10-Q 1 a11-25923_110q.htm 10-Q

 

 

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, 2011

 

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)

 

Delaware

 

04-3372365

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

65 Middlesex Road

 

 

Tyngsboro, Massachusetts

 

01879

(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.  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    x    No    o

 

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

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller Reporting Company  x

 

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 10, 2011, was 32,235,856.

 

 

 



 

BEACON POWER CORPORATION AND SUBSIDIARIES

 

Table of Contents

 

 

Page

 

 

PARTI. Financial Information

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2011, and December 31, 2010

1

 

 

 

 

Unaudited Consolidated Statements of Operations for the three and nine month periods ended September 30, 2011,and 2010

2

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for nine months ended September 30, 2011, and 2010

3

 

 

 

 

Unaudited Consolidated Statements of Stockholders’ Equity for the year ended December 31, 2010, and the nine months ended September 30, 2011

4

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

43

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

68

 

 

 

Item 4.

Controls and Procedures

68

 

 

PART II. Other Information

 

 

 

Item 1.

Legal Proceedings

68

 

 

 

Item 1A.

Risk Factors

69

 

 

 

Item 6.

Exhibits

71

 

 

Signatures

73

 

ii



 

Note Regarding Chapter 11 Bankruptcy Filing

 

On October 30, 2011 Beacon Power Corporation filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of the Bankruptcy Code (the “Bankruptcy Code”).  The filings, case nos. 11-13450, 11-13451 and 11-13452, were made by each of the Company; Stephentown Holding, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company (“Holdings”); and Stephentown Regulation Services, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Holdings (“SRS,” and together with the Company and Holdings, the “Debtors”) (together, the “Bankruptcy Cases”). As of the date of this filing, we continue to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

 

These events create uncertainty relating to our ability to continue as a going concern. The accompanying financial statements do not reflect any adjustments relating to the recoverability of assets and classification of liabilities that might result from the outcome of these uncertainties. Our consolidated financial statements as of September 30, 2011, do not give effect to any adjustments to the carrying value of assets and liabilities that may become necessary as a consequence of the Bankruptcy Cases.

 

Our condensed consolidated financial statements have been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of our bankruptcy filing, such realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors in possession under the protection of Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the ordinary course of business, we may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements.

 

iii



 

PART 1 — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

BEACON POWER CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

 

 

 

September 30,
2011
(Unaudited)

 

December 31,
2010

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,026,219

 

$

10,865,760

 

Accounts receivable, net

 

448,855

 

279,376

 

Unbilled costs on contracts in progress

 

86,213

 

66,725

 

Prepaid expenses and other current assets

 

561,402

 

725,862

 

Total current assets

 

3,122,689

 

11,937,723

 

Property and equipment, net

 

24,530,136

 

56,192,205

 

Restricted cash

 

3,009,970

 

3,228,933

 

Deferred financing costs

 

3,409,681

 

3,496,120

 

Advance payments to suppliers

 

510,042

 

851,984

 

Other assets

 

309,706

 

230,270

 

Total assets

 

$

34,892,224

 

$

75,937,235

 

Liabilities and Stockholders’ Deficiency/Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,003,122

 

$

6,172,210

 

Accrued compensation and benefits

 

1,302,096

 

1,205,071

 

Other accrued expenses

 

1,487,409

 

4,211,555

 

Deferred revenue — current

 

212,919

 

49,214

 

Advance billings on contracts

 

22,865

 

26,409

 

Accrued contract loss

 

849,362

 

1,045,545

 

Deferred rent

 

183,621

 

164,308

 

Current portion of long term debt

 

702,962

 

661,215

 

Mandatorily redeemable convertible preferred stock

 

24,525

 

2,900,170

 

Preferred stock warrant liability — current

 

 

1,009,388

 

Common stock warrant liability

 

668,909

 

3,242,600

 

Total current liabilities

 

7,457,790

 

20,687,685

 

Long term liabilities:

 

 

 

 

 

Deferred revenue - long term

 

799,075

 

 

Deferred rent

 

442,348

 

582,210

 

Long term debt, net of unamortized discount

 

41,247,912

 

25,169,568

 

Preferred stock warrant liability - long-term

 

 

864,012

 

Total long term liabilities

 

42,489,335

 

26,615,790

 

Commitments and contingencies (Notes 10, 20 and 21)

 

 

 

 

 

Stockholders’ deficiency/equity:

 

 

 

 

 

Preferred Stock, $.01 par value; 10,000,000 shares authorized; no shares issued or outstanding

 

 

 

Common stock, $.01 par value; 200,000,000 shares authorized 30,325,288 and 20,967,529 shares issued at September 30,2011, and December 31, 2010, respectively

 

303,253

 

209,675

 

Deferred stock compensation

 

 

 

Additional paid-in-capital

 

276,997,361

 

257,772,383

 

Accumulated deficit

 

(291,642,051

)

(228,635,459

)

Treasury stock, 42,699 shares at cost

 

(713,464

)

(712,839

)

Total stockholders’ deficiency/equity:

 

(15,054,901

)

28,633,760

 

Total liabilities and stockholders’ deficiency/equity:

 

$

34,892,224

 

$

75,937,235

 

 

See notes to unaudited consolidated financial statements.

 

1



 

BEACON POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Revenue

 

$

1,005,495

 

$

124,355

 

$

1,975,624

 

$

525,375

 

Cost of goods sold (exclusive of items shown separately below)

 

549,352

 

118,533

 

1,180,443

 

373,674

 

Gross profit

 

456,143

 

5,822

 

795,181

 

151,701

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Operations and maintenance

 

841,700

 

195,411

 

2,652,333

 

1,985,578

 

Research and development

 

1,034,580

 

1,509,219

 

3,667,011

 

5,470,987

 

Selling, general and administrative

 

1,736,216

 

2,185,046

 

7,084,677

 

6,560,695

 

Loss on contract commitments

 

 

1,070,487

 

 

970,836

 

Depreciation and amortization

 

1,069,023

 

515,789

 

2,758,038

 

1,591,268

 

Loss on impairment of assets

 

42,343,994

 

 

42,343,994

 

 

Total operating expenses

 

47,025,513

 

5,475,952

 

58,506,053

 

16,579,364

 

Loss from operations

 

(46,569,370

)

(5,470,130

)

(57,710,872

)

(16,427,663

)

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

1,678

 

392

 

9,021

 

10,020

 

Interest expense

 

(414,148

)

(15,042

)

(1,331,650

)

(160,003

)

Non-cash interest income related to preferred stock and associated warrants

 

1,157,649

 

 

3,625,525

 

 

Loss on extinguishment of debt

 

(145,182

)

 

(7,524,647

)

 

Other income (expense)

 

(18,768

)

(53,967

)

(73,969

)

(52,076

)

Total other income (expense), net

 

581,229

 

(68,617

)

(5,295,720

)

(202,059

)

Net loss

 

$

(45,988,141

)

$

(5,538,747

)

$

(63,006,592

)

$

(16,629,722

)

Loss to common shareholders

 

$

(45,988,141

)

$

(5,538,747

)

$

(63,006,592

)

$

(16,629,722

)

Loss per share, basic and diluted

 

$

(1,60

)

$

(0.28

)

$

(2.38

)

$

(0.89

)

Weighted-average common shares outstanding

 

28,725,508

 

19,822,934

 

26,427,728

 

18,644,171

 

 

See notes to unaudited consolidated financial statements.

 

2



 

BEACON POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Nine months ended September 30,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(63,006,592

)

$

(16,629,722

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

2,758,038

 

1,591,268

 

Loss (gain) on sale or disposition of assets

 

165,526

 

 

Impairment of assets, net

 

42,343,994

 

 

Interest expense relating to issuance of warrants

 

33,115

 

39,343

 

Loss on extinguishment of debt

 

7,524,647

 

 

Non-cash interest income related to preferred stock and associated warrants

 

(3,625,525

)

 

Options and warrants issued to service provider

 

 

15,739

 

Stock-based compensation

 

1,046,857

 

684,374

 

Deferred rent

 

(120,548

)

(99,091

)

Cash received from landlord for build-out credit

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(169,479

)

(1,511,616

)

Unbilled costs on government contracts

 

(19,488

)

556,046

 

Prepaid expenses and other current assets

 

101,578

 

154,825

 

Accounts payable

 

1,457,190

 

(1,094,056

)

Accrued compensation and benefits

 

97,025

 

163,759

 

Advance billings on contracts

 

795,531

 

(33,541

)

Accrued loss on contract commitments

 

(196,183

)

856,395

 

Deferred revenue – current

 

163,705

 

49,214

 

Other accrued expenses and current liabilities

 

(1,896,829

)

1,396,413

 

Net cash used in operating activities

 

(12,547,438

)

(13,860,650

)

Cash flows from investing activities:

 

 

 

 

 

Restricted cash

 

218,963

 

(3,016,369

)

Increase in other assets

 

(79,436

)

(105,154

)

Purchases and manufacture of property and equipment

 

(19,915,559

)

(12,767,244

)

Advance payments to suppliers (net)

 

341,942

 

(3,248,893

)

Net cash used in investing activities

 

(19,434,090

)

(19,137,660

)

Cash flows from financing activities:

 

 

 

 

 

Stock offerings, net of expenses

 

424,032

 

2,237,764

 

Shares issued under employee stock purchase plan

 

43,244

 

60,522

 

Issuance of debt

 

16,613,225

 

8,199,546

 

Repayment of debt

 

(526,250

)

(491,955

)

Cash paid for financing costs

 

(57,086

)

(2,474,627

)

Preferred warrant exercises

 

5,000,000

 

 

Common warrant exercises

 

1,644,822

 

5,902,038

 

Net cash provided by financing activities

 

23,141,987

 

13,433,288

 

(Decrease) increase in cash and cash equivalents

 

(8,839,541

)

(19,565,022

)

Cash and cash equivalents, beginning of period

 

10,865,760

 

22,605,147

 

Cash and cash equivalents, end of period

 

$

2,026,219

 

$

3,040,125

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

305,709

 

$

216,103

 

Common Stock issued in lieu of dividends or to redeem or convert mandatorily redeemable preferred stock

 

$

16,052,466

 

$

 

 

See notes to unaudited consolidated financial statements.

