Revenue and Cost of Goods Sold

6 Months Ended

Jun. 30, 2011

Revenue and Cost of Goods Sold

Revenue and Cost of Goods Sold

Note 14.  Revenue and Cost of Goods Sold

A breakdown of our sales and the related cost of sales for the three and six months ended June 30, 2011, and 2010, respectively, are as follows:

	Three months ended June 30, 2011						Three months ended June 30, 2010
	Revenue		Cost of Sales		Margin		Revenue		Cost of Sales			Margin
	(in thousands)
Frequency regulation	$	310	$	135	$	175	$	124	$	96		$	28
Contract	195		190		5		31		(24		)	55
Inverters and APS credits	20		—		20		11		—			11
Total	$	525	$	325	$	200	$	166	$	72		$	94

	Six months ended June 30, 2011						Six months ended June 30, 2010
	Revenue		Cost of Sales		Margin		Revenue		Cost of Sales		Margin
	(in thousands)
Frequency regulation	$	578	$	277	$	301	$	267	$	200	$	67
Contract	359		354		5		110		55		55
Inverters and APS credits	33		—		33		24		—		24
Total	$	970	$	631	$	339	$	401	$	255	$	146

Revenue for the three months ended June 30, 2011, was approximately $525,000, as compared to approximately $166,000 for the same period in 2010.  For the six-month period ended June 30, 2011, and 2010, revenue was $970,000 and $401,000, respectively.

Revenue for the three months ending June 30, 2011, included approximately $310,000 of revenue from frequency regulation, as compared to approximately $124,000 during the same period in 2010.  Revenue for the six months ending June 30, 2011, included approximately $578,000 of frequency regulation revenue, as compared to approximately $267,000 during the same period in 2010.   The Stephentown plant began earning revenue in late January 2011, and as of mid-June, was operating at its full capacity of 20 MW.  In addition, in 2010, we earned regulation revenue from 3 MW of capacity operating in the ISO-NE pilot program.  We transferred a portion of this capacity to our New York plant during the third quarter of 2010, and we took the remaining Tyngsboro flywheels out of service temporarily in April 2011 in order to prepare them for shipment to Northwestern Energy later this year.  Consequently, the revenue from the ISO-NE pilot program was significantly lower in 2011 than during 2010.

Gross margin on frequency regulation for the three months ending June 30, 2011, was 56.5%, compared to 22.6% during same period in 2010.  Gross margin on frequency regulation for the six months ending June 30, 2011, was 52.1% compared to 25.1% during the same period in 2010.  During the three and six months ending June 30, 2011, gross margin on frequency regulation services increased by $147,000 and $234,000, respectively, over the same periods in 2010.  Our gross margin in Stephentown is considerably higher than it was in Tyngsboro.  Historically, approximately 70% of our cost of energy in Tyngsboro represented retail transmission and distribution (T&D) charges billed by the local service provider. Because our New York facility is connected to the grid at transmission level, we do not incur T&D charges at that facility. We expect our revenue and margin in New York to increase in the future if prices increase as we expect them to, and as we optimize the plant control algorithms now that we have achieved full capacity.

Contract revenue for the three and six months ended June 30, 2011, has increased by $164,000 and $249,000 or 529% and 226% respectively.  The increase was earned primarily from the ARPA-E contract, whereas contract revenue during the three and six months ending 2010 related primarily to the Tehachapi project, which is now complete, and the Pacific Northwest National Laboratory (PNNL) contract, which was completed in 2010.  These contracts were granted on a cost-share basis, where we recorded a contract loss reserve at the inception of the contract for our expected cost share.   Therefore, our gross margin on these contracts is zero.  In addition, we began work on a fixed-price follow-up contract from the U.S. Navy during the quarter ended June 30, 2011.

Other revenue relates to the sale of inverters or related equipment (which we are no longer manufacturing), or the sale of APS clean energy credits. The costs related to these sales are not fully reflected in the cost of goods sold as a result of the inventory having been reserved in a prior year.  Therefore, our cost of goods sold does not fully reflect the costs associated with these revenues.