863) 474,866
------------ ------------ ------------
Net cash used in operating activities .......... (1,704,728) (1,825,637) (81,678,156)
Cash flows from investing activities:
Purchase of investments .............................. -- -- (1,190,352)
Sale of investments .................................. -- -- 4,752,934
Increase in other assets ............................. -- -- (412,072)
Purchases of property and equipment .................. (36,860) (14,082) (8,489,413)
Sale of property and equipment ....................... -- -- 71,240
------------ ------------ ------------
Net cash used in investing activities ............. (36,860) (14,082) (5,267,663)
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 ..... -- -- 128,150
Exercise of employee stock options ................... 5,833 26,700 1,442,100
Cash paid for financing costs ........................ (26,838) -- (354,484)
Issuance of preferred stock .......................... -- -- 32,868,028
Repayment of subscription receivable ................. -- -- 5,000,000
Proceeds from capital leases ......................... -- -- 495,851
Repayment of capital leases .......................... -- -- (1,031,395)
Proceeds from notes payable issued to investors ...... -- -- 3,550,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (21,005) 26,700 90,280,414
(Decrease) increase in cash and cash equivalents .......... (1,762,593) (1,813,019) 3,334,595
Cash and cash equivalents, beginning of period ............ 5,097,188 8,909,261 --
------------ ------------ ------------
Cash and cash equivalents, end of period .................. $ 3,334,595 $ 7,096,242 $ 3,334,595
============ ============ ============
Supplemental disclosure of non--cash transactions:
Cash paid for interest ............................... $ -- $ -- $ 488,126
============ ============ ============
Cash paid for taxes .................................. $ -- $ 1,956 $ 32,000
============ ============ ============
Assets acquired through capital lease ................ $ -- $ -- $ 535,445
============ ============ ============
See notes to unaudited consolidated financial statements.
BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
Note 1. Nature of Business and Operations
Nature of Business. Beacon Power Corporation ("Beacon" or "the Company") is a
development stage company that was incorporated on May 8, 1997. Since its
inception, Beacon Power Corporation and its subsidiaries have been primarily
engaged in the development of flywheel devices for storing and transmitting
kinetic energy. Because the Company has not yet generated a significant amount
of revenue from its principal operations, it is accounted for as a development
stage company under Statement of Financial Accounting Standards No. 7. The
Company has a single operating segment, developing alternative power sources.
The Company's organizational structure has no divisions or subsidiaries dictated
by product lines, geography or customer type.
The Company has experienced net losses since its inception and, as of March 31,
2005, had an accumulated deficit of approximately $131 million and does not
expect to become profitable or cash flow positive until at least 2008 and must
raise additional funds to execute its business plan and continue as a going
concern.
On April 25, 2005 a fund affiliated with Perseus, L.L.C. committed to invest $3
million in the Company, in exchange for approximately 3.5 million shares of
common stock, warrants covering up to 1.22 million shares of common stock,
exercisable at $1.01 per share and a two year extension of a 1,333,333 warrant,
exercisable at $2.25 per share, already held by Perseus. See Note 11 for more
information. Based on the Company's current cash usage rates and additional
expenditures expected in support of its business plan, the Company has adequate
cash to fund operations through approximately October, 2005. The Company expects
to pursue additional funding as soon as practicable to further support its
continuing operations, working capital, flywheel prototype development and new
business development. Expenditures under two state government contracts for the
development of a one-tenth-power prototype of the Company's Smart Energy Matrix
have begun, but further expenditures for full scale development and ramping
production capabilities will not be made until additional funding is obtained.
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix systems, the amount of equity required would increase
substantially.
The Company is continuing, on a reduced level, production of its Smart Power M5
inverter product for solar energy applications. Although it is continuing to
support the product, the Company does not believe that inverters will be a
significant portion of the Company's business going forward. The Company's
inverter inventory valuation was fully reserved during 2004 in the amount of
approximately $1,025,000 and a provision for future inverter warranty
expenditures of approximately $28,000 was also recorded.
The Company designs, develops, configures and offers for sale, advanced products
and services to support more reliable electricity grid operation. Its
sustainable energy storage and power conversion solutions can help provide
reliable electric power for the utility, renewable energy, and distributed
generation markets. The Company's Smart Energy Matrix is a design concept for a
megawatt-level, utility-grade flywheel-based energy storage solution that would
provide sustainable power quality services for frequency regulation, and support
the demand for reliable, distributed electrical power. The Company has the
following products, which are in varying stages of development, production
readiness or low volume production:
o Smart Energy(TM) Matrix - A design concept for a high-power flywheel-based
system combining several flywheels with power electronics. The Company
believes the Smart Energy Matrix can provide frequency regulation services
for use by independent system operators and regional transmission operators
to regulate electrical power. The Company also believes that the Smart
Energy Matrix can 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. The
Company has a preliminary design for the Smart Energy Matrix and has been
awarded contracts by the California State Energy Resources Conservation and
Development Commission (CEC) and the New York State Energy Research and
Development Authority (NYSERDA) for programs demonstrating the viability of
the Company's flywheel based system for frequency regulation of electricity
on the power grid. The Company has shifted virtually all of its development
spending towards meeting the requirements of these two programs. To
successfully provide frequency regulation, the Company will need to obtain
sufficient funding to complete design of the matrix, develop the flywheel
components and power electronics, integrate and test the matrix and
establish manufacturing capability for the production of commercial
products.
o Smart Energy system - High-energy flywheel-based systems of 2kWh and 6kWh
that store electricity for telecommunications, cable systems, computer
networks, and Internet market applications have been produced in limited
quantities and the Company has sufficient capacity to return to production
if market demand occurs. The Company believes that, based on existing Smart
Energy technology, it could develop a higher energy 25kWh flywheel system
for renewable applications if market interest were sufficient to justify
development. The Company has been unable to successfully market its Smart
Energy 2kWh and 6kWh at commercially acceptable prices. At this time, the
Company expects to use the results of its Smart Energy Matrix demonstration
unit to assess market interest in its 25kWh design product and determine
whether there is sufficient market demand at prices that would support the
additional development activity required for the Company to bring this high
energy product to market.
o Smart Power(TM) M5 inverter system - An electronic system that converts
direct current electricity produced by photovoltaic panels into alternating
current electricity for residential and commercial use. This product is in
low volume production and the Company has sufficient capacity to ramp
production if market demand increases. As a result of the market interest
in the Company's Smart Energy Matrix design, the Company has redeployed
virtually all of its research and development effort from further inverter
development to its Smart Energy Matrix flywheel technologies. As a result
of this change in focus and lower than anticipated sales volumes of the
Smart Power M5, the Company has also reduced its marketing efforts on the
Smart Power M5 and has established reserves on its balance sheet for
inventories and open purchase commitments. Although it is continuing to
support the product, the Company does not believe that inverters will be a
significant portion of the Company's business going forward.
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
the sale of frequency regulation services for the electrical power grid. In
order to maintain a constant frequency alternating current, the power grid must
continuously balance the supply of power generated with the varying demand for
it. This balance is maintained today by constant, small adjustments in the
output of some of the generators operating on the grid. Not all generators can
be successfully operated with constantly varying output, but all generators that
are able to operate this way incur higher operating costs due to increased fuel
consumption and maintenance. 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 specifically designed to address this application.
Separate from the frequency regulation of the power grid market identified
above, 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. A distributed generation facility
is any electrical power source other than the power grid, including advanced
generators such as fuel cells, natural gas engines, wind turbines, photovoltaic
arrays and microturbines which usually supply local power to facilities such as
hospitals or manufacturing plants.
The Company has finished the preliminary designs for the Smart Energy Matrix and
believes that there is ample market interest in the product to begin full scale
development but will not begin significant design or development until
additional funds have been obtained. 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 generate revenues from this product for
approximately two to three years after development has commenced.
Smart Energy
The Company has offered for sale its Smart Energy flywheel 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
is not actively marketing these products and does not have orders for its Smart
Energy products or any inventory of finished products and does not have purchase
orders in place with vendors for components. In the event that the Company
identifies potential customers and then receives significant customer orders for
these products, it will need to place orders for components with vendors and
hire and train manufacturing personnel to assemble, inspect and assist in the
installation of deliverable units.