 

3



 

BEACON POWER CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Deficiency/Equity

(Unaudited)

 

 

 

 

Common Stock

 

Additional

 

 

 

Treasury Stock

 

Total
Shareholders’

 

Description

 

Shares

 

Amount

 

Paid in Capital

 

Retained Deficit

 

Shares

 

Amount

 

Deficiency/Equity

 

Balance, December 31, 2009

 

17,164,162.2

 

$

1,716,416

 

$

245,029,557

 

$

(205,955,693

)

42,169

 

$

(712,839

)

$

40,077,441

 

Issuance of officer restricted stock units

 

3,705.2

 

371

 

(371

)

 

 

 

 

Shares issued through ESPP

 

43,637.2

 

4,364

 

118,304

 

 

 

 

122,668

 

Stock-based compensation

 

 

 

858,467

 

 

 

 

858,467

 

Warrants issued to service provider

 

 

 

15,739

 

 

 

 

15,739

 

Redeemable preferred stock converted to common stock

 

301,577.7

 

30,158

 

672,903

 

 

 

 

703,061

 

Redeemable preferred stock redeemed for common stock

 

598,874.1

 

59,887

 

1,257,635

 

 

 

 

1,317,522

 

Stock issued for dividends on redeemable preferred stock

 

35,821.9

 

3,582

 

75,244

 

 

 

 

78,826

 

Issuance of stock for cash, net of issuance costs

 

992,963.0

 

99,296

 

2,138,468

 

 

 

 

2,237,764

 

Warrant exercises

 

1,826,787.5

 

182,679

 

5,719,359

 

 

 

 

5,902,038

 

Rounding for fractional shares

 

0.2

 

 

 

 

 

 

 

Adjust par value for reverse stock split

 

 

(1,887,078

)

1,887,078

 

 

 

 

 

Net loss

 

 

 

 

(22,679,766

)

 

 

(22,679,766

)

Balance, December 31, 2010

 

20,967,529.0

 

209,675

 

257,772,383

 

(228,635,459

)

42,169

 

(712,839

)

28,633,760

 

Issuance of officer restricted stock units

 

3,197.0

 

33

 

(33

)

 

 

 

 

Shares issued through ESPP

 

30,104.0

 

301

 

42,943

 

 

 

 

43,244

 

Stock-based compensation

 

 

 

1,046,857

 

 

 

 

1,046,857

 

Return of excess dividend on preferred stock

 

 

 

 

 

530

 

(625

)

(625

)

Redeemable preferred stock converted to common stock

 

4,390,026.8

 

43,900

 

10,870,016

 

 

 

 

10,913,916

 

Redeemable preferred stock redeemed for common stock

 

2,962,400.2

 

29,624

 

4,974,598

 

 

 

 

5,004,222

 

Stock issued for dividends on redeemable preferred stock

 

74,758.5

 

749

 

133,579

 

 

 

 

134,328

 

Issuance of stock for cash, net of issuance costs

 

778,086.0

 

7,780

 

416,252

 

 

 

 

424,032

 

Warrant exercises

 

1,119,186.6

 

11,191

 

1,740,766

 

 

 

 

1,751,957

 

Rounding for fractional shares

 

(0.1

)

 

 

 

 

 

 

Net loss

 

 

 

 

(63,006,592

)

 

 

(63,006,592

)

Balance, September 30, 2011

 

30,325,288.0

 

$

303,253

 

$

276,997,361

 

$

(291,642,051

)

42,699

 

$

(713,464

)

$

(15,054,901

)

 

See notes to unaudited consolidated financial statements.

 

4



 

BEACON POWER CORPORATION AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

Note 1.  Nature of Business and Operations

 

On October 30, 2011 Beacon Power Corporation filed a voluntary petition in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of the Bankruptcy Code (the “Bankruptcy Code”).  The filings, case nos. 11-13450, 11-13451 and 11-13452, were made by each of the Company; Stephentown Holding, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company (“Holdings”); and Stephentown Regulation Services, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Holdings (“SRS”) and together with the Company and Holdings, the “Debtors” (together, the “Bankruptcy Cases”). As of the date of this filing, we continue to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. See Note 20 for further discussion of the Bankruptcy Cases.

 

Nature of Business

 

Beacon Power Corporation (together with its subsidiaries, collectively the “Company,” “Beacon,” “we,” “our,” or “us”) 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 $114.5 million as of September 30, 2011, through the sale of our stock and warrant exercises.

 

Prior to June 2011, we were accounted for as a development stage company under the Financial Accounting Standards Board’s Accounting Standard Codification (ASC) Topic 915 because we had not yet generated a significant amount of revenue from our principal operations.  During June 2011, our Stephentown, New York, flywheel energy storage plant reached its full 20 megawatt (MW) capacity.  Since we are now generating significant revenue from our principal operations, as of June 30, 2011, we are no longer accounted for as a development stage company.

 

Recent Developments

 

We have experienced net losses since our inception and, as of September 30, 2011, had an accumulated deficit of approximately $292 million, including a non-cash asset impairment loss of approximately $42 million recorded in the quarter ended September 30, 2011.  We do not expect to have positive cash flow from operations until we have deployed a sufficient number of merchant plants and/or sold turnkey systems.  As of September 30, 2011, we had approximately $2 million in cash and another $3 million in restricted cash, most of which belongs to our wholly-owned subsidiary, SRS.

 

In our Form 10-Q filed on August 9, 2011, we indicated that we would need to raise an additional $5 to $10 million from a combination of equity, debt and/or cash proceeds from the sale of plants to fund operations into the second quarter of 2012.  On August 23, 2011, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with McNicoll, Lewis &Vlak LLC (“MLV”), pursuant to which we could issue and sell shares of our common stock, par value $0.01 per share, having an aggregate offering price of up to $25,000,000 (the “MLV Shares”) from time to time through MLV (the “Offering”).  Through mid-October 2011, we raised approximately $700,000, net of fees, through the sale of stock under the Sales Agreement.  In mid-October 2011, due to factors discussed below, we discontinued sale of stock through the MLV Sale Agreement.

 

Regulation pricing in NYISO has been significantly lower thus far in 2011 than during prior years, particularly during August through October 2011.  The pricing appears to be negatively impacted by the bidding strategy employed by one or more market participants.  In approving its pay-for-performance ruling, the Federal Energy Regulatory Commission (“FERC”) approved a requirement for all ISOs to implement a pricing structure that will reward resources such as ours for faster performance (pay-for-performance, “PFP”).  We are investigating other alternatives to resolve this pricing issue prior to New York’s required implementation of pay-for-performance by October 2012.

 

We believe the drop in our stock price was due to a combination of factors, including conditions in the clean-tech energy industry, and a negative economic and political environment. These factors have resulted in the Company not being able to raise the funds required to support ongoing operations.  As of the end of October 2011, we had essentially exhausted available cash, and did not have access to other sources of cash to fund ongoing business operations.

 

5



 

On October 30, 2011, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. As of the date of the filing of this quarterly report, we continue to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  Please refer to Note 20 for further discussion of the Bankruptcy Cases.

 

There is substantial doubt as to our ability to continue as a going concern. The financial statements included herein do not include any adjustments that might result from the outcome of this uncertainty.  We have retained financial and legal advisors to actively evaluate restructuring alternatives and to solicit proposals from potentially interested parties.  We have engaged CRG Partners Group LLC as financial advisors for the open strategic alternatives process, and have engaged Brown Rudnick LLP as legal advisors.

 

The assessment of our near-term liquidity is based on important factors and assumptions which anticipate certain levels of potential risk.  While all business plans anticipate certain levels of risk, we are exposed to additional bankruptcy- and company-specific risk and uncertainties, including, but not limited to: (1) our ability to successfully fund our operating costs in the near term through debtor-in-possession (“DIP”) financing, a restructuring or other strategic alternatives and (2) successfully emerging from Chapter 11 through a restructuring plan that will lead to our being able to obtain the funds necessary for long-term operating costs and the construction of additional plants.

 

Operations

 

Our current business plan, if we are successful in emerging from Chapter 11, is to increase revenues from the commercialization our Smart Energy Matrix™ flywheel system that provides frequency regulation services to the electricity grid in North America. Our plan also includes the sale of turnkey systems outright or on a fractional basis, both within the United States and internationally, which will also be used to provide frequency regulation as well as related energy balancing services. We believe that as we expand our production capabilities and continue to lower system costs, we should be able to market other cost-effective applications for our flywheel systems that should further expand revenues.

 

We began earning frequency regulation revenue in January 2011 at our Stephentown plant. In June 2011, our Stephentown plant achieved its full 20-MW capacity.  On August 6, 2010, our wholly-owned subsidiary, SRS, closed on a credit facility (the “FFB Credit Facility”) with the Federal Financing Bank (FFB), pursuant to which the FFB agreed to make loans to SRS from time to time in an aggregate principal amount of up to $43,137,019, subject to the terms and conditions set forth in the loan documents governing the FFB Credit Facility (collectively, the “FFB Loan Documents”).  The loans made to SRS by the FFB under the FFB Loan Documents are guaranteed by the U.S. Department of Energy (DOE). Proceeds of the loans made under the FFB Loan Documents, together with $26 million of cash and in-kind assets contributed by Beacon through its wholly-owned subsidiary, Holdings, are being applied to pay the estimated $69 million total project cost of our 20 megawatt (MW) frequency regulation plant in Stephentown, New York.  Advances under the FFB Credit Facility began in September 2010, and were based upon eligible project spending, with the last day for an advance being May 30, 2012. Our Chapter 11 bankruptcy filing on October 30, 2011, constituted an event of default under the FFB Loan Documents.  Accordingly, the loan was accelerated and all amounts thereunder became immediately due and payable as of such date, and we do not expect to receive any additional advances from the FFB Credit Facility except as otherwise ordered by the Bankruptcy Court. Each loan disbursement we received was subject to the satisfaction of multiple conditions.  The total estimated project cost includes capital costs, deferred finance charges, funding for certain reserves upon achievement of “project completion” per the terms of the loan document, and other costs that were expensed as period costs, such as substation improvements and legal fees for DOE and Beacon.  As of September 30, 2011, we expect the project cost to be less than the original estimate, although we have not yet achieved project completion.

 

On February 28, 2011, we announced we had signed a lease agreement with NorthWestern Corporation d/b/a NorthWestern Energy for a one-megawatt (1MW) Beacon Smart Energy Matrix flywheel energy storage system.  At the time of our bankruptcy filing, we were in the process of installing the system, which will be operated in conjunction with the Dave Gates Generating Station (formerly known as the Mill Creek Generating Station), a gas-fired regulating reserve plant recently commissioned in Montana and owned by NorthWestern Energy.  Our system was expected to be operational by the end of 2011.  However, work has been temporarily suspended on this project, pending reorganization efforts. Our completion of this project is dependent upon the availability of funds from DIP financing, an alternative funding source or reorganization under the Bankruptcy Code. The initial term of the lease will be 15 months, which can be extended up to two additional 12-month terms at NorthWestern Energy’s option.  NorthWestern Energy would pay us $500,000 for the first 15-month term and $500,000 for each subsequent term should it choose to extend the lease. At any point, NorthWestern Energy can opt to purchase the 1 MW systems outright for approximately $4 million.  A portion of the lease payments made under the agreement would be applied to the purchase, depending on when the purchase is made.

 

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On October 20, 2011, the Federal Energy Regulatory Commission (FERC) issued mandates that require each grid operator under its jurisdiction to structure their regulation market tariffs to provide pay-for-performance.  Under pay-for-performance tariffs, grid operators would implement a pricing structure that pays faster-ramping resources, such as our flywheels, a higher price for their service.  Because our flywheels react in seconds to a grid operator’s control signal, a response that is exponentially faster than conventional fossil fuel-based regulation resources, pay-for-performance tariffs should enable us to earn increased revenue from any regulation services we provide in those markets, including the NYISO, where we are already operating a 20 MW commercial energy storage facility.  The FERC order is effective 60 days from the issuance date.  Compliance filings are due 120 days from the effective date, and implementation must take place no later than October 2012.

 

In addition to the revenue we earned from our Stephentown plant, we also earned a limited amount of frequency regulation revenue during the first nine months of 2011 from a small amount of capacity (1 MW or less) operating at our Tyngsboro facility under an ISO-NE pilot program.  During the first half of 2010, we had 3 MW in service at this site; however, during the third quarter of 2010 we redeployed a portion of those assets to the Stephentown plant in partial fulfillment of our equity contribution to SRS.  In April 2011, we temporarily discontinued our participation in the ISO-NE pilot program in order to prepare the remaining flywheels for shipment to NorthWestern Energy.  In July 2011, we resumed limited participation in this pilot program for several weeks.  As of September 30, 2011, we were not participating in the pilot.

