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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 September 30, 2010

or

o         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: 000-31973

Beacon Power Corporation

(Exact name of registrant as specified in its charter)

(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.  x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).     Yes    o    No    o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act.) o Yes x No

The number of shares of the Registrant’s common stock, par value $.01 per share, outstanding as of November 5, 2010 was 199,890,859.

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BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)
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PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements

BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)

Consolidated Balance Sheets

See notes to unaudited consolidated financial statements.

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BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)

Consolidated Statements of Operations (Unaudited)

See notes to unaudited consolidated financial statements.

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BEACON POWER CORPORATION AND SUBSIDIARIES

(A Development Stage Company)
Consolidated Statements of Cash Flows (Unaudited)

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See notes to unaudited consolidated financial statements.

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BEACON POWER CORPORATION AND SUBSIDIARIES
(A Development Stage Company)

Consolidated Statements of Stockholders’ Equity (Unaudited)

See notes to unaudited consolidated financial statements.

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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 (collectively the “Company,” “Beacon,” “we,” “our,” or “us”) (a development stage company) was incorporated on May 8, 1997 as a wholly owned subsidiary of SatCon Technology Corporation.  Since our inception, we have been primarily engaged in the development of flywheel devices that store and recycle energy on a highly efficient basis.  In 2000, we completed an initial public offering of our common stock and raised approximately $49.3 million, net of offering expenses. Since our initial public offering, we have raised approximately $111.6 million as of September 30, 2010, through the sale of our stock and exercise of warrants. Because we have not yet generated a significant amount of revenue from our principal operations, we are accounted for as a development stage company under the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic 915.

We expect to increase our revenues from the commercialization of our flywheel energy storage systems to supply frequency regulation services to the electricity grid in North America and from the sale of turnkey systems outright or on a fractional basis, both within the United States and on a global basis. We believe that as we expand our production capabilities and continue to lower our system costs, we will be able to market other cost-effective applications for our flywheel systems that will further expand our revenues.

We are focused on commercializing our Smart Energy Matrix™ flywheel system to provide frequency regulation services and to sell turnkey systems that will also be used to provide frequency regulation.  In the future, as the number of our merchant regulation facilities increases and we develop sustainable cash flows from operations and the sale of turnkey plants, we expect to fund additional plants from a combination of cash flow from operations, non-recourse project financing and project equity.

Operations

On August 6, 2010, our wholly-owned subsidiary, Stephentown Regulation Services, LLC (SRS), closed on a loan with the Federal Financing Bank (FFB) guaranteed by the Department of Energy (DOE), which, over time, will allow us to borrow up to approximately $43 million.  As part of the loan closing, Beacon contributed approximately $26 million to SRS representing its equity in the project by transferring $7 million in cash to SRS, and providing other in-kind equity of approximately $18.9 million. Approximately two weeks after closing, SRS used approximately $4 million of this cash equity contribution to reimburse Beacon for allowable costs previously incurred.  Monthly disbursements from the loan began in September, and are based upon eligible project spending.  Each loan disbursement is subject to the satisfaction of certain conditions.  This loan will provide debt financing for 62.5% of the estimated $69 million total project cost of our 20 megawatt (MW) plant currently under construction in Stephentown, New York. Four MW of the 20 MW total are expected to be online and earning revenue by the end of 2010, and the remaining 16 MW were scheduled to be online and earning revenue by the end of the first quarter of 2011.  However, during the quarter we experienced a delay in the delivery of a key component from a supplier that may impact our ability to be at a full 20 MW of operation in Stephentown by the end of the first quarter of 2011. We expect to have a minimum of 16 MW in operation by that date, with the remainder, if any, operational during the second quarter of 2011.

We had three MW of our Smart Energy Matrix™ operating and generating frequency regulation revenue within the New England Independent System Operator region (ISO-NE) under its Alternative Technologies Regulation pilot program until mid-August 2010, when we began to redeploy a portion of these assets to the Stephentown plant in partial fulfillment of our equity contribution for SRS.

In addition to the revenues we expect to generate from the Stephentown plant, we plan to increase our revenues by building additional 20 MW facilities, which are currently under development.  We have been awarded a $24 million DOE Smart Grid stimulus grant to support a plant in the Mid-Atlantic ISO (PJM) region.  This plant will likely be built either in the Chicago Heights, Illinois, area or in Hazle Township, Pennsylvania. We have site control and have filed interconnection applications for two sites in the Chicago area, as well as one in Hazle Township, PA, and one in Glenville, NY.