Smart Power M5
The Smart Power M5 inverter system for the photovoltaic energy market converts
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 has not been successful in selling a significant number of units of
its Smart Power M5 and therefore has shifted virtually all of its development
and sales activities from the Smart Power M5 to its flywheel based products. The
Company does not believe that inverters will be a significant portion of the
Company's business going forward and is uncertain as to when or at what price it
will be able to sell its inventories. In 2004, the Company established a reserve
for its Smart Power M5 inventory.
Revenues, Cost of Goods Sold and Operations
Revenue Although the Company has shipped a limited number of commercial
products, its operations have not yet reached a level that would qualify it 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."
The Company recognizes revenues in accordance with accounting principles
generally accepted in the United States of America. Revenues on its flywheel
development contracts are recognized on the percentage of completion basis. The
Company's method of revenue recognition on commercial product sales contracts is
to recognize revenues when products are delivered to end users. The Company is
not currently delivering commercial flywheel products. The Company has been
awarded contracts by the California State Energy Resources Conservation and
Development Commission (CEC) and the New York State Energy Research and
Development Authority (NYSERDA) for programs demonstrating the viability of the
Company's flywheel based system for frequency regulation of electricity on the
power grid.
NYSERDA - On February 10, 2005 the Company was awarded a research and
development contract from the New York State Energy Research and Development
Authority (NYSERDA) under a joint initiative between the U.S. Department of
Energy (DOE) Energy Storage Research Program and NYSERDA, entitled "Grid
Frequency Regulation by Recycling Energy in Flywheels," to demonstrate an
advanced energy storage solution for frequency regulation and grid stability in
New York State. The contract requires the Company's flywheel based system to be
delivered and installed during the second half of 2005. The contract is expected
to cost approximately $1.4 million, of which, approximately $385,000 consists of
inventories the Company had previously expensed, and will produce approximately
$645,000 of revenue, nearly all of it in 2005. Under the contract, the Company
will demonstrate a one-tenth-power prototype of the Company's planned
megawatt-level system, known as the Smart Energy Matrix. The demonstration will
integrate the Company's flywheels and associated power electronics into the
distribution power grid.
CEC - On February 14, 2005 the Company was awarded a contract with the
California State Energy Resources Conservation and Development Commission (CEC)
entitled "Flywheel Energy Storage System for Grid Frequency Regulation," to
demonstrate a one-tenth power prototype version of its Smart Energy Matrix
advanced energy storage solution for frequency regulation and grid stability.
Under the contract, the Company will develop and install a one-tenth scale
prototype of the Company's megawatt-level system to demonstrate the potential
benefits of using flywheel energy storage to provide frequency regulation of the
grid. A successful demonstration of frequency regulation will also serve to
demonstrate the system's technical and market feasibility in the grid
stabilization market. The contract requires the Company's flywheel based system
to be delivered and installed during the second half of 2005. The contract is
expected to cost approximately $1.6 million, of which, approximately $140,000
consists of inventories the company had previously expensed, and is expected to
produce approximately $1.2 million of revenue, with the majority of it in 2005.
For the Company's inverter products which are sold to distributors, the Company
recognizes revenues based on the sales by its distributors to their customers.
The Company may enter into contracts to research and develop or manufacture
products with a loss anticipated at the date the contract is signed. These
contracts are entered into in anticipation that profits will be obtained from
future contracts for the same or similar products. These loss contracts may
provide the Company with intellectual property rights that, in effect, establish
it as the sole producer of these products. Anticipated losses on these contracts
are recognized at the date the Company becomes contractually obligated. Future
losses on contracts are charged to earnings as soon as these losses are known.
Estimated costs in excess of revenues are classified under current liabilities
as "Accrued contract loss." The Company accounts for its long-term government
contracts using the percentage of completion method. Under this method,
percentage of completion is measured principally by the percentage of labor
hours incurred to date for each contract to the estimated total labor hours for
each contract at completion. Costs incurred in excess of amounts billed are
classified as current assets under "Unbilled costs under government contracts."
Cost of goods sold. The Company costs its products at the lower of cost or
market. Any cost in excess of this measurement is expensed in the period in
which it is incurred. In addition, the Company continuously evaluates inventory
and purchase commitments to insure that levels do not exceed the expected
deliveries for the next twelve months. 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 March 31, 2005, had an accumulated deficit of approximately $131 million. The
Company's business strategy is to continue to seek Government contracts to
demonstrate the application of its flywheel technologies and identify and review
possible acquisitions or mergers of companies with complementing technologies or
markets. The Company expects to use the results of its Government contracts to
validate its technologies and expand relationships it is developing to gain
market access for the Company's future products for the renewable energy
industry. The Company believes that there is sufficient market interest to begin
full-scale development of its Smart Energy Matrix, however the Company will not
begin full-scale development until it has obtained additional funds. For other
contemplated flywheel-based systems the Company will continue 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 the Company's
products, the Company will seek to obtain additional funds to complete prototype
development and production of identified products. To continue as a going
concern the Company must raise additional funds by October, 2005. The Company
does not expect to become profitable or obtain positive operating 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
except that certain information and footnote disclosure normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q. 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, for the year ended
December 31, 2004. In the opinion of the Company's 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 three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 2005.
Going concern.
The accompanying unaudited consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
had minimal revenues and incurred losses of approximately $131 million since its
inception and losses in the three months ending March 31, 2005 in the amount of
approximately $2,245,000. At March 31, 2005, the Company had approximately
$3,335,000 of cash and cash equivalents on hand. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
On April 25, 2005 a fund affiliated with Perseus, L.L.C. committed to invest $3
million in the Company, in exchange for approximately 3.5 million shares of
common stock, warrants covering up to 1.22 million shares of common stock,
exercisable at $1.01 per share and a two year extension of a warrant to purchase
1,333,333 shares of common stock, exercisable at $2.25 per share, already held
by Perseus. See Note 11 "Subsequent events" for a more detailed description of
this financing arrangement.
Based on the Company's current cash usage rates and additional expenditures
expected in support of its business plan, the Company's existing cash balances
plus the Perseus investment are adequate to fund operations through
approximately October, 2005. The Company plans to pursue additional funding as
soon as practicable to further support its continuing operations, working
capital, flywheel prototype development and new business development. In the
event that the Company elects to begin full scale development of its Smart
Energy Matrix systems, the amount of cash required would increase substantially.
The Company recognizes that its continuation as a going concern is dependent
upon its ability to generate sufficient cash flow to allow it to satisfy its
obligations on a timely basis. The generation of sufficient cash flow is
dependent, in the short term, on the Company's ability to obtain additional
funding, and in the long term, on the success of the Company's identified
products to obtain a share of the target market and the establishment of new
markets in which its technologies could provide competitive products. The
Company believes that the successful achievement of these initiatives should
provide it with sufficient resources to meet its cash requirements. In addition,
the Company is also considering a number of other strategic financing
alternatives, and has incurred substantial costs in these efforts; however, no
assurance can be made with respect to the success of these efforts or the
viability of the Company.
There have been no significant additions to or changes in accounting policies of
the Company since December 31, 2004. For a complete description of the Company's
accounting policies, see Note 2 to Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.
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. Inventory balances include the following amounts:
March 31, 2005 December 31, 2004
----------------------- ----------------------
Raw materials $ - $ 176,349
Work in progress - 46,244
Finished goods - -
----------------------- ----------------------
Inventories, net $ - $ 222,593
======================= ======================
As of March 31, 2005, inventory of approximately $348,000 is included as part of
"Unbilled costs on government contracts" in the Company's consolidated balance
sheet. Any inventories not associated with the Company's government contracts
were previously reserved.
Note 4. Property and Equipment
Property and equipment are stated at cost and consist of the following:
Estimated
Useful March 31, December 31,
Lives 2005 2004
---------- ----------- -----------
Machinery and equipment ....................................... 5 years $ 573,435 $ 571,198
Service vehicles .............................................. 5 years 16,762 16,762
Furniture and fixtures ........................................ 7 years 296,652 296,652
Office equipment .............................................. 3 years 1,431,184 1,396,562
Leasehold improvements ........................................ Lease term 533,352 533,352
Equipment under capital lease obligations ..................... Lease term 918,285 918,285
----------- -----------
Total .................................................... $ 3,769,670 $ 3,732,811
Less accumulated depreciation and amortization ................ (3,492,354) (3,474,164)
----------- -----------
Property and equipment, net .............................. $ 277,316 $ 258,647
=========== ===========
Note 5. Commitments
The Company's principal contractual obligations as of March 31, 2005 are as
follows:
Cash payments due during the
year ended December 31,
Nine months ending -----------------------------
Description of commitment December 31, 2005 2006 2007 Thereafter Total
- ------------------------------------- ---------------------- ------------- -------------- ------------- ---------------
Operating leases .................... 375,269 529,413 397,059 - 1,301,741
Non-cancelable purchase orders ...... 215,295 - - - 215,295
---------------------- ------------- -------------- ------------- ---------------
Total commitments 590,564 529,413 397,059 - 1,517,036
====================== ============= ============== ============= ===============
The Company leases office and light manufacturing space under an operating lease
through September 30, 2007. At March 31, 2005, the Company has provided the
lessor with an irrevocable letter of credit with a balance of $310,011 which is
reduced annually during the lease term. This letter of credit is secured by a
cash deposit, which is included in restricted cash in the accompanying
consolidated balance sheets.