 

We plan to increase revenues by building and operating additional 20 MW facilities. We have been awarded a $24 million DOE Smart Grid stimulus grant to support a plant in Hazle Township, Pennsylvania, which is in the Mid-Atlantic ISO (PJM) region.  In April 2011, we were approved by the DOE to proceed to Phase II tasks, and in September 2011 we received formal approval of the revised project budget, thereby assuring the progression of the project and enabling us to draw Phase II funds of up to 95% of the $24-million grant.  Under Phase I, we were limited to a spending cap of 4% of the grant amount.  We have site control and have filed an interconnection application and DOE has completed and approved the environmental assessment for the Hazle Township site. Recent changes in Pennsylvania law regarding NPDES/Erosion & Sedimentation Control permits have resulted in a need for additional engineering analysis, which will impact our groundbreaking date. As of the date of this filing, we are continuing development work at this plant. The completion of this plant is dependent upon the successful reorganization of the Company and our ability to raise $25 million to fully fund the project.

 

We are 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, frequency response, as well as military applications.  In September 2010 we were awarded a two-year $2.2 million ARPA-E contract to develop the initial design of a new type of flywheel that would have the capability of delivering 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 the new flywheel could be commercialized. Target applications 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.  As of the date of this filing, we are continuing work on this project, the completion of which is dependent upon the successful reorganization of the Company.

 

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, 2010, as filed with the SEC on March 16, 2011.  In 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, 2011, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011, particularly in light of the Bankruptcy Cases.

 

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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 incurred significant losses of approximately $292 million since our inception including losses during the nine months ending September 30, 2011, of approximately $63.0 million.  The losses in 2011 include a non-cash reserve for asset impairment of approximately $42 million, most of which relates to our Stephentown facility. (See Note 4 for additional detail.) We had approximately $2.0 million in cash and cash equivalents on hand at September 30, 2011, and approximately $3 million in restricted cash at SRS.  Since our cash needs exceed the cash we expect to generate from operations, if we are unsuccessful in restructuring and/or finding an investor for the company, we will be unable to continue as a going concern.

 

There is substantial doubt as to our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  We have retained financial and legal advisors to actively evaluate structuring alternatives and to solicit proposals from potentially interested parties.  We have engaged CRG Partners Group LLC as financial advisors for the open strategic alternatives process, and have engaged Brown Rudnick LLP as legal advisors.

 

The assessment of our near-term liquidity is based on important factors and assumptions which anticipate certain levels of potential risk.  While all business plans anticipate certain levels of risk, we are exposed to additional bankruptcy- and company-specific risk and uncertainties, including, but not limited to: (1) our ability to successfully fund our operating costs in the near term though DIP financing, a restructuring or other strategic alternatives and (2) successfully emerging from Chapter 11 through a restructuring plan that will lead to our being able to obtain the funds necessary for long-term operating costs and the construction of additional plants.

 

Reclassification of prior period amounts

 

Our Board of Directors authorized a reverse split of the Company’s common stock at a ratio of one-for-ten, effective February 25, 2011. We filed a Certificate of Amendment to our Sixth Amended and Restated Certificate of Incorporation (the “Amendment”) to implement the reverse stock split and to reduce the number of shares of common stock authorized under the Certificate of Incorporation from 400 million to 200 million. The number of shares authorized and all previously reported share and per share amounts have been restated in the accompanying consolidated financial statements and related notes to reflect the reverse stock split.

 

Certain prior period amounts have also been reclassified to be consistent with current period reporting. Deferred financing costs and other current assets have been reclassified such that the individual components (deferred financing costs, advance payments to suppliers, and other assets) are now shown separately. In addition, on the cash flow statement, purchases and manufacture of property and equipment are now shown net of related payables and accruals.  Also, the components of non-cash interest income related to the preferred stock and associated warrants have been combined in the cash flow statement.

 

Consolidation

 

The accompanying consolidated financial statements include the accounts of Beacon Power Corporation and our subsidiaries, Beacon Power Securities Corporation, Holdings and SRS. In September 2008, we established two additional wholly-owned subsidiaries, Tyngsboro Regulation Services LLC and Tyngsboro Holding LLC.  These subsidiaries were inactive, and were dissolved as of August 9, 2011.  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 as adjusted retroactively for the effect of the reverse stock split that was effective February 25, 2011. 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, 2011, and 2010, 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.

 

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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 recorded at par value or stated value

 

The Massachusetts Development Finance Agency (MassDev) and FFB loans are recorded on our balance sheet at par value or stated value adjusted for unamortized discount or premium. Discounts and premiums for debt recorded at par value or stated value generally are capitalized and amortized over the life of the debt and are recorded in interest expense using the effective interest method. Such costs are amortized over the life of the debt and are recorded in depreciation and amortization expense.

 

Debt or derivative liabilities recorded at fair value

 

Costs related to the issuance of debt for which we have elected the fair value option are recognized in current earnings. We have elected not to mark our MassDev or FFB loan to market through the income statement. However, we have three instruments that are recorded as debt or derivatives which we have elected to mark to fair value through earnings: our mandatorily redeemable convertible preferred stock, our preferred stock warrants (which had been fully-exercised as of September 30, 2011), and the common stock warrants issued in conjunction with our preferred stock. We determine fair value for these instruments as of the end of each reporting period, and we reduce the amount outstanding for any redemptions, exercises, or conversions at the fair value determined at the end of the prior reporting period. The fair value adjustment is charged or credited to Interest expense.

 

· Mandatorily Redeemable Convertible Preferred Stock

 

The certificate of designations governing the rights and preferences of the preferred stock contains several embedded features that would be required to be considered for bifurcation. The preferred stock was mandatorily redeemable and therefore was recorded as a liability. We have elected the fair value option, and as such, we valued the host preferred stock certificate of designations and embedded features as one instrument. Changes in the fair value of the preferred stock were recorded as Non-cash interest on the Statement of Operations.

 

·                  Redemptions

 

Historically, we have redeemed our preferred stock by issuing common stock. The difference between the fair value of the preferred stock and the fair value of the common stock on the date the common stock was issued is charged or credited to Non-cash interest income (expense).  We have 48.4 shares of preferred stock outstanding as of September 30, 2011.  As of November 1, 2011, all preferred shares had been redeemed or converted, and there were no preferred shares outstanding.

 

·                  Conversions

 

Investors in the preferred stock were able to voluntarily convert their preferred shares to common stock at a conversion price defined in the preferred stock certificate of designations. The difference between the fair value of the preferred stock and the fair value of the common stock given in conversion is recognized as a non-cash gain or loss on the extinguishment of debt.

 

·                  Dividends

 

Historically, we have paid the dividends that were due with scheduled redemptions in stock. However, when an investor voluntarily converts its preferred shares, we are required to pay the investor for the dividends that would have been earned had the shares been held to maturity. The portion of those dividends that have not been accrued must be paid in cash, and are referred to as

 

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“make whole” payments. Dividends paid in cash are charged to Interest expense. Dividends paid in stock are valued at the fair value of the common stock as of the date of issuance, and are charged to Non-cash interest.

 

· Preferred Stock Warrants

 

We accounted for freestanding warrants to purchase shares of our mandatorily redeemable convertible preferred stock as liabilities on the consolidated balance sheets at fair value upon issuance. The preferred stock warrants were recorded as a liability because the underlying shares of convertible preferred stock were mandatorily redeemable, which obligated us to transfer assets at some point in the future. (See Note 14.) The warrants were subject to re-measurement to fair value at each balance sheet date and any changes in fair value were recognized in Non-cash interest, net, on the consolidated statements of operations. As the warrants were exercised, the warrant liability was reclassified to preferred stock. The difference between the fair value of the preferred warrant and of the preferred stock as of the date of exercise was charged or credited to Non-cash interest.  As of September 30, 2011, there were no preferred stock warrants outstanding.

 

· Common Stock Warrants

 

We issued common stock warrants in connection with the December 2010 preferred stock offering. (See Note 16.) Because this warrant has terms that adjust the exercise price in certain circumstances, the warrant cannot be considered indexed to our own stock and is therefore accounted for as a derivative liability at fair value. Changes in fair value of derivative liabilities are recorded in the consolidated statements of operations as Non-cash interest. The fair value of the warrant liability is determined using the Black-Scholes option pricing model. The fair value of the warrants is subject to significant fluctuation based on changes in our stock price, expected volatility, remaining contractual life and the risk free interest rate. Upon exercise, the difference between the fair value of the common stock and the common stock warrant is charged or credited to Non-cash interest.

 

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 15,000 shares of our common stock and a warrant exercisable for 50,000 shares of our common stock in return for lower cash payments under the lease. (See Note 10.)  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.”

 

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.”

 

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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. See Note 4 “Loss on Asset Impairment”.

 

Impairment of Long-Lived Assets

 

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.  Events that would indicate impairment and trigger an interim impairment assessment include, but are not limited to, a determination that the asset has become obsolete, current economic and market conditions, a significant adverse change in legal factors, business climate or operational performance of the business, and an adverse action or assessment by a regulator.  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.  See Note 4 “Loss on Asset Impairment.”

 

In light of ongoing decreases in regulation pricing in the NYISO market, we have been performing an impairment analysis of our New York facility on a quarterly basis.  In performing this impairment test, we utilize the two-step approach prescribed under ASC 360-10.  The first step requires a comparison of the carrying value and expected undiscounted cash flows of the reporting units to determine whether the assets are recoverable.  The expected cash flows require significant judgment based upon historical experience, our most recent budget, estimates for revenue and expenses based upon assumed growth rates, external consultants’ reports of anticipated pricing in the energy markets and the effects of actual and probable regulatory changes, such as the FERC pay-for-performance order.  The expected cash flows include estimates for future expenditures required to maintain the service potential of the assets.  Given the uncertainties involved in our estimates, we assign probabilities to various scenarios (e.g., increases in pricing, decreases in pricing, etc.) to calculate a probability-weighted average of potential cash flows. If the assets are recoverable, an impairment loss is not recognized even if the net book value of the long-lived assets exceeds their fair value.

 

If this first test indicates that the assets are not recoverable, we apply a discount rate to the most likely future cash flows (determined based upon the probability-weighted average of potential cash flows) to determine the fair value of the asset group, and record an impairment charge for the difference. The determination of a discount rate requires judgment relative to the risk.

 

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.

 

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.  See “Debt or derivative liabilities recorded at fair value” for treatment of issuance costs on liability for which we have elected the fair value option.

 

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Advance payments to suppliers

 

Advance payments to suppliers represent payments made in advance of receipt for services or custom materials used in the manufacture of our flywheels or frequency regulation facilities. Advance payments are relieved when the materials or services are received. The advance payments are for the construction of our merchant plants, and therefore they are recorded as non-current assets.

 

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 increases to our reserve for contract losses are recognized in the period in which they are determined.

 

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.

 

Revenue and Deferred Revenue

 

We earn revenue from several sources, which are accounted for as follows:

 

·      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

 

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settlements may result in future revisions to contract costs and revenue.  Revenues recognized in excess of 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 have been credited with producing a type of Renewable Energy Credit (REC) known as an Alternative Renewable Energy Credit.  These have a market value, and we have recognized revenue on the sale of such credits as revenue when sold on the open market.  As our participation in the ISO-NE pilot program has been reduced, we no longer anticipate earning APS credits.