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We are also identifying other plant locations for future merchant facilities, as well as marketing our systems to domestic and foreign utilities that lack open-bid markets with the objective of selling our plants in those markets on a turnkey basis.  Additionally, we are exploring other potential flywheel applications, including the sale of systems for wind/diesel/flywheel energy storage hybrid power systems on islands and remote grids, as well as military applications.  In September 2010 we were also awarded a two-year ARPA-E development contract which we expect will provide us with $2.2 million to develop the initial design of a new type of flywheel that would have the capability of storing four times the energy as our current Gen4 flywheel.  If successful, this new flywheel design would be capable of delivering 100 kW for up to one hour.  Additional effort would be required once a design is developed before this new flywheel could be commercialized. Target markets for this device would include ramp mitigation for wind and solar generation whose power output may exceed local ramp rate limitations, demand limiting for commercial, industrial, institutional and government facilities that pay high electricity demand charges, and back-up power supply for a portion of the Uninterruptable Power Supply (UPS) market that requires extended time to achieve orderly shutdown because the customer lacks back-up generation capability.

We have experienced net losses since our inception and, as of September 30, 2010, had an accumulated deficit of approximately $222.6 million.  We do not expect to have positive EBITDA (earnings before interest, taxes, depreciation and amortization) or positive cash flow from operations until we have deployed a sufficient number of merchant plants and/or sold turnkey systems. We will need to raise additional capital to continue to build regulation facilities, support operations at our Tyngsboro and other facilities, implement our business plan and continue as a going concern.  We expect these funds to come from a combination of equity and/or project financing, the sale of our systems and/or other sources. We have $3 million cash on hand as of September 30, 2010, which can be used for general corporate purposes, and an additional $3 million of which belongs to SRS and thus can only be used for eligible project costs (included in Restricted cash on our balance sheet). Based on our projected cash usage rates including the anticipated borrowings from the FFB loan guaranteed by the DOE and our equity contribution to the Stephentown project, we have sufficient cash to fund our operations into the fourth quarter of 2010. We estimate that we will need to raise approximately $15 to $20 million during the remainder of 2010 and 2011 in order to fund operations.  Additional funds would be required to order long-lead items and begin construction of our second merchant plant from a combination of project finance and equity in addition to the DOE grant.

Note 2.  Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

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 disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q.  We suggest that the consolidated financial statements presented herein be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.  In our management’s opinion, 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 nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2010.

Going Concern

The accompanying 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.  As shown in our consolidated financial statements, we have had minimal revenues, and have incurred significant losses of approximately $222.6 million since our inception including losses during the nine months ending September 30, 2010, of approximately $16.6 million.  We have approximately $3 million of cash and cash equivalents on hand at September 30, 2010, which, in combination with the anticipated proceeds from the FFB loan and the remaining $3 million we contributed to SRS for the Stephentown project, is adequate to complete the construction of the Stephentown facility and finance our operations into the fourth quarter of 2010.  Since our cash needs beyond that point exceed the cash we expect to generate from operations, we may be unable to continue as a going concern.  The consolidated financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should we be unable to continue as a going concern.

We recognize that our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to allow us to satisfy our obligations on a timely basis.  The generation of sufficient cash flow is dependent, in the short term, on our ability to raise additional capital from a combination of equity and/or project financing; and in the long term, on the successful

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operation of our merchant plants and on our sales of turnkey systems. We believe that the successful achievement of these initiatives should provide us with sufficient resources to meet our long-term cash requirements.

Reclassification of prior period amounts

Certain prior period amounts have been reclassified to be consistent with current period reporting.

Consolidation

The accompanying consolidated financial statements include the accounts of Beacon Power Corporation and our subsidiaries, Beacon Power Securities Corporation, Stephentown Holding LLC and Stephentown Regulation Services, LLC (SRS).  In August 2010, as required to close the FFB loan, Beacon’s equity and cash contributions to the Stephentown project were transferred to SRS.  The borrowings from the FFB loan are a liability of SRS, and are guaranteed in part by Beacon.

In September 2008, we established other two wholly-owned subsidiaries, Tyngsboro Regulation Services LLC and Tyngsboro Holding LLC, which remain inactive as of September 30, 2010. The frequency regulation service revenue and costs from the ISO-NE pilot program are accounted for as part of Beacon Power Corporation All significant inter-company accounts and transactions have been eliminated in consolidation.