The Company has firm non-cancelable purchase commitments with its suppliers to
fulfill its Smart Power M5 production requirements and to satisfy contractual
obligations for its research and development programs in the amount of
approximately $215,295. In the fourth quarter of 2004 the Company fully reserved
all contractual obligations related to its Smart Power M5 purchase commitments.
Legal Proceedings. The Company may be subject to various legal proceedings, many
involving routine litigation incidental to its business. The outcome of any
legal proceeding is not within the complete control of the Company, is often
difficult to predict and may be resolved over very long periods of time.
Estimating probable losses associated with any legal proceedings or other loss
contingencies are very complex and require the analysis of many factors
including assumptions about potential actions by third parties. Loss
contingencies are recorded as liabilities in the consolidated financial
statements when it is both (1) probable and known that a liability has been
incurred and (2) the amount of the loss is reasonably estimable. If the
reasonable estimate of the loss is a range and no amount within the range is a
better estimate, the minimum amount of the range is recorded as a liability. If
a loss contingency is not probable or not reasonably estimable, a liability is
not recorded in the consolidated financial statements.
On August 16, 2004, Ricardo and Gladys Farnes, and TLER Associates, Ltd. a
Bahamas corporation ("TLER"), delivered a complaint to the Company, naming as
defendants, the Company, John Doherty, Richard Lane, and unidentified
individuals and corporations. The case was filed in District Court in Clark
County, Nevada on or about June 1, 2004, and later was removed to the United
States District Court for the District of Nevada, where it is pending. The
complaint alleges that in 2001, defendants (a) forged the signature of plaintiff
Ricardo Farnes (a principal of TLER) to a document purporting to extend the
performance period on a purchase order issued by TLER to the Company, and (b)
thereafter, posted on the internet defamatory and personal information
concerning the plaintiffs. The plaintiffs do not allege any specific amount of
damages, and instead assert that damages exceed $10,000. The Company has
answered the complaint, denying its material allegations, and is vigorously
defending, including by filing a motion for summary judgment seeking dismissal
of all counts against the Company in the complaint. Although the outcome of this
matter cannot yet be determined, the Company does not expect that the ultimate
costs to resolve this matter will have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows
and accordingly, no liability has been recorded.
Note 6. Common Stock
Shareholder Rights Agreement. In September 2002, and amended as of December 27,
2002 the Company's Board of Directors approved a Rights Agreement, under which,
each holder of common stock on October 7, 2002 automatically received a
distribution of one Right for each share of common stock held. Each Right
entitles the holder to purchase 1/100th of a share of the Company's newly issued
preferred stock for $22.50 in the event that any person not approved by the
board of directors acquires more than 15% (35% in the case of one large
shareholder that already owned more than 15%) of the outstanding common stock,
or in the event that the Company is acquired by another company, $22.50 worth of
the common stock of the other company at half its market value (in each case any
rights held by the acquiring person are not exercisable and become void).
Reserved Shares. At March 31, 2005 and December 31, 2004, 11,593,470 and
11,601,803 shares of common stock were reserved for issuance under the Company's
stock option plan and for outstanding warrants, respectively. The following
schedule shows warrants outstanding as of March 31, 2005:
Strike Issued and
Warrant Class Grant Date Expiration Date Price Outstanding
- --------------------- -------------- ---------------- ---------- --------------
Class E 4/7/2000 4/7/2005 $ 1.25 510,672
Class F 5/23/2000 5/23/2005 $ 2.25 3,222,221
Class F (extended) 5/23/2000 5/23/2007 $ 2.25 1,333,333
F Financing (Bridge) 4/21/2000 4/21/2005 $ 2.10 58,000
Consultants 8/2/2000 8/2/2005 $ 6.00 20,000
GE (CR&D) 10/24/2000 10/24/2005 $ 2.10 120,000
- --------------------- -------------- ---------------- ---------- --------------
Total Warrants 5,264,226
===============
Note 7. Related Party Transactions
Loan to Officer. During 2001, the Company advanced approximately $565,000 to an
officer of the Company, Mr. William Stanton, its former CEO and President and
currently a director of and consultant to the Company. This advance is interest
bearing and secured by Mr. Stanton's holdings of Beacon common stock and was
provided to him to allow the exercise of stock options and the payment of
related taxes. In 2004, Mr. Stanton was paid approximately $80,000 of consulting
fees by the Company, of which, Mr. Stanton paid the Company $20,000 to reduce
his outstanding loan balance. Through March 31, 2005, the Company collected
approximately $464,000 in principal payments on this advance. The balance of
this loan as of March 31, 2005 is $101,000 including current year interest of
approximately $1,000 and is fully reserved; however, it has not been cancelled.
Mr. Stanton continues to serve as a director of the Company.
Perseus Investment. On April 25, 2005 a fund affiliated with Perseus, L.L.C.
committed to invest $3 million in the Company, in exchange for approximately 3.5
million shares of common stock, warrants covering up to 1.22 million shares of
common stock, exercisable at $1.01 per share and a two year extension of a
warrant to purchase 1,333,333 shares of common stock, exercisable at $2.25 per
share, already held by Perseus. See Note 11 "Subsequent Events" for a more
detailed description of this financing arrangement.
Note 8. Restructuring Charges
Restructuring and asset impairment 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 products into this market. Therefore, in December,
2003, the Company recorded a non-cash asset impairment charge of $0.4 million in
order to reduce the carrying amount of its flywheel related patents and patents
pending as the estimated future cash flows anticipated from these assets were
substantially in doubt. Also, 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 were idled, including
machinery and equipment, tooling, office furniture and fixtures, and equipment
and leasehold improvements. The Company 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, in 2002,
incurred 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 sheet.
A summary of the restructuring reserves is as follows:
March 31,
------------------------------------
2005 2004
---------------- ----------------
Beginning balance $ 1,062,644 $ 1,406,191
Charges for the period - -
Payments (85,886) (85,886)
---------------- ----------------
Ending balance $ 976,758 $ 1,320,305
================ ================
Note 9. Stock-Based Compensation
The Company's stock option plan provides for the granting of stock options to
purchase up to 9,000,000 shares of the Company's common stock. Options may be
granted to employees, officers, directors and consultants of the Company with
terms of up to 10 years. Under the terms of the option plan, incentive stock
options ("ISOs") are to be granted at fair market value of the Company's stock
at the date of grant, and nonqualified stock options ("NSOs") are to be granted
at a price determined by the Board of Directors. ISOs and NSOs generally vest
ratably over 36 months from the grant date and have contractual lives of up to
10 years.
The Company accounts for stock based employee compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25
(Accounting for Stock Issued to Employees) and related interpretations. In 2002
the Company implemented FASB Statement of Financial Accounting Standards No. 148
("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and
Disclosure." SFAS 148 amends current 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 the Company
has not adopted at this time.
Deferred compensation expense associated with stock awards to non-employees is
measured using the fair-value method and is amortized over the vesting period
using a calculation under FASB Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans."
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 March 31,
2005 2004
------------ --------------
Net loss to common shareholders as reported $(2,245,000) $(2,148,727)
Pro forma compensation expense ............ 82,686 92,867
----------- -----------
Net loss--pro forma ....................... $(2,327,686) $(2,241,594)
Loss per share--as reported ............... $ (0.05) $ (0.05)
Loss per share--pro forma ................. $ (0.05) $ (0.05)
Restricted Stock Units
In 2003 the Company put into place a long-term incentive plan (LTIP) for all
executives and employees for 2003 and 2004. Based on the Company's need to
conserve cash and the desire to retain its professional staff, the Company
determined that it would be in the best interest of it, its employees, and its
stockholders to implement a stock-based Deferred Compensation Plan.