 

·                  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.

 

·                  Grants

 

Grants that relate to revenues are recognized as earned on a percentage of completion basis. Grants that relate to current expenses are reflected as reductions of the related expenses in the period in which they are reported. Grants that relate to depreciable property and equipment are reflected in income over the useful lives of the related assets, and those related to land are recognized as revenue over the life of the depreciable facilities constructed on it. A given grant may be parsed into various components, each of which may be treated either as current revenue, reduction of current expenses, or as deferred revenue to be amortized over the life of a fixed asset, as appropriate given the structure and nature of the grant.

 

Cost of Goods Sold

 

For frequency regulation services, 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 the 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.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents.  We keep our cash investments with high-credit-quality financial institutions or Treasury funds.  At September 30, 2011, substantially all of our cash and cash equivalents were held in interest bearing accounts at financial institutions earning interest at varying rates from 0.006% to 0.159%.  At September 30, 2011, we had approximately $261,000 of cash equivalents that were held in non-interest bearing checking accounts.  Also at September 30, 2011, we had approximately $4,775,000 of cash equivalents (including approximately $3,010,000 in cash equivalents shown on our balance sheet as “Restricted Cash”) that were held in interest-bearing money market accounts at high-quality financial institutions, some of which are invested in off-shore securities. The fair value of these investments approximates their cost. A 10% change in interest rates would change the investment income realized on an annual basis by an immaterial amount.  The funds invested in money market accounts may not be covered under FDIC Insurance, and therefore may be at some risk of loss. However, the money market accounts are invested primarily in government funds, such as Treasury Bills.  Approximately $1.3 million of our cash on hand at September 30, 2011, was invested in mutual funds at a brokerage firm that has purchased supplementary insurance through Lloyd’s of London. This insurance coverage

 

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provides protection above the Securities Investor Protection Corporation (SIPC) coverage in the event that the broker becomes insolvent.  SIPC protects against the loss of securities up to a total of $500,000 (of which $100,000 may be in cash) per client. The supplemental insurance provided by the broker would cover investments at that brokerage firm up to a maximum of $1 billion, including up to $1.9 million per client for the cash portion of any remaining shortfall.  SIPC and the supplemental insurance do not cover market losses; however, management believes the risk of substantial market losses is low because our funds are invested primarily in government funds.

 

At September 30, 2011, one of our third-party suppliers represented approximately 21.5% of the outstanding balance of our accounts payable and accrued liabilities. Excluding the limited revenue earned in our ISO-NE pilot program, we have one customer for our regulation services, NYISO, who is also the supplier for the cost of goods sold related to those services, e.g., the cost of energy.  The market rates for both energy and frequency regulation can fluctuate significantly from hour to hour, and we have limited control over both rates.

 

Recently Issued or Adopted Accounting Pronouncements and Regulations

 

None.

 

Note 3.  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 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 13 for debt fair value, which also approximates carrying value.  See Note 14 for preferred stock and preferred stock warrants, and Note 16 for common stock warrants.

 

The following tables show information regarding assets and liabilities measured at fair value on a recurring basis as of September 30, 2011, and December 31, 2010:

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Balance as of
September 30,
2011

 

Quoted prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,026,219

 

$

2,026,219

 

$

 

$

 

Long Term Assets

 

 

 

 

 

 

 

 

 

Restricted cash

 

3,009,970

 

3,009,970

 

 

 

Total Assets

 

$

5,036,189

 

$

5,036,189

 

$

 

$

 

 

14



 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Balance as of
September 30,
2011

 

Quoted prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Current Liabilities

 

 

 

 

 

 

 

 

 

Mandatorily redeemable convertible preferred stock

 

$

24,525

 

$

 

$

 

$

24,525

 

Preferred stock warrant liability - current

 

 

 

 

 

Common stock warrant liability

 

668,909

 

 

 

668,909

 

Total Current Liabilities

 

693,434

 

 

 

693,434

 

Long Term Liabilities

 

 

 

 

 

 

 

 

 

Preferred stock warrant liability - long term

 

 

 

 

 

Total Liabilities

 

$

693,434

 

$

 

$

 

$

693,434

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Balance as of
December 31,
2010

 

Quoted prices in
Active Markets
for Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Current Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,865,760

 

$

10,865,760

 

$

 

$

 

Long Term Assets

 

 

 

 

 

 

 

 

 

Restricted cash

 

3,228,933

 

3,228,933

 

 

 

Total Assets

 

$

14,094,693

 

$

14,094,693

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Mandatorily redeemable convertible preferred stock

 

$

2,900,170

 

$

 

$

 

$

2,900,170

 

Preferred stock warrant liability - current

 

1,009,388

 

 

 

1,009,388

 

Common stock warrant liability

 

3,242,600

 

 

 

3,242,600

 

Total Current Liabilities

 

7,152,158

 

 

 

7,152,158

 

Long Term Liabilities

 

 

 

 

 

 

 

 

 

Preferred stock warrant liability - long term

 

864,012

 

 

 

864,012

 

Total Liabilities

 

$

8,016,170

 

$

 

$

 

$

8,016,170

 

 

There were no significant transfers between levels in the periods ended September 30, 2011, or December 31, 2010.

 

Financial assets or liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.  The following table provides a summary of the changes in fair value of our financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2011:

 

15



 

 

 

Three months ended September 30, 2011

 

 

 

Mandatorily
Redeemable
Convertible
Preferred Stock

 

Preferred Stock
Warrant
Liability

 

Common
Stock
Warrant
Liability

 

Total

 

Beginning balance

 

$

529,544

 

$

 

$

2,132,760

 

$

2,662,304

 

Issued

 

 

 

 

 

Conversions to Common Stock

 

(156,925

)

 

 

(156,925

)

Redemptions

 

(342,360

)

 

 

(342,360

)

Exercises

 

 

 

(146,141

)

(146,141

)

Adjustment to fair value

 

(5,734

)

 

(1,317,710

)

(1,323,444

)

Transfers in and/or out of Level 3

 

 

 

 

 

Balance as of September 30, 2011

 

$

24,525

 

$

 

$

668,909

 

$

693,434

 

 

 

 

Nine months ended September 30, 2011

 

 

 

Mandatorily
Redeemable
Convertible
Preferred Stock

 

Preferred
Stock
Warrant
Liability

 

Common
Stock Warrant
Liability

 

Total

 

Beginning balance

 

$

2,900,170

 

$

1,873,400

 

$

3,242,600

 

$

8,016,170

 

Issued

 

1,830,767

 

 

 

1,830,767

 

Conversions to Common Stock

 

(3,389,269

)

 

 

(3,389,269

)

Redemptions

 

(1,535,065

)

 

 

(1,535,065

)

Exercises

 

 

(1,915,133

)

(313,830

)

(2,228,963

)

Adjustment to fair value

 

217,922

 

41,733

 

(2,259,861

)

(2,000,206

)

Transfers in and/or out of Level 3

 

 

 

 

 

Balance as of September 30, 2011

 

$

24,525

 

$

 

$

668,909

 

$

693,434

 

 

The warrant liabilities are marked-to-market each reporting period with the change in fair value recorded as a gain or loss within Non-cash interest in our consolidated statement of operations until they are exercised, expire or other facts and circumstances lead the liability to be reclassified as an equity instrument.  The fair value of the warrant liabilities are determined each reporting period by utilizing a third-party valuation completed using a Black-Scholes option pricing model that takes into account volatility as well as estimated probabilities of possible outcomes provided by us and the valuation analyst (unobservable inputs).

 

The preferred stock is recorded at fair value with changes in fair value recorded as gains or losses within Non-cash-interest.  The fair value of the preferred stock is determined at each reporting period by utilizing a third-party valuation completed using a Black-Scholes option pricing model that takes into account volatility as well as estimated probabilities of possible outcomes provided by us and the valuation analyst (unobservable inputs.)

 

Valuation—Methodology and Significant Assumptions

 

The estimate of the fair value of the securities noted above as of the valuation date is based on the rights and privileges afforded to each class of equity.  The valuation of derivative instruments utilized certain estimates and judgments that affect the fair value of the instruments.  Fair values for our derivatives are estimated by utilizing valuation models that consider current and expected stock prices, volatility, dividends, forward yield curves and discount rates.  Such amounts and the recognition of such amounts are subject to significant estimates which may change in the future.

 

The following methods and significant input assumptions were applied in estimating the fair value of the preferred stock and warrants:

 

16



 

Methods

 

A Black-Scholes option pricing model was utilized to estimate the fair value of the mandatorily redeemable convertible preferred stock, preferred stock warrants and common stock warrants on September 30, 2011, and December 31, 2010.  The option pricing model relies on financial theory to allocate value among different classes of stock based upon a future “claim” on value.  The equity claim of the securities is equivalent to a series of call options at various breakpoints, which are determined by the necessary equity required for the diluted common stock price to reach the exercise price of the different equity instruments.  The change in option values represents the equity that is to be allocated among the different classes of stocks.  In estimating the fair value of the preferred stock, preferred stock warrants and common stock warrants, the following significant inputs and assumptions were applied as of September 30, 2011, and December 31, 2010:

 

Inputs

 

September 30, 2011

 

December 31, 2010

 

Equity value based on stock closing price at reporting date

 

$

15,465,897

 

$

46,035,791

 

Exercise price

 

$

1,000

 

$

1,000

 

Time to maturity

 

3 - 5 years

 

3 - 5 years

 

Stock volatility

 

87.84% - 88.06%

 

89% - 92%

 

Risk-free rate

 

0.42% - .96%

 

1.02% - 2.01%

 

Dividend rate

 

0%

 

0%

 

Non-exercise period

 

NA

 

NA

 

 

Significant Assumptions

 

·                  Due to the difficult nature of accurately estimating a potential exit event, we calculated the fair value using both a 3-year and a 5-year model. The fair values used are an average of the value calculated using these two maturities.

 

·                  Stock volatility was estimated by annualizing the daily volatility of our stock price during the historical period preceding the valuation date and measured over a period corresponding to the remaining life of the instruments.  Historic stock prices were used to estimate volatility as we did not have trade options as of the valuation dates.

 

·                  Based on our historical operations and management expectations for the near future, our stock was assumed to be a non-dividend paying stock.

 

·                  The quoted market price of our stock was utilized in the valuations because the derivative guidance requires the use of quoted market prices without considerations of blockage discounts, i.e., an amount or percentage deducted from the current market price of a publicly traded security to reflect the decrease in the per share value of a block of those securities that is of a size that could not be sold in a reasonable period of time given normal trading volume.

 

The quoted market price of our stock as of the measurement dates and expected future stock prices were assumed to reflect the dilution upon conversion of the instruments to shares of common stock.

 

Note 4.  Loss on asset impairment

 

We have been performing a quarterly impairment test of our New York facility.  Our tests were based upon the weighted-average expected cash flow using various scenarios and pricing assumptions. The results of prior quarterly tests, including the test that was completed as of June 30, 2011, indicated that the Stephentown assets were recoverable, so no asset impairments were recognized, although we disclosed in prior Reports on Form 10-Q that continued degradation in pricing could result in future impairment losses.