Loss per Share — Basic and Diluted

Basic and diluted losses per share have been computed using the weighted-average number of shares of common stock outstanding during each period. Warrants, options and other securities exercisable for common shares are used in the calculation of fully diluted earnings per share (EPS) only if their conversion to common shares would decrease income or increase loss per share from continuing operations.  Since the three and nine-month periods ended September 30, 2010, and 2009, reflect losses, including the potential conversion of warrants and options in the diluted EPS calculation would decrease loss per share. Accordingly, they are considered anti-dilutive and are not included in the calculation of loss per share.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Debt

Debt is recorded on our balance sheet at par value or stated value adjusted for unamortized discount or premium.  Discounts and premiums generally are capitalized and amortized over the life of the debt and are recorded in Interest Expense using the interest method. Costs directly related to the issuance of debt are amortized over the life of the debt and are recorded in Depreciation and Amortization Expense.  We have elected not to mark any of our debt to fair value through earnings.

Lease Obligation and Deferred Rent

In July 2007, we signed a seven-year operating lease with escalating payments on a 103,000 square foot facility in Tyngsboro, Massachusetts. As part of this lease agreement, we issued to the landlord 150,000 shares of our common stock and a warrant exercisable for 500,000 shares of our common stock in return for lower cash payments under the lease. (See Note 6: Commitments and Contingencies.)  Additionally, the landlord has reimbursed us for certain leasehold improvements we have made. In accordance with the Financial Accounting Standards Board’s (FASB’s) Accounting Standards Codification (ASC) Topic 840, “Leases,” these reimbursements have been credited to “Deferred Rent”, and we have recorded rent expense on a straight line basis. The current portion of the deferred rent is included in current liabilities, and the remainder is shown on the balance sheet as “Deferred rent – long term.”

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Property and Equipment

Property and equipment in service is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Property and equipment are defined as tangible items with unit costs exceeding our capitalization threshold that are used in the operation of the business, are not intended for resale and which have a useful life of one year or more. The cost of fixed assets is defined as the purchase price of the item, as well as all of the costs necessary to bring it to the condition and location necessary for its intended use.  These costs include labor, overhead, capitalized interest and, if applicable, exit costs. Exit costs for which we are obligated are accounted for in accordance with ASC Topic 410, “Asset Retirement and Environmental Obligations.”  No overhead is generally applied for internally-constructed projects not directly related to our core business (e.g., leasehold improvements). Interest costs incurred during the construction of major construction projects (such as the construction of our frequency regulation plants) are capitalized in accordance with ASC Topic 835, Subtopic 20, “Interest — Capitalization of Interest.”  The interest is capitalized until the underlying asset is ready for its intended use, and is considered an integral part of the total cost of acquiring a qualifying asset.  Thus, the capitalized interest costs are included in the calculation of depreciation expense once the constructed assets are in service. Repair and maintenance costs are expensed as incurred.  Materials used in our development efforts are considered research and development materials, and are expensed as incurred in accordance with ASC Topic 730, “Research and Development.”

Capital assets are classified as “Construction in Progress” (CIP) when initially acquired, and reclassified to the appropriate asset account when placed into service, with the exception of land, which is capitalized upon purchase. Depreciation expense is not recorded on assets not yet placed into service.

Materials purchased to build flywheels, power electronics and other components used in our frequency regulation installations are classified as CIP, along with the related labor and overhead costs. Some components of the Smart Energy Matrix™, such as the flywheels and power electronics, are considered “fungible” in that they can be moved and redeployed at a different location.  Non-fungible costs are costs which would not be recovered if we redeployed the matrix or portions thereof.  In some cases, we may elect to deploy a Smart Energy Matrix™ system at a location for the purpose of demonstrating our technology or gaining experience operating in that particular market.  In these instances, the costs of the fungible components are capitalized, and the remaining costs, which may include such costs as site preparation, interconnection costs, capitalized interest and estimated exit costs, are expensed.

Deferred financing costs

Deferred financing costs represent legal, due diligence and other direct costs incurred to raise capital or obtain debt.  Direct costs include only “out-of-pocket” or incremental costs directly related to the effort, such as a finder’s fee and fees paid to outside consultants for accounting, legal or engineering investigations or for appraisals.  These costs will be capitalized if the efforts are successful, or expensed when unsuccessful.  Indirect costs are expensed as incurred. Deferred financing costs related to debt are amortized over the life of the debt. Deferred financing costs related to issuing equity are charged to Paid in Capital.