The LTIP has eliminated the previous cash bonus structure for successful
performance and replaced it with a program whereby the Company establishes goals
that are strategically aligned to the Company's performance and, therefore,
shareholder value. The LTIP agreement is intended 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 738,921 and 667,151
RSUs for the fiscal years ended December 31, 2004 and 2003, respectively, which
are not available for exercise until satisfaction of the quarterly vesting
period during the following calendar year. 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. Compensation expense recorded for the three months
ending March 31 was $278,010 and $349,401 for 2005 and 2004, respectively.
Note 10. Income Taxes
At December 31, 2004 the Company had approximately $81 million of net operating
loss carry forwards which begin to expire in 2012 and additional research and
development tax credits. Valuation allowances have reduced the potential
benefits from the use of these carry forwards to zero as their future
utilization is not assured.
Under the provisions of the Internal Revenue Code, certain substantial changes
in the Company's ownership may limit, in the future, the amount of net operating
loss carry forwards which could be utilized annually to offset future taxable
income and income tax liabilities. The amount of any annual limitation is
determined based upon the Company's value prior to an ownership change. The
Company's agreement to effect a business combination with NxtPhase T&D
Corporation (see Note 11) may limit the value of these tax loss carry-forwards,
but the Company has not yet made an assessment of this limitation.
Note 11. Subsequent Events
On April 22, 2005 the Company entered into an agreement to acquire NxtPhase T&D
Corporation ("NxtPhase"), a privately held Canadian supplier of digital and
fiber optic products for electric power and grid monitoring and control. Under
terms of the agreement, the Company will acquire NxtPhase for approximately 15.7
million new common shares of the Company (subject to adjustment as described in
the agreement), which will be distributed to NxtPhase stockholders. Also,
immediately after closing, the Company will grant restricted stock units for
approximately 2.7 million new common shares of the Company's common stock to the
NxtPhase employees. As of April 22, 2005, the closing bid price of the Company's
shares as reported on The Nasdaq Small Cap Market was $0.84 per share. The
proposed acquisition is subject to approval by the stockholders of both the
Company and NxtPhase, and also requires regulatory approval. This agreement
results from introductions made by Perseus, L.L.C., which is an affiliate of
both the Company and NxtPhase.
NxtPhase manufactures and markets optical sensors to measure current and
voltage, protective relays and digital fault recorders - all key components for
reliable electrical grid operation. NxtPhase sensors are gaining market
acceptance and are protected by a portfolio of more than 20 owned or licensed
patents. Headquartered in Vancouver, British Columbia, NxtPhase has sales and
manufacturing operations in the U.S. and Canada. Following the acquisition,
NxtPhase will operate as a wholly owned subsidiary of the Company and will
retain the NxtPhase brand name.
Many of NxtPhase's products are in the early stages of development or
production, and as such, NxtPhase does not yet have revenues sufficient to
offset its cost of sales and operating costs. NxtPhase and its predecessor have
incurred losses since their inception.
On April 25, 2005 a fund affiliated with Perseus, L.L.C. committed to invest $3
million in the Company, in exchange for approximately 3.5 million shares of
common stock, warrants covering up to 1.22 million shares of common stock,
exercisable at $1.01 per share and a two year extension of a warrant to purchase
1,333,333 shares of common stock, exercisable at $2.25 per share, already held
by Perseus. Based on the Company's current cash usage rates and additional
expenditures expected in support of its business plan, the Company has adequate
cash to fund operations through approximately October, 2005. The Company plans
to pursue additional funding as soon as practicable to further support its
continuing operations, working capital, flywheel prototype development and new
business development. In the event that the Company elects to begin full scale
development of its Smart Energy Matrix systems, the amount of cash required
would increase substantially.
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.
Critical accounting policies and estimates
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. On an ongoing basis, management evaluates the
Company's estimates and assumptions including but not limited to those related
to revenue recognition, asset impairments, inventory valuation, warranty
reserves, contract losses and other assets and liabilities. Management bases its
estimates on historical experience and various other assumptions that it
believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Revenue Recognition. Although the Company has shipped products, and recorded
contract revenues, its operations have not yet reached a level that would
qualify it 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."
The Company recognizes revenues, in accordance with accounting principles
generally accepted in the United States of America. Generally, revenue is
recognized on transfer of title, typically when products are shipped and all
related costs are estimable. For sales to distributors, the Company makes an
adjustment to defer revenue until they are subsequently sold by distributors to
their customers.
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
are recognized in the period in which they are determined. Revenues recognized
and/or costs incurred in excess of amounts billed are classified as current
assets and included in "Unbilled costs on government contracts" and amounts
billed to clients in excess of revenues recognized to date are classified as
current liabilities under "Advance billings on contracts" in the Company's
consolidated balance sheets. Provisions for contract losses are included in
current liabilities as "Accrued contract loss." Changes in project performance
and conditions, estimated profitability, and final contract settlements may
result in future revisions to construction contract costs and revenue.
Inventory Valuation. The Company values its inventory at the lower of actual
cost or the current estimated market value. It regularly reviews inventory
quantities on hand and records a provision for excess and obsolete inventory
based primarily on historical usage for the prior twelve month period and future
sales forecasts. 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 its inventory and its reported operating results.
Warranty Reserves. The Company's warranties require it to repair or replace
defective products returned to it during the applicable warranty period at no
cost to the customer. It records an estimate for warranty-related costs based on
actual historical return rates, anticipated return rates, and repair costs at
the time of sale. A significant increase in product return rates, or a
significant increase in the costs to repair products, could have a material
adverse impact on future operating results for the period or periods in which
such returns or additional costs materialize and thereafter.
Income Taxes. Deferred tax assets and liabilities are determined based on
differences between the financial reporting and income tax bases of assets and
liabilities as well as net operating loss and tax credit carryforwards and are
measured using the enacted tax rates and laws that will be in effect when the
differences reverse. Deferred tax assets are reduced by a valuation allowance to
reflect the uncertainty associated with their ultimate realization.
Significant management judgment is required in determining the provision for
income taxes, the deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. The valuation allowance is based
on the Company's estimates of taxable income and the period over which its
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates or the Company adjusts these estimates in future periods it
may need to establish an additional valuation allowance or reduce its current
valuation allowance which could materially impact its tax provision.
Long-Lived Assets. In accordance with Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", long-lived assets to be held and used by the Company are reviewed to
determine whether any events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable. The conditions to be
considered include whether or not the asset is in service, has become obsolete,
or whether external market circumstances indicate that the carrying amount may
not be recoverable. When appropriate the Company recognizes a loss for the
difference between the estimated fair value of the asset and the carrying
amount. The fair value of the asset is measured using either available market
prices or estimated discounted cash flows.
Overview
The Company's initial product strategy was to develop high energy, composite
flywheels for back-up powering of telecommunications applications. With the
weakening of the telecommunications market, which began in 2001, the Company
recognized that its Smart Energy flywheel products as alternative backup
solutions to the telecommunications industry were not on a path to produce
meaningful revenues. With that recognition, 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. The
Company has:
(i) identified promising applications for its Smart Energy Matrix design in the
electric utility power grid marketplace. In the first quarter of 2005 the
Company was awarded development contracts by CEC and NYSERDA to demonstrate
the viability of the Company's flywheel technologies for frequency
regulation by grid operators. The demonstrations will be a one-tenth-power
prototype of the Smart Energy Matrix;
(ii) pursued additional development and design contracts for a variety of
applications by government agencies. The Company has been successful in
obtaining two small contracts and is continuing its efforts to obtain
additional research and development funding; and
(iii)entered into an agreement on April 22, 2005 to acquire NxtPhase T&D
Corporation ("NxtPhase"), a privately held Canadian supplier of digital and
fiber optic products for electric power and grid monitoring and control.
On April 25, 2005 an aggregate of $4.5 million of equity financing was committed
to the combined operations of the Company and NxtPhase by a fund affiliated with
Perseus, L.L.C. Included in this amount is $2.9 million in exchange for
approximately 3.5 million shares of common stock, warrants covering up to 1.22
million shares of common stock, exercisable at $1.01 per share and $0.1 million
to extend by two years (until May 23, 2007) a preexisting warrant, covering
1,333,333 shares of common stock at an exercise price of $2.25 per share. Also
included in the Perseus commitment is $1.5 million to fund NxtPhase operations
during and after the acquisition by the Company. Based on the Company's current
cash usage rates and additional expenditures expected in support of its business
plan, and the Perseus investment, the Company has adequate cash to fund its own
operations through approximately October, 2005.
The Company has been advised by Perseus and NxtPhase management that with the
above $1.5 million of additional financing, NxtPhase has sufficient cash to fund
its operations through approximately December, 2005.
The Company expects to pursue additional financing in 2005 to fund:
o continuing as a going concern;
o ongoing research and development of the Smart Energy Matrix;
o completing the NxtPhase transaction;
o working capital requirements; and
o developing new business.
In the event that the Company elects to begin full scale development of its
Smart Energy Matrix flywheel system, the amount of equity required would
increase substantially. The Company believes that there is ample market interest
for its Smart Energy Matrix but will not begin full scale development until it
obtains sufficient funding.
From inception through March 31, 2005, the Company has incurred losses of
approximately $131.0 million. The Company expects to continue to incur losses as
it expands its product development, commercialization program, and expansion of
its manufacturing capabilities.
The Company recognized an asset impairment charge in 2003 and restructuring and
asset impairment charges in 2002. The Company, as required by Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," periodically evaluates all of its property and
equipment in light of facts and circumstances and the outlook for future cash
flows. As a result of its ongoing evaluations, in 2003 the Company took a
non-cash charge of approximately $0.4 million representing the impairment of
capitalized costs of internally developed intellectual property including
various patents and patents pending relating to the Company's flywheel
technology. In 2002 the Company took a non-cash charge of $6.5 million of which
$4.3 million represented impaired capital equipment and leasehold improvements,
$1.9 million related to a reserve against future lease payments and related
facility costs and $0.3 million relating to severance costs. These charges
related to a substantial portion of the Company's long-term assets being idled,
including machinery and equipment, tooling, office furniture and fixtures and
leasehold improvements. The portion of the reserve that relates to future lease
payments is classified as "Restructuring reserve" in the current liabilities
section of the balance sheet.
Results of operations:
Comparison of three months ended March 31, 2005 and 2004
Three months ended March 31,
2005 2004 $ Change % Change
------- -------- --------- ----------
(in thousands)
Revenues ............................. $ 636 $ 57 $ 579 1016%
Cost of goods sold ................... 671 76 (595) 783%
Selling, general and administrative .. 1,172 1,076 (96) 9%
Research and development ............. 486 1,048 562 54%
Loss on sales and contract commitments 548 -- (548) 0%
Depreciation and amortization ........ 18 47 29 62%
Interest and other income, net ....... 14 41 (27) 66%
Revenues. For the three months ending March 31, 2005, the Company recorded
revenues from its development contracts of approximately $620,000 and revenues
from the sale of its Smart Power M5 power conditioning systems of approximately
$16,000.. Revenues for the three months ending March 31, 2004 were generated
from sales of the Company's Smart Power M5.
During the quarter the Company was awarded development contracts with the
California State Energy Resources Conservation and Development Commission (CEC)
and the New York State Energy Research and Development Authority (NYSERDA) to
demonstrate the viability of the Company's flywheel technologies for frequency
regulation. The demonstrations will be conducted using one-tenth-power
prototypes of the Company's planned megawatt-level system known as the Smart
Energy Matrix. Under these contracts, the Company expects to develop and install
a system in both California and New York during 2005 to demonstrate the benefits
of using flywheel energy storage to provide frequency regulation of the grid; a
service required by all grid operators. Successful demonstrations of frequency
regulation with CEC and NYSERDA may also demonstrate the system's technical and
market feasibility in other large, important, growing markets related to the
North American grid.
Cost of Goods Sold. Cost of goods sold for the three months ending March 31,
2005 includes costs incurred to date for the Company's flywheel development
contracts in the amount of approximately $617,000, sell through adjustment and
warranty accruals for Smart Power M5 inverter product sold of approximately
$6,000. Cost of goods sold, for the three months ending March 31, 2004, included
costs associated with the sell-through of Smart Power M5 inverters. These costs
include materials and direct labor.
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 and travel
costs. Selling, general and administrative expenses totaled approximately
$1,172,000 and $1,076,000 for the three months ended March 31, 2005 and 2004,
respectively. The increase of approximately $96,000 or 9% is primarily the
result of increases in the cost of personnel and benefits and higher
professional fees.
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 decreased for the three months ending
March 31, 2005 over the same period during 2004 due primarily to the allocation
of resources from research and development departments to the Company's flywheel
development contracts presented in cost of goods sold in the amount of
approximately $529,000. As a result, the Company expects its cost of research
and development for the duration of these contracts to continue to be lower
compared to 2004. The Company expects costs of development of its flywheel
systems will be more significant during the last quarter of 2005, once its
flywheel development contracts are substantially complete and it begins
development of a full scale prototype of the Smart Energy Matrix and it has
obtained funding to complete this work. Research and development expenses
totaled approximately $486,000 and $1,048,000 for the three months ended March
31, 2005 and 2004, respectively. The decrease of $562,000 or 54% is primarily
the result of accounting allocations from research and development to its
development contracts.
Loss on Sales and Contract Commitments. The Company has established reserves for
anticipated losses on its government contracts with CEC and NYSERDA. Expected
losses are approximately $548,000 ($207,000 for CEC and $341,000 for NYSERDA).
The reason for the expected losses is the Company's agreement to provide cost
sharing dollars in its original contract proposals. The Company did not accrue
such losses during 2004. The Company will re-evaluate its loss reserve and make
any necessary adjustments as appropriate.
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 its facilities. The Company also
amortized the Smart Power M5 intellectual property it acquired from Advanced
Energy Systems in 2004. Depreciation and amortization totaled approximately
$18,000 and $47,000 for the three months ended March 31, 2005 and 2004,
respectively. The decrease of $29,000 or 62% 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 and accrued dividends on the Company's holdings in the Series A Preferred
stock of Evergreen Solar, Inc. Interest and Other Income/Expense, net for the
three months ended March 31, 2005 was approximately $14,000, compared to
approximately $41,000 for the same period in 2004. The decrease of approximately
$27,000 in 2005 compared to the prior year is the result of lower interest due
to lower cash balances and lower dividends received since the Company sold its
Evergreen investment in 2004..
Liquidity and Capital Resources
Quarter ending March 31,
--------------------
2005 2004
------- -------
(in thousands)
Cash and cash equivalents ............... $ 3,335 $ 7,096
Working capital ......................... 2,207 7,098
Cash provided by (used in)
Operating activities ............... (1,705) (1,826)
Investing activities ............... (37) (14)
Financing activities ............... (21) 27
------- -------
Net decrease in cash and cash equivalents $(1,763) $(1,813)
======= =======
Current ratio ........................... 2.0 3.9
======= =======
The Company's cash requirements depend on many factors, including but not
limited to research and development activities, executing its development
contracts, continued efforts to commercialize products, facilities costs,
general and administrative expenses, and costs related to raising additional
funding and costs related to the NxtPhase transaction. 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 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. 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 additional financing by October
2005 to fund:
o continuing as a going concern;
o ongoing research and development primarily related to the Smart Energy
Matrix;
o completing the NxtPhase transaction;
o working capital requirements; and
o new business development,
If the Company elects to begin full scale development of its Smart Energy Matrix
flywheel systems, the amount of cash required would increase substantially.
Net cash used in operating activities was approximately ($1,705,000) and
($1,826,000) for the three months ended March 31, 2005 and 2004, respectively.
The primary component to the negative cash flow from operations is from net
losses. For the first three months of 2005, the Company had a net loss of
approximately ($2,245,000). This included employee stock compensation of
approximately $278,000, facility related cash payments charged against
restructuring reserves of approximately ($86,000) and depreciation and
amortization of approximately $18,000. Changes in operating assets and
liabilities generated approximately $330,000 of cash during the first three
months of 2005. For the first three months of 2004, the Company had a net loss
of approximately ($2,149,000). This included employee stock compensation of
$349,000, facility related cash payments charged against restructuring reserves
of approximately ($86,000), and depreciation and amortization of approximately
$47,000. Changes in operating assets and liabilities generated approximately
$13,000 of cash during the first three months of 2004.
Net cash used in investing activities was approximately ($37,000) and ($14,000)
for the three months ended March 31, 2005 and 2004, respectively, for the
purchase of capital equipment.
Net cash generated/ (used) by financing activities was approximately ($21,000)
and $27,000 for the three months ended March 31, 2005 and 2004, respectively.
For the first three months of 2005, the cash generated by financing activities
of approximately $6,000 related to the exercise of stock options, offset by cash
paid for financing costs of ($27,000). For the first three months of 2004, the
cash generated by financing activities related to the exercise of stock options
in the amount of $27,000.
In the event that the Company elects to begin full-scale development of its
Smart Energy Matrix flywheel systems, the amount of cash required will increase
substantially. The Company is not expecting to become profitable or cash flow
positive until at least 2008 and its ability to continue as a going concern will
depend on being able to raise additional cash to fund operations. The Company
may not be able to raise these funds, or if it is able to do so, it may be on
terms that are adverse to existing stockholders.
On April 25, 2005 a fund affiliated with Perseus, L.L.C. committed to invest $3
million in the Company, in exchange for approximately 3.5 million shares of
common stock, warrants covering up to 1.22 million shares of common stock,
exercisable at $1.01 per share and a two year extension of 1,333,333 warrants,
exercisable at $2.25 per share, already held by Perseus. .
In addition, Perseus is providing $1.5 million to fund NxtPhase operations
during and after the acquisition by the Company. The Company has been advised by
Perseus and NxtPhase management that with the $1.5 million of additional
financing, NxtPhase has sufficient cash to fund its operations through
approximately December, 2005.
Certain Factors Affecting Future Operating Results
The following factors, as well as others mentioned in the Company's Annual
Report on Form 10-K for the year ended December 31, 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 has a history of losses and anticipates future losses.
As shown in the unaudited consolidated financial statements, the Company
incurred significant losses from operations of approximately $2,245,000 and
$2,149,000 for the three months ending March 31, 2005 and 2004,
respectively. The Company has an accumulated deficit of $131 million and
has incurred net losses in each year since its inception in 1997. The
Company is unsure if or when it will become profitable. The size of its net
losses will depend, in part, on the growth rate of its revenues and the
level of its expenses.
The Company expects future revenues, if any, to come from a combination of
the sale of services related to its Smart Energy Matrix and sales of Smart
Energy Matrix units. The Company has no revenues to date from its Smart
Energy Matrix. The timing of future revenues, if any, is uncertain.
The Company expects that it will be several years, if ever, before it will
recognize significant revenues from the products it intends to offer and
the services it intends to provide. A large portion of its expenses are
fixed, including expenses related to facilities, equipment and personnel.
In addition, the Company expects to spend significant amounts to fund
product development based on its core technologies. The Company also
expects to incur substantial expenses to manufacture its Smart Energy
Matrix product in the future. As a result, operating expenses may increase
significantly over the next several years and, consequently, the Company
may need to generate significant additional revenue to achieve
profitability. Even if the Company does achieve profitability, it may not
be able to sustain or increase profitability on a consistent basis.
The Company will have limited revenues in the near term. Unless it raises
additional funds to operate its business, it may not be able to continue as a
going concern, as its cash balances are sufficient to fund operations only
through approximately October, 2005.
The Company intends to focus on further development of the Smart Energy
Matrix to provide frequency regulation services and this product will not
be available for revenues in the near-term. For the foreseeable future, the
Company will have limited revenues, if any, since the Company has not
generated any revenue from the Smart Energy Matrix. The Company has
incurred significant losses from operations since its inception. The
Company had approximately $3,335,000 of cash and cash equivalents on hand
at March 31, 2005. On April 25, 2005 a fund affiliated with Perseus, L.L.C.
committed to invest $3 million in the Company, in exchange for
approximately 3.5 million shares of common stock, warrants covering up to
1.22 million shares of common stock, exercisable at $1.01 per share and a
two year extension of a warrant to purchase 1,333,333 shares of common
stock, exercisable at $2.25 per share, already held by Perseus. Based on
the Company's current cash usage rates and additional expenditures expected
in support of its business plan, the Company has adequate cash to fund
operations through approximately October, 2005.
The Company will require substantial funds to conduct research and
development activities, market its products and services, and increase its
sales. The Company anticipates that such funds will be obtained from
external sources and intends to seek additional equity or debt to fund
future operations. However, the Company's actual capital requirements will
depend on many factors. If the Company experiences unanticipated cash
requirements, it may need to seek additional sources of funding, which may
not be available on favorable terms, if at all. Such additional funding may
only be available on terms that may, for example, cause dilution to common
stockholders, and/or have liquidation preferences and/or pre-emptive
rights. If the Company does not succeed in raising additional funds on
acceptable terms, it may be unable to complete planned development for its
products and services. In addition, the Company could be forced to take
unattractive steps, such as discontinuing product development, limiting the
services it can offer, reducing or foregoing sales and marketing efforts
and attractive business opportunities, or discontinuing operations
entirely.
Miller Wachman, 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, 2004, 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's possible inability to continue as a going concern may negatively
impact the Company's ability to obtain customers.
The uncertainty of the Company's ability to continue as a going concern may
negatively impact the Company's ability to successfully attract customers
for its products. Even if customers find the Company's products attractive
from a performance and price analysis, the warranty and support activities
that the Company's long-life products feature may prevent customers from
making purchases in sufficient quantities for the Company to be able to
function as a going concern.
The Company's stock may be removed from The NASDAQ SmallCap Market System.
On May 12, 2005, the Company's stock closed at $0.86 per share and had
closed below $1.00 per share for 30 consecutive business days. On May 13,
2005 the Company received a letter from Nasdaq dated May 13, 2005
indicating that the Company's common stock has not met the $1.00 minimum
bid price requirement for continued listing for the past 30 days and that
the Company's common stock is, therefore, subject to delisting from the
Nasdaq SmallCap Market, pursuant to Nasdaq Marketplace Rule 4310(c)(4).
Therefore in accordance with Marketplace Rule 4310(c)(8)(D), the Company
will be provided 180 calendar days, or until November 9, 2005, to regain
compliance or face delisting on November 9, 2005. To attain compliance the
Company's common stock must close at $1.00 per share or more for a minimum
of ten consecutive days before November 9, 2005. In the event that the
Company's stock does not meet this requirement, but meets the requirements
for inclusion on the Nasdaq SmallCap Market as set forth in Marketplace
Rule 4310(c), the Company may be granted an additional 180 calendar day
period to regain compliance. There can be no assurance that the Company
will continue to meet Nasdaq's SmallCap listing requirements and therefore
may no longer be eligible for quotation on The NASDAQ SmallCap Market.
Should the Company's stock lose its eligibility to be quoted on the
SmallCap Market, it will seek to have its stock quoted on the OTCBB. While
the Company knows of no reason that its stock will not be accepted for
quotation on OTCBB, it cannot guarantee that acceptance. If the Company's
stock is not accepted for listing on the OTCBB, it will be listed on the
pink sheets.
The Company has no history of being able to complete development of designs into
economically competitive commercially viable products
The Company has no history of being able to complete development of designs
into economically competitive commercially viable products. Examples of the
Company's challenges in developing its technologies into commercial
products are the following:
o it may take longer than anticipated to develop these services and
products;
o as there are costs associated with the development of these
technically challenging products the economic return may not be
adequate to pay for these costs;
o the Company must ensure that warranty expenses are kept to a minimum;
and
o the Company must obtain additional financing.
The Company may fail to develop its 25kWH generation flywheel system which is a
critical requirement for the development of the Smart Energy Matrix.
Although the Company has successfully developed two high energy systems
(the 2kWH and 6kWH) that had similar technical challenges, there can be no
assurance that the Company will be able to successfully develop the 25kWH
system. The successful development of the Company's new 25kWh flywheel
system, which is the flywheel system that will be used in the Smart Energy
Matrix, involves significant technological and cost challenges, including:
o it may take longer to develop the software and key hardware components
such as the rim, motor, and bearing system;
o the Company is relying on single-source suppliers to supply key
components to meet the Company's engineering requirements, cost
objectives and development and production schedules. Specifically:
o the composite rim, which has four times more volume than the rim
in the 6kWh flywheel product;
o a high speed, vacuum friendly, permanent magnet, high power motor
with overall dimensions that will not adversely affect rotor
dynamics; and
o an active magnetic bearing system that supports the rotor over
the entire speed range;
o the Company's ability to develop cost effective designs on schedule
for:
o rotor-cooling scheme to avoid overheating during operation;
o cost effective bearings to ensure acceptable vibration levels at
all speeds;
o touchdown bearing system to stabilize the rotor during abnormal
conditions such as an earthquake.
o the ability to ramp up and maintain production rates;
o the cost of developing key components that have significant technical
risk;
o quality and cost control from key suppliers;
The Company may fail to develop the Smart Energy Matrix.
The Company's Smart Energy Matrix will integrate up to ten 25kWh flywheels
into a common 40 foot shipping container. This effort will pose significant
technological and cost challenges including:
o locating a contract manufacturer to install the flywheels, control
electronics, and ancillary equipment, then perform final test and
deliver the Smart Energy Matrix to the end user;
o resolving flywheel vibration transference from one flywheel to
another;
o transporting the Smart Energy Matrix safely to customer locations;
o meeting the technical requirements for interconnection to the utility
grid;
o developing a communication and control system adequate to meet the
performance standards of the grid managers; and
o designing flywheel accessibility in the Smart Energy Matrix for repair
and reduce the cost of field service.
Although the market for frequency regulation services is large and growing the
Company has not demonstrated its ability to sell into that market.
The Company believes that the use of its Smart Energy Matrix will be
successful in the frequency regulation market. However, this market is
being served by well-known utilities and independent service providers that
use conventional generators and that have far greater resources than the
Company. These utilities and independent service providers are primarily
focused on the sale of energy and provide frequency regulation services as
a secondary source of revenue. Companies that are providing frequency
regulation include Allegheny Energy Supply Company, Commonwealth Chesapeake
Company, Dominion Virginia Power, Ingenco Wholesale Power, NRG Power
Marketing and Reliant Energy Services.
Although the Company believes that the products and services it plans to
provide by using its products offer greater effectiveness than generators
and could produce positive investment returns for the Company and perhaps
other independent service providers, there can be no assurance that the
Company will be able to establish its products or services in that market.
To date, the Company has not completed any services or product sales of the
Smart Energy Matrix.
The Company's stockholders may be adversely affected if the Company issues debt
securities or additional equity securities to obtain financing.
If the Company raises additional funds by issuing debt securities or
additional equity securities, existing stockholders may be adversely
affected because new investors may have superior rights than current
stockholders and current stockholders may be diluted.
If the Company is unable to increase its sales of inverter products, it may not
recover the capital that it has invested in developing these products.
The Company has invested considerable capital in the development of its
inverter products, including the Smart Power M5. To date, the Company has
generated limited revenue based on low volume sales of these products. If
the Company is unable to increase sales of its inverter products in the
near future, it may be forced to abandon these products, and may
consequently not be able to recover the full amount of capital it has
invested in developing inverter products.
The Company has limited experience manufacturing 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 products
or services, 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 flywheel or inverter 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. 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 halting capital build-out.
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 is a development stage entity and has a limited operating
history. 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.
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 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 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. 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 sales personnel.
The Company's ability to meet its business plan may be adversely affected
if the Company cannot attract and retain sales personnel. Competition for
skilled sales people is intense and the Company may not be successful in
attracting and retaining the sales talent necessary to develop markets and
achieve sufficient sales volume to operate profitably.
The Company's financial performance could be adversely affected if it is unable
to retain key executive officers.
Because the Company's future success depends to a large degree on the
management provided by the executive officers, the Company's
competitiveness will depend significantly on whether it can retain members
of its executive team. The Company has employment agreements with Messrs.
Spiezio, Vice President of Finance, Chief Financial Officer, Treasurer and
Secretary; and Lazarewicz, Vice President and Chief Technical Officer. The
employment agreement between the Company and Mr. Capp, CEO and President,
expired on December 31, 2004. Negotiations between Mr. Capp and the Company
are ongoing. There can be no assurance that an agreement will be reached
with Mr. Capp.
The Company's ability to effectively implement its business plan depends,
to a significant extent, on its ability to retain its executive officers.
There can be no assurance that the Company will be successful in retaining
its other executive officers.
If the Company cannot reach agreement with Mr. Capp and he elects to leave
the Company, pursuant to the terms of the expired employment agreement, if
he ceases to be an employee the Company is obligated to pay him a monthly
amount until December 31, 2005, equal to the sum of one-twelfth of his base
salary at the time of expiration plus one-twelfth of his bonus for the most
recent fiscal year. No monthly payment is required after December 31, 2005.
If the at-will employment continues after December 31, 2005 but then
terminates, no such monthly amount will be paid. As of December 31, 2004,
Mr. Capp's base salary was $240,000 annually. Based on the closing bid
price of the Company's common stock as of December 31, 2004 as reported on
The NASDAQ SmallCap Market, Mr. Capp received a bonus in the amount of
$236,800, paid in the form of a grant of 251,391 restricted stock units,
pursuant to the Company's Second Amended and Restated 1998 Stock Incentive
Plan.
The Company's financial performance could be adversely affected by its need to
retain and attract technical personnel.
The Company's future success depends to a large degree on the technical
skills of its engineering staff and its ability to attract technical
personnel. Competition for skilled technical professionals is intense and
the Company may not be successful in attracting and retaining the talent
necessary to design, develop and manufacture its flywheel products.
Failure to protect the Company's intellectual property could 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 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 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.
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 services or to do
so at prices that will yield profits.
There are a number of technology companies in various stages of
development, there may be emerging technologies that the Company is unaware
of and there may be combinations of technologies in the future. The Company
cannot give assurance that some or all of its target markets for the sale
of product or services will not be displaced by these emerging
technologies.
The Company may invest cash in other companies in its sector to increase
shareholder value through strategic alliances or return on investment which do
not create gains and therefore reduce shareholder value.
Given the Company's financial position, its ability to make cash
investments in other companies is very limited at this time. However, in
the future, the Company may make cash 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
investments may decrease and reduce shareholder value.
Product liability claims against the Company could result in substantial
expenses and negative publicity that could impair successful marketing of
products.
The Company's business exposes it to potential product liability claims
that are inherent in the manufacture, 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 its competitors
could reduce market demand or acceptance for flywheel services or products in
general.
A serious accident involving either the Company's flywheels or competitors'
similar products could be a significant deterrent to market 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, its flywheel will fail in a more benign
manner.
The Company has signed an Agreement to acquire NxtPhase which may cost more or
take longer to complete than expected, or not produce the revenues and cash flow
expected which may increase the Company's cash usage and thereforer increase the
Company's need for additional cash to sustain its operations
The Company has agreed to acquire NxtPhase and the costs associated with
completing the transaction may be greater than expected and the time to
complete the transaction may be extended or the transaction may not be
approved by NxtPhase stockholders, the Company's stockholders or
regualtors. Further if the acquisition is completed NxtPhase may not
achieve the revenues and cash flow projections that the Company expects.
These factors could shorten the period of time that the Company's cash
balances will be sufficient to fund operations. There can be no assurance
that this acquisition will be perceived as positive by potential investors
and therefore investments necessary to sustain operations may not be
realized.
The Company may make acquisitions or mergers which may cost more or take longer
to complete than expected, or not produce the revenues and cash flow expected
which may increase the Company's cash usage and thereforer increase the
Company's need for additional cash to sustain its operations
The Company has may make acquisitions or mergers and the costs associated
with completing these transaction may be greater than expected and the time
to complete the transactions may be extended or the transactions may not be
approved by stockholders or regulators. Further if acquisition or mergers
are completed revenues and cash flow projections that the Company expects
may not be achieved. These factors could shorten the period of time that
the Company's cash balances will be sufficient to fund operations. There
can be no assurance that acquisition or mergers will be perceived as
positive by investors and therefore investments necessary to sustain
operations may not be realized.
The Company has limited experience in acquisitions and mergers and may not be
successful in identifying appropriate acquisitions or mergers or be unsuccessful
in integrating these entities.
The Company and its management have limited experience in evaluating,
integrating and coordinating the acquisition or merger of companies and
therefore may not be successful in this effort.
Any weaknesses identified in the Company's internal controls as part of the
evaluation being undertaken by the Company and its independent public accountant
pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse
effect on the Company's business.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies
evaluate and report on their systems of internal control over financial
reporting. In addition, the independent accountants must report on
management's evaluation. The Company is in the process of documenting and
testing its system of internal control over financial reporting to provide
the basis for its report. At this time, the Company is aware that its
financial reporting information systems and point-of-sale information
systems require a significant level of manual controls to ensure the
accurate reporting of its results of operations and financial position.
Upon the completion of its review, certain deficiencies may be discovered
that will require remediation. This remediation may require the
implementation of certain information systems operating protocols and/or
additional manual controls, the costs of which could have a material
adverse effect on the Company's business, financial condition and results
of operations. Due to the ongoing evaluation and testing of The Company's
internal controls, there can be no assurance that there may not be
significant deficiencies or material weaknesses that would be required to
be reported. In addition, the Company expects the evaluation process and
any required remediation, if applicable, to increase its accounting, legal
and other costs and divert management resources from core business
operations.
Ongoing compliance with the Sarbanes-Oxley Act of 2002 may require additional
personnel or systems changes.
The Company's business plan may not have sufficient resources identified to
insure ongoing compliance with the Sarbanes-Oxley Act of 2002. Given the
limited size of the Company and its cash position the Company may not have
sufficient resources to satisfy the segregation of duties required for
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 or to be
compliant the Company may need to obtain additional funding and cash flow
positive timing may need to be extended.
Government regulation may impair the Company's ability to market its 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 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.
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 The
Company. 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.
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 but not to
market risk of principal. At March 31, 2005, the Company had approximately
$60,000 of cash equivalents that were held in non-interest bearing accounts.
Also at March 31, 2005, the Company had approximately $540,000 of cash
equivalents that were held in interest bearing checking accounts and $2,734,000
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 $3,000.
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 Quarterly
Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q that has
materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting.
PART II
Item 1. Legal Proceedings
On August 16, 2004, Ricardo and Gladys Farnes and TLER Associates, Ltd., a
Bahamas corporation ("TLER"), delivered a complaint to the Company naming as
defendants the Company, John Doherty, Richard Lane, and unidentified individuals
and corporations. The case was filed in District Court in Clark County, Nevada
on or about June 1, 2004, and later was removed to the United States District
Court for the District of Nevada where it is pending. The complaint alleges that
in 2001 defendants (a) forged the signature of plaintiff Ricardo Farnes (a
principal of TLER) to a document purporting to extend the performance period on
a purchase order issued by TLER to the Company and (b) thereafter posted on the
internet defamatory and personal information concerning the plaintiffs. The
plaintiffs do not allege any specific amount of damages and instead merely
assert that damages exceed $10,000. The Company has answered the complaint,
denying its material allegations, and is vigorously defending, including by
filing a motion for summary judgment, seeking dismissal of all counts against
the Company in the complaint. Although the outcome of this matter cannot yet be
determined, management does not expect that the ultimate costs to resolve this
matter will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On May 13, 2005 the Company received a letter from The Nasdaq Stock Market
Listing Qualifications panel stating that the Company has not met the minimum
$1.00 per share bid price requirement for 30 consecutive business days and that,
in accordance with Marketplace Rule 4310(c)(8)(D), the Company will be provided
180 calendar days, or until November 9, 2005, to regain compliance.
Item 6. Exhibits
Exhibit
Number Description of Document
3.1(1) Sixth Amended and Restated Certificate of Incorporation of the
Company.
3.2(1) Amended and Restated Bylaws of the Company.
4.1(2) Rights Agreement dated September 25, 2002 between the Company
and EquiServe Trust Company, N.A.
4.2(3) Amendment No. 1 to Rights Agreement dated December 27, 2002
between the Company and EquiServe Trust Company, N.A.
10.1.1(1) Securities Purchase Agreement dated May 28, 1997 among the
Company, SatCon Technology Corporation and Duquesne Enterprises
(n/k/a DQE Enterprises, Inc.).
10.1.2(1) Securities Purchase Agreement dated April 7, 2000 among the
Company, Perseus Capital, L.L.C., Duquesne Enterprises (n/k/a
DQE Enterprises, Inc.), Micro-Generation Technology Fund,
L.L.C. and SatCon Technology Corporation.
10.1.3(1) Securities Purchase Agreement dated April 21, 2000 among the
Company, Perseus Capital, L.L.C., Micro-Generation Technology
Fund, L.L.C., Mechanical Technology Incorporated, The Beacon
Group Energy Investment Fund II, L.P. and Penske Corporation.
10.1.4(1) Securities Purchase Agreement dated May 23, 2000 among the
Company, Perseus Capital, L.L.C., DQE Enterprises, Inc.,
Micro-Generation Technology Fund, L.L.C., Mechanical Technology
Incorporated, GE Capital Equity Investments, Inc., The Beacon
Group Energy Investment Fund II, L.P. and Penske Corporation.
10.1.5(1) Investor Rights Agreement dated May 23, 2000 among the Company,
Perseus Capital, L.L.C., DQE Enterprises, Inc.,
Micro-Generation Technology Fund, L.L.C., Mechanical Technology
Incorporated, GE Capital Equity Investments, Inc., The Beacon
Group Energy Investment Fund II, L.P., Penske Corporation,
SatCon Technology Corporation, James S. Bezreh, Russel S.
Jackson, Russell A. Kelley, Stephen J. O'Connor, Jane E.
O'Sullivan and Robert G. Wilkinson.
10.1.6(1) Form of Warrant of the Company issued pursuant to Class E
financing and list of holders thereof.
10.1.7(1) Form of Warrant of the Company issued pursuant to Class F
bridge financing and list of holders thereof.
10.1.8(1) Form of Warrant of the Company issued pursuant to Class F
financing and list of holders thereof.
10.1.9(1) Warrant of the Company dated August 2, 2000 issued to
Kaufman-Peters Company.
10.1.10(1) Warrant of the Company dated October 24, 2000 issued to GE
Capital Equity Investments, Inc.
10.1.11(1) Second Amended and Restated 1998 Stock Incentive Plan of the
Company.
10.1.12(1) Form of Incentive Stock Option Agreement of the Company.
10.1.13(1) Form of Non-Qualified Stock Option Agreement of the Company.
10.1.14(1) Form of Non-Qualified Stock Option Agreement of the Company
issued to certain consultants on July 24, 2000 and list of
holders thereof.
10.1.15(1) Amended and Restated License Agreement dated October 23, 1998
between the Company and SatCon Technology Corporation.
10.1.16(1) Lease dated July 14, 2000 between the Company and BCIA New
England Holdings LLC.
10.1.17(1) Letter Agreement dated October 24, 2000 among the Company, GE
Capital Equity Investments, Inc. and GE Corporate Research and
Development.
10.1.18(1) Form of Director and Officer Indemnification Agreement of the
Company.
10.1.19(4) Employment Agreement dated December 1, 2003 between the Company
and F. William Capp.
10.1.20(9) Employment Agreement dated April 25, 2004 between the Company
and Matthew L. Lazarewicz.
10.1.21(3) Employment Agreement dated October 25, 2002 between the Company
and James M. Spiezio.
10.1.22(4) Form of Restricted Stock Unit Agreement of the Company.
10.1.23(5) Assignment dated December 27, 2004 between the Company and CRT
Capital Group LLC.
10.1.24(6) Agreement dated January 31, 2005 between the Company and the
New York State Energy Research and Development Authority.
10.1.25(7) Agreement dated January 31, 2005 between the Company and
California State Energy Resources Conservation and Development
Commission.
10.1.26(9) Amendment to employment agreement between the Company and
Matthew L. Lazarewicz.
31.1+ Principal Executive Officer--Certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2+ Principal Financial Officer--Certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1+ Principal Executive Officer--Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2+ Principal Financial Officer--Certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference from the Form S-1 filed on November 16, 2000
(File No. 333-43386).
(2) Incorporated by reference from the Form 8-K filed on October 4, 2002
(File No. 001-16171).
(3) Incorporated by reference from the Form 10-K filed on March 31, 2003
(File No. 001-16171).
(4) Incorporated by reference from the Form 10-K/A filed on May 17, 2004
(File No. 001-16171).
(5) Incorporated by reference from the Form 8-K filed on December 30, 2004
(File No. 001-16171).
(6) Incorporated by reference from the Form 8-K filed on February 14, 2005
(File No. 001-16171).
(7) Incorporated by reference from the Form 8-K filed on February 16, 2005
(File No. 001-16171).
(8) Incorporated by reference from the Form 8-K/A filed on November 2, 2004
(File No. 001-16171).
(9) Incorporated by reference from the Form 10-K filed on March 31, 2005
(File No. 001-16171).
+ Filed herewith.
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: May 16, 2005 By: /s/ F. William Capp
-------------------
F. William Capp
President and Chief Executive Officer
May 16, 2005 By: /s/ James M. Spiezio
-------------------
James M. Spiezio
Vice President of Finance, Chief Financial
Officer, Treasurer and Secretary
Principal Financial Officer