 

Regulation pricing is subject to seasonal fluctuation.  Historically, we have used a 24-month historical average price as the “base” for our impairment calculations, not only to eliminate the effect of these seasonal fluctuations, but also in large part because we believed that pricing was depressed due to various market factors, and that, over the 20-year life of our facility, pricing was likely to increase, particularly with the implementation of pay-for-performance tariffs.  These assumptions were supported by reports we received from external energy consultants.  In June 2011, the 24-month average price for regulation was $26.57 per MWh. The 24-month average price decreased from June to September 2011 by 6.4% to $24.86.  Beginning in August 2011, regulation pricing in the New York market decreased significantly from levels earlier in the year.  This recent decrease in pricing does not appear to be directly linked to natural gas prices or normal seasonal fluctuations.  We believe it may have been negatively impacted by the bidding strategy

 

17



 

of certain market participants.  The 12-month average price paid for regulation in New York decreased by approximately 18% from June 2011 to September 2011, from $18.95 to $15.61.  The 12-month average has continued to decrease further through the date of this filing.

 

In general, we expect regulation pricing to increase in the future, but we are unable to assess whether the recent pricing trend in New York is reflective of a temporary or a permanent change in the pricing structure.  On October 20, 2011, FERC approved a requirement for all ISOs to implement a pricing structure that would reward resources such as ours for faster performance (pay-for-performance, or “PFP).  The details of such pricing structure have not yet been defined in NYISO, although we anticipate that it should have a significant positive impact on our regulation revenue.  However, should frequency regulation pricing remain at current levels in New York, it is unlikely that we would be able to pay the FFB loan.

 

Our evaluation of anticipated future cash flows for Stephentown as of September 30, 2011, was based primarily upon the 12-month average price, rather than the 24-month average price, which we believe is appropriate given our uncertainty as to the expected duration of the current pricing trend and apparent change in the bidding strategy of other participants in this market.  It also reflects variability in the impact on pricing in the future resulting from the implementation of PFP (which is required, under FERC rules, to be implemented no later than October 2012).  The third quarter decrease in pricing, combined with changes in our assumptions reflecting future pricing and PFP, were significant enough to result in a negative value for our September 2011 recoverability test, indicating that the value of the Stephentown plant was impaired. In accordance with ASC 360-10, we proceeded to determine the fair value of the asset group by discounting the probability-weighted cash flows.  Given our lack of liquidity and the uncertainty that we will be able to restructure and emerge from bankruptcy, we determined that a discount rate of 25% was appropriate.  Accordingly, we recognized an impairment loss of $42 million on our Stephentown assets as of September 30, 2011.  In addition, we prepared an alternate cash flow evaluation for the Stephentown assets as of June 30, 2011, using the12-month average pricing at that time and the revised assumptions used in the September analysis.  This alternate cash flow evaluation supported our prior evaluation concluding that no impairment existed as of June 30, 2011.

 

Additionally, we expensed the non-fungible costs associated with our Northwestern Energy lease project, and recorded an asset impairment to reduce the basis of the fungible assets to market value, which was determined to be $500,000 (the price at which Northwestern Energy can lease the system under their agreement with us).

 

The asset impairment loss as of September 30, 2011, was allocated as follows:

 

 

 

As of September 30, 2011

 

Description

 

Preliminary
Balance

 

Accumulated
Depreciation

 

Preliminary
Net Book
Value

 

Impairment
Adjustment

 

Adjusted Net
Book Value

 

SRS Property and Equipment:

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

192,487

 

$

 

$

192,487

 

$

 

$

192,487

 

Other property and equipment

 

 

 

 

 

 

 

 

 

 

 

Machinery and Equipment

 

86,579

 

 

86,579

 

(66,599

)

19,980

 

Production Flywheels & ECMS

 

34,451,315

 

(850,254

)

33,601,061

 

(25,925,961

)

7,675,100

 

Frequency Regulation Installations — Fungible

 

9,123,789

 

(237,821

)

8,885,968

 

(6,856,373

)

2,029,595

 

Frequency Regulation Installations - Non-fungible

 

11,885,434

 

(172,715

)

11,712,719

 

(9,037,394

)

2,675,325

 

Subtotal - all other property and equipment

 

55,547,117

 

(1,260,790

)

54,286,327

 

(41,886,327

)

12,400,000

 

Total SRS

 

$

55,739,604

 

$

(1,260,790

)

$

54,478,814

 

$

(41,886,327

)

$

12,592,487

 

Northwestern Energy CIP:

 

 

 

 

 

 

 

 

 

 

 

Fungible

 

$

532,283

 

$

 

$

532,283

 

$

(32,283

)

$

500,000

 

Non- fungible

 

425,384

 

 

425,384

 

(425,384

)

 

Total Northwestern Energy CIP

 

$

957,667

 

$

 

$

957,667

 

(457,667

)

$

500,000

 

Total impairment loss

 

 

 

 

 

 

 

$

(42,343,994

)

 

 

 

18



 

Our property, plant and equipment includes the following construction in progress related to frequency regulation projects:

 

 

 

September 30,
2011

 

December 31,
2010

 

Flywheels/ECM (Northwestern Energy lease project)

 

$

500,000

 

$

23,481,822

 

Stephentown, NY

 

 

16,193,811

 

Hazle, PA

 

852,184

 

1,516

 

Glenville, NY

 

277,915

 

253,383

 

Chicago

 

53,179

 

55,195

 

Flywheel material (primarily for PA project)

 

$

1,614,944

 

757,913

 

Total

 

$

3,298,222

 

$

40,743,640

 

 

We performed a recoverability test on our Hazle Township project as of September 30, 2011, which indicated that the project is expected to have a positive cash flow.  Accordingly, no reserve was recorded for these assets as of September 30, 2011.  As of that date, we did not anticipate a bankruptcy filing.  However, our ability to complete the Hazel project and all of the other projects shown above is contingent upon our ability to successfully obtain financing, restructure the company and emerge from bankruptcy, and there is substantial risk that we will be unable to do so.   If we are unsuccessful, we will be unable to continue as a going concern.  The assets shown in CIP will be significantly impaired, and will have little fair value, if any.  Additionally, our Tyngsboro assets, which consist primarily of leasehold improvements and manufacturing equipment, would likely be substantially impaired.

 

Note 5.  Accounts Receivable

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Accounts receivable, trade

 

$

448,855

 

$

279,376

 

Allowance for doubtful accounts

 

 

 

Accounts receivable, net

 

$

448,855

 

$

279,376

 

 

There was no allowance for doubtful accounts as of September 30, 2011, or December 31, 2010. As of September 30, 2011, all accounts were 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. There were no holdbacks as of September 30, 2011.  As of December 31, 2010, our accounts receivable balance included holdbacks of approximately $19,000.

 

Note 6.  Property and Equipment

 

Details of our property and equipment, net of the asset impairment reserves (see Note 4 above) follow:

 

 

 

Estimated

 

As of:

 

 

 

Useful

 

September 30,

 

December 31,

 

 

 

Life

 

2011

 

2010

 

Construction in Progress

 

Varied

 

$

3,487,174

 

$

41,227,183

 

Land

 

 

 

192,487

 

192,487

 

Smart Energy 25 flywheels

 

20 years

 

11,010,578

 

6,241,732

 

Smart Energy Matrix™ installations - fungible

 

20 years

 

4,227,997

 

2,526,337

 

Smart Energy Matrix™ installations - non-fungible

 

20 years

 

1,832,570

 

 

Machinery and equipment

 

5 - 10 years

 

2,877,082

 

2,696,752

 

Service vehicles

 

5 years

 

16,763

 

16,763

 

Furniture and fixtures

 

7 years

 

728,771

 

798,263

 

 

19



 

 

 

Estimated

 

As of:

 

 

 

Useful

 

September 30,

 

December 31,

 

 

 

Life

 

2011

 

2010

 

Office equipment and software

 

3 years

 

1,170,870

 

1,084,720

 

Leasehold improvements

 

Lease term

 

7,888,066

 

7,804,606

 

Equipment under capital lease obligations

 

Lease term

 

540,059

 

563,783

 

Total

 

 

 

$

33,972,417

 

$

63,152,626

 

Less accumulated depreciation and amortization

 

 

 

(9,442,281

)

(6,960,421

)

Property and equipment, net

 

 

 

$

24,530,136

 

$

56,192,205

 

 

The “Land” shown in the schedule above represents the cost of land for our Stephentown, New York frequency regulation plant. The Smart Energy 25 flywheels shown above represent the cost of the flywheels and electronic control modules in service. Smart Energy Matrix™ installations, otherwise referred to as “balance of plant,” represent the ancillary equipment required to operate our systems; construction costs charged by the contractor; equipment installation, testing and commissioning expenses; and capitalizable soft costs, such as permits, interconnection costs and capitalized interest.  The balance of plant costs are separated between those that are considered “fungible” and those that are “non-fungible.”  Fungible equipment is equipment that can be relocated to other sites, whereas non-fungible costs represent either equipment that cannot be moved, or “soft” costs such as capitalized interest.  The Smart Energy Matrix™ costs shown above also relate to equipment and costs in Stephentown, Tyngsboro, or being installed in Montana for the Northwestern Energy lease project.  Total net property and equipment for Stephentown were approximately $12,600,000 (net of an impairment reserve of approximately $42,000,000) and $36,000,000 as of September 30, 2011 and December 31, 2010, respectively.

 

“Construction in progress” (CIP), represents costs related to assets that have not yet been placed into service, including costs related to site development for future frequency regulation plants, completed flywheels not yet in service and materials to build flywheels. We do not take depreciation expense on CIP.  The components of CIP were as follows:

 

 

 

As of:

 

 

 

September 30,
2011

 

December 31,
2010

 

Materials to build production flywheels

 

$

1,614,944

 

$

757,913

 

Smart Energy 25 flywheels

 

500,000

 

23,481,822

 

Smart Energy Matrix™ in progress

 

1,133,107

 

16,455,318

 

Deposits and other costs related to the acquisition of land for frequency regulation systems

 

50,171

 

48,587

 

Machinery and equipment

 

181,504

 

103,590

 

Software

 

7,448

 

121,620

 

Leasehold improvements

 

 

258,333

 

Construction in progress

 

$

3,487,174

 

$

41,227,183

 

 

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 outside of our facility were previously expensed and carried in accrued expenses.  Machinery and equipment and leasehold improvements include approximately $54,000 in estimated exit costs as of September 30, 2011, and December 31, 2010, that are being depreciated over the remaining life of the lease.  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 “Property and Equipment, net” on our balance sheet as of September 30, 2011.

 

20



 

Note 7.  Deferred Financing Costs

 

Details of our deferred financing costs, which are amortized over the life of the debt using the effective interest method, are as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Deferred financing costs associated with:

 

 

 

 

 

FFB loan guaranteed by the DOE

 

$

3,454,584

 

$

3,456,781

 

MassDev loan

 

90,517

 

90,517

 

Other prepaid finance costs

 

50,563

 

 

 

 

3,595,664

 

3,547,298

 

Less accumulated amortization

 

(185,983

)

(51,178

)

Total

 

$

3,409,681

 

$

3,496,120

 

 

Note 8.  Other Assets

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

Patents

 

$

326,451

 

$

238,296

 

Less accumulated amortization

 

(16,745

)

(8,026

)

Net other assets

 

$

309,706

 

$

230,270

 

 

Note 9.  Other Accrued Expenses

 

Other accrued expenses were as follows:

 

 

 

As of September 30,

 

As of December 31,

 

 

 

2011

 

2010

 

Accrued expenses

 

$

928,728

 

$

2,107,845

 

Accrued interest payable

 

56,525

 

28,297

 

Accrued legal, audit and public company expenses

 

397,593

 

447,872

 

Accrued warranty

 

27,859

 

28,488

 

Accrued sales and other taxes

 

76,704

 

1,536,801

 

Accrued insurance payable

 

 

62,252

 

 

 

$

1,487,409

 

$

4,211,555

 

 

21



 

Note 10.  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, 2011, and for the subsequent five years:

 

 

 

Description of Commitment

 

 

 

Operating leases

 

Purchase Obligations

 

Total

 

Period ending:

 

 

 

 

 

 

 

December 31, 2011

 

$

193,125

 

$

2,474,903

 

2,668,028

 

December 31, 2012

 

778,937

 

 

 

778,937

 

December 31, 2013

 

804,688

 

 

 

804,688

 

December 31, 2014

 

618,001

 

 

 

618,001

 

December 31, 2015 and thereafter

 

 

 

 

 

Total Commitments

 

$

2,394,751

 

$

2,474,903

 

$

4,869,654

 

Non-cancellable purchase obligations:

 

 

 

$

1,512,519

 

 

 

Less advance payments to suppliers

 

 

 

(347,225

)

 

 

Non-cancellable purchase obligations net of advance payments:

 

 

 

$

1,165,294

 

 

 

 

As of September 30, 2011, we had purchase commitments with our suppliers of approximately $2.5 million. Of this amount, approximately $1.5 million represents firm, non-cancelable commitments against which we have made advance payments totaling $347,000, leaving a net non-cancelable obligation of approximately $1.2 million as of September 30, 2011.

 

In July 2007, we signed a seven-year lease on our current corporate headquarters.  Our 103,000-square-foot facility is located at 65 Middlesex Road, Tyngsboro, Massachusetts.  Our facility has an estimated production capacity of approximately 600 flywheels per year and, with further capital spending for equipment, its capacity could increase to approximately 1,000 flywheels per year on a multi-shift basis.

 

We provided our landlord with a $200,000 irrevocable letter of credit securing our performance under the lease. 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 expenses were approximately $147,000 and $442,000 during each of the three- and nine-month periods ended September 30, 2011, and 2010, respectively.

 

In November 2009, the DOE announced that it had awarded us a Smart Grid Stimulus Grant valued at $24 million for use in construction of a 20 MW flywheel energy storage plant. We are planning for this facility to be built on a property situated in Hazle Township, Pennsylvania, for which we have entered into an option agreement executed with an economic development agency of the Commonwealth of Pennsylvania. Under the terms of this two-year option, we are paying $2,500 for each of four six-month option 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 site covered by this option is located in an economic development zone, which provides an exemption from the payment of state sales tax on equipment used to build the plant and an exemption from property taxes through 2017. We have filed for interconnection, and the regional grid operator, the PJM Interconnection (PJM) has completed the system impact study for this site.

 

In 2009, we entered into an option to lease land in Glenville, New York. This option was amended and extended until December 31, 2011, at a cost of $1,500 per month. In April 2010, we entered a two-year option that provides for the right to purchase property in Chicago Heights, Illinois, for $1 million. In consideration for this option, we were paying the owner $2,000 per month. Payment on both options has been discontinued as of the filing of the Bankruptcy cases, and the options will be allowed to lapse.  Accordingly, we will be writing off approximately $331,000 related to the Glenville and Chicago projects that is included in CIP as of September 30, 2011.

 

Additional capital expenditures will be required in the future to optimize our manufacturing facility in Tyngsboro for maximum capacity. The amount and timing of these expenditures are dependent on requirements of equipment needed to meet production schedules as well as having sufficient funding.

 

22



 

Legal Proceedings

 

On October 30, 2011, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. As of the date of the filing of this quarterly report, the Debtors continue to operate their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. See Note 20 for further discussion of the Bankruptcy Cases.

 

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.

 

Note 11.  Deferred Revenue

 

Deferred revenue was as follows:

 

 

 

Balance as of
December 31,
2010

 

Additions

 

Revenue
Recognized

 

Balance as of
September 30,
2011

 

Deferred revenue consists of the following:

 

 

 

 

 

 

 

 

 

Inverter sales to distributors

 

$

29,587

 

$

 

$

(21,668

)

$

7,919

 

Deposit on lease paid by Northwestern Energy

 

 

200,000

 

 

 

200,000

 

NYSERDA Grant for the construction of Visitor Center

 

 

100,000

 

(833

)

99,167

 

Stimulus grant for the construction of 20 MW plant at Hazel Township, Pennsylvania

 

19,627

 

685,281

 

 

 

704,908

 

Total deferred revenue

 

49,214

 

$

985,281

 

$

(22,501

)

1,011,994

 

Less: Deferred revenue — current

 

(49,214

)

 

 

 

 

(212,919

)

Deferred revenue - long term

 

$

 

 

 

 

 

$

799,075

 

 

Note 12.  Accrued Contract Loss

 

Our contract loss reserves are as follows:

 

 

 

September 30, 2011

 

December 31, 2010

 

Beginning balance

 

$

1,045,545

 

$

257,698

 

Charges for the period

 

 

970,836

 

Reductions

 

(196,183

)

(182,989

)

Ending balance

 

$

849,362

 

$

1,045,545

 

 

As of September 30, 2011, we have approximately $849,000 reserved for contract losses which represents our expected cost share portion of the ARPA-E contract, plus the difference between our GAAP overhead rate and the contract bid rate.  As of September 30, 2011, no other adjustments were considered necessary to our contract loss reserve.

 

23



 

Note 13.  Long-Term Debt

 

Long-term debt is as follows, which approximates fair value:

 

 

 

As of:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

3.04% - 3.97% Notes Payable to Federal Financing Bank, due June 2030

 

$

38,766,127

 

$

22,152,902

 

6.5% Note Payable to MassDev, due September 2015

 

3,270,890

 

3,797,140

 

Subtotal

 

42,037,017

 

25,950,042

 

Less unamortized discount (warrants)

 

(86,143

)

(119,259

)

Total

 

41,950,874

 

25,830,783

 

Less current portion of long term debt

 

(702,962

)

(661,215

)

Net long-term debt

 

41,247,912

 

25,169,568

 

 

Based on the amounts outstanding as of September 30, 2011, principal payments required under the DOE and MassDev loans over the next five years, excluding discount due to warrants, are as follows:

 

 

 

MassDev Loan

 

Federal
Financing Bank
Loan

 

Total

 

Period ending:

 

 

 

 

 

 

 

December 31, 2011

 

$

179,997

 

$

 

$

179,997

 

December 31, 2012

 

751,656

 

1,076,837

 

1,828,493

 

December 31, 2013

 

803,295

 

2,153,674

 

2,956,969

 

December 31, 2014

 

857,863

 

2,153,674

 

3,011,537

 

December 31, 2015

 

678,079

 

2,153,674

 

2,831,753

 

December 31, 2016

 

 

2,153,674

 

2,153,674

 

Thereafter

 

 

29,074,594

 

29,074,594

 

Total payments remaining

 

$

3,270,890

 

$

38,766,127

 

$

42,037,017

 

 

Note Payable to the Federal Financing Bank (DOE loan)

 

On August 6, 2010, SRS, an indirect, wholly-owned subsidiary of Beacon Power Corporation, issued a Future Advance Promissory Note to the Federal Financing Bank (FFB) to evidence the loans made by the FFB under the FFB Loan Documents, which loans are guaranteed by the DOE (FFB Loans).  The FFB is an instrument of the U.S. government that is under the general supervision of the U.S. Secretary of the Treasury.  Under the FFB Loan Documents, the FFB has made available to SRS a multi-draw term loan facility in an aggregate principal amount of up to $43.1 million to finance up to 62.5% of the eligible costs of the Stephentown project. At the closing of the FFB Credit Facility, Beacon contributed the remaining 37.5% of the expected project costs in the form of $18.9 million in inventory, assets, and eligible project costs and $7 million in cash, which was deposited into an SRS cash account (known as the “Base Equity Account”) controlled by the collateral agent.

 

As 62.5% of the aggregate of all eligible project costs as of June 30, 2011, had been funded with the proceeds of the loans, beginning with the July 2011 loan draw, (a) 62.5% of all future requests for funding were to be funded with loan proceeds from the FFB, and (b) 37.5% of all funding requests subsequent to that date were to be funded with the proceeds returned to Beacon from the Base Equity Account.  As of September 30, 2011, SRS had spent $4.4 million of the cash that was initially contributed to the Base Equity Account, and has received advances of $38.8 million from the FFB for eligible project expenditures. Additional advances totaling approximately $358,000 were received from the FFB Credit Facility between October 1 and the date of this filing.

 

The project is proceeding on budget, and we do not currently anticipate any cost overruns.  Beacon is responsible for any cost overruns for the project.  As of September 30, 2011, although we have been operating at our full expected capacity since June 2011, we have not reached “physical completion” of the plant under the terms defined by the FFB Loan Documents.

 

24



 

The last day to receive an advance according to the FFB Loan Documents for eligible project costs is May 30, 2012, and the loan will mature on June 17, 2030. Each loan advance we have taken under the FFB Loan Documents was subject to the satisfaction of certain conditions, and bears interest at a per annum rate determined by the Secretary of the Treasury as of the date of the advance.  The interest rates were based on the Treasury yield curve and the scheduled principal installments for such advance, plus a .375% premium.  Interest on advances under the FFB loan is payable quarterly in arrears. The weighted average interest rate on advances received as of September 30, 2011, was 3.548%.  Principal payments are due in 72 equal quarterly installments, beginning on September 15, 2012, through June 17, 2030.

 

Our Chapter 11 bankruptcy filing on October 30, 2011, constituted an event of default under the FFB Loan Documents.  Accordingly, the loan was accelerated and all amounts thereunder became immediately due and payable as of such date, and we do not expect to receive any additional advances from the FFB Credit Facility except as otherwise ordered by the Bankruptcy Court.

 

Advances on the loan facilities may not be voluntarily prepaid prior to May 30, 2012, without the consent of the DOE.  Any voluntary prepayments shall be subject to the payments by us of a prepayment price determined based on interest rates at the time of prepayment for loans made from the Secretary of the Treasury to FFB for obligations with an identical payment schedule to the advance being prepaid. The loan facilities are subject to mandatory prepayments of differing amounts with net cash proceeds received from certain dispositions, loss events with respect to property and other events.  In addition, concurrently with the payment of any dividend by SRS, the loan facilities must be prepaid in an amount equal to 36% of the amount of such dividend. All obligations under the FFB Loan Documents are secured by substantially all of SRS’s assets (subject to certain exceptions), the book value of which were approximately $12.6 million as of September 30, 2011, after giving effect to the impairment loss reserve recorded as of September 30, 2011 (see Note 4).

 

The FFB Loan Documents contain customary covenants that include, among others, requirements that the project be conducted in accordance with the business plan for the project, property and assets be maintained in good working order, and that the borrower stay in compliance with all applicable environmental laws and other governmental rules, including FERC rules.  The FFB Loan Documents place limitations on SRS’s ability to use any loss proceeds, incur indebtedness, incur liens, make investments or loans, enter into mergers and acquisitions, dispose of assets or purchase capital items except for expenditures contemplated by the project budget or operating plan or from the proceeds of insurance, pay dividends or make distribution on capital stock, pay indebtedness, make payments of management, advisory or similar fees to affiliates, enter into certain affiliate transactions, enter into new lines of business and enter into certain restrictive agreements, in each case subject to exceptions set forth in the FFB Loan Documents.