Advance payments to suppliers

Advance payments to suppliers represent payments for custom materials used in the manufacture of our flywheels or frequency regulation facilities.

Loss on Contract Commitments

Our contracts have been primarily for the development of demonstration units of new products, design of a frequency regulation plant, design of a flywheel for use by the Navy in their electric ships, and other work that supports our core research and development efforts.  Most of these contracts have been structured on a cost-share basis for which the expected cost share has been recorded as a contract loss.  The “cost” basis allowable on these contracts is based on government-allowable overhead rates, which differ from overhead rates required by GAAP.  In particular, most of our stock compensation expense is not an allowable cost for the purposes of calculating government-allowable rates.  As a consequence, we may incur losses on our financial statements even for contracts granted on a cost-plus-fixed fee basis.  We establish reserves for anticipated losses on contract commitments if, based on our cost estimates to complete the commitment, we determine that the cost to complete the contract will exceed the total expected contract revenue.  Each quarter, we perform an estimate-to-complete analysis, and any changes to our original estimates are recognized in the period in which they are determined.

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Stock-Based Compensation

We account for stock-based compensation for employees in accordance with ASC Topic 718, “Compensation-Stock Compensation.” Under the fair value recognition provision of ASC Topic 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense as it is earned over the requisite service period, which is the vesting period. The fair value of the options on their grant date is measured using the Black-Scholes option-pricing model, which we believe yields a reasonable estimate of the fair value of the grants made. The valuation provisions of ASC Topic 718 apply to grants issued since January 1, 2006 (the effective date) and to grants that were outstanding as of that date that are subsequently modified. Estimated compensation expense for grants that were outstanding as of the effective date will be recognized over the remaining vesting period.

Non-employee stock-based compensation is accounted for in accordance with ASC Topic 505, “Equity-based payments to Non-Employees.”  In accordance with this topic, cost recognized for non-employee share-based payment transactions is determined by the fair value of whichever is more reliably measurable:  (a) the goods or services received; or (b) the equity instruments issued.

Restructuring and Asset Impairment Charges

In accordance with ASC Topic 360, “Property, Plant and Equipment,” long-lived assets to be held and used are periodically reviewed to determine whether any events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.  The conditions 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.  We recognize 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.

In certain instances, we may determine that it is in the best interest of the Company to move and redeploy all or part of a Smart Energy Matrix™ system installed at a given location.  When such a decision is made, we will determine which costs are associated with the movable (fungible) components, and which costs are non-fungible. We will record a period expense for the net book value associated with the non-fungible components.

No asset impairment charges were considered necessary for the nine months ended September 30, 2010 or 2009.

Revenue Recognition

Although we have recorded revenues for our research and development contracts and frequency regulation service from the ISO-NE pilot program, our operations have not yet reached a level that would qualify us to emerge from the development stage.  Therefore we continue to be accounted for as a development stage company under ASC Topic 915, “Development Stage Entities.”

·      Frequency Regulation Revenue

Revenue from frequency regulation is recognized when it has been earned and is realized or realizable. Revenue from services is earned either as the services are performed or when they are complete and is considered realizable once the customer has committed to pay for the services and the customer’s ability to pay is not in doubt.  Frequency regulation revenue is calculated on an hourly basis, as services are provided, based on formulas specific to the tariffs in effect at the applicable ISO at bid award rates that are published by the ISO.  Frequency regulation service revenue is calculated using the applicable rates and formulas as services are provided.

·      Research and Development Contract Revenue Recognized on the Percentage-of-Completion Method

We recognize contract revenue using the percentage-of-completion method. We use labor hours as the basis for the percentage of completion calculation, which 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. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to contract costs and revenue.  Revenues recognized in excess of

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amounts billed are classified as current assets, and included in “Unbilled costs on contracts in progress” in our balance sheets.  Amounts billed to clients in excess of revenues recognized to date are classified as current liabilities under “Advance billings on contracts.”  Changes in project performance and conditions, estimated profitability, and final contract settlements may result in future revisions to contract costs and revenue.

Our research and development contracts are subject to cost review by the respective contracting agencies. Our reported results from these contracts could change as a result of these reviews.

·                  Sale of Alternative Renewable Energy Credits

Under the Massachusetts Alternative Energy Portfolio Standard (APS) program, our flywheel energy storage frequency regulation assets operating within the Commonwealth of Massachusetts are credited with producing a type of Renewable Energy Credit (REC) known as an Alternative Renewable Energy Credit.  These have a market value, and we recognize revenue on the sale of such credits as revenue when sold on the open market.

·                  Inverter Sales

Generally, revenue on inverter and related product sales is recognized on transfer of title, typically when products are shipped and all related costs are estimable.  For sales to distributors, we make an adjustment to defer revenue until the products are subsequently sold by distributors to their customers.

Cost of Goods Sold

For frequency regulation revenue, cost of goods sold represents the cost of energy. Cost of goods sold for our research and development contracts is calculated on a percentage-of-completion basis, using the same percentage of contract costs (up to the total contract revenue amount) as is used to calculate revenue. In the event that expected costs exceed total contract revenue amount, the excess costs are charged to contract loss. We value our products at the lower of cost or market.  Costs in excess of this measurement are expensed in the period in which they are incurred.

Fair Value of Financial Instruments

Accounting for fair value measurements involves a single definition of fair value, along with a conceptual framework to measure fair value, with a fair value defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement hierarchy consists of three levels:

·            Level one—quoted market prices in active markets for identical assets or liabilities;

·            Level two—inputs other than level one inputs that are either directly or indirectly observable, and

·            Level three—unobservable inputs developed using estimates and assumptions which are developed by the reporting entity and reflect those assumptions that a market participant would use.

We apply valuation techniques that (1) place greater reliance on observable inputs and less reliance on unobservable inputs and (2) are consistent with the market approach, the income approach and/or the cost approach, and include enhanced disclosures of fair value measurements in our financial statements.

The carrying values of cash and cash equivalents, accounts receivable, other current assets, accounts payable, accrued expenses, and other current liabilities approximate their fair values due to the short maturity of these instruments.  See Note 8 for debt fair value, which also approximates carrying value.

Recently Issued Accounting Pronouncements and Regulations

None.

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Recently Adopted Accounting Pronouncements and Regulations

None.

Note 3.  Accounts Receivable

Our accounts receivable include amounts due from customers and are reported net of a reserve for uncollectible accounts as follows:

There was no allowance for doubtful accounts as of September 30, 2010, or December 31, 2009.  All accounts are expected to be collected.

Some of our research and development contracts contain holdback provisions that allow our customers to withhold 10% from each invoice payment. Our accounts receivable balance includes holdbacks of approximately $19,000 and $17,000 as of September 30, 2010 and December 31, 2009, respectively.  These holdbacks are payable once work has been satisfactorily completed and the final reports have been delivered and approved. We believe the holdbacks will be collected upon completion of the contracts and collected within one year, and therefore have not recorded any reserve against this amount.

Note 4.  Property and Equipment

Details of our property and equipment follow:

In November 2008, we deployed 1 MW of capacity under the ISO-NE Alternative Technologies pilot program (“pilot program”) with a system installed inside our Tyngsboro facility. We deployed a second MW of capacity under the pilot program in July 2009, and a third MW in December 2009.  Both of these additional MWs were installed outside and adjacent to our facility in Tyngsboro.  In August 2010, we moved a portion of the two MW installed outside our facility to the Stephentown site as part of our equity contribution to that project.  The Smart Energy 25 flywheels shown above represent the cost of the flywheels and electronic control modules in use for this pilot program.  In addition, the “Smart Energy Matrix™ installations — fungible” shown above

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represent the cost of ancillary equipment, such as chillers, installed outside our facility. This equipment is considered fungible because it can be relocated to other sites.

Under the terms of our Tyngsboro facility lease, we will incur certain exit costs at termination of our lease.  Estimated exit costs of approximately $267,000 relating to certain non-fungible equipment included in the Smart Energy Matrix™ system operating outside of our facility were expensed in 2008 and carried in accrued expenses.  Machinery and equipment and leasehold improvements include approximately $54,000 in estimated exit costs as of September 30, 2010, and December 31, 2009, that are being depreciated over the remaining life of the assets.  In addition, we paid the Town of Stephentown, New York $75,000 to be held in escrow to cover any land clearing or exit costs at that site.  This amount is included in “Deferred financing costs” on our balance sheet.

In July 2008, we purchased land in Stephentown, New York, for the construction of a frequency regulation system, the cost of which is reflected as “Land” in the schedule shown above.