 

On June 2, 2011, SRS entered into an amendment to the Common Agreement dated as of August 6, 2010, (the “Common Agreement”) by and among SRS, as Borrower; the DOE, as Credit Party; the DOE, as Loan Servicer; and Midland Loan Services, Inc. (“Midland”), as Administrative Agent and Collateral Agent (in such capacity, the “Collateral Agent”) that, among other things, modifies certain covenants and certain provisions regarding the funding of reserves.  The DOE requested the changes (described below) in light of the currently low NYISO market pricing for Stephentown’s services.  Beacon agreed to increase its corporate support of the Stephentown project because, at the time, it believed that NYISO pricing would improve back towards historical pricing by the time that SRS would be required to make its first principal payment on the loan (September 2012).  We based this belief on internal analysis, on independent reports, and on the recent FERC proposal (now as final ruling) to require grid operators under its jurisdiction to develop premium market pricing that reflects pay-for-performance. The FERC ruling essentially recognizes that fluctuations in the grid can occur very quickly, and hence that frequency regulation that is provided very quickly (by fast-response suppliers such as Stephentown) is far more valuable to the grid than that which is provided more slowly (by slower-response suppliers such as fossil fuel generators). As of September 2011, the pricing of regulation continued to decline, and, without a recovery in regulation pricing, and pay-for-performance, we would be unable to repay the loan to FFB.

 

The Common Agreement amendment, among other things, increased the amount required to be maintained in SRS’s debt service reserve account (the “Debt Service Reserve Requirement”) from an amount equal to two quarters of debt service to an amount equal to four quarters of debt service consisting of principal and interest.  However, the amendment provides that if the rolling 12-month debt service coverage ratio for any period of twelve consecutive calendar months which includes four quarterly principal and interest payments is at least 1.5 to 1.0, the Debt Service Reserve Requirement shall be reduced to an amount equal to two quarters of debt service.  The debt service coverage ratio for any period is the ratio of (a) SRS’s cash available to pay debt service for that period to (b) the debt service required to be paid by SRS during that period.  The amendment also changed the date by which the initial deposit is required to be made to the debt service reserve account (the “Initial Debt Service Reserve Funding Date”) from the Project Completion Date (as defined in the Common Agreement) to the first to occur of (a) the date on which the FFB has funded an advance

 

25



 

requested by SRS in an amount equal to two quarters of debt service and deposited the proceeds of such advance to the debt service reserve account, (b) the second anniversary of the Physical Completion Date (as defined in the Common Agreement) or (c) the Project Completion Date.  Under the terms of the amendment, the increase in the Debt Service Reserve Requirement is to be phased in over time, with the Debt Service Reserve Requirement being raised to an amount equal to three quarters of debt service on the second anniversary of the Physical Completion Date and to an amount equal to four quarters of debt service on the third anniversary of the Physical Completion Date.  The amendment further provides that an amount equal to four quarters of debt service consisting of principal and interest (or, after the rolling 12-month debt service coverage ratio test described above is satisfied, an amount equal to two quarters of debt service) must be on deposit in the debt service reserve account before any dividends may be paid to Beacon.

 

The FFB Loan Documents also contain financial covenants.  As of the last day of each fiscal quarter, SRS is required to:

 

·                  following the Project Completion Date (as defined in the Common Agreement); maintain a specified minimum ratio of current assets to current liabilities. maintain a leverage ratio as of the last day of each fiscal quarter which does not exceed the maximum ratio set forth in the Common Agreement

 

·                  commencing with the first fiscal quarter to end after the first anniversary of the Project Completion Date, maintain a specified debt service coverage ratio as of the last day of each fiscal quarter

 

·                  commencing on the Initial Debt Service Reserve Funding Date, maintain in the debt service reserve account an amount equal to the Debt Service Reserve Requirement (as described above); provided that, in the event of any withdrawal from the debt service reserve account, SRS must restore the amount on deposit in the debt service reserve account to the Debt Service Reserve Requirement within ninety days of such withdrawal.

 

·                  commencing on the first anniversary of the Project Completion Date, maintain specified amounts in a maintenance reserve account and project capital account.  If SRS draws from these accounts, it is required to restore the accounts to the required amounts within ninety days of the withdrawal. The amount required to be maintained in the maintenance reserve account is an amount projected to be equal to six months of plant maintenance and fixed operating costs, currently anticipated to be approximately $559,000 for the initial year of project operation.  The amount required to be maintained in the maintenance reserve account will be recalculated prior to the beginning of each fiscal year. The project capital account requirement is $1,000,000.

 

The FFB Loan Documents also contain customary events of default, subject in some cases to customary cure periods for certain defaults.  The FFB Loan Documents provide that it shall not be considered a breach of any of the financial covenants so long as within thirty days of the delivery of quarterly or annual financial statements showing the breach of any such covenants, SRS causes Beacon to contribute cash through Stephentown Holding LLC to SRS in an amount necessary to cure such breach.

 

The FFB loan requires SRS to establish and maintain collateral cash accounts with a collateral agent.  The collateral agent has sole dominion and control over, and the exclusive right of withdrawal from all project accounts, other than the operating disbursement account and the maintenance reserve account.  All revenue must be deposited in the collateral cash account for subsequent flow to the remaining project accounts, as provided in the FFB Loan Documents.  Following our Chapter 11 filing on October 30, 2011, a Bankruptcy Court hearing was held on November 2, 2011. At the hearing, we received interim approval from the court to use a portion of approximately $3 million in cash collateral. The cash collateral consists of cash we deposited at the closing of the FFB Loan and from revenue earned by our Stephentown facility; funds that are currently held for the benefit of the DOE under the terms of the FFB Loan Agreement. The DOE objected to our use of these funds, but the Bankruptcy Court ruled that we could use the funds at least until a second hearing on November 18. At the second hearing we will seek Bankruptcy Court approval for a longer-term use of cash collateral.

 

Beacon has executed an Engineering, Procurement and Construction agreement with SRS, and as such has provided certain facility and flywheel system warranties.  In addition, as indirect owner of all of SRS’s equity interests, Beacon has entered into a Completion Guaranty dated as of August 6, 2010, pursuant to which Beacon has guaranteed all obligations of SRS pursuant to and in accordance with the terms of the Common Agreement and other FFB Loan Documents through the Project Completion Date. In addition, Beacon has entered into a separate Corporate Guaranty dated as of August 6, 2010, (the “Corporate Guaranty”) in favor of the DOE and Collateral Agent under which Beacon has guaranteed SRS’s obligations to fund and replenish the debt service reserve account in accordance with the Common Agreement.  Beacon’s maximum liability under the Corporate Guaranty was initially $2,397,000.  On June 2, 2011, Beacon also amended the Corporate Guaranty to provide that (i) prior to the Project Completion Date (as defined in the Common Agreement), its maximum liability thereunder is unlimited and (ii) from and after the Project Completion Date, its maximum liability thereunder is $5,000,000. Beacon will provide administrative services and operation and maintenance

 

26



 

services to SRS, and SRS will be obligated to pay Beacon for those services, according to the terms of agreements between those parties.

 

Notes Payable to MassDev

 

On June 30, 2008, we entered into an agreement with Massachusetts Development Finance Agency (“MassDev”) pursuant to which MassDev agreed to lend us up to $5 million; (the “MassDev Loan”). This loan derives from a funding collaboration between the Emerging Technology Fund of MassDev and the Massachusetts Technology Collaborative Business Expansion Initiative. The MassDev Loan proceeds were used to help fund the expansion of our production facility.

 

The MassDev Loan is evidenced by a promissory note under which we were able to request advances of up to $5 million total for the purchase of equipment and installation of certain building improvements at our Tyngsboro, Massachusetts facility. The initial advance on the loan was made in October 2008 for approximately $3.6 million. The final advance was made in October 2009 for approximately $1.0 million. The approximately $0.4 million balance of the loan commitment has expired.  The note will mature 84 months after the initial advance and bears a fixed annual interest rate of 6.5%.

 

Payments to MassDev began in November 2008. The payments were interest only during the first twelve months. Since October 2009, the balance of the principal outstanding under the note is being amortized in equal monthly installments of principal and interest over the remaining term of the note.

 

Pursuant to the note, we entered into a security agreement which grants to MassDev an exclusive first priority security interest in all equipment and tenant improvements substantially funded with the proceeds of the loan with an approximate carrying value of $3,167,000 and $3,978,000 at September 30, 2011, and December 31, 2010, respectively. We also entered into a collateral assignment of lease agreement as additional security for the repayment of borrowings.  This agreement grants MassDev all rights, title and interest in and to our lease for the Tyngsboro facility in the event that we default on our obligations. In addition, the MassDev loan requires us to maintain a minimum cash balance of $1,500,000 at all times during the term of the loan. At the end of October we were unable to sustain a cash balance above the minimum requirement and are in default.

 

As partial consideration for the MassDev Loan, on June 30, 2008, we issued MassDev two warrants. Each warrant provides to for the purchase of 8,598 shares of our common stock at an exercise price of $18.90 per share, subject to any adjustments as set forth in the warrants. The warrants are exercisable for seven years commencing on June 30, 2008, and provide for registration rights for the resale of the shares issued upon their exercise. MassDev assigned one of the warrants to the Massachusetts Technology Park Corporation (“MTPC”), as part of MTPC’s participation under the Massachusetts Technology Collaborative Business Expansion Initiative.  The Black-Scholes fair value of the warrants is shown as a discount against the loan, and is being amortized over the life of the loan using the effective interest method at an imputed interest rate of 1.237%.  The amortization of this discount resulted in approximately $33,000 and $39,000 charged to interest expense during the nine months ended September 30, 2011, and 2010, respectively. The effective interest rate of the loan, including the cost of the warrants and other deferred loan costs, is approximately 8.55%.

 

Note 14.  Series B Mandatorily Redeemable Convertible Preferred Stock and Preferred Stock Warrants

 

Series B Convertible Preferred Stock

 

On December 23, 2010, we sold 10,000 units for net proceeds of approximately $8.7 million. Each unit sold consisted of (i) one share of our Series B mandatorily redeemable convertible preferred stock, par value $0.01 per share (the “preferred stock”), (ii) a warrant to purchase 0.5 of a share of preferred stock (the “preferred warrant”) and (iii) a warrant to purchase 445.827 shares of common stock, together with any associated rights (the “common warrant”, and together with the preferred warrants, the “warrants”), at a price to the public of $1,000 per unit, less issuance costs.  The shares of preferred stock, the preferred warrants and the common warrants were immediately exercisable and were issued separately.  As of November 1, 2011, all preferred stock and preferred warrants had been converted or redeemed, as discussed below; there were no preferred shares outstanding.

 

Each share of preferred stock had a stated value of $1,000.  The preferred stock was entitled to receive dividends on the stated value at a rate of 8% per annum. We were able to elect to pay the dividends in cash, or if certain “Equity Conditions” were satisfied, in shares of common stock.  Dividends were payable monthly, in arrears, on the first day of each month beginning February 1, 2011, and through the maturity date, which is February 1, 2012.  If we elected to pay dividends in shares of our common stock, we were required to give notice to the holder on the 23rd trading day prior to the applicable dividend due date, and

 

27



 

we were required to deliver a number of shares of common stock equal to the dividend amount divided by the “Market Price” determined as of the date notice is given.  We made a similar determination using the Market Price on the dividend due date, and made an adjustment for the difference (by payment of additional shares, if positive, or by deemed redemption of the equivalent amount of preferred stock, if negative) at that time.  The “Market Price” is the arithmetic average of the six lowest daily VWAPs during the 20 consecutive trading day period ending two trading days prior to the relevant date of determination.  Subject to certain limitations, a holder of shares of preferred stock could convert its shares of preferred stock at any time after the initial issuance, plus accrued and unpaid dividends, at a rate equal to the “Conversion Price”, which was initially $2.5234 per share subject to adjustment as described below.

 

We were required to redeem up to 1,154 shares of preferred stock not previously converted on the first business day of each month, beginning February 1, 2011, through the maturity date (each an “installment date”).  If we elected to make the redemption in shares of common stock, we were required to give notice to the holder on the 23rd trading day prior to the installment due date, and we required to deliver a number of shares of common stock determined by dividing the stated value of the converted preferred stock by the lower of  (i) the then applicable conversion price and (ii) 85% or 90% (depending on whether our Market Price is below or above $1.00, respectively) of the Market Price as of the installment notice date. On the relevant installment date, we made a similar determination with respect to the shares payable, and made an adjustment for the difference (by payment of additional shares, if positive, or by a deemed redemption of the equivalent amount of preferred stock, if negative) at that time.  As of September 30, 2011, we have completed the scheduled redemption installment for September 1, 2011, and we have made the preliminary installment payment for October 1.  The preliminary installment payment for November 1 was made on October 3, 2011.  All redemptions and pre-redemptions have been made in shares of common stock.  As of September 30, 2011, there were 48.4 shares of preferred stock outstanding, all of which were voluntarily converted as of November 1, 2011, and no preferred warrants were outstanding as of that date.

 

We were able to redeem any or all of the preferred stock at any time, so long as the Equity Conditions had been satisfied on the date we delivered a redemption notice to the holders and the redemption date (which shall be the 20th trading day following the notice date). The redemption price in connection with any such optional redemption was an amount in cash equal to 125% of the sum of the stated value of the preferred stock being redeemed, with accrued and unpaid dividends, and an amount reflecting the dividends that would have been payable through the maturity date if the preferred stock had remained outstanding.

 

The “Equity Conditions” were satisfied on any date if (a) on each day during the 30 trading days prior to such measurement date, all shares of common stock issued and issuable upon conversion of the preferred stock (including the preferred stock issuable upon exercise of the preferred warrants) or payable as dividend shares and upon exercise of the common warrants will be eligible for sale without restriction and without the need for registration under the securities laws; (b) on each such day, the common stock is listed on The NASDAQ Capital Market, on one of several named alternative markets and, if subject to certain delisting proceedings or a failure to meet the maintenance standards of such an exchange, we must meet the minimum listing conditions of one of the other permitted markets (including the OTC Bulletin Board), (c) on each such day, we have delivered common stock upon conversion by holders of preferred stock on a timely basis, as and if required; (d) any applicable shares to be issued in connection with the determination may be issued in full without violating the ownership limitations described below or the rules of our principal market (except that the ownership limitations will not prevent us from delivering common stock in amounts up to such limits); (e) during such period, we shall have made timely payments as required; (f) there has been no “triggering event” or potential triggering event under the certificate of designations; (g) we have no knowledge of any fact that would cause the shares of common stock issuable in connection with the preferred stock or warrants not to be eligible for sale without restriction; (h) we meet certain minimum average trading volume qualifications on our principal market (i.e., a $200,000 daily dollar volume, averaged over the applicable 30 trading days); and (i) we are otherwise in material compliance with our covenants and representations in the related transaction documents, including the certificate of designations.  We did not meet the equity condition related to the minimum average trading volume for the prepayment of the November 1 scheduled redemption and interest payment; however, we received a waiver of this requirement from the holder. As of November 1, 2011, there were no preferred shares still outstanding.

 

The conversion price of the preferred stock was adjusted to reflect any stock splits and similar capital events proportionately.  In the event of a consolidation of our common stock, such as a reverse stock split, the conversion price of the preferred stock was adjusted proportionately, and then further adjusted (but not increased) to equal the product of (x) the quotient determined by dividing the conversion price in effect prior to the stock combination by the average of the daily VWAPs for the 15 trading days prior to such combination, and (y) the average of the daily VWAPs for the 15 trading days following the combination. This adjustment was triggered by our February 25, 2011 reverse stock split, which resulted in an adjusted conversion price of $2.2895 for all conversions effective as of March 18, 2011. In addition, when we issued (or were deemed to issue through the issuance or sale of convertible securities) shares of common stock at a price (as determined under the certificate of designations) less than the conversion price at the time, the conversion price of the preferred stock was reduced to the price at which such common stock is issued or deemed to be

 

28



 

issued.  Adjustments were not required upon the issuance of certain “excluded securities”, including shares issued or deemed to be issued under our existing employee stock plans, or upon the issuance of shares of common stock as dividend payments or conversions under the preferred stock. However, common stock issued on the dividend date or installment dates in June 2011 were not excluded from these adjustment provisions.  We made the June 2011 payment in common stock, consequently the conversion price was adjusted to $1.0073 based on the Market Price as of the installment date. As of September 30, 2011, the adjusted conversion price was $0.5526 as a result of our subsequent issuance of stock at a price less than the conversion price at the time.  Subsequent to the end of the quarter, the conversion price was adjusted to $0.30 per share, and 47.4 shares were converted at this price.

 

We were prohibited from effecting any conversion of the preferred stock, and from allowing a holder to convert its shares of preferred stock, to the extent that such conversion would cause the holder to have acquired, through conversion of the preferred stock or otherwise, beneficial ownership of a number shares of our common stock in excess of 4.99% of the common stock immediately preceding the conversion.

 

In the event of a liquidation event, before any amounts are made available to the holders of our common stock, the holders of the preferred stock will be entitled to receive in cash, out of our assets, an amount per share of preferred stock equal to the stated value, with accrued and unpaid dividends, plus an amount representing the dividends that would have accrued but for such event through the maturity date.  After such a distribution, the holders of the preferred stock will be entitled to participate in any distribution to the holders of our common stock on an as-converted basis.

 

While the preferred stock was outstanding, neither we nor our subsidiaries could incur any additional indebtedness, with the exception of certain project-level indebtedness at the subsidiary level, our guaranty of such project-level indebtedness, and ordinary course equipment leases, obligations to vendors and similar exceptions.  We were also prohibited from issuing additional or other capital stock that is senior to, or on par with, the preferred stock, or from issuing variable rate securities, without the consent of holders of 90% of the preferred stock then outstanding.

 

The units were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission in connection with registration statements on Form S-3 filed with the Securities and Exchange Commission that became effective on September 15, 2009, and July 29, 2008.

 

Because the preferred stock has mandatorily redeemable installments with the remainder outstanding at maturity also subject to mandatory redemption, it met the definition of a “mandatorily redeemable financial instrument” under ASC 480, and thus was recorded as a liability at fair value.  The embedded features were required to be considered for bifurcation.  However, we have elected the Fair Value Option under ASC 825-10-15, and as such, valued the host preferred stock agreement and the five embedded features together.  The election was made at the initial recording of the transaction, in accordance with ASC 825-10-25-4.  Thus, the host preferred stock certificate of designations and the embedded features were eligible to be accounted for at fair value.  We have elected to do so; consequently, the preferred stock has been recorded as a liability at fair value and subsequently maintained at fair value, with changes in fair value being recorded in the income statement.

 

Preferred Stock Warrants

 

The preferred warrants had an exercise price of $1,000 per share of preferred stock and were scheduled to expire on the maturity date.  All preferred warrants have been exercised in full as of September 30, 2011. We received gross proceeds of $5 million for these exercises.

 

The preferred warrants met the definition of “Obligations to Repurchase Issuer’s Equity Shares by Transferring Assets”.  As the warrants were for shares of preferred stock that were both puttable and mandatorily redeemable, the warrants were accounted for as a liability, and were marked to fair value each reporting period, with the change in fair value recorded through the income statement.

 

29



 

The following is a summary of the exercise and conversion activity for our mandatorily redeemable preferred stock, preferred stock warrants and common stock warrants during the nine months ended September 30, 2011:

 

 

 

Mandatorily
Redeemable
Convertible
Preferred Stock

 

Preferred Stock
Warrants

 

Common Stock
Warrant Liability

 

Shares outstanding as of December 31, 2010

 

8,085.0

 

5,000

 

4,458,274

 

Shares issued year to date

 

5,000.0

 

 

 

Number of shares converted

 

(9,204.3

)

 

 

Number of shares redeemed or pre-redeemed

 

(3,832.3

)

 

 

Exercises

 

 

(5,000

)

(430,854

)

Shares outstanding as of September 30, 2011

 

48.4

 

 

4,027,420

 

 

The following is a summary of the non-cash interest related to the preferred stock, preferred warrants and common warrants during the three and nine months ending September 30, 2011, and 2010:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

Non- cash interest income (expense):

 

2011

 

2010

 

2011

 

2010

 

Expense dividends prepaid at end of prior period

 

$

(5,809

)

$

 

$

(62,886

)

$

 

Dividends paid in common stock with conversions

 

(291

)

 

(37,742

)

 

Dividends paid in common stock with redemptions

 

(11,179

)

 

(95,959

)

 

Interest expense on redemption of preferred stock

 

(242,447

)

 

(3,469,156

)

 

Interest expense on exercise of preferred warrants

 

 

 

5,084,366

 

 

Interest expense on exercise of common warrants

 

93,929

 

 

206,695

 

 

Fair value adjustment to preferred stock

 

5,735

 

 

(217,921

)

 

Fair value adjustment to preferred stock warrants

 

 

 

(41,733

)

 

Fair value adjustment to common stock warrants

 

1,317,711

 

 

2,259,861

 

 

Subtotal

 

1,157,649

 

 

3,625,525

 

 

Less: prepaid dividends

 

 

 

 

 

Non-cash interest income as of September  30, 2011

 

$

1,157,649

 

$

 

$

3,625,525

 

$

 

 

Under the terms of the preferred stock, if we want to redeem the preferred stock and pay dividends with common stock rather than cash, we must meet certain “Equity Conditions” (as described above), give notice to the holders on the 23rd trading day prior to the applicable redemption or dividend date, and we must deliver a number of shares of common stock based upon the “Market Price” determined as of the date notice is given.  On the scheduled redemption or dividend date, we would recalculate the shares payable based upon the Market Price on that date, and make an adjustment for the difference (by payment of additional shares, if positive, or by a deemed redemption of the equivalent amount of preferred stock, if negative).  On August 30, 2011, and September 29, 2011, respectively, we elected to make the scheduled October 1, 2011, and November 1, 2011, installments and dividend payments in shares of our common stock and on those dates issued 951,679 shares of our common stock under these prepayment procedures.  On October 3, 2011, based upon the differences between the Market Price on August 30, 2011, and the Market Price on October 1, 2011, we issued an additional 91,352 shares.  The balance of the preferred stock was voluntarily converted by the investor; there were no preferred shares outstanding as of November 1, 2011.

 

Common Stock Warrant — see Note 16, “Common Stock Warrants,” below.

 

30



 

The scheduled redemptions and actual activity for the Preferred Stock and Preferred Warrants as of September 30, 2011, is as follows:

 

Installment
Date

 

Pre-
delivery
Date