The components of “Construction in progress” (CIP), which represent costs related to assets that have not yet been placed into service and for which no depreciation expense has been taken, were as follows:

As of September 30, 2010, and December 31, 2009, approximately $26,353,000 and $7,621,000, respectively, of the total shown as CIP represent completed flywheels not yet in service, materials to build flywheels and other costs related to the Smart Energy Matrix™ installations under construction for our Stephentown site and other potential sites.

Note 5.  Deferred Financing Costs

Details of our deferred financing costs are as follows:

Note 6.  Other Assets

Other assets represent deferred costs for patents, and are as follows:

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Note 7.  Commitments and Contingencies

The following table summarizes our purchase obligations and the aggregate maturities and payments due for our contractual obligations as of September 30, 2010, and for the subsequent five years:

As of September 30, 2010, we had purchase commitments with our suppliers of approximately $22.6 million. Of this amount, approximately $15 million represents firm, non-cancelable commitments against which we have made advance payments totaling $3.5 million, leaving a net non-cancelable obligation of approximately $11.5 million as of September 30, 2010.  Total purchase commitments include approximately $19.6 million for materials required to build the flywheels, electronic control modules and other ancillary equipment needed for Stephentown, of which $13.0 million are non-cancelable as of September 30, 2010. The remaining commitments are for equipment and other operating expenses.

In July 2007, we signed a seven-year lease on our current corporate headquarters, and relocated all of our operations to this facility in January 2008.  Our 103,000-square-foot facility is located at 65 Middlesex Road, Tyngsboro, Massachusetts.  We believe our facility has a production capacity of approximately 600 flywheels per year, and with further capital spending for equipment its capacity will increase to approximately 1,000 flywheels per year.

We provided our landlord with an irrevocable letter of credit securing our performance under the lease with a balance at September 30, 2010, of $200,000, which is reduced periodically over 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.  In addition to our rent payments, we are responsible for real estate taxes and all operating expenses of the Tyngsboro facility.  Rent expense was approximately $442,000 during the nine months ended September 30, 2010 and 2009.

On August 31, 2009, we purchased an option to lease land in Glenville, New York, as a location where we could build another 20 MW facility.  During the lease option period, we have agreed to negotiate a ground lease to be entered into upon our unilateral exercise of the lease option.  Key terms of the ground lease were substantially delineated in the executed option of the lease.  The lease option expires on February 28, 2011, but may be extended for an additional consecutive six-month period.  In consideration for this option, we are paying the landlord a non-refundable fee of $4,550 per month in lease commitments.  More attractive site options may be developed in the same or other markets, and these factors will be evaluated over the next four to six

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months before deciding whether to extend the lease option on the Glenville site for another six-month period to maintain it as a viable potential location for a future 20 MW plant.

In April 2010, we entered into two land option agreements:

·                  The first of these is a two-year option that provides the right to purchase either of two properties in the Chicago area, but not both, for $1 million. Both properties are zoned industrial, and contain certain improvements relevant to our planned use, including equipment required for physical interconnection to 138 KVA transmission lines.  In consideration for this option, we are paying the owner $2,000 per month.  If we elect to purchase the land, the option payments will be applied to the purchase price.

·                  The second is an option to lease approximately 5.5 acres in Humboldt North Industrial Park, located in Luzerne County, Hazle Township, Pennsylvania.  The site is zoned for industrial use.  The option was executed with the Greater Hazleton Community Area New Development Organization, Inc., also known as CAN DO, Inc., a Pennsylvania Industrial Development Organization.  Under the terms of this two-year option, we are paying $2,500 for each of four six-month periods, or until the option is converted to a lease.  The option allows us to lease the property for 21 years at the rate of $3,250 per month.  The Hazle Township site is located within an economic development zone that would exempt us from having to pay any state tax on materials and equipment used to build a plant on this site.

We expect to build the plant for which we have received a $24 million DOE grant award on either one of the two sites located in the Chicago area or the Hazle Township site in Luzerne County, Pennsylvania.

Legal Proceedings

We may from time to time be subject to legal proceedings, often likely to involve routine litigation incidental to our business.  The outcome of any legal proceeding is not within our complete control, may often be difficult to predict and may be resolved over a very long period of time.  Estimating probable losses associated with any legal proceedings or other loss contingency is very complex and requires the analysis of many factors, including assumptions about potential actions by third parties.  A loss contingency is recorded as a liability in the consolidated financial statements when it is both (i) probable and known that a liability has been incurred and (ii) 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. There are no material legal proceedings pending.

Note 8.  Accrued Contract Loss

Our contract loss reserves are as follows: